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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, 1997
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 1-10640
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RELIASTAR FINANCIAL CORP.
-------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 41-1620373
- ---------------------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 WASHINGTON AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55401
- ---------------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
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, $.01 Par Value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
8.20% Trust-Originated Preferred Securities New York Stock Exchange
8.10% 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 27, 1998, was $4,337,173,404.
The number of shares outstanding of the Registrant's common stock as of February
27, 1998, was 90,949,901.
Documents Incorporated By Reference:
Parts of the Registrant's Annual Report for the year ended December 31, 1997,
are incorporated by reference in Part II of this Form 10-K.
Parts of the Registrant's Proxy Statement to be dated March 24, 1998, are
incorporated by reference in Part III of this Form 10-K.
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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 provides and
distributes individual life insurance and annuities; employee benefit products
and services; life and health reinsurance; retirement plans; mutual funds;
residential mortgages and personal finance education. 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; Security-Connecticut Life Insurance Company
("Security-Connecticut"), Avon, Connecticut; and ReliaStar Life Insurance
Company of New York ("RLNY"), Woodbury, New York. Effective January 1, 1998,
Lincoln Security Life Insurance Company ("Lincoln Security") merged with and
into ReliaStar Bankers Security Life Insurance Company, ("Bankers Security") and
the surviving entity was renamed RLNY. These subsidiaries are sometimes
collectively referred to as the "Insurers". Additional subsidiaries include
ReliaStar Investment Research Inc., Minneapolis, Minnesota; Washington Square
Securities, Inc., Minneapolis, Minnesota; ReliaStar Mortgage Corporation, West
Des Moines, Iowa; Northstar Investment Management Corporation, Greenwich,
Connecticut; PrimeVest Financial Services, Inc., St. Cloud, Minnesota; and
Successful Money Management Seminars, Inc., Portland, Oregon.
The Registrant's strategy is to compete by providing its customers with the
information, products and services they need to make financial choices.
Financial information by business segment is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
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(In Millions) 1997 1996 1995
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<S> <C> <C> <C>
Revenues:
Individual Insurance $1,437.4 $1,222.8 $1,147.0
Employee Benefits 627.2 643.5 661.9
Life and Health Reinsurance 240.7 200.3 180.9
Pension 65.1 68.4 76.6
Other 139.9 55.6 24.0
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Total $2,510.3 $2,190.6 $2,090.4
======== ======== ========
Pretax Operating Income (Loss):
Individual Insurance $ 228.8 $ 204.5 $ 181.6
Employee Benefits 52.1 46.0 44.1
Life and Health Reinsurance 57.5 50.7 43.5
Pension 15.9 14.0 10.3
Other (3.6) (19.3) (23.5)
-------- -------- --------
Total $ 350.7 $ 295.9 $ 256.0
======== ======== ========
Pretax Income (Loss) from Continuing
Operations:
Individual Insurance $ 237.0 $ 212.2 $ 186.0
Employee Benefits 53.3 47.7 46.2
Life and Health Reinsurance 57.8 50.8 43.7
Pension 13.7 12.9 10.1
Other (1.9) (19.5) (26.2)
-------- -------- --------
Total $ 359.9 $ 304.1 $ 259.8
======== ======== ========
</TABLE>
2
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<TABLE>
<CAPTION>
Identifiable Assets (As of December 31):
<S> <C> <C> <C>
Individual Insurance $16,570.8 $13,022.8 $12,378.0
Employee Benefits 921.2 906.1 883.0
Life and Health Reinsurance 530.0 417.8 357.5
Pension 2,144.3 1,681.9 1,389.5
Other 834.5 678.4 511.2
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Total $21,000.8 $16,707.0 $15,519.2
========= ========= =========
</TABLE>
Notes:
Financial information prior to July 1997 has not been restated to reflect the
contributions of Security-Connecticut Corp.
"Other" includes amounts from operations not deemed to be reportable business
segments, corporate operations and assets and inter-segment eliminations and
adjustments. Identifiable assets are those assets that are used in the
Registrant's operations in each business segment.
Operating income excludes realized investment gains and losses and their impact
on the amortization of deferred policy acquisition costs and present value of
future profits.
Additional information concerning the Registrant may be found in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Registrant's Annual Report for the year ended December 31, 1997, attached hereto
as Exhibit 13 and which is incorporated herein by reference.
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 also 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 term and 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 ReliaStar Life and United
Services' 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.
Security-Connecticut distributes individual life insurance and annuity products,
consisting principally of term and universal life insurance, including second-
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to-die products which are designed for the estate planning marketplace.
Security-Connecticut distributes its products primarily through a network of
independent agents.
RLNY 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. RLNY sells individual products which are very similar to those sold by
ReliaStar Life. RLNY's individual sales force consists predominantly of
independent agents. RLNY distributes voluntary life insurance and annuity
products through employer sponsored plans which are marketed at the worksite.
RLNY 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 which 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 which 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 ($316.6
million as of December 31, 1997) 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 88 marketing professionals
employed full-time by ReliaStar Life and located in 20 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
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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'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 RLNY, 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, market capacity, the availability and pricing of
retrocessional programs, loss experience 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 and Amsterdam. During
1997, ReliaStar Life formed a subsidiary located in London to provide an
additional presence in the international reinsurance market place. ReliaStar
Life writes business in over 40 countries worldwide and is expanding
relationships in Europe and in other non-U.S. markets that have strong growth
potential.
5
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PENSION
The Pension segment is composed of the 401(k) Retirement Plan, participating
pension and Guaranteed Investment Contract (GIC) businesses of the Registrant.
The 401(k) 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 (estimated first
year deposits on new contracts) of $405.8 million during 1997.
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 $389.5 million at December 31, 1997. 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 $236.4
million at December 31, 1997) 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 Registrant.
As of December 31, 1997, ReliaStar Life had $62.2 million in outstanding GIC
obligations. ReliaStar Life is no longer making sales of GICs.
REGULATION AND OTHER
Insurance Regulatory Action
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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 National Association of
Insurance Commissioners (NAIC) developed minimum risk-based capital requirements
on insurance enterprises. The formulas for determining the amount of risk-based
capital specify various weighting factors that are applied to financial balances
and various levels of activity, based upon the nature and perceived degree of
risk associated with such balances and levels of activity. Regulatory
compliance is measured by a company's risk-based capital ratio, which is
calculated as a company's regulatory total adjusted capital, as defined, divided
by its authorized control level risk-based capital, as defined. Companies with
ratios below specific trigger points are classified within certain regulatory
action levels, each of which requires specified corrective action. The risk-
based capital ratio of each of the Insurers significantly exceeds the ratio 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, 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
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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, many
of which have greater resources than the Registrant. 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 all of the
Insurers is AA-; and the Duff & Phelps claims paying rating for all of the
Insurers is AA. The Moody's claims paying rating for ReliaStar Life, Northern,
United Services and RLNY is A1, and is A2 for Security-Connecticut. The A.M.
Best claims paying rating for ReliaStar Life, Northern, United Services and RLNY
is A+, while Security-Connecticut 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.
The life and health reinsurance business is also highly competitive, and is
affected by cyclical pressures as supply and demand for reinsurance changes from
year to year.
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 RLNY, the limit is $400,000 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, 1997, $34.3 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 Registrant has determined that it will
not seek to directly provide capitated plans, but, rather has marketed plans
maintained by third party managed care organizations through a series of
strategic alliances in selected markets. The Employee Benefits segment has
experienced a significant decline in sales of insured health and health related
products and expects that its book of insured health and health related business
will decline over the next several years. The Registrant does not expect
significant new sales of insured health and health related products. The
Registrant cannot predict the impact that these market developments will have on
future reported earnings. The health insurance and health related businesses of
the Employee Benefits segment represented approximately 5% of the Registrant's
after tax earnings in 1997.
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.
7
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Geographic Distribution
- -----------------------
The Registrant, through the Insurers, conducts business in all 50 states. The
distribution of the Insurers' premium volume, by state, for the year ended
December 31, 1997 for life insurance, individual annuities and accident and
health insurance, on a statutory accounting basis, was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
California 13 % Pennsylvania 3 %
New York 9 Connecticut 3
Minnesota 5 North Carolina 3
Texas 5 Michigan 3
Florida 5 New Jersey 3
Illinois 5 Virginia 3
Ohio 4 Georgia 3
Washington 4 All Other (1) 26
Massachusetts 3
</TABLE>
(1) states with 2% or less of total premium volume
Other
- -----
On July 1, 1997, the Registrant completed the acquisition of Security-
Connecticut Corporation (SCC). SCC was a holding company with two primary
subsidiaries: Security-Connecticut of Avon, Connecticut, and Lincoln Security of
Brewster, New York. The transaction was effected through a stock-for-stock
exchange. The acquisition was accounted for using the purchase method of
accounting, and therefore, the consolidated financial statements of the
Registrant include the accounts of SCC since the date of acquisition.
On December 1, 1997, the Registrant acquired the common stock of Northstar
Holding, Inc. (Northstar) held by minority shareholders. Northstar's principal
subsidiary, Northstar Investment Management Corporation, is the investment
advisor, manager and distributor of the Registrant's mutual fund family, the
Northstar Funds. The transaction was effected through a stock-for-stock
exchange. The acquisition was accounted for using the purchase method of
accounting.
At December 31, 1997, the Registrant and its subsidiaries employed 4,093
persons. None of the Registrant's 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, Security-
Connecticut and RLNY lease office space in Seattle, Washington; Arlington,
Virginia; Avon, Connecticut; and Woodbury, New York, respectively. In addition,
the Registrant leases space in various cities of the United States and Europe
for regional group, reinsurance, pension and claims offices.
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information entitled "Common Stockholder Information" from page 56 of the
Annual Report for the year ended December 31, 1997, is attached as Exhibit 13
hereto and is incorporated herein by reference.
Since January 1, 1997, the Registrant has issued and sold an aggregate of
466,199 shares of Common Stock that were not registered under the Securities Act
of 1933, as amended (the "Securities Act"). These shares were issued in
connection with the acquisition by the Registrant of the shares owned by the
minority shareholders of Northstar. The issuances were made by the Company in
reliance upon Sections 4(2) and 4(6) of the Securities Act. With respect to
such issuances, the certificates representing such shares were imprinted with a
legend restricting their transfer and a stop transfer order was given to the
Registrant's transfer agent with respect to such shares.
ITEM 6. SELECTED FINANCIAL DATA.
The information entitled "Revenues and Earnings" and "Financial Position" from
page 17 of the Annual Report for the year ended December 31, 1997, 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 18 through 29 of the Annual
Report for the year ended December 31, 1997, is attached as Exhibit 13 hereto
and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for 1997 as the Registrant's market capitalization was less than
$2.5 billion on January 28, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data from pages 30
through 54, but not including the Report of Management from page 54 included in
the Annual Report for the year ended December 31, 1997, 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
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Except for the information concerning executive officers set forth below, the
information from pages 6 and 7, but not including the information entitled
"Committees of the Board of Directors" from page 7 and the information entitled
"Section 16(a) Beneficial Ownership Reporting Compliance" from page 8 of the
Registrant's 1998 Proxy Statement is incorporated herein by reference in
response to this item.
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 58 1972
John H. Flittie President and Chief Operating Officer 61 1985
Richard R. Crowl Senior Vice President, General Counsel and Secretary 50 1982
James R. Miller Senior Vice President, Chief Financial Officer and Treasurer 50 1985
Mark S. Jordahl Senior Vice President and Chief Investment Officer 37 1996
Michael J. Dubes Senior Vice President 55 1984
Wayne R. Huneke Senior Vice President 46 1986
Ronald D. Jarvis Senior Vice President 60 1997
Kenneth U. Kuk Senior Vice President 51 1990
Robert C. Salipante Senior Vice President 41 1992
</TABLE>
Mr. Crowl has been Senior Vice President, General Counsel and Secretary of the
Registrant since 1996. Mr. Crowl was Vice President and Associate General
Counsel of the Registrant from 1989 to 1996. Mr. Crowl has been associated with
the Registrant since 1974.
Mr. Miller has been Senior Vice President, Chief Financial Officer and Treasurer
of the Registrant since November 1997. From 1992 to 1997, Mr. Miller was
Executive Vice President and Chief Operating Officer of Northern. Mr. Miller
has been associated with the Registrant since 1985.
Mr. Jordahl became Senior Vice President and Chief Investment Officer of the
Registrant effective January 1, 1998. From 1987 to 1997, Mr. Jordahl was Vice
President of ReliaStar Investment Research, Inc., a wholly-owned subsidiary of
the Registrant, engaged in investment management. Mr. Jordahl has been
associated with the Registrant since 1987.
Mr. Dubes has been Senior Vice President of the Registrant since 1996 and
President and Chief Executive Officer of Northern since 1994. From 1987 to
1994, Mr. Dubes was Senior Vice President of Individual Insurance Operations of
ReliaStar Life. Mr. Dubes has been associated with the Registrant since 1984.
Mr. Huneke has been Senior Vice President of the Registrant since 1994, and
since November 1997 has been responsible for the Financial Markets business of
the Registrant. From 1994 to 1997, Mr. Huneke was Senior Vice President, Chief
Financial Officer and Treasurer of the Registrant. From 1990 to 1994, Mr.
Huneke was Vice President, Treasurer and Chief Accounting Officer of the
Registrant. Mr. Huneke has been associated with the Registrant since 1986.
Mr. Jarvis has been Senior Vice President of the Registrant since July 1997.
Mr. Jarvis has been President and Chief Executive Officer of Security-
Connecticut since 1984. Mr. Jarvis has been associated with the Registrant
since July 1997.
Mr. Kuk has been a Senior Vice President of the Registrant since 1996. In 1998,
Mr. Kuk will assume responsibility for the Registrant's Worksite Financial
Services. From 1996 to 1997, Mr. Kuk was responsible for strategic marketing.
From 1991 to 1996, Mr. Kuk was Vice President, Investments of the Registrant.
Mr. Kuk has been associated with the Registrant since 1985.
Mr. Salipante has been Senior Vice President of the Registrant since 1992, and
since 1997, has been responsible for the Registrant's Personal Financial
Services. From 1996 to 1997, Mr. Salipante served as Senior Vice President of
Individual Insurance and Technology, from 1994 to 1996, as Senior Vice President
10
<PAGE>
of Strategic Marketing and Technology, and from 1992 to 1994, Senior Vice
President and Chief Financial Officer of the Registrant. Mr. Salipante has been
associated with the Registrant since 1992.
Officers are elected annually by the Board of Directors for one year terms,
subject to removal by the Board.
ITEM 11. EXECUTIVE COMPENSATION.
The information from pages 13 through 21, up to proposal 2 from page 21 of the
Registrant's 1998 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 1998 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information entitled "Other Compensation" from page 21 of the Registrant's
1998 Proxy Statement is incorporated herein by reference.
11
<PAGE>
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, 1997, are incorporated by reference
in Item 8.
a. Consolidated Balance Sheets as of December 31, 1997 and 1996
b. Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995
c. Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995
d. Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
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 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:
3(a) - Certificate of Incorporation, as amended, of the Registrant
(incorporated by reference to Exhibit 4(a) to the Registrant's
Registration Statement on Form S-8, Registration No. 333-42125).
3(b) - By-Laws, as amended, of the Registrant (incorporated by
reference to Exhibit 3 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1990, File No. 1-10640).
4(a) - Certificate of Incorporation, as amended, of the Registrant
(incorporated by reference to Exhibit 4(a) to the Registrant's
Registration Statement on Form S-8, Registration No. 333-42125).
4(b) - By-Laws, as amended, of the Registrant (incorporated by
reference to Exhibit 3 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1990, File No. 1-10640).
4(c) - Surplus Note (incorporated by reference to Exhibit 4(e) to the
Registrant's Registration Statement on Form S-3, Registration
No. 33-87588).
4(d) - Rights Agreement dated as of October 7, 1988 (incorporated by
reference to Exhibit 1 to the Registrant's Registration
Statement on Form 8-A dated October 4, 1989, File No. 0-17441).
4(e) - Amendment to Rights Agreement dated as of February 8, 1990
(incorporated by reference to Exhibit 1 to the Registrant's
Amendment on Form 8 dated February 15, 1990 to Registration
Statement on Form 8-A dated October 4, 1989, File No. 0-17441).
12
<PAGE>
4(f) - Amendment to Rights Agreement dated as of September 10, 1994
(incorporated by reference to Exhibit 1 to the Registrant's
Amendment on Form 8-A/A dated September 12, 1994 to Registration
Statement on Form 8-A dated October 4, 1989, File No. 0-17441).
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, 1997:
. Amendment No. 1 ReliaStar Stock Ownership Plan for
Nonemployee Directors
. ReliaStar 1993 Stock Incentive Plan (as amended and restated
effective as of February 11, 1998)
. Form of Management Employment Agreement
Management contracts and compensatory plans involving Directors
and Executive Officers filed as exhibit to Form 10-K for
Fiscal Year Ended December 31, 1996:
. 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:
. ReliaStar Financial Corp. Supplemental Executive Retirement
Plan
. ReliaStar Executives' Long-term Incentive Compensation
Program (as amended and restated effective January 1, 1996)
. Form of Deposit Share Agreement issued under the ReliaStar
1993 Stock Incentive Plan
. Form of Nonqualified Stock Option Agreement issued under the
ReliaStar 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, 1994:
. ReliaStar Executives' Annual Incentive Compensation Program
. ReliaStar Annual Incentive Bonus Plan For Designated
Executive Officers
. ReliaStar Supplemental 401(k) Plan
. ReliaStar Supplemental Profit Sharing Plan
. First Amendment to Compensation Trust Agreement
Management contracts and compensatory plans involving Directors
and Executive Officers filed as exhibit to Form 10-K for Fiscal
Year Ended December 31, 1993:
. Form of Incentive Stock Option Agreement issued under The
NWNL Companies 1993 Stock Incentive Plan
. Form of Nonqualified Stock Option Agreement issued under The
NWNL Companies 1993 Stock Incentive Plan
. Form of Nonqualified Stock Option Agreement (Replacement
Stock Option Grant) issued under The NWNL Companies 1993
Stock Incentive Plan
. Form of Incentive Stock Option Agreement (Replacement Stock
Option Grant) issued under The NWNL Companies 1993 Stock
Incentive Plan
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)
. Form of 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
13
<PAGE>
. 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
13 - Registrant's Annual Report for the year ended December 31, 1997,
is filed as an exhibit to the extent incorporated by reference
herein
21 - Subsidiaries
23 - Consent
24 - Powers of attorney
27 - Supplemental Data Schedule
(B) REPORTS ON FORM 8-K:
None
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ReliaStar Financial Corp. and Subsidiaries
Minneapolis, Minnesota
We have audited the consolidated financial statements of ReliaStar Financial
Corp. and Subsidiaries as of December 31, 1997 and 1996, and for each of the
three years in the period ended December 31, 1997, and have issued our report
thereon dated February 3, 1998, such consolidated financial statements and
report are included in the Company's 1997 Annual Report to Shareholders and are
incorporated herein by reference. Our audits also included the consolidated
financial statement schedules of ReliaStar Financial Corp. and Subsidiaries,
listed in Item 14(A)2 of this Report on Form 10-K. These consolidated 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 consolidated financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 3, 1998
15
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE I-CONSOLIDATED SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
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 $ 164.5 $ 173.9 $ 173.9
States, Municipalities and
Political Subdivisions 891.0 941.0 941.0
Foreign Governments 94.8 102.0 102.0
Public Utilities 895.0 955.5 955.5
All Other Corporate Bonds 8,612.7 8,968.7 8,968.7
Redeemable Preferred Stocks 5.9 5.6 5.6
--------- --------- ---------
Total Fixed Maturities 10,663.9 11,146.7 11,146.7
--------- --------- ---------
Equity Securities
Industrial, Miscellaneous and
all Other Common Stocks 20.9 21.6 21.6
Nonredeemable Preferred Stocks 4.6 5.4 5.4
--------- --------- ---------
Total Equity Securities 25.5 27.0 27.0
--------- --------- ---------
Mortgage Loans on Real Estate /1/ 2,281.2 2,270.7
Real Estate /1/ 35.4 32.6
Real Estate Acquired in
Satisfaction of Debt /1/ 51.0 41.9
Policy Loans 663.3 663.3
Other Long-Term Investments /1/ 83.8 81.1
Short-Term Investments 157.2 157.2
--------- ---------
Total Investments $13,961.3 $14,420.5
========= =========
</TABLE>
/1/ Amounts in Column D differ from amounts shown in Column B because they are
net of allowances and write-downs for losses.
16
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Investments
Investment in and Advances to Subsidiaries $2,606.8 $1,788.8
Short-Term Investments 7.9 2.0
-------- --------
Total Investments 2,614.7 1,790.8
Accounts and Notes Receivable 8.3 7.8
Other Assets 10.9 11.4
-------- --------
TOTAL ASSETS $2,633.9 $1,810.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other Liabilities $ 36.7 $ 26.2
Bank Borrowings 37.0 7.0
Notes Payable 553.2 354.0
Income Taxes Payable (4.0) 5.1
-------- --------
TOTAL LIABILITIES 622.9 392.3
-------- --------
SHAREHOLDERS' EQUITY
Common Stock .9 .4
Additional Paid-in Capital 1,019.8 571.9
Note Receivable from ESOP (20.8) (21.6)
Unamortized Restricted Stock Awards (1.0) (1.8)
Net Unrealized Investment Gains 226.2 140.8
Retained Earnings 964.8 794.2
Less Treasury Common Stock, at Cost (178.9) (66.2)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 2,011.0 1,417.7
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,633.9 $1,810.0
======== ========
</TABLE>
See page 20 for Notes to Condensed Financial Information of Registrant.
17
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
REVENUES
Net Investment Income $ 11.6 $ 10.2 $ 8.2
Other Income 2.9 3.1 3.2
------ ------ ------
TOTAL 14.5 13.3 11.4
------ ------ ------
BENEFITS AND EXPENSES
Sales and Operating Expenses (2.4) (1.9) (1.5)
Interest Expense 38.0 26.7 20.1
------ ------ ------
TOTAL 35.6 24.8 18.6
------ ------ ------
Loss from Continuing Operations
Before Income Taxes (21.1) (11.5) (7.2)
Income Tax - - -
------ ------ ------
Loss of Parent Only (21.1) (11.5) (7.2)
Equity in Net Income from Continuing
Subsidiaries Operations 243.1 204.5 176.3
------ ------ ------
Income from Continuing Operations 222.0 193.0 169.1
Equity in Net Loss from Discontinued Operations - - (5.4)
------ ------ ------
NET INCOME $222.0 $193.0 $163.7
====== ====== ======
PER COMMON SHARE
Basic
Income from Continuing Operations $ 2.59 $ 2.54 $ 2.21
Loss from Discontinued Operations - - (.07)
------ ------ ------
Net Income $ 2.59 $ 2.54 $ 2.14
====== ====== ======
Diluted
Income from Continuing Operations $ 2.55 $ 2.37 $ 2.06
Loss from Discontinued Operations - - (.07)
------ ------ ------
Net Income $ 2.55 $ 2.37 $ 1.99
====== ====== ======
Net Income Available to Common Shareholders $222.0 $187.8 $155.4
====== ====== ======
</TABLE>
See page 20 for Notes to Condensed Financial Information of Registrant.
18
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Cash Provided (Used) by Operating Activities $ (3.5) $ (3.8) $ 3.7
------- ------ -------
INVESTING ACTIVITIES
Sales (Purchases) of Short-Term Investments, Net (5.9) 2.7 (1.5)
Dividends Received from Subsidiaries 68.5 55.1 43.1
Investments in or Advances to Subsidiaries (40.7) (41.7) (19.5)
Cash Acquired with Acquisition of Security-Connecticut Corp. 7.7 - -
------- ------ -------
Net Cash Provided by Investing Activities 29.6 16.1 22.1
------- ------ -------
FINANCING ACTIVITIES
Redemption of 10% Senior Cumulative Preferred Stock - (63.2) -
Increase in Notes and Mortgages Payable 174.9 148.9 166.3
Repayment of Notes and Mortgages Payable (19.9) (65.6) (104.5)
Payments Received on Note Receivable from ESOP .1 .4 .9
Issuance of Common Stock under Stock Option
and Other Plans 21.8 18.5 8.9
Dividends on 10% Senior Cumulative Preferred Stock - (3.2) (6.3)
Dividends on ESOP Convertible Preferred Stock - (2.8) (2.8)
Dividends on Common Stock (52.0) (40.0) (35.8)
Acquisition of Treasury Common Stock (151.0) (5.6) (52.2)
------- ------ -------
Net Cash Used by Financing Activities (26.1) (12.6) (25.5)
------- ------ -------
Increase (Decrease) in Cash - (.3) .3
Cash at Beginning of Year - .3 -
------- ------ -------
Cash at End of Year $ - $ - $ .3
======= ====== =======
</TABLE>
See page 20 for Notes to Condensed Financial Information of Registrant.
19
<PAGE>
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. 1997 Annual Report to Shareholders.
2. Dividends from Subsidiaries
The cash dividends paid to ReliaStar for 1997, 1996 and 1995 by its subsidiaries
were $68.5 million, $55.1 million and $43.1 million, respectively.
20
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(IN MILLIONS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
- --------------------------- ----------- ----------- ------------- -------- ---------- -------------- ------------- ---------
Pending Amortization
Future Policy of
Deferred Policy Claims and Deferred Sales
Policy and Other Net Benefits Policy and
Acquisition Contract Policyholder Investment to Acquisition Operating
Segment Costs Benefits Funds Premiums Income Policyholders Costs Expenses
- --------------------------- ----------- ---------- ------------- -------- ---------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997
- ----
Individual Insurance $1,029.1 $12,124.9 $218.9 $156.3 $ 876.4 $ 792.0 $85.2 $258.2
Employee Benefits .2 475.0 202.0 509.7 60.0 417.8 - 148.1
Life and Health Reinsurance 6.0 144.0 204.6 221.9 18.0 121.8 .5 51.3
Pension 51.5 587.7 1.5 - 54.0 41.1 2.5 7.7
Other 5.1 (2.2) - - 16.6 (.7) .7 107.3
-------- --------- ------ ------ -------- -------- ----- ------
Total $1,091.9 $13,329.4 $627.0 $887.9 $1,025.0 $1,372.0 $88.9 $572.6
======== ========= ====== ====== ======== ======== ===== ======
1996
- ----
Individual Insurance $ 958.2 $10,092.8 $107.7 $130.9 $ 792.4 $ 694.3 $82.8 $198.6
Employee Benefits - 473.2 197.7 522.2 60.7 439.1 - 147.1
Life and Health Reinsurance 2.5 118.8 172.1 183.7 16.1 107.4 .4 37.9
Pension 39.4 651.2 .6 .1 61.5 47.7 .6 7.0
Other 5.9 (3.8) .1 - 10.0 (.8) 1.0 46.8
-------- --------- ------ ------ -------- -------- ----- ------
Total $1,006.0 $11,332.2 $478.2 $836.9 $ 940.7 $1,287.7 $84.8 $437.4
======== ========= ====== ====== ======== ======== ===== ======
1995
- ----
Individual Insurance $ 827.3 $ 9,753.6 $101.9 $147.0 $ 747.3 $ 713.4 $60.6 $151.2
Employee Benefits - 445.3 184.1 537.4 54.3 448.7 - 154.6
Life and Health Reinsurance 2.4 97.5 143.8 167.0 13.7 99.4 .9 33.0
Pension 24.3 740.1 2.3 .1 72.1 60.4 .1 5.7
Other 6.7 (3.3) - - 3.7 (.7) .8 24.0
-------- --------- ------ ------ -------- -------- ----- ------
Total $ 860.7 $11,033.2 $432.1 $851.5 $ 891.1 $1,321.2 $62.4 $368.5
======== ========= ====== ====== ======== ======== ===== ======
</TABLE>
21
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE IV - REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN MILLIONS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
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
---------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1997
- ----
Life Insurance In Force $223,972.0 $34,305.4 $43,052.9 $232,719.5 18.5%
========== ========= ========= ==========
Premiums
Life Insurance $ 486.1 $ 78.6 $ 235.7 $ 643.2 36.6
Accident and Health Insurance 189.5 95.3 150.5 244.7 61.5
---------- --------- --------- ----------
Total Premiums $ 675.6 $ 173.9 $ 386.2 $ 887.9 43.5%
========== ========= ========= ==========
1996
- ----
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%
========== ========= ========= ==========
</TABLE>
22
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
AS OF DECEMBER 31, 1997, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
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
- ------------------------------- ---------- ---------- --------------- ---------- ---------
<S> <C> <C> <C> <C> <C><C>
1997
- ----
Commercial Mortgage Loans $11.0 $2.0 - $(3.6) $9.4
Residential Mortgage Loans .7 .4 - - 1.1
Foreclosed Real Estate 11.2 1.6 - (3.7) 9.1
Real Estate 2.1 .7 - - 2.8
Other Invested Assets 2.6 .1 - - 2.7
Accounts and Notes Receivable 2.2 .1 - (.2) 2.1
1996
- ----
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
</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.
23
<PAGE>
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 23rd day of March 1998.
RELIASTAR FINANCIAL CORP.
By 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 23rd day of March 1998 by the following persons on behalf
of the Registrant and in the capacities indicated.
JOHN G. TURNER* Chairman and Chief Executive Officer
----------------------- (Principal Executive Officer)
John G. Turner
JAMES R. MILLER* Senior Vice President, Chief Financial Officer
----------------------- and Treasurer
James R. Miller (Principal Financial Officer)
CHRIS D. SCHREIER* Second Vice President and Controller
----------------------- (Principal Accounting Officer)
Chris D. Schreier
CAROLYN H. BALDWIN
DAVID C. COX
JOHN H. FLITTIE
LUELLA GROSS 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, M.D.
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
24
<PAGE>
ReliaStar Financial Corp.
Exhibit Index
Exhibit No. Description Page
- ----------- ----------- ----
10 Material contracts:
Amendment No. 1 ReliaStar Stock Ownership Plan for
Nonemployee Directors 25
ReliaStar 1993 Stock Incentive Plan (as amended and
restated effective as of February 11, 1998) 26
Form of Management Employment Agreement 40
13 Registrant's Annual Report for the year ended
December 31, 1997, is filed as an exhibit to the
extent incorporated by reference herein 49
21 Subsidiaries 88
23 Consent 90
24 Powers of attorney 91
27 Financial Data Schedule 107
<PAGE>
EXHIBIT 10.1
AMENDMENT NO. 1
RELIASTAR STOCK OWNERSHIP PLAN
FOR NONEMPLOYEE DIRECTORS
Pursuant to authority of the Board of Directors of ReliaStar Financial Corp. at
its regularly scheduled meeting on January 8, 1998, Sections 8(a), 8(b) and 8(e)
of the ReliaStar Stock Ownership Plan for Nonemployee Directors are amended in
their entirety to read as follows:
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 3,500 Shares
(as adjusted provided in Section 9(b) hereof) shall be granted to 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 3,500 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.
e. VESTING. Except as otherwise provided in paragraphs (h) and (i) of
this Section 8, one-third (1,167 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 (1,167 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 (1,166) of each Stock Option shall vest on and be
exercisable on or after the third anniversary of the Date of Grant.
This amendment shall be effective January 8, 1998.
/s/ John G. Turner
------------------
John G. Turner
Chairman and Chief Executive Officer
<PAGE>
EXHIBIT 10.2
RELIASTAR 1993
STOCK INCENTIVE PLAN
(AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 11, 1998)
ARTICLE I.
GENERAL
Sec. 1.1 Name of Plan. The name of the plan set forth herein is
------------
"ReliaStar 1993 Stock Incentive Plan" (the "Plan").
Sec. 1.2 Purposes. The purposes of the Plan are to provide long-term
--------
incentives and rewards to employees who are largely responsible for the success
and growth of ReliaStar Financial Corp. ("Corporation") and its Subsidiaries, to
assist the Corporation in attracting and retaining employees with experience and
ability on a basis competitive with industry practices, and to associate the
interests of such employees with those of the Corporation's shareholders.
Sec. 1.3 Effective Date. The effective date of the Plan is January 14,
--------------
1993, the date on which it was approved by the Board of Directors of the
Corporation.
Sec. 1.4 Number of Shares. Subject to adjustments contemplated by Sec.
----------------
5.2 hereof, the Shares that may be delivered or purchased under the Plan prior
to January 1, 1997 shall not exceed the sum of four million eight hundred
thousand (4,800,000) Shares. Commencing on January 1, 1997, all Shares not
previously delivered or purchased under the Plan plus two percent (2%) of the
total issued and outstanding Shares as of January 1, 1997 and each subsequent
year the Plan is in effect shall be available for delivery or purchase under the
Plan. The amount of Shares available for delivery or purchase in any one
calendar year shall include any such Shares available in the previous year or
years but not delivered or purchased in such year or years, provided that no
more than four million eight hundred thousand (4,800,000) Shares shall be
cumulatively available for the grant of Incentive Stock Options. Shares to be
delivered or purchased under the Plan may be authorized and unissued shares or
issued shares reacquired by the Corporation including treasury Shares. Subject
to the adjustments contemplated by Sec. 5.2 hereof, and only to the extent
required in order for Stock Options under the Plan to qualify for the
performance-based compensation exception described in Sec. 162(m) of the Code,
the maximum number of Shares with respect to which Stock Options may be awarded
to any individual Participant in any calendar year shall be 1,500,000.
ARTICLE II.
DEFINITIONS
Sec. 2.1 Award. "Award" means a grant of Stock Options, Stock Awards, or
-----
Restricted Stock Awards, or a combination thereof, under the Plan.
Sec. 2.2 Beneficiary. "Beneficiary" means the person or persons designated
-----------
as such by a Participant's will or pursuant to the laws of decent and
distribution.
<PAGE>
Sec. 2.3 Board of Directors. "Board of Directors" or "Board" means the
------------------
Board of Directors of the Corporation.
Sec. 2.4 Bonus Determination Date. "Bonus Determination Date" means the
------------------------
date as of which the dollar amount of a Qualified Bonus has been determined and
approved by the Committee, and the Committee has determined that all or a
portion thereof shall be paid in the form of a Stock Award.
Sec. 2.5 Broad-based Stock Option Grant. "Broad-based Stock Option Grant"
------------------------------
means the simultaneous grant of Nonqualified Stock Options to at least 1,000
employees of the Corporation and its Subsidiaries.
Sec. 2.6 Chief Executive Officer. "Chief Executive Officer" means the
-----------------------
Chairman and chief executive officer of the Corporation.
Sec. 2.7 Code. "Code" means the Internal Revenue Code as amended from time
----
to time.
Sec. 2.8 Committee. "Committee" means the members of the Personnel and
---------
Compensation Policy Committee of the Board of Directors exclusive of any member
who is not a "Non-employee Director" within the meaning of Regulation
(S)240.16b-3 under the Exchange Act, as applicable to the Corporation at the
time in question.
Sec. 2.9 Corporation. "Corporation" means ReliaStar Financial Corp.
-----------
Sec. 2.10 Date of Grant. "Date of Grant" means the date designated in a
-------------
resolution by the Committee or in a written resolution by the CEO as the date
for granting Stock Options. If the resolution does not designate a Date of
Grant, the Date of Grant shall be the date of the resolution or written action.
Sec. 2.11 Fair Market Value. "Fair Market Value" as applied to a specific
-----------------
date means the average of the highest and lowest market price of Shares, as
reported on the consolidated transaction reporting system for New York Stock
Exchange issues on such date or, if Shares were not traded on such date, on the
next preceding day on which the Shares were traded.
Sec. 2.12 Incentive Stock Options. "Incentive Stock Options" means Stock
-----------------------
Options that are intended to qualify under Section 422 of the Code.
Sec. 2.13 Nonqualified Options. "Nonqualified Options" means Stock Options
--------------------
that are not intended to qualify under Section 422 of the Code.
Sec. 2.14 Participant. A "Participant" means a person designated as such
-----------
by the Committee for participation in the Plan.
Sec. 2.15 Plan Year. "Plan Year" means a one-year period commencing on
---------
January 1 of a calendar year and ending on December 31 of such calendar year.
Sec. 2.16 Qualified Bonus. "Qualified Bonus" means a bonus to which a
---------------
Participant is entitled under the terms of a bonus plan or program of the
Corporation or
<PAGE>
a Subsidiary which permits, subject to the Committee's approval, payment of all
or a portion of such bonus in the form of a Stock Award pursuant to the terms of
this Plan.
Sec. 2.17 Restricted Stock Award. "Restricted Stock Award" means Shares
----------------------
awarded to a Participant by the Committee pursuant to Article VIII hereof, which
shares are subject to certain terms, conditions and restrictions.
Sec. 2.18 Exchange Act. "Exchange Act" means the Securities Exchange Act
------------
of 1934, as amended.
Sec. 2.19 Shares. "Shares" means shares of common stock of the
------
Corporation.
Sec. 2.20 Stock Award. "Stock Award" means Shares awarded to a Participant
-----------
by the Committee pursuant to the terms of Article VII hereof.
Sec. 2.21 Stock Option. "Stock Option" or "Stock Options" means an option
------------
or options granted to a Participant to purchase Shares from the Corporation. As
to Participants who are subject to Section 16 of the Exchange Act, Stock Options
may be either Nonqualified Stock Options or Incentive Stock Options. Stock
Options are subject to the terms of Article VI hereof.
Sec. 2.22 Subsidiary. "Subsidiary" means a subsidiary of the Corporation
----------
in which the Corporation has a fifty percent (50%) or more interest.
Sec. 2.23 Ten Percent Shareholder. "Ten Percent Shareholder" means any
-----------------------
individual owning more than ten percent (10%) of the total combined voting power
of all classes of stock of the Corporation. An individual shall be considered to
own any voting stock owned (directly or indirectly) by or for his brothers,
sisters, spouse, ancestors, or lineal descendants and shall be considered to own
proportionately any voting stock owned (directly or indirectly) by or for a
corporation, partnership, estate, or trust of which said individual is a
shareholder, partner or beneficiary.
ARTICLE III.
ADMINISTRATION OF PLAN
Sec. 3.1 Eligibility. Any key employee of the Corporation or a Subsidiary
-----------
who has been designated as a Participant by the Committee (or by the CEO
pursuant to Sec. 3.5 hereof) is eligible to participate in the Plan. In
addition, at the election of the Committee, some or all employees of the
Corporation and its subsidiaries are eligible to receive options in a Broad-
based Stock Option Grant. No member of the Committee is eligible to participate
in the Plan. The Committee may designate one or more classes of Participants
under the Plan.
Sec. 3.2 Committee. The Plan shall be administered by the Committee.
---------
Members of the Committee shall serve at the pleasure of the Board.
Sec. 3.3 Powers of Committee. The Committee shall have all the powers
-------------------
vested in it by the terms of the Plan, such powers to include exclusive
authority (within the limitations described herein and except as provided to the
CEO pursuant to Sec. 3.5 hereof) to select the employees to be granted Awards
under the Plan, to determine the type, size and terms of Awards to be made to
each employee selected, to determine
<PAGE>
the time when Awards will be granted, and to establish objectives and conditions
for earning Awards. The Committee shall have full power and authority to
administer and interpret the Plan and to adopt such rules, regulations,
agreements, guidelines and instruments for the administration of the Plan and
for the conduct of its business as the Committee deems necessary or advisable.
The Committee's interpretation of the Plan, and all actions taken and
determinations made by the Committee pursuant to the powers vested in it, shall
be conclusive and binding on all parties concerned, including the Corporation,
its Subsidiaries, its shareholders, Plan Participants and any employee of the
Corporation or its Subsidiaries. To the extent permitted by law, the Committee
may delegate duties to any person or persons.
Sec. 3.4 Decisions of the Committee. Any action required or permitted to
--------------------------
be taken by the Committee under the Plan shall require the affirmative vote of a
majority of those members present and voting at a properly convened meeting of
the Committee. Members of the Committee may participate in a meeting of the
Committee by means of conference telephone or similar communications equipment
whereby all meeting participants can hear each other and such participation will
constitute presence in person at the meeting. A majority of all members of the
Committee shall constitute a "quorum" for Committee business. The Committee may
act by written determination instead of by affirmative vote at a meeting,
provided that any written determination shall be signed by all members of the
Committee, and any such written determination shall be as fully effective as a
majority vote of members constituting a quorum at a meeting. Any decision made
or action taken by the Committee in connection with the Plan shall be final and
conclusive as to all parties involved.
Sec. 3.5 Delegation of Certain Powers of the Committee to the CEO.
----------------------------------------------------------
Notwithstanding any provision of the Plan to the contrary, the Committee may, by
written resolution, authorize the CEO, in his discretion, to make certain awards
of Nonqualified Stock Options, to employees of the Corporation or its
Subsidiaries who are not subject to Section 16 of the Exchange Act and who are
not "covered employees" within the meaning of Section 162(m) of the Code ("CEO
Awards"). CEO Awards shall be made pursuant to terms and conditions prescribed
by the Committee, shall be limited to immaterial amounts as prescribed by the
Committee, and shall be subject to all provisions of Article VI hereof as if
granted by the Committee.
ARTICLE IV.
AWARDS
Sec. 4.1 Types. Awards under the Plan may include Stock Awards, Stock
-----
Options, Restricted Stock Awards or a combination thereof as the Committee shall
determine. Stock Options shall be subject to the provisions of Article VI
hereof, Stock Awards shall be subject to the provisions of Article VII hereof,
and Restricted Stock Awards shall be subject to the provisions of Article VIII
hereof.
Sec. 4.2 Performance Goals. The Committee may establish meaningful
-----------------
performance goals to be achieved within such performance periods as may be
selected by it in its sole discretion, using such measures of the performance of
the Corporation and its Subsidiaries as it may select.
Sec. 4.3 Guidelines. The Committee may from time to time adopt written
----------
policies for its implementation of the Plan. Such policies may include, but need
not be limited to, the type, size and term of Awards to be made to Participants
and the conditions for payment of such Awards.
<PAGE>
Sec. 4.4 Vesting. The Committee may determine that all or a portion of a
-------
payment to a Participant under the Plan, whether it is to be made as a Stock
Award, Restricted Stock Award or Stock Options or a combination thereof, shall
be vested at such times and upon such terms as may be selected by it in its sole
discretion.
Sec. 4.5 Assignment or Transfer. No Awards under the Plan or rights or
----------------------
interests in the Plan shall be assignable or transferable by a Participant,
voluntarily or involuntarily, except by the will or the laws of descent and
distribution. For the purposes of this Sec. 4.5, an original deposit, as defined
in Sec. 8.6(a), is not considered an Award under, or right or interest in Plan.
During the lifetime of a Participant, Awards are exercisable only by, and
payable only to, the Participant.
Sec. 4.6 Agreements. All Awards granted under the Plan shall be evidenced
----------
by agreements in such form and containing such terms and conditions (not
inconsistent with the Plan) as the Committee shall adopt.
ARTICLE V.
MISCELLANEOUS PROVISIONS
Sec. 5.1 Rights as Shareholder. A Participant under the Plan shall have
---------------------
no rights as a shareholder with respect to Awards under the Plan unless and
until certificates for such Shares are issued to the Participant. The issuance
by the Corporation of shares of stock of any class, or securities convertible
into shares of stock of any class, for cash or property or for labor or
services, either upon direct sale or upon the exercise of rights or warrants to
subscribe therefor, or upon conversion of shares or obligations of the
Corporation convertible into such shares or other securities, shall not affect,
and no adjustment by reason thereof shall be made with respect to Awards under
the Plan.
Sec. 5.2 Dilution and Other Adjustments. In the event of any change in
------------------------------
the outstanding Shares by reason of any split, stock dividend, recapitalization,
merger, consolidation, combination or exchange of shares or other similar
corporate change, such equitable adjustments shall be made in the Plan and the
Awards under it as the Committee determines are necessary and appropriate,
including, if necessary, any adjustment in the maximum number or kind of shares
subject to the Plan or which may be or have been awarded to any Participant.
Such adjustment shall be conclusive and binding for all purposes of the Plan.
Sec. 5.3 Compliance with Law and Approval by Regulatory Bodies. No Stock
-----------------------------------------------------
Option shall be exercisable, no Shares shall be issued, no certificates for
Shares shall be delivered, and no payment shall be made except in compliance
with all applicable federal and state laws and regulations and rules of all
domestic stock exchanges on which the Shares are listed. The Corporation shall
have the right to rely on the opinion of its counsel as to such compliance. If,
in the opinion of the Corporation's counsel, the transfer, issuance or sale of
any Shares under the Plan shall not be lawful for any reason, including the
inability of the Corporation to obtain from any regulatory body having
jurisdiction the authority deemed by such counsel to be necessary for such
transfer, issuance or sale, the Corporation shall not be obligated to transfer,
issue or sell such Shares. Any share certificate issued may bear such legends
and statements as the Committee may deem advisable or desirable. Further, in
connection with any sale, issuance or transfer hereunder, the Participant
acquiring the Shares shall, if
<PAGE>
requested by the Corporation, give satisfactory assurances to the Corporation's
counsel that the Shares are being acquired for investment and not with a view to
resale or distribution thereof and provide any other assurance as the
Corporation may deem desirable.
Sec. 5.4 Amendment of Plan. To the extent permitted by law, the Committee
-----------------
may at any time terminate or from time to time amend the Plan in whole or in
part, but no such action shall adversely affect any rights or obligations with
respect to any Awards previously made under the Plan. With the consent of the
affected Participant, the Committee may amend outstanding agreements evidencing
Awards under the Plan in a manner not inconsistent with the terms of the Plan.
Sec. 5.5 Duration of Plan. Unless the Plan is terminated earlier by the
----------------
Committee, the Plan shall remain in full force and effect until the close of
business on January 13, 2003, at which time the right to grant Awards under the
Plan shall terminate unless the Corporation's shareholders approve an extension
or renewal. Any awards granted under the Plan on or before January 13, 2003,
shall continue to be governed thereafter by the terms of the Plan and of the
Awards; provided if the Corporation terminates the Plan, Stock Options not
vested on the date of the Plan termination are, unless otherwise determined by
the Committee, forfeited.
Sec. 5.6 Withholding of Taxes. There shall be deducted from all
--------------------
distributions under the Plan the amount of any taxes which the Corporation or
Subsidiary may be required to withhold by any federal, state, or local
government. In addition, there shall be deducted any other amount required by
law or by order of a court or government agency to be withheld from payments to
any Participant. With respect to Stock Awards and Restricted Stock Awards, the
Corporation shall have the right to require payment of any such taxes through
withholding from the Participant's salary or otherwise. Participants and their
personal representatives shall be responsible for payment of any and all
federal, state, local, foreign, or other taxes imposed on amounts paid under the
Plan. The Corporation and its Subsidiaries assume no responsibility for the tax
consequences to the Participant for his/her participation in the Plan. Subject
to rules established by the Committee, withholding required by this Sec. 5.6 may
be satisfied by (i) the Company withholding shares issued on exercise or award
or (ii) the Participant delivering Shares owned by Participant, having a Fair
Market Value as of the date of delivery equal to or less than the amount
required to be withheld pursuant to this Sec. 5.6.
Sec. 5.7 Not an Employment Contract. Neither the Plan nor participation
--------------------------
in the Plan shall be construed as creating any agreement as to continued
employment with the Corporation or any of its affiliates.
Sec. 5.8 Transfer of Employment. For purposes of the Plan, transfer of
----------------------
employment between the Corporation, its Subsidiaries or affiliates (affiliates
shall not apply for Incentive Stock Options) shall not be deemed a termination
of employment.
Sec. 5.9 Unfunded Plan. The Plan shall be unfunded, and the Corporation
-------------
shall not be required to segregate any assets that may represent Awards under
the Plan. Any liability of the Corporation to any person with respect to any
Award under the Plan shall be based solely upon the contractual obligations
created pursuant to the Plan and evidenced by Agreements pursuant to Sec. 4.6
hereof. No such obligation of the
<PAGE>
Corporation shall be deemed to be secured by any pledge of, or other encumbrance
on, any property of the Corporation.
Sec. 5.10 No Rights as Shareholder. Awards under the Plan shall not
------------------------
entitle a Participant or any other person succeeding to his/her rights, to any
dividend, voting or other right as a shareholder of the Corporation unless and
until the issuance of a stock certificate to the Participant or such other
person pursuant to the provisions of the Plan and then only subsequent to the
date of issuance thereof.
Sec. 5.11 Governing Law. This Plan is governed in all respects by the
-------------
laws of the State of Delaware.
Sec. 5.12 Severability. In the event that any provision in this Plan
------------
would invalidate the Plan, the provision shall be null and void, and the Plan
shall be construed as if it did not contain that provision.
Sec. 5.13 Rules of Construction. Headings are given to the articles and
---------------------
sections of the Plan solely as a convenience to facilitate reference. Reference
to any statute, regulation, or other provision of law shall be construed to
refer to any amendment to or successor of such provision of law.
Sec. 5.14 References are to Plan. References herein to sections or
----------------------
articles are to sections or articles of the Plan unless the context clearly
indicates to the contrary.
Sec. 5.15 Compliance with Section 16. With respect to persons subject to
--------------------------
Section 16 of the Exchange Act, transactions under the Plan are intended to
comply with all applicable conditions of Rule 16b-3 or its successors under the
Exchange Act. To the extent any provision of the Plan or action by the
Committee fails to so comply, it shall be deemed null and void, to the extent
permitted by law and deemed advisable by the Committee.
ARTICLE VI.
AWARD OF STOCK OPTIONS
Sec. 6.1 Grant of Stock Options. Contemporaneously with or at any time
----------------------
after the Committee has designated an eligible employee as a Participant, the
Committee may award a Participant Stock Options at Fair Market Value as of the
Date of Grant, provided however, that an award of Stock Options to a Ten Percent
Shareholder shall be at one hundred ten percent (110%) of such Fair Market
Value. At the time of grant, the Committee shall send written notification to
each Participant indicating (i) the Date of Grant, (ii) the number of Stock
Options granted to the Participant, (iii) the time period in which to exercise
such Stock Options, and (iv) a stock option agreement providing for the purchase
of one Share for each Stock Option granted.
Sec. 6.2 Calculation of Awards. The number of Stock Options granted to a
---------------------
Participant in a Plan Year shall be determined by the Committee.
Sec. 6.3 Exercise of Stock Options. An individual entitled to exercise a
-------------------------
Stock Option may, subject to the terms and conditions of the Plan, exercise it
in whole or in part at any time, by delivery to the Corporate Secretary at the
Company's principal office written notice of exercise. Such notice of exercise
shall specify the number of whole Shares with respect to which the option is
being exercised, the Fair Market Value of the Shares on the Date of Grant, and
must be accompanied by payment in full by certified check, cashier's check,
money order or other form of cash payment as approved by the Committee in the
amount of the exercise price for the Shares to be purchased, plus any amount
required for withholding as provided in Sec. 5.6; provided, however, in lieu of
paying the exercise price by certified check, cashier's check, or money order as
described above, the individual may pay all or part of such exercise price by
delivering to the Company owned and unencumbered Shares having a Fair Market
Value
<PAGE>
as of the date of exercise equal to or less than the exercise price of the
options exercised, with cash for the remainder, if any, of the exercise price.
Sec. 6.4 Incentive Stock Options. Incentive Stock Options granted under
-----------------------
the Plan are intended to be incentive stock options under Section 422 of the
Code and shall be administered as such by the Committee. An Incentive Stock
Option shall be subject to the following:
(a) Option Period. Each Incentive Stock Option granted shall expire, and all
-------------
rights to purchase shares shall cease ten (10) years after the Date of
Grant of the Incentive Stock Option or on such earlier date as may be
fixed by the Committee, or on such date as is provided by this Plan in
the event of termination of employment or a reorganization of the
Corporation, provided however, that any Incentive Stock Option granted
to a Ten Percent Shareholder shall expire five (5) years after the Date
of Grant, or on such earlier date as otherwise may be fixed by the
Committee or provided by this Plan.
(b) Exercise at Termination of Employment. The right to exercise an
-------------------------------------
Incentive Stock Option upon a termination of employment shall be as
follows:
1. Upon a termination of employment due to the Participant's death, any
outstanding Incentive Stock Options must be exercised by a
Beneficiary within the earlier of five (5) years from the
Participant's date of death or the time period remaining to the
Participant to exercise his Award had the Participant lived.
2. Upon a termination of employment due to a Participant's disability,
as that term is used in Code Section 22(e)(3), any outstanding
Incentive Stock Options must be exercised within the earlier of one
year after the onset of such disability or the time period remaining
to the Participant to exercise his Award.
3. Upon a termination of employment for any other reason, except
dishonesty or any other illegal act, a Participant must exercise any
outstanding Incentive Stock Options within the earlier of three (3)
months of such termination or the time period remaining to the
Participant to exercise his Award. In the event of dishonesty or any
other illegal act, any Incentive Stock Options unexercised at
termination shall be forfeited by the Participant.
4. Notwithstanding the foregoing, the Committee may grant Stock Options
with exercise periods longer than provided in paragraphs 1, 2, and 3
of this subsection (b) which are intended to qualify as Incentive
Stock Options and which, if not exercised in the time periods
provided in
<PAGE>
paragraphs 1, 2, and 3 of this subsection (b) shall thereafter
become Nonqualified Stock Options subject to the provisions of Sec.
6.5 hereof; provided, however, that this paragraph 4 of subsection
(b) shall apply only to Participants who are not subject to Section
16 of the Exchange Act.
(c) Transferability of Stock Options. No Incentive Stock Option shall be
--------------------------------
assignable or transferable by the individual to whom it is granted
except that it may be transferred by will or the laws of descent and
distribution, in accordance with the provisions of the Plan. If a
Participant dies within the exercise period specified in either
paragraph (2) or (3) of subsection (b) hereof, the Beneficiary shall
have the time period remaining to the Participant in which to exercise
the Incentive Stock Option.
(d) The Committee shall determine the vesting schedule applicable to
Incentive Stock Options.
Sec. 6.5 Nonqualified Stock Options. Nonqualified Stock Options are Stock
--------------------------
Options that are not intended to qualify under Code Section 422. Nonqualified
Stock Options shall be subject to the following:
(a) Option Period. Except as provided below, each option granted shall
-------------
expire and all rights to purchase shares shall cease ten years and one
day after the Date of Grant of the Nonqualified Stock Option or on such
date prior thereto as may be fixed by the Committee. In the event of a
plan termination or Company reorganization, Nonqualified Stock Options
shall be exercisable pursuant to the rules set forth in Sec. 5.5 and
Sec. 6.6.
(b) Vesting of Nonqualified Stock Options. The Committee shall determine
-------------------------------------
the vesting schedule applicable to Nonqualified Stock Options.
(c) Exercise at Termination of Employment. The right to exercise
-------------------------------------
Nonqualified Stock Options upon a termination of employment shall be as
follows:
1. Upon the Participant's termination of employment that qualifies as a
retirement under the qualified retirement plan of the Corporation or
Subsidiary under which the Participant is covered, or a termination
of employment due to the onset of a Participant's disability as that
term is used in Sec. 8.6 (i), the Participant shall have until the
earlier of the expiration of the option period provided to the
Participant in subsection (a) above or the date five (5) years from
the date of such termination of employment to exercise such options.
Any nonvested options previously granted to the Participant shall
immediately vest on the date of such termination of employment and
shall no longer be subject to any vesting schedule.
2. To the extent a Participant's termination of employment is due to
his death, or his death occurs subsequent to a termination of
employment, the Participant's Beneficiary shall have the time period
remaining to the Participant had the Participant lived in which to
exercise such options. Any nonvested options previously granted to
the Participant shall
<PAGE>
immediately vest on the date of such termination of employment due
to the death of the Participant.
3. Upon the Participant's termination of employment for any other
reason except dishonesty or any illegal act, the Participant shall
have until the earlier of the expiration of the option period
provided to the Participant in subsection (a) above or unless a
longer period is provided by the Committee, the date sixty (60) days
from the date of such termination of employment to exercise options
in which the Participant is vested on the date of such termination
of employment. Any options in which the Participant is not vested
on the date of such termination shall be forfeited. In the event of
dishonesty or other illegal act, all Stock Options unexercised at
termination of employment shall be forfeited by the Participant.
Sec. 6.6 Merger, Dissolution, or Transfer of Substantially All of the
------------------------------------------------------------
Property of the Corporation. Stock Options granted but unexercised under the
- ---------------------------
Plan shall terminate upon the effective date of the dissolution or liquidation
of the Corporation; or upon reorganization, merger, or consolidation of the
Corporation with one or more Corporations, if the Corporation is not the
surviving corporation; or upon a transfer of substantially all of the property
of the Corporation.
Notwithstanding the above, Stock Options shall not terminate to the extent
that written provision is made for their continuance, assumption, or
substitution by a successor employer or its parent or subsidiary in connection
with a transaction described in the preceding sentence.
Sec. 6.7 Unexercised Stock Options. Any Stock Option not exercised
-------------------------
within the applicable time period set forth in Article VI shall be forfeited.
Sec. 6.8 Replacement Stock Options. A Stock Option granted at any time
-------------------------
under the Plan may, at the Committee's discretion, include the right to acquire
a Replacement Stock Option ("RSO"). The Committee may also grant separate
options ("Separate Options") which include an RSO feature with respect to Stock
Options issued under the Plan not containing an RSO feature. If a Stock Option
either contains the RSO feature or a Separate Option has been granted with
respect thereto and if a Participant pays all or part of the purchase price of
the Stock Option with Shares held by the Participant for at least six (6) months
or with cash, then upon exercise of the Stock Option the Participant is granted
an RSO to purchase, at the Fair Market Value as of the date of the Stock Option
exercise, such number of Shares as determined by the Committee at the time of
granting the Stock Option, but not in excess of the number of whole Shares used
by the Participant in payment of the purchase price (or would have been used if
Shares had been tendered instead of cash) and the number of whole shares, if
any, withheld by the Corporation or remitted by Participant as payment for
withholding taxes. An RSO may be exercised between the date six (6) months
after the Date of Grant of the RSO and the date of expiration, which will be the
same as the date of expiration of the Stock Option to which the RSO is related.
An RSO shall not contain an RSO feature and a Separate Option shall not be
granted with respect to an RSO. The RSO feature of a Stock Option and a
Separate Option are subject to cancellation by the Committee without notice at
any time in the Committee's sole discretion.
<PAGE>
ARTICLE VII.
STOCK AWARDS
Sec. 7.1 Bonus Payable in the Form of Stock Awards. The Committee, in
-----------------------------------------
its sole discretion, may determine that all or part of any Qualified Bonus shall
be paid in the form of a Stock Award. Stock Awards shall be subject to such
guidelines and rules as the Committee may establish pursuant to Sec. 3.3. hereof
and to the specific provisions of this Article VII.
Sec. 7.2 Determination by Number of Shares. The portion of any
---------------------------------
Qualified Bonus payable as a Stock Award shall be converted to a whole number of
Shares by dividing the dollar amount of such Qualified Bonus, or portion thereof
by the Fair Market Value of one Share as of the Bonus Determination Date as
determined in good faith by the Committee. Any fractional Shares shall be paid
to the Participant in cash.
Sec. 7.3 Issuance of Stock Certificate. The Corporation shall issue and
-----------------------------
deliver a certificate for the Shares granted as a Stock Award as soon as
administratively and legally possible after the Bonus Determination Date. Any
delay in issuance of such certificate for such Shares after the Bonus
Determination Date shall be subject to the following:
(a) If, during the period of such delay, the Corporation declares and pays a
cash dividend and the circumstances are such that, if the certificate
for such Shares had been issued on the Bonus Determination Date, the
cash dividend would have been paid on such Shares, then there shall be
paid in cash to Participants to whom Shares have been awarded but not
issued on the dividend payable date an amount equivalent to the
dividends which would have been payable with respect to such Shares if
they had been issued and outstanding on or after the Bonus Determination
Date. Such dividend equivalents shall be paid in cash on the date or
dates as of which dividends on the Corporation's issued and outstanding
Shares are payable.
(b) If, during the period of such delay, there is an increase or decrease in
the number of issued and outstanding Shares through the declaration of a
stock dividend or through recapitalization resulting in a stock split-
up, change in par value, combination or exchange of Shares, or the like
("Stock Adjustment"), and the circumstances are such that if the
certificate for each Share had been issued on the Bonus Determination
Date such Shares would have been adjusted to give effect to such Stock
Adjustment, then the number of Shares in such Stock Award shall be
adjusted to reflect such Stock Adjustment.
(c) If such Shares have not been issued 90 days following the Bonus
Determination Date, then the net dollar amount of such Stock Award
shall, in lieu of issuance of Shares, be paid in cash.
ARTICLE VIII.
RESTRICTED STOCK AWARDS
Sec. 8.1 Restricted Stock Awards. The Committee may make Restricted Stock
-----------------------
Awards to Participants which shall be subject to the provisions of this Article
VIII.
<PAGE>
Sec. 8.2 Restricted Stock Agreements. Restricted Stock Awards shall be
---------------------------
evidenced by Restricted Stock Agreements which shall conform to the requirements
of the Plan and may contain such other provisions (such as provisions for the
protection of Restricted Stock in the event of mergers, consolidations,
dissolutions, and liquidations affecting either the Restricted Stock Agreement
or the stock issued thereunder) as the Committee shall deem advisable.
Sec. 8.3 Payment of Restricted Stock Awards. Restricted Stock Awards
----------------------------------
shall be paid by delivering to the Participant, or custodian or escrow
designated by the Committee and the Participant, a certificate or certificates
for such restricted shares of common stock of the Corporation ("Restricted
Shares") registered in the name of such Participant. The Participant shall have
all of the rights of a common stock shareholder with respect to such Restricted
Shares except as to such restriction as appear on the face of the certificate.
The Committee shall designate the Corporation or one or more of its employees to
act as custodian or escrow for the certificates ("Escrow Agent").
Sec. 8.4 Terms, Conditions and Restrictions. Restricted Shares shall be
----------------------------------
subject to such terms and conditions, including vesting and forfeiture
provisions, if any, and to such restrictions against resale, transfer or other
disposition as may be determined by the Committee at such time as it grants a
Restricted Stock Award to a Participant. Any new or different Shares or other
securities resulting from any adjustment of such Restricted Shares pursuant to
Section 8.2 hereof shall be subject to the same terms, conditions and
restrictions as the Restricted Shares prior to such adjustment. The Committee
may in its discretion, remove, modify or accelerate the release of restrictions
on any Restricted Shares as it deems appropriate. In the event of the
Participant's death following the transfer of Restricted Shares to him or her,
the Participant's legal representative or person receiving such Restricted
Shares under the Participant's will or under the laws of descent and
distribution shall take such Restricted Shares subject to the same terms and
conditions and provisions in effect at the time of the Participant's death, to
the extent applicable.
Sec. 8.5 Dividends and Voting Rights. During the restricted period the
---------------------------
Participant shall have the right to receive dividends from and to vote his or
her Restricted Shares.
Sec. 8.6 Deposit Share Provisions. Subject to the provisions set forth
------------------------
below ("Deposit Share Provisions") and subject to rules established by the
Committee, eligible Participants who deposit with the Corporation Shares which
such Participants elect to receive in the form of Shares, rather than cash under
the Corporation's incentive compensation programs designated by the Committee,
are eligible to receive a Restricted Stock Award:
(a) The Committee shall notify each Participant selected to participate in
the Deposit Share Provisions ("Deposit Share Participants") of the
maximum number (and any lesser number) of Shares they are permitted to
deposit with the Escrow Agent, and Deposit Share Participants may choose
to deposit any number of Shares they are permitted to deposit under the
Committee rules (the "Original Deposit").
(b) Deposit Share Participants must make their irrevocable election on or
before the date designated by the Committee or if no date is designated,
then at least 30 days prior to the date payment of awards is made
("Award Date").
<PAGE>
(c) All elections shall be in writing and filed with the Committee or its
designee. Such elections may, if permitted by the Committee, also
specify one of the following alternatives regarding the manner in which
dividends are paid on all deposited stock (including shares in the
Original Deposit, Shares purchased with dividends, if any, and matching
Restricted Shares :
(1) Dividends shall be used for the purchase of additional Shares for
the Deposit Share Participant's account; or
(2) Dividends shall be paid currently to the Deposit Share Participant.
(d) As soon as practicable following an Original Deposit, the Corporation
shall match these Shares and deposit with the Escrow Agent for the
Deposit Share Participant's account up to one Restricted Share for each
Share of the Original Deposit, as determined by the Committee. The
Restricted Shares deposited by the Corporation shall vest in accordance
with the schedule determined by the Committee. Restricted Shares shall
be distributed promptly as they vest.
(e) Shares purchased with dividends paid on deposited stock (Original
Deposit, Restricted Stock or any shares purchased with dividends) may be
withdrawn from a Deposit Share Participant's account at any time.
(f) A Deposit Share Participant may temporarily withdraw all or a portion of
the Shares on deposit (other than non-vested Restricted Stock) in order
to exercise Stock Options, subject to an equal number of Shares being
promptly redeposited with the Escrow Agent after such exercise.
(g) A Deposit Share Participant's interests in the Original Deposit or the
Restricted Stock may not be sold, pledged, assigned or transferred in
any manner, other than by will or the laws of descent and distribution,
so long as such shares are held by the Escrow Agent, and any such sale,
pledge, assignment or other transfer shall be null and void, provided,
however, a pledge of the Deposit Share Participant's interest in the
Original Deposit may be permitted in accordance with rules which the
Committee may establish.
(h) Any or all of the Original Deposit may be withdrawn at any time.
Withdrawal shall cause a forfeiture of any non-vested Restricted Shares
attributable to the Shares of the Original Deposit being withdrawn. Any
Shares withdrawn shall be deemed to be made under paragraph (e) to the
extent there are any such shares, and then under this paragraph (h).
(i) In the event the Deposit Share Participant's employment with the
Corporation and its subsidiaries is terminated during the vesting period
by the reason of the Deposit Share Participant's death, "Disability" or
"Retirement", the vesting requirement shall be deemed fulfilled upon the
date of such termination of employment. For purposes of this Sec.
8.6(i), "Disability" shall mean the cessation of employment of the
Deposit Share Participant under circumstances where the Deposit Share
Participant is eligible to receive a monthly disability benefit pursuant
to the group long-term disability insurance program sponsored by the
Corporation or subsidiary
<PAGE>
which employs the Participant or would be eligible to receive if he/she
were a participant in the applicable program. Unless otherwise provided
by the Committee, for purposes of this Sec. 8.6(i), "Retirement" shall
mean the Deposit Share Participant's termination of employment that
qualifies as Normal Retirement under the qualified retirement plan of
the Corporation or subsidiary of the Corporation under which the Deposit
Share Participant is covered.
(j) In the event of Deposit Share Participant's termination of employment
with the Corporation and its subsidiaries during the vesting period for
any reason other than those set forth in Sec. 8.6(i) hereof, the Shares,
to the extent not otherwise vested, shall automatically be forfeited and
returned to the Corporation unless the Committee shall, in its sole
discretion, otherwise provide.
<PAGE>
EXHIBIT 10.3
FORM OF
MANAGEMENT EMPLOYMENT AGREEMENT
AGREEMENT entered into as of __________________ by and between
_________________ (the "Company") a Delaware corporation and a wholly owned
subsidiary of ReliaStar Financial Corp., a Delaware corporation ("ReliaStar"),
and __________________ (the "Employee"), this agreement replaces in its entirety
the agreement signed and dated December 1, 1997.
WITNESSETH:
WHEREAS, the Employee is a key member of the management of the Company and
is expected to devote substantial skill and effort to the affairs of the
Company, and the Board of Directors of the Company desires to recognize the
significant personal contribution that the Employee will make to further the
best interests of the Company and its stockholder; and
WHEREAS, it is desirable and in the best interests of the Company and its
stockholder to obtain the benefits of the Employee's services and attention to
the affairs of the Company; and
WHEREAS, it is desirable and in the best interests of the Company and its
stockholder to provide inducement for the Employee (A) to remain in the service
of the Company in the event of any proposed or anticipated change in control of
ReliaStar and (B) to remain in the service of the Company in order to facilitate
an orderly transition in the event of a change in control of ReliaStar; and
WHEREAS, it is desirable and in the best interests of the Company and its
stockholder that the Employee be in a position to make judgments and advise the
Company and ReliaStar with respect to proposed changes in control of ReliaStar
without regard to the possibility that Employee's employment may be terminated
without compensation in the event of certain changes in control of ReliaStar;
and
WHEREAS, the Employee desires to be protected in the event of certain
changes in control of ReliaStar; and
WHEREAS, for the reasons set forth above, the Company and the Employee
desire to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, the Company and the Employee agree as follows:
Section 1. Employment. The Employee shall remain in the employ of the
----------
Company for the term of this Agreement (the "Term"), and during the Term the
Employee shall have such title, duties, responsibilities and authority, and
receive such remuneration and fringe benefits, as the Board of Directors of the
Company shall from time to time provide for the Employee; provided, however,
that either the Employee or the Company may terminate the employment of the
Employee at any time prior to the expiration of the Term, with or without Cause
and for any reason whatever, upon at least 10 working days' prior written notice
to the other party, subject to the right of the Employee to receive any payment
and other benefits that may be due pursuant to the terms and conditions of
Section 3 of this Agreement and pursuant to any other agreement governing the
terms of the employment of Employee with the Company.
<PAGE>
Section 2. Change in Control "Event". For purposes of this Agreement, a
-------------------------
change in control event ("Event") shall mean the occurrence of any of the
following:
(a) An acquisition (other than directly from ReliaStar) of any voting
securities of ReliaStar (the "Voting Securities") by any "Person" (as
the term person is used for purposes of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"))
immediately after which such Person is the "Beneficial Owner" (within
the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty
percent (20%) or more of the combined voting power of the then
outstanding Voting Securities; provided, however, in determining
-------- -------
whether an Event has occurred, Voting Securities which are acquired in
a "Non-Control Acquisition" shall not constitute an acquisition which
would cause an Event. A "Non-Control Acquisition" shall mean (1) an
acquisition by an employee benefit plan (or a trust forming a part
thereof) maintained by ReliaStar or any corporation or other Person of
which a majority of its voting power or its equity securities or
equity interest is owned directly or indirectly by ReliaStar (a
"Subsidiary"), (2) an acquisition by the Company or any Subsidiary,
(3) a transaction in which any Person became the Beneficial Owner of
more than twenty percent (20%) of the outstanding Voting Securities as
a result of an acquisition of Voting Securities by ReliaStar which, by
reducing the number of Voting Securities outstanding, increased the
percentage of the outstanding Voting Securities Beneficially Owned by
such Person, provided that if an Event would occur (but for the
operation of this sentence) and after such share acquisition by
ReliaStar, such Person becomes the Beneficial Owner of any additional
Voting Securities which increases the percentage of the then
outstanding Voting Securities Beneficially Owned by such Person then
an Event shall occur, or (4) an acquisition by any Person in
connection with a "Non-Control Transaction" (as defined in subsection
(c) of Section 2 hereof).
(b) The individuals who, as of the date this Agreement is approved by the
Board of Directors of ReliaStar, are members of the Board of Directors
of ReliaStar (the "Incumbent Board") cease for any reason to
constitute at least two-thirds of the Board; provided, however, that
-------- -------
if the election, or nomination for election by ReliaStar's
stockholders, of any new director was approved by a vote of at least a
two-thirds majority of the Incumbent Board, such new director shall,
for purposes of the Program, be considered as a member of the
Incumbent Board; provided further, however, that no individual shall
---------------- -------
be considered a member of the Incumbent Board if such individual
initially assumed office as a result of either an actual or threatened
"Election Contest" (as described in Rule 14a-11 promulgated under the
1934 Act) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board (a "Proxy
Contest") including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest; or
(c) Approval by stockholders of ReliaStar of:
(1) A merger, consolidation or reorganization involving ReliaStar,
unless such merger, consolidation or reorganization is a "Non-
Control Transaction" which is defined as a transaction in which
<PAGE>
(A) the stockholders of ReliaStar, immediately before such
merger, consolidation or reorganization, own, directly or
indirectly immediately following such merger, consolidation
or reorganization, at least fifty-one percent (51%) of the
combined voting power of the outstanding voting securities
of the corporation resulting from such merger or
consolidation or reorganization (the "Surviving
Corporation") in substantially the same proportion as their
ownership of the Voting Securities immediately before such
merger, consolidation or reorganization,
(B) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement
providing for such merger, consolidation or reorganization
constitute at least two-thirds of the members of the board
of directors of the Surviving Corporation, and
(C) no person (other than ReliaStar or any Subsidiary, any
employee benefit plan (or any trust forming a part thereof)
maintained by ReliaStar, the Surviving Corporation or any
Subsidiary, or any Person who, immediately prior to such
merger, consolidation or reorganization had Beneficial
Ownership of twenty percent (20%) or more of the then
outstanding Voting Securities) has Beneficial Ownership of
twenty percent (20%) or more of the combined voting power of
the Surviving Corporation's then outstanding voting
securities.
(2) A complete liquidation or dissolution of ReliaStar; or
(3) An agreement for the sale or other disposition of all or
substantially all of the assets of ReliaStar to any Person (other
than a transfer to a Subsidiary).
(d) ReliaStar enters into an agreement in principle or a definitive
agreement relating to an Event described in subsection (a), (b) or (c)
of Section 2 which ultimately results in such Event occurring or a
tender or exchange offer or proxy contest is commenced which
ultimately results in an Event described in subsection (a) or (b) of
Section 2 hereof occurring.
Section 3. Rights to Payment Following Change in Control "Event".
------------------------------------------------------
(a) If any Event shall occur during the Term of this Agreement (the first
such Event being the "First Event"), and if at any time after the
occurrence of the First Event and prior to the end of the Transition
Period, the employment of the Employee with the Company is terminated
for any reason (unless such termination is a voluntary termination by
the Employee other than a Constructive Involuntary Termination or is
on account of the death, Disability or Retirement of the Employee or
is a termination by the Company for Cause), and if Employee is less
than 65 years of age on the date of such termination, the Employee (or
the Employee's legal representative), subject to the limitations set
forth in Section 3(e), shall be entitled
<PAGE>
(1) to receive from the Company or its successor, upon such
termination of employment with the Company or its successor, a
cash payment in an amount equal to (A) the lesser of three (3)
("Severance Multiple") or, if Employee has attained the age of
62, a percentage of the Severance Multiple equal to the
percentage which the number of months from the date of the
Employee's termination to the date of such Employee's attainment
of age 65, is of thirty-six months, times (B) the sum of (i) the
base annual salary payable by the Company to the Employee at the
time of the Employee's termination of employment or at the time
of the First Event, whichever is greater, plus (ii) the average
annual bonus payable by the Company to the Employee for the
shorter of the most recent three completed years ending before
the Employee's termination of employment or that portion of such
period during which the Employee was employed by the Company,
such payment to be made to the Employee by the Company or its
successor in a lump sum at the time of such termination of
employment;
(2) to receive from the Company or its successor, upon such
termination of employment with the Company or its successor, a
cash payment equal to the excess, if any, of (A) the present
value of the sum of the retirement plan benefits under the
qualified and nonqualified supplemental defined benefit
retirement plans of the Company covering the Employee at the time
of his/her termination of employment to which the Employee would
have been entitled had his/her period of service for purposes of
computing such benefits included service until the earlier of the
last day of the Transition Period or such Employee's sixty-fifth
birthday, over (B) the present value of the sum of the actual
retirement plan benefits to which the Employee is entitled under
such retirement plans as of his/her termination of employment;
provided, that for purposes of this subsection 3(a)(2), present
value shall be determined using the UP 1984 Mortality Table with
a two-year set back or any successor table thereto, and the
interest rate assumptions which are used by the Pension Benefit
Guaranty Corporation deferred annuity factor as in effect on the
first day of the Plan Year in which the termination of employment
occurred; and
(3) to participate in any health, disability and life insurance plan
or program in which the Employee was entitled to participate
immediately prior to the First Event as if he were an employee of
the Company until the earlier of the Employee's sixty-fifth
birthday or the third anniversary date of such termination
(except, with respect to health insurance coverage, for those
portions remaining after such termination that duplicate health
insurance coverage that is in place for the Employee under any
other policy provided at the expense of the Company or another
employer); provided, however, that in the event that the
Employee's participation in any such health, disability or life
insurance plan or program is barred, the Company, at its sole
cost and expense, shall arrange to provide the Employee with
benefits substantially similar to those which the Employee is
entitled to receive under such plan or program.
<PAGE>
(b) Notwithstanding anything contained in this Agreement to the contrary,
if the Employee's employment is terminated during the Term and the
Employee reasonably demonstrates that such termination (1) was at the
request of a third party who has indicated an intention or taken steps
reasonably calculated to effect an Event and who effectuates an Event
(a "Third Party") or (2) otherwise occurred in connection with, or in
anticipation of, an Event which actually occurs, then for all purposes
of this Agreement, the date of an Event with respect to the Employee
shall mean the date immediately prior to the date of such termination
of the Employee's employment.
(c) The payments provided for in Section 3(a)(1) shall be in addition to
any salary or other remuneration otherwise payable to the Employee on
account of employment by the Company or by ReliaStar or one or more of
its subsidiaries or its successor (including any amounts received
prior to such termination of employment for personal services rendered
after the occurrence of the First Event) but shall be reduced (but not
to less than zero) by any severance pay which the Employee receives
from the Company, or by ReliaStar or any of its subsidiaries or its
successor under any other policy or agreement of the Company or
ReliaStar in the event of involuntary termination of Employee's
employment; provided, however, that payment of amounts previously
-------- -------
credited to deferred compensation accounts on behalf of the Employee
or the value of any accelerated vesting of benefits shall not be
considered severance pay for purposes of this subsection (c) of
Section 3.
(d) The Company shall also pay to the Employee all legal fees and expenses
incurred by the Employee as a result of such termination, including,
but not limited to, all such fees and expenses, if any, incurred in
contesting or disputing any such termination or in seeking to obtain
or enforce any right or benefit provided by this Agreement.
Section 4. Constructive Involuntary Termination of Employment. In the
--------------------------------------------------
event that at any time from the date of the First Event until the end of the
Transition Period, any one of the conditions described in subsections (a), (b),
(c) or (d) occurs, a termination of employment with the Company by the Employee
thereafter shall constitute a Constructive Involuntary Termination; provided,
however, that termination of employment shall not constitute a Constructive
Involuntary Termination if (A) the Employee is immediately thereafter an
employee of the Company, of ReliaStar, a subsidiary of ReliaStar or a successor
company with substantially equivalent or greater title, duties, responsibilities
and authority or substantially equivalent or greater salary and other
remuneration and fringe benefits (including paid vacation), (B) the new employer
enters into a management employment agreement offering benefits at least
comparable to this Agreement, and (C) the events described in subsections (c) or
(d) of this Section 4 would not effectively occur by reason of such new
employment. The conditions are
(a) the Employee shall not be given substantially equivalent or greater
title, duties, responsibilities and authority or substantially
equivalent or greater salary and other remuneration and fringe
benefits (including paid vacation), in each case as compared with the
Employee's status immediately prior to the First Event, other than for
Cause or on account of Disability,
<PAGE>
(b) the Company shall have failed to obtain assumption of this Agreement
by any successor as contemplated by Section 8(b) hereof,
(c) the Company shall require the Employee to relocate to any place other
than a location within twenty-five miles of the location at which the
Employee performed his duties immediately prior to the First Event or,
if the Employee performed such duties at the Company's principal
executive offices, the Company shall relocate its principal executive
offices to any location other than a location within twenty-five miles
of the location of the principal executive offices immediately prior
to the First Event, or
(d) the Company shall require that the Employee travel on Company business
to a substantially greater extent than required immediately prior to
the First Event.
Section 5. Overall Limit on Payments. If the lump sum cash payments and
-------------------------
the other benefits to which the Employee is entitled under this Agreement,
together with all other payments or benefits in the nature of compensation to
the Employee which would constitute "parachute payments" as defined in Section
280G of the Internal Revenue Code of 1986 ("Code") or any successor provision
thereto (hereinafter "total payments") exceed the largest aggregate amount ("Tax
Limit") that will result in no portion thereof being subject to the excise tax
imposed under Section 4999 of the Code (or any successor provision thereto) or
being non-deductible to the Company for federal income tax purposes pursuant to
Section 280G of the Code (or any successor provision thereto), then such lump
sum payments and/or such other benefits provided under this Agreement shall be
reduced (but not below zero) to the Tax Limit; provided, however, that such
-------- -------
payments or benefits provided under this Agreement shall not be so reduced if
the benefit to the Employee, net of excise taxes imposed by Section 4999, of the
Code, resulting from the receipt of total payments (without reduction of the
payments and benefits provided under this Agreement) exceeds the Tax Limit; and
provided further that in the event that Section 280G or Section 4999 is modified
- ----------------
or superseded with a successor provision subsequent to the date of this
Agreement, the payments and benefits to which the Employee would be entitled
under this Agreement in the absence of this Section 5 shall not be reduced to a
greater extent than they would have been reduced if Section 280G or Section 4999
had not been modified or superseded subsequent to the date of this Agreement.
Section 6. Miscellaneous.
-------------
(a) The Employee shall not be required to mitigate the amount of any
payment or other benefit provided for in this Agreement by seeking
other employment or otherwise, nor (except as specifically provided in
Section 3(a)(3), shall the amount of any payment or other benefit
provided for in this Agreement be reduced by any compensation earned
by the Employee as the result of employment by another employer after
termination, or otherwise.
(b) The obligations of the Company under Sections 3, 4 and 5 of this
Agreement shall survive the termination of this Agreement.
(c) If the Employee is also an employee of ReliaStar or one or more of its
other Subsidiaries (1) any termination of such employment shall be
treated in the same manner and have the same effect as a termination
of employment with the Company, (2) any compensation received from
<PAGE>
ReliaStar or its other Subsidiaries shall be included in calculating
the amount due under Section 3(a)(1) hereof, (3) the Employee shall be
entitled to participate in any health, disability and life insurance
plan or program of ReliaStar or such other Subsidiaries to the same
extent as any plan or program of the Company under Section 3(a)(3)
hereof, and (4) the provisions of Section 3(c) shall apply to any such
payments.
Section 7. Definition of Certain Terms. As used in this Agreement the
---------------------------
following terms shall have the meanings set forth in this Section.
(a) "Person" shall mean an individual, partnership, corporation, estate,
trust or other entity.
(b) "Cause" shall mean, and be limited to, (1) willful and gross neglect
of duties by the Employee or (2) an act or acts committed by the
Employee constituting a felony and substantially detrimental to the
Company or ReliaStar or the reputation of either.
(c) "Retirement" shall mean mandatory termination of employment in
accordance with the Company's retirement policy generally applicable
to its salaried employees.
(d) "Disability" shall mean the Employee's absence from his duties with
the Company on a full time basis for 160 consecutive business days, as
a result of the Employee's incapacity due to physical or mental
illness, unless within 30 days after written notice pursuant to
Section 1 hereof is given following such absence, the Employee shall
have returned to the full time performance of his duties.
(e) "Transition Period" shall mean the three-year period commencing on the
date of the earliest to occur of an Event described in clause (a), (b)
or (c) of Section 2 hereof (the "Commencement Date") and ending on the
third anniversary of the Commencement Date.
Section 8. Successors and Assigns.
----------------------
(a) This Agreement shall be binding upon and inure to the benefit of the
successors, legal representatives and assigns of the parties hereto;
provided, however, that the Employee shall not have any right to
assign, pledge or otherwise dispose of or transfer any interest in
this Agreement or any payments hereunder, whether directly or
indirectly or in whole or in part, without the written consent of the
Company or its successor.
(b) On or after the Commencement Date, the Company will require any
successor (whether direct or indirect, by purchase of a majority of
the outstanding voting stock of the Company or all or substantially
all of the assets of the Company, or by merger, consolidation or
otherwise), by agreement in form and substance satisfactory to the
Employee, to assume expressly and agree to perform this Agreement in
the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. Failure
of the Company to obtain such agreement prior to the effectiveness of
any such succession on or after the Commencement Date (other than in
the case of a merger or consolidation) shall be a breach of this
Agreement and shall
<PAGE>
entitle the Employee to compensation from the Company in the same
amount and on the same terms as the Employee would be entitled
hereunder if the Employee terminated his employment on account of a
Constructive Involuntary Termination, except that for purposes of
implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the date of termination. As used in
this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid
which is required to execute and deliver the agreement provided for in
this Section 8(b) or which otherwise becomes bound by all the terms
and provisions of this Agreement by operation of law.
Section 9. Governing Law. This Agreement shall be construed in accordance
-------------
with the laws of the State of Minnesota
Section 10. Notices. All notices, requests and demands given to or made
-------
pursuant hereto shall be in writing and shall be delivered or mailed to any such
party at its address which:
(a) In the case of the Company shall be:
ReliaStar Financial Corp.
20 Washington Avenue South
Minneapolis, Minnesota 55401
Attention: Secretary
(b) In the case of the Employee shall be his or her residence address as
maintained in the employment records of the Company, or following
termination of employment, as provided in writing by the Employee to
the Company.
Either party may, by notice hereunder, designate a changed address. Any notice,
if mailed properly addressed, postage prepaid, registered or certified mail,
shall be deemed to have been given on the registered date or that date stamped
on the certified mail receipt.
Section 11. Severability; Severance. In the event that any portion of
-----------------------
this Agreement is held to be invalid or unenforceable for any reason, it is
hereby agreed that such invalidity or unenforceability shall not affect the
other portions of this Agreement and that the remaining covenants, terms and
conditions or portions hereof shall remain in full force and effect, and any
court of competent jurisdiction may so modify the objectionable provision as to
make it valid, reasonable and enforceable. In the event that any benefits to
the Employee provided in this Agreement are held to be unavailable to the
Employee as a matter of law, the Employee shall be entitled to severance
benefits from the Company, in the event of an involuntary termination or
Constructive Involuntary Termination of employment of the Employee (other than a
termination on account of the death, Disability or Retirement of the Employee or
a termination for Cause) during the term of this Agreement following the
occurrence of an Event, at least as favorable to the Employee (when taken
together with the benefits under this Agreement that are actually received by
the Employee) as the most advantageous benefits made available by the Company to
employees of comparable position and seniority to the Employee during the five-
year period prior to the First Event.
<PAGE>
Section 12. Term. This Agreement shall commence on the date of this
----
Agreement and shall continue in effect until the later of (1) the date the
Company is no longer controlled by ReliaStar (which for purposes hereof shall
include a sale of all or substantially all the assets of the Company), provided
that the Commencement Date has not occurred or (2) the later of (A) the date
this Agreement is effectively amended or terminated in accordance with this
Section 12, or, (B) if a Commencement Date occurs prior to such effective date
of amendment or termination, the third anniversary of the Commencement Date. No
amendment or termination of this Agreement shall become effective until the
earlier of (A) the date which is two years following the date the Company has
provided the Employee written notice of such amendment or termination, or (B)
the date the Employee consents in writing to such amendment or termination.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
By
- -------------------------------------- -----------------------------------
(EMPLOYEE)
<PAGE>
Exhibit 13
ReliaStar Financial Corp. and Subsidiaries
Five-Year Consolidated Financial Highlights
<TABLE>
<CAPTION>
(In Millions, Except Per Share Data)1, 2, 3 1997 1996 1995 1994 1993
- ---------------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES AND EARNINGS
Premiums $ 887.9 $ 836.9 $ 851.5 $ 726.9 $ 659.6
Net Investment Income 1,025.0 940.7 891.1 618.3 635.0
Realized Investment Gains (Losses) 11.7 11.2 4.9 (27.4) (32.4)
Other Income 585.7 401.8 342.9 253.0 228.2
---------- ---------- ---------- ---------- ----------
Total Revenues 2,510.3 2,190.6 2,090.4 1,570.8 1,490.4
Benefits and Expenses 2,150.4 1,886.5 1,830.6 1,404.2 1,361.8
Income Tax Expense 127.5 106.1 90.7 58.9 46.1
Dividends on Preferred Securities of Subsidiaries,
Net of Tax 10.4 5.0 -- -- --
---------- ---------- ---------- ---------- ----------
Income from Continuing Operations 222.0 193.0 169.1 107.7 82.5
Loss from Discontinued Operations -- -- (5.4) (2.6) --
Extraordinary Charges -- -- -- -- (9.7)
Cumulative Effect of Accounting Changes -- -- -- -- (7.5)
---------- ---------- ---------- ---------- ----------
Net Income $ 222.0 $ 193.0 $ 163.7 $ 105.1 $ 65.3
---------- ---------- ---------- ---------- ----------
Net Income Available to Common Shareholders $ 222.0 $ 187.8 $ 155.4 $ 96.8 $ 57.0
---------- ---------- ---------- ---------- ----------
Per Common Share
Income from Continuing Operations (Diluted) $ 2.55 $ 2.37 $ 2.06 $ 1.54 $ 1.22
Net Income (Diluted) 2.55 2.37 1.99 1.50 .94
Dividends Paid .605 .545 .488 .438 .393
FINANCIAL POSITION
Assets $ 21,000.8 $ 16,707.0 $ 15,519.2 $ 10,366.8 $ 9,912.9
Notes and Mortgages Payable 593.5 407.5 422.3 194.6 230.3
Trust-Originated Preferred Securities 241.9 120.9 -- -- --
Other Liabilities 18,154.4 14,760.9 13,676.8 9,373.7 8,882.0
Common Shareholders' Equity 2,011.0 1,417.7 1,351.4 730.6 733.9
Preferred Shareholders' Equity -- -- 68.7 67.9 66.7
Common Shareholders' Equity Excluding
Unrealized Investment Gains and Losses 1,784.8 1,276.9 1,104.6 810.0 733.9
OTHER DATA (Unaudited)
Operating Income 4 $ 216.0 $ 187.6 $ 166.6 $ 124.4 $ 101.8
Operating Income Per Diluted Common Share 4 2.48 2.30 2.02 1.80 1.54
Statutory Premiums and Deposits and Fee
Revenues 6 $ 3,243.8 $ 2,750.3 $ 2,577.0 $ 1,916.0 $ 1,678.7
Return on Equity - Operating Income 4, 5 15.0% 16.6% 16.2% 16.1% 15.1%
Year-End Market Price Per Common Share $ 41 3/16 $ 28 7/8 $ 22 3/16 $ 14 1/2 $ 16
Book Value Per Common Share 5 19.74 15.95 14.27 12.57 11.49
Assets Under Management 5 20,336.9 18,141.0 15,826.5 10,602.4 9,715.6
Insurance Product Sales 7
Individual Life $ 140.6 $ 119.0 $ 104.2 $ 74.2 $ 63.5
Individual Annuity 762.3 643.3 669.6 427.8 355.7
Group Life 64.7 43.5 23.0 30.5 26.3
Group Health 16.7 32.1 49.1 68.3 91.3
Life and Health Reinsurance 98.1 70.2 46.5 57.5 32.2
Retirement Plan Sales 405.8 315.7 255.2 201.3 110.9
---------- ---------- ---------- ---------- ----------
Total $ 1,488.2 $ 1,223.8 $ 1,147.6 $ 859.6 $ 679.9
---------- ---------- ---------- ---------- ----------
Life Insurance In Force
Individual $118,485.2 $ 67,653.1 $ 66,399.5 $ 27,808.3 $ 26,761.6
Group 141,311.4 117,342.1 106,873.7 96,503.8 88,784.6
Reinsurance 7,228.3 5,220.0 4,715.4 5,319.3 3,512.8
---------- ---------- ---------- ---------- ----------
Total $267,024.9 $190,215.2 $177,988.6 $129,631.4 $119,059.0
- ---------------------------------------------------- ---------- ---------- ---------- ---------- ----------
</TABLE>
- ---------------
/1/ Security-Connecticut Corporation and USLICO Corporation were acquired
effective July 1, 1997, and January 1, 1995, respectively. The financial data
does not include the contributions of the acquired entities prior to their
respective acquisition dates.
/2/ During the fourth quarter of 1997, the Company adopted SFAS No. 128,
"Earnings per Share," for all periods presented.
/3/ All share and per common share amounts reflect the 2:1 common stock split
that occurred in September 1997.
/4/ Operating Income excludes realized investment gains and losses and their
impact on the amortization of deferred policy acquisition costs and present
value of future profits.
During the fourth quarter of 1997, the Company incurred a $14 million after-tax
charge to earnings related to restructuring and other non-recurring expenses.
Excluding the charge, 1997 operating income per diluted common share and return
on equity, based on operating income, were $2.64 and 15.9%, respectively.
/5/ Amounts exclude the balance sheet effect of net unrealized investment gains
and losses recorded in accordance with SFAS No. 115.
/6/ Premiums and deposits of life insurance subsidiaries are presented in
accordance with statutory insurance accounting practices. Fee revenues are
presented in accordance with generally accepted accounting principles.
/7/ Represents annualized amounts of new premiums and deposits.
<PAGE>
ReliaStar Financial Corp. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS
Pretax results of operations by business segment are summarized below:
<TABLE>
<CAPTION>
Year Ended December 31 (In Millions) 1997 1996 1995
- -------------------------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Pretax Operating Income (Loss)1
Individual Insurance $228.8 $204.5 $181.6
Employee Benefits 52.1 46.0 44.1
Life and Health Reinsurance 57.5 50.7 43.5
Pension 15.9 14.0 10.3
Corporate and Other (3.6) (19.3) (23.5)
------ ------ ------
Pretax Operating Income 350.7 295.9 256.0
Pretax Net Realized Investment Gains 9.2 8.2 3.8
------ ------ ------
Pretax Income Before Dividends on Preferred Securities of Subsidiaries 359.9 304.1 259.8
Tax Expense 127.5 106.1 90.7
Dividends on Preferred Securities of Subsidiaries, Net of Tax 10.4 5.0 --
------ ------ ------
Income from Continuing Operations 222.0 193.0 169.1
Loss from Discontinued Operations -- -- (5.4)
------ ------ ------
Net Income $222.0 $193.0 $163.7
- ----------------------------------------------------------------------------------------------------
</TABLE>
/1/ Operating income excludes realized investment gains and losses and their
impact on the amortization of deferred policy acquisition costs and present
value of future profits.
ReliaStar Financial Corp. (the Company or ReliaStar) conducts its operations in
four business segments: Individual Insurance, Employee Benefits, Life and Health
Reinsurance, and Pension; through its life insurance companies: ReliaStar Life
Insurance Company (ReliaStar Life), Northern Life Insurance Company (Northern),
ReliaStar United Services Life Insurance Company (United Services), ReliaStar
Life Insurance Company of New York (RLNY) and Security-Connecticut Life
Insurance Company (Security-Connecticut). Effective January 1, 1998, Lincoln
Security Life Insurance Company (Lincoln Security) merged with and into
ReliaStar Bankers Security Life Insurance Company and the surviving entity was
renamed RLNY. These subsidiaries are sometimes collectively referred to as the
Insurers.
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.
1997 COMPARED WITH 1996
On July 1, 1997, ReliaStar completed the acquisition of Security-Connecticut
Corporation (SCC) (see Note 3 of Notes to Consolidated Financial Statements).
The acquisition was accounted for using the purchase method of accounting and,
accordingly, the results of operations prior to July 1, 1997 do not include the
results of the former SCC subsidiaries. Therefore, current period operating
results are not directly comparable with those of prior periods. The operating
results of Security-Connecticut and Lincoln Security are reflected in the
Individual Insurance segment.
Individual Insurance Pretax operating income of the Individual Insurance
segment for 1997 increased $24.3 million, or 12%, compared with 1996. The
increase in pretax operating income is primarily due to the additional pretax
earnings in 1997 of Security-Connecticut and Lincoln Security, which totaled
$29.4 million.
Excluding Security-Connecticut and Lincoln Security, pretax operating income
decreased $5.1 million compared with the prior year. The decrease was primarily
due to the impact of restructuring and other non-recurring expenses totaling
$9.7 million (after-tax) incurred in the fourth quarter of 1997. The
restructuring expenses were primarily for severance and facilities costs, and
relate primarily to efforts to eliminate redundancies and create operational
efficiencies in the Individual Insurance segment. These actions are expected to
result in an after-tax earnings benefit to the Individual Insurance segment of
more than $4 million in 1998 and $6 million per year in future years.
Excluding Security-Connecticut, Lincoln Security and the restructuring and
other non-recurring expenses, 1997 pretax operating income increased $9.8
million compared with 1996. The increase was primarily due to a 9% increase in
assets under management and improved mortality experience, partially offset by
reduced interest spreads and increased noncapitalized expenses, including
expenses related to new product development and introduction and information
technology. The average interest spread of 246 basis points for 1997 compares to
254 basis points for 1996. This decrease in spreads reflects a 16 basis point
reduction in the portfolio yield, offset in part by an 8 basis point decrease in
the average crediting rate. Assets under management grew from $11.2 billion as
of December 31, 1996, to $12.2 billion as of December 31, 1997.
For some of the business included in the Individual Insurance segment,
crediting rates on in force business are reset annually at the beginning of the
calendar year and are guaranteed for one year. The balance of the business has
crediting rates that can be changed on the policy anniversary or some other
date. Crediting rates offered on new business can be changed at any time in
response to
<PAGE>
competition and market interest rates and are guaranteed on most new premiums
received to the end of the calendar year.
Excluding sales from Security-Connecticut and Lincoln Security, total 1997
individual life and annuity sales (annualized new premiums and deposits)
increased 14% compared with 1996, reflecting a 39% increase in individual
variable annuity sales, a 5% increase in individual fixed annuities and a 1%
increase in individual life insurance sales.
Employee Benefits Pretax operating income of the Employee Benefits segment for
1997 increased $6.1 million, or 13%, compared with 1996. The increase in pretax
operating income was primarily due to improved mortality and morbidity
experience, partially offset by higher expense levels. Pretax operating income
from group life products increased $4.8 million compared with 1996 and pretax
operating income from group health and other businesses increased $1.3 million
compared with 1996 primarily due to improved results from the group long-term
disability line of business.
Group life sales were $64.7 million in 1997 an increase of 49% compared to
1996. Group health sales of $16.7 million decreased 48% compared with 1996, due
primarily to a decrease in emphasis on sales of insured health products.
Life and Health Reinsurance Pretax operating income of the Life and Health
Reinsurance segment for 1997 increased $6.8 million, or 13%, compared with 1996.
The increase in pretax operating income is primarily due to a 21% increase in
earned premiums, partially offset by higher experience rating refunds and higher
commission expenses. Earnings in the reinsurance business can fluctuate based
upon a number of factors, including pricing, market capacity, the availability
and pricing of retrocessional programs, loss experience and the risk profile of
the book of business included in this segment.
Pension Pretax operating income of the Pension segment for 1997 increased $1.9
million, or 14%, compared with 1996. Pretax operating income from the small
employer 401(k) line of business increased $3.6 million to $8.4 million for
1997. Pretax operating income in the 401(k) line of business increased primarily
due to higher fee revenues reflecting the growth in assets under management.
Retirement plan sales of $405.8 million increased 29% compared to 1996. Assets
under management in the 401(k) line of business were $1.53 billion at December
31, 1997, compared with $1.02 billion at December 31, 1996. Pretax operating
income from the Company's closed block of pension contract liabilities was $7.5
million for 1997, a decrease of $1.7 million compared with 1996.
Corporate and Other Pretax operating losses of Corporate and Other for 1997
decreased $15.7 million compared with 1996. This favorable variance was
primarily due to increased operating earnings from the Company's mutual fund
operations, which included a $4.6 million pretax gain on the sale of 12b-1 fees
attributable to a portion of their Class B shares, a $4.5 million pretax gain on
the sale of substantially all of the assets of Washington Square Advisers, Inc.,
the Company's fixed income fund investment manager for unaffiliated
institutions, increased earnings from PrimeVest Financial Services, Inc., the
Company's broker/dealer specializing in bank marketing of insurance and other
investment products, that was acquired in the fourth quarter of 1996, improved
operating results of the Company's mortgage operations and increased recovery of
corporate costs from other business segments. Partially offsetting these
favorable items were increased interest costs associated with debt assumed from
SCC and lower operating results from Successful Money Management Seminars, Inc.
Dividends on preferred securities ($10.4 million, net of tax) is reported on a
separate line in the results of operations table. Dividend expense increased
$5.4 million compared with 1996 due primarily to the issuance of $125.0 million
of 8.10% Trust-Originated Preferred Securities in June 1997. (see Liquidity and
Capital Resources -- ReliaStar Financial Corp.)
1996 COMPARED WITH 1995
Individual Insurance Pretax operating income of the Individual Insurance
segment 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.
Total individual life insurance and annuity sales for 1996 (annualized new
premiums and deposits) decreased 1% 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.
Employee Benefits Pretax operating income of 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.
<PAGE>
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 as
compared with 1995.
Pension 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 of 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 operations and
short-term interest income on the proceeds from the issuance of $125.0 million
in 8.20% Trust-Originated Preferred Securities prior to the redemption of $63.25
million of 10% Senior Cumulative Preferred Stock (see Financial Condition -
Liquidity and Capital Resources - ReliaStar Financial Corp.). Dividends on
preferred securities ($5.0 million, net of tax) is reported on a separate line
in the results of operations table.
REALIZED INVESTMENT GAINS AND LOSSES
The sources of pretax net realized investment gains (losses) were as follows:
<TABLE>
<CAPTION>
Year Ended December 31 (In Millions) 1997 1996 1995
- ------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Net Gains (Losses) on Sales of Investments
Fixed Maturity Securities
Gross Gains $10.3 $ 8.7 $ 8.3
Gross Losses (6.4) (5.5) (5.0)
Equity Securities 5.1 1.3 12.6
Mortgage Loans -- .1 (.1)
Foreclosed Real Estate .1 1.8 .6
Real Estate .6 2.7 1.7
Other 9.8 13.2 2.2
Provisions for Losses on Investments
Fixed Maturity Securities (3.0) (2.6) (3.0)
Equity Securities (.1) -- (.1)
Mortgage Loans (2.4) (3.5) (6.3)
Foreclosed Real Estate (1.6) (3.5) (5.2)
Real Estate (.7) (1.1) (.8)
Other -- (.4) --
----- ----- -----
Pretax Realized Investment Gains 11.7 11.2 4.9
DAC/PVFP Amortization /1/ (2.5) (3.0) (1.1)
----- ----- -----
Pretax Net Realized
Investment Gains $ 9.2 $ 8.2 $ 3.8
- -----------------------------------------------------------------------------
/1/ Due to pretax realized investment gains and losses.
</TABLE>
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 35.4% for 1997 and 34.9% for 1996 and 1995
compared to the federal tax rate of 35.0%. The Company's effective tax rate for
1997 is higher than the federal tax rate primarily due to non-deductible
goodwill amortization.
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 the Company. Under Minnesota
insurance law regulating the payment of dividends by ReliaStar Life, any such
payment must be in an amount deemed prudent by ReliaStar Life's Board of
Directors and, unless otherwise approved by the Commissioner of the Minnesota
Department of Commerce (the Commissioner), must be paid solely from the adjusted
earned surplus of ReliaStar Life. Adjusted earned surplus means the earned
surplus as determined in accordance with statutory accounting practices
(unassigned funds) less 25% of the amount of such earned surplus which is
attributable to net unrealized capital gains. Further, without approval of the
Commissioner, ReliaStar Life may not pay in any calendar year any dividend
which,
<PAGE>
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 1998, the
amount of dividends which can be paid by ReliaStar Life without Commissioner
approval is $186.4 million.
ReliaStar has loaned $100.0 million to ReliaStar Life under a surplus note.
The surplus note 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. The surplus note provides that
there may be no payment of interest or principal without the express approval of
the Minnesota Department of Commerce.
The Company maintains a $75.0 million unsecured revolving credit facility with
a group of banks. As of December 31, 1997, $38.0 million remained available for
borrowing under this facility.
The Company also 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 258,637,
245,650 and 135,254 shares for an aggregate purchase price of $8.3 million, $5.5
million and $2.3 million during the years ended December 31, 1997, 1996 and
1995, respectively.
On May 9, 1997, the Company filed a shelf registration with the Securities and
Exchange Commission for the issuance of up to $400.0 million of debt securities
and other securities. As of December 31, 1997, $275.0 million of debt securities
and other securities remain available for issuance under the shelf registration.
On June 3, 1997, the Company completed the issuance of $125.0 million of 8.10%
Trust-Originated Preferred Securities (8.10% Preferred Securities) due June 3,
2027. The Company used the proceeds from this offering to repurchase 3,252,200
of its common shares in a $125.0 million common stock buyback program that was
completed during the third quarter of 1997 in conjunction with the acquisition
of SCC.
Also in conjunction with the acquisition of SCC, the Company assumed $75.0
million of 7 1/8% notes (the 7 1/8% Notes) due March 1, 2003.
During December 1997, the Company repurchased 466,000 of its common shares at
an average price of $39.21 per share in a common stock buyback program
completed in conjunction with the acquisition of the common stock held by the
minority interest shareholders of the Company's mutual fund company.
On March 29, 1996, the Company completed the issuance of $125.0 million of
8.20% Trust-Originated Preferred Securities (8.20% Preferred Securities) 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
Corporation (USLICO), the Company issued $110.0 million of 8 5/8% notes (the 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.
During 1995, the Company repurchased 2,783,000 of its common shares in a $50.0
million common stock buyback program completed in conjunction with the
acquisition of USLICO.
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, 1997, the Insurers' investment portfolios included
$8.0 billion (38% of total assets) of short-term investments and investment
grade marketable bonds. The December 31, 1997 investment portfolio also included
$2.6 billion of investment grade privately placed bonds which, while not
publicly traded, are an additional source of liquidity.
The policies and annuities issued by the Individual Insurance segment contain
provisions which allow contractholders to withdraw or surrender their contracts
under defined circumstances. These policies and annuities generally contain
provisions which apply penalties or otherwise restrict the ability of contract-
holders to make such withdrawals or surrenders. The Insurers monitor the
surrender and policy loan activity of their insurance products and manage the
composition of their investment portfolios, including liquidity, in light of
such activity. While the
<PAGE>
Insurers have recently experienced an increase in withdrawal and surrender
activity attributable to their individual fixed annuity products, the surrender
activity is well below a level which would have a material effect on liquidity.
Changes in interest rates may affect the incidence of policy surrenders and
other withdrawals. In addition to the potential impact on liquidity,
unanticipated withdrawals in a changed interest rate environment could adversely
affect earnings if the Company were required to sell investments at reduced
values in order to meet liquidity demands. The Company seeks assets which have
duration characteristics similar to the liabilities which they support. The
Company also uses derivative instruments, such as interest rate swaps, to adjust
the duration of the asset and liability portfolios (see Investments - Derivative
Financial Instruments).
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 NAIC developed minimum
risk-based capital requirements on insurance enterprises. The formulas for
determining the amount of risk-based capital specify various weighting factors
that are applied to financial balances and various levels of activity, based
upon the nature and perceived degree of risk associated with such balances and
levels of activity. Regulatory compliance is measured by a company's risk-based
capital ratio, which is calculated as a company's regulatory total adjusted
capital, as defined, divided by its authorized control level risk-based capital,
as defined. Companies with ratios below specific trigger points are classified
within certain regulatory action levels, each of which requires specified
corrective action. The risk-based capital ratio of each of the Insurers
significantly exceeds the ratio at which regulatory corrective action would be
required.
CONSOLIDATED CASH FLOWS
The Company's cash balance at December 31, 1997 was $46.4 million. During 1997,
net cash provided by operating and financing activities was $220.6 million and
$181.3 million, respectively, which was offset by net cash used by investing
activities of $387.9 million.
The $220.6 million of net cash provided by operating activities was primarily
the result of positive cash flow from premiums, policy contract charges and
investment income in excess of cash outflows for insurance benefits and sales
and operating expenses. Net cash provided by financing activities of $181.3
million was primarily the result of the issuance of the 8.10% Preferred
Securities, proceeds from short-term borrowings and issuance of commercial
paper, partially offset by funds used for the repurchase of common stock in
conjunction with purchase business combinations.
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 1998 to
the acquisition of investment grade marketable and privately placed bonds and
commercial mortgages. 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 below investment grade bonds subject to overall limitations.
The assets held by each of the Insurers are legally segregated and support
only their respective contractual obligations. The investment portfolios of each
Insurer are structured to reflect the characteristics of the liabilities which
they support. The Company internally allocates assets within the Insurers to
facilitate segment asset/liability matching. These segment allocations are
solely for portfolio management purposes, and generally all of the assets
allocated to a segment are available to satisfy the respective liabilities of
all segments within each Insurer. Assets within these portfolios are selected to
provide duration, cash flow and return characteristics which are compatible with
the liabilities they support. All of the investments in the Insurers' portfolios
are subject to diversification, quality and reserving requirements of state laws
regulating the Insurers.
<PAGE>
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) 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Grade Bonds:
Marketables $ 7,824.4 54.2% $ 6,604.9 55.0%
Private Placements 2,619.4 18.2 2,156.2 18.0
--------- ----- --------- -----
Subtotal 10,443.8 72.4 8,761.1 73.0
Below Investment Grade Bonds:
Marketables 296.7 2.0 279.7 2.4
Private Placements 400.6 2.8 255.4 2.1
--------- ----- --------- -----
Subtotal 697.3 4.8 535.1 4.5
Equity Securities 27.0 .2 36.9 .3
Commercial Mortgages 1,594.9 11.1 1,359.6 11.3
Mortgages, Residential and Other 675.8 4.7 495.8 4.1
Real Estate 74.5 .5 77.5 .7
Short-Term Investments 157.2 1.1 119.4 1.0
Other 750.0 5.2 610.9 5.1
--------- ----- --------- -----
Total Invested Assets $14,420.5 100.0% $11,996.3 100.0%
- ------------------------------------------------------------------------
</TABLE>
FIXED MATURITY SECURITIES
The amounts invested in fixed maturity securities as of December 31, 1997 and
1996, were $11.1 billion and $9.3 billion, respectively. The average marketable
and private placement bond investments in a single corporate issuer (excluding
structured finance securities such as CMOs, mortgage-backed pass throughs and
asset-backed securities) as of December 31, 1997 were $9.3 million and $6.8
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, 1997, the weighted average book yields of the Company's
investment grade portfolio and below investment grade portfolio were 7.7% and
8.7%, 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.
<PAGE>
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>
December 31 (In Millions) 1997
- ------------------------------------------------------------------------------------------------------------------------------
Marketables Private Placements
------------------------------------------ --------------------------------------
Gross Unrealized Gross Unrealized
Amortized ------------------ Fair Amortized ----------------- Fair
NAIC Rating Cost Gains (Losses) Value Cost Gains (Losses) Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $5,306.0 $260.8 $ (6.6) $5,560.2 $ 877.0 $ 41.6 $ (2.0) $ 916.6
2 2,154.5 114.1 (4.4) 2,264.2 1,634.2 71.7 (3.1) 1,702.8
3 264.2 11.5 (.8) 274.9 244.7 5.2 (.6) 249.3
4 19.0 .5 (.2) 19.3 137.5 3.9 (1.2) 140.2
5 1.6 .1 (.1) 1.6 10.2 .1 (.1) 10.2
6 .9 -- -- .9 .9 -- -- .9
Redeemable Preferred Stock 3.7 .4 -- 4.1 1.5 -- -- 1.5
-------- ------ ------ -------- -------- ------ ------ --------
Total $7,749.9 $387.4 $(12.1) $8,125.2 $2,906.0 $122.5 $ (7.0) $3,021.5
- ------------------------------------------------------------------------------------------------------------------------------
December 31 (In Millions) 1996
- ------------------------------------------------------------------------------------------------------------------------------
Marketables Private Placements
------------------------------------------ --------------------------------------
Gross Unrealized Gross Unrealized
Amortized ------------------ Fair Amortized ----------------- Fair
NAIC Rating Cost Gains (Losses) Value Cost Gains (Losses) Value
- ------------------------------------------------------------------------------------------------------------------------------
1 $4,738.4 $189.6 $(20.6) $4,907.4 $ 779.7 $ 29.4 $ (3.6) $ 805.5
2 1,633.7 70.2 (6.4) 1,697.5 1,311.3 43.0 (3.6) 1,350.7
3 252.3 8.3 (1.6) 259.0 158.2 3.0 (1.4) 159.8
4 18.9 .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>
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>
1997 1996
------------------------------------------
Amortized Fair Amortized Fair
December 31 (In Millions) Cost Value Cost Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturing in:
One Year or Less $ 199.9 $ 200.9 $ 155.8 $ 157.4
One to Five Years 3,651.3 3,789.2 2,967.6 3,057.0
Five to Ten Years 3,006.4 3,180.7 2,622.4 2,723.6
Ten Years or Later 1,244.0 1,324.4 1,055.3 1,108.7
Mortgage-Backed/Structured Finance 2,554.3 2,651.5 2,192.4 2,251.5
--------- --------- -------- --------
Total $10,655.9 $11,146.7 $8,993.5 $9,298.2
- -------------------------------------------------------------------------------
</TABLE>
The fair values for the marketable bonds are based upon the quoted market prices
for bonds actively traded. The fair values for marketable bonds without an
active market are obtained through several commercial pricing services which
provide the estimated fair values. Fair market values for privately placed bonds
which are not considered problems are determined utilizing a matrix-based
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 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 their 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.
<PAGE>
The Company's marketable and private placement bond portfolios were
diversified by industry (based upon amortized cost) as of the indicated dates as
set forth in the following table:
<TABLE>
<CAPTION>
Marketables Private Placements
------------------ --------------------
December 31 1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic Materials 6.7% 6.7% 8.9% 9.5%
Consumer Non-Cyclical 5.7 6.0 18.0 18.4
Consumer Products/Services 7.5 7.3 16.8 18.4
Energy 5.7 6.2 6.6 6.9
Financial Services 20.8 19.3 20.5 18.6
Government 3.2 3.5 .6 .8
Industrial 3.9 3.6 9.3 10.3
Mortgage Backed/Structured Finance 31.4 32.2 4.3 1.2
Real Estate .7 .3 1.5 1.3
Retailing 2.1 2.3 5.6 5.9
Technology 1.8 2.5 2.5 3.2
Utilities 10.5 10.1 5.4 5.5
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
- ------------------------------------ ----- ----- ----- -----
</TABLE>
BELOW INVESTMENT GRADE INVESTMENTS
Issuers of below investment grade debt frequently have relatively high levels of
indebtedness and are more sensitive to adverse economic conditions, such as
recession or increasing interest rates, than are issuers of investment grade
securities.
The largest investment in below investment grade bonds of any one borrower was
approximately two-tenths of one percent of invested assets at December 31, 1997.
The largest investment in below investment grade bonds of any one industry
grouping was approximately 1.3% of invested assets at December 31, 1997. The
portfolio of below investment grade bonds is regularly analyzed and managed in
an effort to avoid concentration risks.
MORTGAGE-BACKED/STRUCTURED FINANCE 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:
<TABLE>
<CAPTION>
Amortized Fair
December 31, 1997 (In Millions) Cost Value
- --------------------------------- --------- --------
<S> <C> <C>
Adjustable Rate Pass Through:
Below 6% $ 15.1 $ 15.3
6% - 7% 89.9 90.6
7% - 8% 255.5 255.5
Above 8% 40.1 40.6
Fixed Rate Pass Through:
Below 9% 98.6 100.9
Above 9% 10.3 10.9
Planned Amortization Class:
Below 7% 314.8 333.3
7% - 8% 391.0 412.4
8% - 9% 123.8 129.8
Above 9% 6.7 7.0
Other:
Below 7% 211.2 225.2
7% - 8% 93.1 101.4
8% - 9% 28.2 29.7
Above 9% 13.0 13.6
-------- --------
Total $1,691.3 $1,766.2
- --------------------------------- -------- --------
</TABLE>
The Company invests in asset-backed securities in addition to the MBS securities
described above. As of December 31, 1997, the Insurers held asset-backed
securities with an amortized cost of $863.0 million and a fair value of $885.3
million.
<PAGE>
MORTGAGE LOANS
The Company's commercial mortgage loans generally range in size from $4 million
to $7 million, with the average commercial mortgage loan investment as of
December 31, 1997 being approximately $2.5 million.
The commercial mortgage loan portfolio diversification by property type and
geographic region of the United States was as follows:
<TABLE>
<CAPTION>
December 31 1997 1996
- --------------------------------------- ------ ------
<S> <C> <C>
Property Type
Apartment 20.9% 15.7%
Industrial 20.8 23.5
Office 20.4 24.6
Retail 18.4 16.1
Special Purpose 18.2 17.3
Hotel/Motel 1.3 2.8
----- -----
Total 100.0% 100.0%
- --------------------------------------- ------ ------
December 31 1997 1996
- --------------------------------------- ------ ------
Geographic Region
Midwest 32.7% 31.6%
Pacific 25.3 30.1
Southeast 18.5 18.2
Northeast 9.9 8.7
Mountain 7.5 6.5
Southwest 6.1 4.9
----- -----
Total 100.0% 100.0%
- --------------------------------------- ------ ------
</TABLE>
The weighted average yield of the commercial mortgage loan portfolio as of
December 31, 1997 was 8.5%. The weighted average maturity of these loans was 7.4
years.
The Company invests in individual and pools of individual residential mortgage
loans in addition to the structured finance securities backed by residential
mortgages. As of December 31, 1997 and 1996, the Insurers held $674.6 million
and $493.9 million, respectively, of non-securitized residential mortgage loans.
UNREALIZED INVESTMENT GAINS AND LOSSES
All of the Company's debt and equity securities are classified as available-for-
sale and carried at fair value on the 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:
<TABLE>
<CAPTION>
December 31 (In Millions) 1997 1996
- ------------------------------------------------- -------- -------
<S> <C> <C>
Unrealized Investment Gains $ 489.1 $310.5
DAC/PVFP Adjustment (138.8) (93.8)
Deferred Income Taxes (124.1) (75.9)
------- ------
Net Unrealized Investment Gains $ 226.2 $140.8
- ------------------------------------------------- ------- ------
</TABLE>
Changes in 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: (i) the Company has the present intent and
practice to hold most of its available-for-sale fixed maturity securities to
maturity and (ii) the Company's asset/liability management activity is designed
to monitor and adjust for the effects of changes in market interest rates.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has an established program prescribing the use of derivatives in its
asset/liability management activity. The investment policy of each of the
Insurers expressly precludes the use of such instruments for speculative
purposes. The policy details permissible uses and instruments and contains
accounting and management controls designed to assure compliance with these
policies. The Company is not a party to leveraged derivatives.
The insurance liabilities of the Company are sensitive to changes in market
interest rates. The Company has established procedures for evaluating these
liabilities and attempts to structure investment asset portfolios with
compatible characteristics. Investment assets are selected in an effort to
provide yield, cash flow and interest rate sensitivities appropriate to support
the insurance products.
The Company manages its interest rate risk by managing its assets within
target duration ranges, based on the Company's liability profile. The Company
uses duration analysis to estimate the amount of sensitivity to market interest
rate changes. The duration of a bond or a 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
caps.
<PAGE>
The target duration ranges 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.
A goal of this risk control process is to optimize portfolio performance
relative to the product liability requirements.
The following table sets forth the asset duration, portfolio duration and
target duration for the investment portfolio of each business segment at
December 31, 1997:
<TABLE>
<CAPTION>
Asset Portfolio Target
(In Years) Duration Duration Duration
- ----------------------------- -------- --------- --------
<S> <C> <C> <C>
Individual Insurance 3.9 4.0 3.5- 5.0
Employee Benefits 3.2 3.4 3.5- 8.0
Life and Health Reinsurance 4.5 4.6 3.5- 8.0
Pension 2.0 2.7 2.5- 3.5
- ----------------------------- --- --- --------
</TABLE>
The Company uses interest rate swaps as part of this asset/liability management
program. The Company has acquired a significant amount of certain shorter
duration investments, such as floating rate or adjustable rate investments.
Acquisition of these assets shortens the duration of an asset portfolio. The
Company uses interest rate swaps to extend the duration of these portfolios as
an alternative to purchasing longer duration investments.
At December 31, 1997, the Company had 71 interest rate swap contracts in
effect with a notional amount of $1.16 billion. At December 31, 1996, the
Company had 69 interest rate swap contracts in effect with a notional amount of
$1.11 billion. During 1997, seven new interest rate swap contracts were entered
into with a notional amount of $140.0 million and five interest rate swap
contracts matured with a notional amount of $87.0 million. There were no
terminations of interest rate swap contracts prior to maturity during 1997. The
Company has no deferred gains or losses at December 31, 1997 related to interest
rate swap contracts terminated early. The estimated fair value of the interest
rate swap contracts in effect at December 31, 1997 was an unrealized gain of
$13.3 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, 1997.
<TABLE>
<CAPTION>
Range of
Notional Fixed Rates
(In Millions) Amount Received
- ----------------------------------------------------------- -------- ------------
<S> <C> <C>
Maturing in:
One Year or Less $ 315.0 5.2- 8.7%
One to Three Years 382.5 5.2- 6.9
Three to Five Years 315.0 5.5- 8.2
Five to Seven Years 150.0 6.3- 6.8
--------
Total $1,162.5
- ----------------------------------------------------------- -------- -----------
</TABLE>
The Company monitors the effect of the swap position on reported income. The
Company's investment portfolio includes a substantial amount of floating rate
investments. Changes in market interest rates have an opposite (and
approximately offsetting) effect on the reported income from the swap portfolio.
Accordingly, the reported investment income (or loss) 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, 1997, the Company held $1.5 billion of
adjustable rate invested assets, short-term investments and cash.
The Company also uses interest rate caps as part of its overall interest rate
risk management strategy for certain annuity products primarily to hedge the
risk of investment losses due to product surrenders in an increasing interest
rate environment. The Company held eight interest rate caps with a notional
amount of $510.0 million and a fair value of $.2 million as of December 31,
1997.
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.
<PAGE>
The amortized cost of Problem Investments, net of related write-offs and
allowances and non-recourse debt, is shown below:
<TABLE>
<CAPTION>
December 31 (In Millions) 1997 1996
- ----------------------------------------------------- ----- -----
<S> <C> <C>
Private Placement Bonds $ 6.2 $15.5
Marketable Bonds 2.7 --
Commercial Mortgage Loans 12.5 22.4
Residential and Other Mortgage Loans 7.3 4.2
Investment Real Estate1 8.4 12.3
Foreclosed Real Estate 42.3 37.4
----- -----
Total $79.4 $91.8
- ----------------------------------------------------- ----- -----
</TABLE>
/1/ 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:
<TABLE>
<CAPTION>
December 31 (In Millions) 1997 1996
- -------------------------------------------------- ----- -----
<S> <C> <C>
Private Placement Bonds $ 6.0 $ 8.3
Marketable Bonds .8 --
Commercial Mortgage Loans 9.0 10.5
Residential and Other Mortgage Loans 1.1 .7
Foreclosed Real Estate 23.6 24.7
- ------------------------------------------------- ----- -----
</TABLE>
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 their
relevant market.
For problem and potential problem securities, the Company determines whether a
decline in fair value below the amortized cost is other than temporary. If the
decline in fair value is determined to be other than temporary, the Company
writes down the cost basis to fair value and the amount of the write-down is
recorded as a realized loss. Subsequent changes in the fair value of problem
available-for-sale securities which are determined to be temporary are reflected
directly in equity as unrealized investment gains or losses.
Fair value for problem real estate and problem mortgage loans is determined
taking into consideration one or more of the following factors, depending on the
circumstances for each property, including: (i) property valuation techniques
utilizing discounted cash flows at the time of stabilization including capital
expenditures and stabilization costs; (ii) sales of comparable properties; (iii)
geographic location of the property and related market conditions; and (iv)
disposition costs. In many instances, there is not an active market for such
properties. Therefore, the fair value determined by the Company may be greater
than the price which may be realized if the Company were forced to liquidate
such properties on an immediate sale basis. If fair value of a problem mortgage
loan or real estate investment is less than the carrying value, the Company
records a write-off or an increase in the allowance for uncollectible amounts.
Foreclosed properties are managed by the Company in order to maximize net
realizable value. The Company has the intent and ability to hold these assets
until appropriate sales opportunities arise.
The 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, marketable bonds and mortgage loan Potential
Problem Investments were $26.8 million, $1.4 million and $12.3 million,
respectively, at December 31, 1997.
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.
<PAGE>
KNOWN TRENDS AND UNCERTAINTIES WHICH MAY AFFECT FUTURE REPORTED RESULTS
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 has marketed plans
maintained by third party managed care organizations through a series of
strategic alliances in selected markets. The Employee Benefits segment has
experienced a significant decline in sales of insured health and health related
products and expects that its book of insured health and health related business
will decline over the next several years. The Company does not expect
significant new sales of insured health and health related products. The Company
cannot predict the impact that these market developments will have on future
reported earnings. The health insurance and health related businesses of the
Employee Benefits segment represented approximately 5% of the Company's after
tax earnings in 1997.
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 its businesses, including several class action suits which seek both
compensatory and punitive damages. The Company believes the results of
litigation will not have a material adverse effect on the financial position of
the Company. Some financial services companies have recently been subjected to
significant awards in connection with class actions and/or suits seeking
punitive damages. While the Company is not aware of any actions or allegations
which should reasonably give rise to any material adverse effect, it is possible
that the Company could be subjected to such a claim in an amount which could be
material.
FINANCIAL SERVICES DEREGULATION
The United States Congress is currently considering a number of legislative
proposals intended to reduce or eliminate restrictions on affiliations among
financial services organizations. Proposals are extant which would allow banks
to own or affiliate with insurers and securities firms. An increased presence of
banks in the life insurance and annuity businesses may increase competition in
these markets. The Company cannot predict the impact of these proposals on
future earnings of the Company.
YEAR 2000 SYSTEMS MODIFICATIONS
The Company's business units utilize data processing systems in the production
of new business and to service business after it is sold. Many of the Company's
data processing systems require modifications to enable them to process dates
including the year 2000 and beyond. The Company has a thorough and complete plan
to address the year 2000 issue and that work is progressing on schedule.
During 1998, the Company expects to redirect certain internal and
external data processing resources to efforts which will enable its data
processing systems to process dates including the year 2000 and beyond. The
Company expects its Year 2000 work will be substantially complete by the end of
1998. The Company believes the net effect of these efforts will not materially
impact the Company's 1998 consolidated financial statements, however, some
additional expenditure for external resources will be incurred.
IMPACT OF ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED IN THE FUTURE
In December 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125."
SFAS No. 127 delayed the effective date of certain provisions of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." The Company will adopt the deferred provisions of SFAS No. 125
in the first quarter of 1998. The adoption of this standard will not have a
material effect on the results of operations of the Company
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes new rules for the reporting and display of
comprehensive income and its components in a company's financial statements. The
Company will adopt SFAS No. 130 in the first quarter of 1998. The adoption of
this standard will not have an effect on the results of operations of the
Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131 requires a
company to utilize a "management approach" to reporting segment information. The
Company will adopt SFAS No. 131 in the first quarter of 1998. The adoption of
this standard will not have an effect on the results of operations of the
Company.
<PAGE>
<TABLE>
<CAPTION>
ReliaStar Financial Corp. and Subsidiaries
Consolidated Balance Sheets
<S> <C> <C>
December 31 (In Millions) 1997 1996
- --------------------------------------------------------------------------------------- --------- ---------
ASSETS
Fixed Maturity Securities (Amortized Cost: 1997, $10,655.9; 1996, $8,993.5) $11,146.7 $ 9,298.2
Equity Securities (Cost: 1997, $25.2; 1996, $32.0) 27.0 36.9
Mortgage Loans on Real Estate 2,270.7 1,855.4
Real Estate and Leases 74.5 77.5
Policy Loans 663.3 549.0
Other Invested Assets 81.1 59.9
Short-Term Investments 157.2 119.4
--------- ---------
TOTAL INVESTMENTS 14,420.5 11,996.3
Cash 46.4 32.4
Accounts and Notes Receivable 217.5 171.0
Reinsurance Receivable 324.4 199.0
Deferred Policy Acquisition Costs 1,091.9 1,006.0
Present Value of Future Profits 480.0 220.2
Property and Equipment, Net 112.4 121.3
Accrued Investment Income 200.6 164.7
Other Assets 641.2 383.9
Participation Fund Account Assets 316.6 316.2
Assets Held in Separate Accounts 3,149.3 2,096.0
--------- ---------
TOTAL ASSETS $21,000.8 $16,707.0
--------- ---------
LIABILITIES
Future Policy and Contract Benefits $13,329.4 $11,332.2
Pending Policy Claims 340.5 287.6
Other Policyholder Funds 286.5 190.6
Notes and Mortgages Payable 593.5 407.5
Income Taxes 192.1 133.8
Other Liabilities 545.5 410.0
Participation Fund Account Liabilities 316.6 316.2
Liabilities Related to Separate Accounts 3,143.8 2,090.5
--------- ---------
TOTAL LIABILITIES 18,747.9 15,168.4
--------- ---------
Company-Obligated Mandatorily Redeemable Preferred
Securities Issued by Consolidated Subsidiaries 241.9 120.9
--------- ---------
SHAREHOLDERS' EQUITY
Common Stock (Shares Issued: 1997, 98.1;1996, 84.8) .9 .4
Additional Paid-in Capital 1,019.8 571.9
Note Receivable from ESOP (20.8) (21.6)
Unamortized Restricted Stock Awards (1.0) (1.8)
Net Unrealized Investment Gains 226.2 140.8
Retained Earnings 964.8 794.2
Less Treasury Common Stock, at Cost (Shares Held: 1997, 7.7; 1996, 4.8) (178.9) (66.2)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 2,011.0 1,417.7
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $21,000.8 $16,707.0
- --------------------------------------------------------------------------------------- --------- ---------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
ReliaStar Financial Corp. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31 (In Millions, Except Per Share Data) 1997 1996 1995
- --------------------------------------------------------------------------------------- -------- -------- ---------
<S> <C> <C> <C>
REVENUES
Premiums $ 887.9 $ 836.9 $ 851.5
Net Investment Income 1,025.0 940.7 891.1
Realized Investment Gains, Net 11.7 11.2 4.9
Policy and Contract Charges 332.9 245.9 218.5
Other Income 252.8 155.9 124.4
-------- -------- --------
TOTAL 2,510.3 2,190.6 2,090.4
-------- -------- --------
BENEFITS AND EXPENSES
Benefits to Policyholders 1,372.0 1,287.7 1,321.2
Sales and Operating Expenses 572.6 437.4 368.5
Amortization of Deferred Policy Acquisition Costs and
Present Value of Future Profits 146.1 113.0 90.5
Interest Expense 34.9 28.7 27.0
Dividends and Experience Refunds to Policyholders 24.8 19.7 23.4
-------- -------- --------
TOTAL 2,150.4 1,886.5 1,830.6
-------- -------- --------
Income from Continuing Operations Before Income Taxes and
Dividends on Preferred Securities of Subsidiaries 359.9 304.1 259.8
Income Tax Expense 127.5 106.1 90.7
Dividends on Preferred Securities of Subsidiaries, Net of Tax 10.4 5.0 --
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 222.0 193.0 169.1
Loss from Discontinued Operations, Net of Tax -- -- (5.4)
-------- -------- --------
NET INCOME $ 222.0 $ 193.0 $ 163.7
-------- -------- --------
PER COMMON SHARE
Basic
Income from Continuing Operations $ 2.59 $ 2.54 $ 2.21
Loss from Discontinued Operations -- -- (.07)
-------- -------- --------
Net Income $ 2.59 $ 2.54 $ 2.14
-------- -------- --------
Diluted
Income from Continuing Operations $ 2.55 $ 2.37 $ 2.06
Loss from Discontinued Operations -- -- (.07)
-------- -------- --------
Net Income $ 2.55 $ 2.37 $ 1.99
-------- -------- --------
Net Income Available to Common Shareholders $ 222.0 $ 187.8 $ 155.4
-------- -------- --------
Weighted Average Common Shares
Basic 85.6 73.8 72.6
Diluted 87.1 80.0 79.1
- --------------------------------------------------------------------------------------- -------- -------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
ReliaStar Financial Corp. and Subsidiaries
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Year Ended December 31 (In Millions, Except Per Share Data) 1997 1996 1995
- --------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
10% SENIOR CUMULATIVE PREFERRED STOCK
Beginning of Year -- $ 63.2 $ 63.2
Redeemed -- (63.2) --
-------- -------- --------
End of Year -- -- 63.2
-------- -------- --------
ESOP CONVERTIBLE PREFERRED STOCK
Beginning of Year -- 28.9 29.3
Redeemed -- (.2) (.4)
Conversion to Common Stock -- (28.7) --
-------- -------- --------
End of Year -- -- 28.9
-------- -------- --------
COMMON STOCK
Beginning of Year $ .4 .4 .3
Issued for Acquisitions .1 -- .1
Issued for Common Stock Split .4 -- --
-------- -------- --------
End of Year .9 .4 .4
-------- -------- --------
ADDITIONAL PAID-IN-CAPITAL
Beginning of Year 571.9 566.1 293.1
Issued for Acquisitions 428.3 -- 265.8
Issued for Benefit Plans 11.7 2.4 .1
Loss on Treasury Shares Reissued for Benefit Plans (8.1) (4.1) (3.6)
Gain (Loss) on Treasury Shares Reissued for Acquisitions 9.5 (23.9) 10.1
Tax Benefit on Stock Options Exercised 6.9 2.7 1.4
Conversion of ESOP Convertible Preferred Stock -- 28.7 --
Other (.4) -- (.8)
-------- -------- --------
End of Year 1,019.8 571.9 566.1
-------- -------- --------
NOTE RECEIVABLE FROM ESOP
Beginning of Year (21.6) (23.4) (24.6)
Repayments, Accrued or Paid .8 1.8 1.2
-------- -------- --------
End of Year (20.8) (21.6) (23.4)
-------- -------- --------
UNAMORTIZED RESTRICTED STOCK AWARDS
Beginning of Year (1.8) (3.0) (2.1)
Awards, Net (.1) (.1) (2.1)
Amortization of Restricted Stock Awards .9 1.3 1.2
-------- -------- --------
End of Year (1.0) (1.8) (3.0)
-------- -------- --------
NET UNREALIZED INVESTMENT GAINS (LOSSES)
Beginning of Year 140.8 246.8 (79.4)
Change for the Year 85.4 (106.0) 326.2
-------- -------- --------
End of Year 226.2 140.8 246.8
-------- -------- --------
RETAINED EARNINGS
Beginning of Year 794.2 647.2 528.4
Net Income 222.0 193.0 163.7
Dividends to Shareholders
10% Senior Cumulative Preferred Stock (Per Share: 1996,
$5.00; 1995, $10.00) -- (3.2) (6.3)
ESOP Convertible Preferred Stock (1996 and 1995, $2.19 Per Share) -- (2.8) (2.8)
Common Stock (Per Share: 1997, $.605; 1996, $.545; 1995, $.488) (52.0) (40.0) (35.8)
Other, Net .6 -- --
-------- -------- --------
End of Year 964.8 794.2 647.2
-------- -------- --------
TREASURY COMMON STOCK
Beginning of Year (66.2) (106.1) (9.7)
Acquired with Acquisition -- -- (72.7)
Acquired, Other (151.0) (5.6) (52.2)
Reissued for Acquisitions 17.6 25.2 9.7
Reissued, Other 20.7 20.3 18.8
-------- -------- --------
End of Year (178.9) (66.2) (106.1)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY $2,011.0 $1,417.7 $1,420.1
- --------------------------------------------------------------------------------------- -------- -------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
ReliaStar Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 (In Millions) 1997 1996 1995
- --------------------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 222.0 $ 193.0 $ 163.7
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
Interest Credited to Insurance Contracts 548.9 500.1 500.1
Future Policy Benefits (396.9) (238.9) (117.5)
Capitalization of Policy Acquisition Costs (212.7) (196.2) (176.6)
Amortization of Deferred Policy Acquisition Costs and
Present Value of Future Profits 146.1 113.0 90.5
Deferred Income Taxes 7.7 20.6 13.1
Net Change in Receivables and Payables 7.0 63.8 2.5
Other Assets (91.5) (84.8) (97.4)
Realized Investment Gains, Net (11.7) (11.2) (4.9)
Other 1.7 1.8 1.7
--------- --------- ---------
Net Cash Provided by Operating Activities 220.6 361.2 375.2
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturity Securities 474.0 204.1 190.5
Proceeds from Maturities or Repayment of Fixed Maturity Securities
Available-for-Sale 910.7 882.3 329.9
Held-to-Maturity -- -- 415.6
Cost of Fixed Maturity Securities Acquired
Available-for-Sale (1,431.6) (1,594.7) (972.5)
Held-to-Maturity -- -- (519.8)
Sales of Equity Securities, Net 14.8 5.6 31.0
Proceeds of Mortgage Loans Sold, Matured or Repaid 350.4 483.8 314.2
Cost of Mortgage Loans Acquired (649.4) (407.3) (385.2)
Sales of Real Estate and Leases, Net 14.1 35.7 28.8
Policy Loans Issued, Net (41.5) (49.2) (63.0)
Sales (Purchases) of Other Invested Assets, Net (10.1) (.1) 39.0
Sales (Purchases) of Short-Term Investments, Net (37.8) 12.1 (50.2)
Cash Acquired with Acquisition of Security-Connecticut Corp. 18.5 -- --
--------- --------- ---------
Net Cash Used by Investing Activities (387.9) (427.7) (641.7)
--------- --------- ---------
FINANCING ACTIVITIES
Deposits to Insurance Contracts 1,429.3 1,173.3 1,265.6
Maturities and Withdrawals from Insurance Contracts (1,299.5) (1,133.0) (1,015.3)
Redemption of 10% Senior Cumulative Preferred Stock -- (63.2) --
Net Proceeds from Issuance of Trust-Originated Preferred Securities 120.8 120.8 --
Increase in Notes and Mortgages Payable 132.2 51.5 238.4
Repayment of Notes and Mortgages Payable (20.4) (66.3) (106.7)
Payments Received on Note Receivable from ESOP .1 .4 .9
Issuance of Common Stock Under Stock Option and Other Plans 21.8 18.5 8.9
Dividends on 10% Senior Cumulative Preferred Stock -- (3.2) (6.3)
Dividends on ESOP Convertible Preferred Stock -- (2.8) (2.8)
Dividends on Common Stock (52.0) (40.0) (35.8)
Acquisition of Treasury Common Stock (151.0) (5.6) (52.2)
--------- --------- ---------
Net Cash Provided by Financing Activities 181.3 50.4 294.7
--------- --------- ---------
Increase (Decrease) in Cash 14.0 (16.1) 28.2
Cash at Beginning of Year 32.4 48.5 20.3
--------- --------- ---------
Cash at End of Year $ 46.4 $ 32.4 $ 48.5
- --------------------------------------------------------------------------------------- --------- --------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
ReliaStar Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 CHANGES IN ACCOUNTING PRINCIPLES
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
Effective for transactions occurring on or after January 1, 1997, ReliaStar
Financial Corp. (ReliaStar or the Company) adopted those provisions of Statement
of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which have
not been deferred by SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." SFAS No. 125 requires a company to
recognize the financial and servicing assets it controls and the liabilities it
has incurred and to derecognize financial assets when control has been
surrendered in accordance with the criteria provided in SFAS No. 125. The
adoption of this standard did not have a significant effect on the financial
results of the Company.
EARNINGS PER SHARE
During the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings
per Share." SFAS No. 128 requires the computation and disclosure of basic and
diluted earnings per share (EPS). Basic EPS is computed by dividing income
available to common stockholders (the numerator) by the weighted-average number
of common shares outstanding (the denominator) during the period. Shares issued
during the period and shares reacquired during the period are weighted for the
portion of the period that they were outstanding. Income available to common
stockholders is computed by deducting both the dividends declared in the period
on preferred stock (whether or not paid) and the dividends accumulated for the
period on cumulative preferred stock (whether or not earned) from income from
continuing operations and also from net income. The computation of diluted EPS
is similar to the computation of basic EPS except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if all dilutive potential common shares had been issued. In
addition, in computing the dilutive effect of convertible securities, the
numerator is adjusted to add back any convertible preferred dividends and any
other changes in income or loss that would result from the assumed conversion of
those potential common shares. All EPS amounts for all periods presented have
been computed in accordance with the provisions of SFAS No. 128.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF
Effective January 1, 1996, the Company adopted 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 estimated costs 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, "Accounting for Stock Issued
to Employees," which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company applies 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.
<PAGE>
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
provides and distributes individual life insurance and annuities; employee
benefit products and services; life and health reinsurance; retirement plans;
mutual funds; residential mortgages and personal finance education. 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.
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 which
approximates fair value.
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
$102.2 million and $94.9 million at December 31, 1997 and 1996, 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 1997, 1996 and 1995 amounted to $7.1 million, $6.6 million and $9.3 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) from a combined stock and mutual life 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 policyholder dividend practices. Assets and
liabilities of the PFA are presented in accordance with statutory
<PAGE>
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 and liabilities of the
separate accounts are primarily related to variable annuity, variable life and
401(k) contracts and represent policyholder directed funds that are separately
administered. 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 valued at fair
value. Revenues from these separate account contracts consist primarily of
charges for mortality risk and expenses, cost of insurance, contract
administration and surrender charges. Revenue for these products is recognized
when due.
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 term
and 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
deposits to 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 deposits to 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 products 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.
An analysis of the PVFP asset account is presented below:
<TABLE>
<CAPTION>
Year Ended December 31 (In Millions) 1997 1996 1995
- --------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Balance, Beginning of Year $220.2 $192.0 --
Acquisition 323.6 -- $300.0
Imputed Interest 25.5 16.4 17.6
Amortization (66.0) (37.5) (32.6)
Impact of Net Unrealized Investment
Gains and Losses (23.3) 49.3 (93.0)
------ ------ ------
Balance, End of Year $480.0 $220.2 $192.0
- --------------------------------------- ------ ------ ------
</TABLE>
Based on current conditions and assumptions as to future events on acquired
policies in force, the Company expects that the net amortization of the December
31, 1997 PVFP balance will be between 6% and 8% in each of the years 1998
through 2002. The interest rates used to determine the amount of imputed
interest on the unamortized PVFP balance ranged from 5% to 8%.
<PAGE>
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 indicators of
impairment of value. No events or circumstances were identified which warrant
consideration of impairment or a revised estimate of useful lives.
FUTURE POLICY AND CONTRACT BENEFITS
Liabilities for future policy benefits for traditional life insurance 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
APB Opinion No. 25.
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 Company utilizes the settlement method of
accounting for its interest rate swap agreements whereby the difference between
amounts paid and amounts received or accrued on interest rate swap agreements is
reflected in net investment income.
The characteristics (notional amount, maturity and payment dates) of
the interest rate swap agreements are similar to the characteristics of the
designated hedged assets. In the event an interest rate swap agreement would
cease to be an effective hedge, the affected interest rate swap agreement would
be recorded as an asset or liability at fair value with changes in fair value
recorded as income or expense. There were no terminations of interest rate swap
agreements during 1997, 1996 and 1995. The fair value and changes in fair value
of interest rate swap agreements are not recognized in the consolidated
financial statements.
SPLIT OF COMMON STOCK
In August 1997, the Company's Board of Directors approved a 2:1 split of the
Company's common stock. The split was effected by a 100% dividend of the
Company's common stock on September 10, 1997 for each common share owned by
shareholders of record at the close of business August 19, 1997. All share and
per common share amounts have been restated to reflect the 2:1 common stock
split.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to current-year
presentation.
NOTE 3 ACQUISITIONS
On July 1, 1997, the Company completed the acquisition of Security-Connecticut
Corporation (SCC). SCC was a holding company with two primary subsidiaries:
Security-Connecticut Life Insurance Company (Security-Connecticut) of Avon,
Connecticut, and Lincoln Security Life Insurance Company (Lincoln Security) of
Brewster, New York.
The acquisition was accounted for using the purchase method of
accounting. Therefore, the consolidated financial statements include the
accounts of SCC since the date of acquisition. The acquisition was effected
through a stock-for-stock exchange whereby the Company issued 1.4734 shares of
its common stock for each issued and outstanding share of SCC common stock, or
approximately 12.7 million additional ReliaStar common shares. The purchase
price was approximately $433 million and included approximately $4 million of
other direct costs of acquisition. Goodwill of approximately $140 million was
recorded.
The following pro forma consolidated financial information was
prepared, assuming the acquisition of SCC had taken place at the beginning of
each period presented:
<TABLE>
<CAPTION>
Year Ended December 31 (In Millions) 1997 1996
- --------------------------------------- --------- ---------
<S> <C> <C>
Revenues $2,668.3 $2,523.3
Net Income 237.3 224.6
Net Income per Common Share (Diluted) 2.54 2.39
- --------------------------------------- -------- --------
</TABLE>
The pro forma consolidated financial information is not necessarily indicative
of either the results of operations that would have occurred if this acquisition
had been completed at the beginning of each year presented or of future
operations of the combined companies.
<PAGE>
On December 1, 1997, the Company acquired the common stock of
Northstar Holding, Inc. (Northstar) held by minority shareholders. Prior to the
acquisition, the Company was the majority shareholder and held 80% of
Northstar's common stock. Northstar's principal subsidiary, Northstar Investment
Management Corporation, is the investment advisor, manager, and distributor of
the Company's mutual fund family, the Northstar Funds. The acquisition was
effected through a stock-for-stock exchange whereby the Company issued
approximately .5 million shares of ReliaStar common stock from treasury. The
acquisition was accounted for using the purchase method of accounting. Goodwill
recorded as a result of this transaction was approximately $27 million.
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 cash purchase price was approximately $16 million and goodwill
of $11 million was recorded.
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
approximately 1.3 million shares of common stock from treasury. The acquisition
was accounted for using the pooling of interests method of accounting. Prior
period financial statements were not restated due to immateriality.
Effective January 1, 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 exchange
whereby the Company issued 1.38 shares of ReliaStar common stock for each USLICO
share, or approximately 14.8 million additional ReliaStar common shares. An
additional 4.7 million common shares were issued to and are currently held by a
former USLICO subsidiary which held USLICO shares prior to the acquisition;
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 of $44.3 million.
NOTE 4 INVESTMENTS
Investment income summarized by type of investment was as follows:
<TABLE>
<CAPTION>
Year Ended December 31 (In Millions) 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Maturity Securities $ 787.9 $709.4 $ 673.4
Equity Securities 2.2 4.1 3.1
Mortgage Loans on Real Estate 197.6 187.6 184.3
Real Estate and Leases 16.1 18.0 16.8
Policy Loans 34.3 32.2 28.9
Other Invested Assets 3.6 7.3 7.8
Short-Term Investments 9.3 9.2 8.4
--------- ------ ---------
Gross Investment Income $ 1,051.0 967.8 922.7
Investment Expenses 26.0 27.1 31.6
--------- ------ ---------
NET INVESTMENT INCOME $ 1,025.0 $940.7 $ 891.1
- ---------------------------------------------------------------------------
Net pretax realized investment gains (losses) were as follows:
Year Ended December 31 (In Millions) 1997 1996 1995
- --------------------------------------------------------------------------
Net Gains (Losses) on Sales
Fixed Maturity Securities
Gross Gains $ 10.3 $ 8.7 $ 8.3
Gross Losses (6.4) (5.5) (5.0)
Equity Securities 5.1 1.3 12.6
Mortgage Loans -- .1 (.1)
Foreclosed Real Estate .1 1.8 .6
Real Estate .6 2.7 1.7
Other 9.8 13.2 2.2
------ ------ ---------
19.5 22.3 20.3
------ ------ ---------
Provisions for Losses
Fixed Maturity Securities (3.0) (2.6) (3.0)
Equity Securities (.1) -- (.1)
Mortgage Loans (2.4) (3.5) (6.3)
Foreclosed Real Estate (1.6) (3.5) (5.2)
Real Estate (.7) (1.1) (.8)
Other -- (.4) --
------ ------ ---------
(7.8) (11.1) (15.4)
------ ------ ---------
PRETAX REALIZED INVESTMENT GAINS $ 11.7 $ 11.2 $ 4.9
- -------------------------------------------------------------------------
All fixed maturity securities sales were from the available-for-sale portfolio.
</TABLE>
<PAGE>
The amortized cost and fair value of investments in fixed maturity
securities by type of investment were as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------
Amortized Gross Unrealized Fair
----------------
December 31 (In Millions) Cost Gains (Losses) Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government and Government Agencies and Authorities $ 128.8 $ 9.3 $ (.3) $ 137.8
States, Municipalities and Political Subdivisions 66.8 4.5 (.3) 71.0
Foreign Governments 94.8 7.3 (.1) 102.0
Public Utilities 895.0 61.4 (.9) 955.5
Corporate Securities 6,911.0 327.2 (14.9) 7,223.3
Mortgage-Backed/Structured Finance 2,554.3 99.8 (2.6) 2,651.5
Redeemable Preferred Stock 5.2 .4 -- 5.6
--------- ------ ------ ---------
TOTAL $10,655.9 509.9 $(19.1) $11,146.7
- --------------------------------------------------------------------------------------------------------
1996
---------------------------------------
Gross Unrealized
Amortized ---------------- Fair
December 31 (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 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
- --------------------------------------------------------------------------------------------------------
</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>
1997 1996
-----------------------------------------
Amortized Fair Amortized Fair
December 31 (In Millions) Cost Value Cost Value
- ------------------------------------ --------- --------- --------- --------
<S> <C> <C> <C> <C>
Maturing in:
One Year or Less $ 199.9 $ 200.9 $ 155.8 $ 157.4
One to Five Years 3,651.3 3,789.2 2,967.6 3,057.0
Five to Ten Years 3,006.4 3,180.7 2,622.4 2,723.6
Ten Years or Later 1,244.0 1,324.4 1,055.3 1,108.7
Mortgage-Backed/Structured Finance 2,554.3 2,651.5 2,192.4 2,251.5
--------- --------- -------- --------
TOTAL $10,655.9 $11,146.7 $8,993.5 $9,298.2
- ------------------------------------ --------- --------- -------- --------
</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 matrix-
based 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 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 their relevant market.
At December 31, 1997, the largest industry concentration in the private
placement portfolio was financial services, where 20.5% of the portfolio was
invested, and the largest industry concentration in the marketable bond
portfolio was mortgage backed/structured finance, where 31.4% of the portfolio
was invested. At December 31, 1997, the largest geographic concentration of
commercial mortgage loans was in the Midwest region of the United States, where
approximately 32.7% of the commercial mortgage loan portfolio was invested.
<PAGE>
At December 31, 1997 and 1996, gross unrealized appreciation of equity
securities was $2.3 million and $5.2 million, respectively, and gross unrealized
depreciation was $.5 million and $.3 million, respectively.
Invested assets which were nonincome producing (no income received for the 12
months preceding the balance sheet date) were as follows:
<TABLE>
<CAPTION>
December 31 (In Millions) 1997 1996
- --------------------------------------------------- ----- -----
<S> <C> <C>
Fixed Maturity Securities $ 1.5 $ .6
Mortgage Loans on Real Estate 1.1 1.2
Real Estate and Leases 21.5 16.0
----- -----
Total $24.1 $17.8
- --------------------------------------------------- ----- -----
</TABLE>
Allowances for losses on investments are reflected on the Consolidated Balance
Sheets as a reduction of the related assets and were as follows:
<TABLE>
<CAPTION>
December 31 (In Millions) 1997 1996
- -------------------------------------------------- ----- -----
<S> <C> <C>
Mortgage Loans $10.5 $11.7
Foreclosed Real Estate 9.1 11.2
Investment Real Estate 2.8 2.1
Other Invested Assets 2.7 2.6
- -------------------------------------------------- ----- -----
</TABLE>
At December 31, 1997 and 1996, 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 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
(In Millions) 1997 1996
- --------------------------------------------------- ----- -----
<S> <C> <C>
Impaired Mortgage Loans
Total Investment $14.4 $22.3
Allowance for Credit Losses 10.5 11.7
Average Investment 1.6 1.9
Interest Income Recognized 1.3 1.4
- --------------------------------------------------- ----- -----
</TABLE>
Increases to the allowance for credit losses account were $2.4 million and $2.9
million, and the amount of decreases to the allowance account were $3.6 million
and $3.6 million for the years ended December 31, 1997 and 1996, 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:
<TABLE>
<CAPTION>
Year Ended December 31 (In Millions) 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate Assets Acquired Through Foreclosure $ 11.3 $ 14.8 $ 28.0
Mortgage Loans Acquired in
Sales of Real Estate Assets -- 11.2 15.3
- ---------------------------------------------------------------------------------
The components of net unrealized investment gains reported in shareholders'
equity are shown below:
December 31 (In Millions) 1997 1996
- ---------------------------------------------------------- ------- -------
Unrealized Investment Gains $ 489.1 $ 310.5
DAC/PVFP Adjustment (138.8) (93.8)
Deferred Income Taxes (124.1) (75.9)
------- -------
NET UNREALIZED INVESTMENT GAINS $ 226.2 $ 140.8
- --------------------------------------------------------- ------- -------
NOTE 5 INCOME TAXES
The income tax liability as reflected on the Consolidated Balance Sheets
consisted of the following:
December 31 (In Millions) 1997 1996
- --------------------------------------------------------- ------- -------
Current Income Taxes $ 14.8 $ 4.3
Deferred Income Taxes 177.3 129.5
------- -------
TOTAL $ 192.1 $ 133.8
- --------------------------------------------------------- ------- -------
The provision for income taxes reflected on the Consolidated Statements of
Income consisted of the following:
Year Ended December 31 (In Millions) 1997 1996 1995
- --------------------------------------------- ------ ------ --------
Currently Payable $ 119.8 $ 85.5 $ 77.6
Deferred 7.7 20.6 13.1
------ ------- -------
TOTAL $ 127.5 $ 106.1 $ 90.7
- --------------------------------------------- ------ ------- -------
The Internal Revenue Service has completed its review of the Company's tax
returns for all years through 1993.
</TABLE>
<PAGE>
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 the net deferred tax liability relate to the following:
<TABLE>
<CAPTION>
December 31 (In Millions) 1997 1996
- --------------------------- ------- -------
<S> <C> <C>
Future Policy and Contract Benefits $(363.6) $(265.1)
Investment Write-Offs and Allowances (41.4) (39.0)
Pension and Postretirement Benefit Plans (7.7) (10.4)
Employee Benefits (12.8) (11.1)
Other (73.6) (60.6)
------- -------
Gross Deferred Tax Asset (499.1) (386.2)
------- -------
Deferred Policy Acquisition Costs 322.9 296.0
Present Value of Future Profits 142.8 92.4
Net Unrealized Investment Gains 95.6 32.1
Property and Equipment 22.9 28.5
Real Estate Joint Ventures 16.5 12.0
Accrual of Market Discount 9.1 7.9
Policyholder Dividends 7.9 5.2
Other 58.7 41.6
------- -------
Gross Deferred Tax Liability 676.4 515.7
------- -------
NET DEFERRED TAX LIABILITY $ 177.3 $ 129.5
- ---------------------------------------------------------- ------- -------
</TABLE>
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, 1997, 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:
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
- ------------------------------------------------ ----- ----- -----
<S> <C> <C> <C>
Statutory Tax Rate 35.0% 35.0% 35.0%
Other .4 (.1) (.1)
---- ---- ----
Effective Tax Rate 35.4% 34.9% 34.9%
- ------------------------------------------------ ---- ---- ----
</TABLE>
The Company had approximately $41 million of non-life net operating loss
carryforwards for tax purposes available as of December 31, 1997.
Cash paid for federal income taxes was $88.2 million, $71.0 million and $79.9
million for 1997, 1996 and 1995, respectively.
NOTE 6 NOTES AND MORTGAGES PAYABLE
A summary of notes and mortgages payable is as follows:
<TABLE>
<CAPTION>
December 31 (In Millions) 1997 1996
- ----------------------------------------- ------ ------
<S> <C> <C>
Commercial Paper $218.5 $146.5
Bank Borrowings 63.0 22.9
Other Indebtedness - Current Portion .3 .6
------ ------
Short-Term Debt 281.8 170.0
------ ------
6 5/8% Notes Payable 119.9 119.9
8 5/8% Notes Payable 109.4 109.3
7 1/8% Notes Payable 74.2 --
Other Indebtedness - Noncurrent Portion 8.2 8.3
------ ------
Long-Term Debt 311.7 237.5
------ ------
Total $593.5 $407.5
- ----------------------------------------- ------ ------
</TABLE>
In September 1993, the Company issued $120.0 million of 6 5/8% notes payable
at a price of 99.829% (the 6 5/8% Notes). The 6 5/8% Notes are due on September
15, 2003.
In February 1995, the Company issued $110.0 million of 8 5/8% notes payable at
a price of 99.274% (the 8 5/8% Notes). The 8 5/8% Notes are due on February 15,
2005.
In conjunction with the acquisition of SCC, the Company assumed $75.0 million
of 7 1/8% notes payable (the 7 1/8% Notes). The 7 1/8% Notes are due on March
1, 2003.
At December 31, 1997 and 1996, 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, 1997.
The weighted average interest rate on the commercial paper outstanding at
December 31, 1997 and 1996 was 6.18% and 5.56%, respectively, with maturities
ranging from 2 to 14 days at December 31, 1997. The Company has unsecured
revolving credit facilities with banks totaling $425.0 million for commercial
paper back-up and general corporate purposes. At December 31, 1997, $63.0
million was borrowed under these facilities with interest rates ranging from
5.8% to 6.2%. At December 31, 1997, $143.5 million remains available under the
revolving credit facilities. The facilities require annual commitment fees
ranging from 7/100% to 1/10%.
Principal payments required in each of the next five years and thereafter are
as follows:
<TABLE>
<CAPTION>
(In Millions)
- -----------------------------------------------------
<S> <C> <C> <C>
1998 - $281.8 2001 - $1.9
1999 - $ .1 2002 - $ .1
2000 - $ 5.8 2002 and thereafter - $303.8
- -----------------------------------------------------
</TABLE>
Interest paid on debt was $32.5 million, $28.0 million and $23.2 million for
1997, 1996 and 1995, respectively.
<PAGE>
NOTE 7 COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES ISSUED BY
CONSOLIDATED SUBSIDIARIES
On June 3, 1997, ReliaStar Financing II (Subsidiary Trust II) issued $125.0
million (5 million shares) of 8.10% Trust-Originated Preferred Securities (the
8.10% Preferred Securities). In connection with Subsidiary Trust II's issuance
of the 8.10% Preferred Securities and the related purchase by ReliaStar of all
of Subsidiary Trust II's common securities (Common Securities II), ReliaStar
issued to Subsidiary Trust II $128.9 million principal amount of its 8.10%
Subordinated Deferrable Interest Notes, due June 3, 2027, (the Junior
Subordinated Debt Securities II). ReliaStar, at its option, may extend the
maturity date of the Junior Subordinated Debt Securities II to a date not later
than June 3, 2046. All issued shares remain outstanding.
On March 29, 1996, ReliaStar Financing I (Subsidiary Trust I), issued
$125.0 million (5 million shares) of 8.20% Trust-Originated Preferred Securities
(the 8.20% Preferred Securities). In connection with Subsidiary Trust I's
issuance of the 8.20% Preferred Securities and the related purchase by ReliaStar
of all of Subsidiary Trust I's common securities (Common Securities I),
ReliaStar issued to Subsidiary Trust I $128.9 million principal amount of its
8.20% Subordinated Deferrable Interest Notes, due March 15, 2016 (the Junior
Subordinated Debt Securities I). All issued shares remain outstanding.
Subsidiary Trust I and II (the Subsidiary Trusts) are wholly owned
subsidiaries of ReliaStar. The sole assets of Subsidiary Trust I and II are and
will be the Junior Subordinated Debt Securities I and II (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 8.20% and 8.10% Preferred Securities (the Preferred
Securities) and the Common Securities I and II (the Common Securities). Under
certain circumstances, the Junior Subordinated Debt Securities may be
distributed to holders of the Preferred Securities and holders of the Common
Securities in liquidation of the Subsidiary Trusts.
The Junior Subordinated Debt Securities I are redeemable at the option
of ReliaStar on or after March 29, 2001, at a redemption price of $25 per Junior
Subordinated Debt Securities I plus accrued and unpaid interest. The Junior
Subordinated Debt Securities II are redeemable at the option of ReliaStar on or
after June 3, 2002 at a redemption price of $25 per Junior Subordinated Debt
Securities II 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.
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 Company's 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 mutual funds,
common stock and corporate bonds. As of December 31, 1997, plan assets included
1,232,982 shares of Company common stock with a fair value of $50.8 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 Company's Board of
Directors.
Net periodic pension expense for the Company included the following
components:
<TABLE>
<CAPTION>
Year Ended December 31 (In Millions) 1997 1996 1995
- ----------------------------------- ------ ------ ------
<S> <C> <C> <C>
Service Cost - Benefits Earned
During the Year $ 4.9 $ 3.8 $ 3.4
Interest Cost on Projected
Benefit Obligation 15.2 13.6 11.9
Actual Return on Plan Assets (45.2) (23.0) (33.7)
Net Amortization and Deferral 30.8 8.4 19.1
------ ------ ------
Net Periodic Pension Expense $ 5.7 $ 2.8 $ .7
- ----------------------------------- ------ ------ ------
</TABLE>
<PAGE>
The following table sets forth the funded status of the Company's plans:
<TABLE>
<CAPTION>
Funded Plans Unfunded Plans
---------------------- -----------------
December 31 (In Millions) 1997 1996 1997 1996
- -------------------------------------------------------------- ------- ------------ ------ ------
<S> <C> <C> <C> <C>
Accumulated Benefit Obligation
Vested $(197.2) $ (164.7) $(15.0) $(11.8)
Nonvested (4.7) (4.0) (.7) (.5)
Effect of Projected Future Compensation Increases (18.0) (12.7) (1.5) (2.1)
------- ------------ ------ ------
Projected Benefit Obligation (219.9) (181.4) (17.2) (14.4)
Plan Assets at Fair Value 229.1 184.9 -- --
------- ------------ ------ ------
Plan Assets Greater (Less) than Projected Benefit Obligation 9.2 3.5 (17.2) (14.4)
Unrecognized Net Loss and Prior Service Cost 13.4 19.0 5.4 5.3
Unrecognized Transition Asset (.1) (.4) -- --
Additional Minimum Liability -- -- (3.9) (3.5)
------- ------------ ------ ------
Net Pension Asset (Liability) $ 22.5 $ 22.1 $(15.7) $(12.6)
- -------------------------------------------------------------- ------- ------------ ------ ------
</TABLE>
The projected benefit obligation was determined using an assumed discount rate
of 7.25% at January 1, 1998 and 7.50% at January 1, 1997 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 contribution levels 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 also reduces 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:
<TABLE>
<CAPTION>
December 31 (In Millions) 1997 1996
- ---------------------------------------------------------------------------------- ------ ------
<S> <C> <C> <C>
Retirees $ 7.2 $ 7.3
Fully Eligible Active Plan Participants 1.2 .9
Other Active Plan Participants 2.5 1.6
----- -----
Unfunded APBO 10.9 9.8
Unrecognized Prior Service Cost 7.2 8.9
Unrecognized Gain 1.7 1.5
----- -----
Accrued Postretirement Benefit Liability $19.8 $20.2
- ---------------------------------------------------------------------------------- ----- -----
Net periodic postretirement benefit costs consisted of the following components:
Year Ended December 31 (In Millions) 1997 1996 1995
- ---------------------------------------------------------------------------------- ----- ----- -----
Service Cost - Benefits Earned $ .4 $ .6 $ 1.3
Interest Cost on APBO .7 1.0 1.4
Amortization of Prior Service Cost (1.7) (1.2) (.1)
----- ----- -----
Net Periodic Postretirement Benefit Expense $ (.6) $ .4 $ 2.6
- ---------------------------------------------------------------------------------- ----- ----- -----
</TABLE>
The assumed health care cost trend rate used in measuring the APBO as of January
1, 1998 was 6.0%, decreasing 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,
1997 was 7.0%, decreasing gradually to 5.0% in the year 1999 and thereafter. The
assumed discount rate used in determining the APBO was 7.25% at January 1, 1998
and 7.50% at January 1, 1997. The assumed health care cost trend rate has an
effect on the amounts reported.
<PAGE>
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, 1997 by
approximately $.4 million and 1997 net postretirement health care cost 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% of the annual award
contributed to a deferred investment account and the remaining 50% of the annual
award 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. On December 31, 1996, all
of the outstanding shares of the ESOP Convertible Preferred Stock were converted
into 5,112,760 shares of the Company's common stock. The stock portion of the
Company's Success Sharing Plan contributions were met through an allocation of
139,594, 105,704 and 116,436 shares in 1997, 1996 and 1995, respectively, of
stock to participants' accounts.
Costs charged to expense for the Success Sharing Plan were $2.8 million, $4.2
million and $4.0 million in 1997, 1996 and 1995, 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 $4.9 million, $2.3 million, and $.9 million in 1997, 1996 and
1995, respectively; or approximately $0.05, $0.03 and $0.01 per diluted common
share for 1997, 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 per option granted
during 1997, 1996 and 1995 is estimated as $9.17, $4.72 and $4.32, respectively,
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions: dividend yield ranging from 1.675% to 2.0%, volatility
factors ranging from .1868 to .2065, risk-free interest rates of 6.157% for
1997, 5.1% to 5.3% for 1996 and 7.4% for 1995, and an expected life of 2.65 to
5.83 years.
Stock option transactions are shown in the table below:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
---------- --------------
<S> <C> <C>
Balance, December 31, 1994 3,211,972 $11.07
Granted 1,296,414 16.61
Exercised (620,022) 8.50
Canceled (83,866) 16.02
--------- ------
Balance, December 31, 1995 3,804,498 12.96
Granted 1,451,296 23.53
Exercised (841,628) 12.42
Canceled (194,166) 20.20
--------- ------
Balance, December 31, 1996 4,220,000 16.32
Granted 2,662,745 26.98
Exercised (934,903) 14.42
Canceled (177,479) 29.92
--------- ------
Balance, December 31, 1997 5,770,363 $21.12
- ---------------------------- --------- ------
Options exercisable at:
December 31, 1995 2,226,024 $11.04
December 31, 1996 2,349,408 12.57
December 31, 1997 3,032,472 15.12
- ---------------------------- --------- ------
</TABLE>
<PAGE>
The following table summarizes information concerning options outstanding and
exercisable options as of December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ---------------------------
Weighted-Average Weighted-Average Weighted-Average
Range of Remaining Contractual Exercise Exercise
Exercise Prices Number Life (In Years) Price Number Price
- ----------------- --------- -------------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$ 4.83 - $ 8.37 1,118,771 3.3 $ 6.97 971,620 $ 7.29
$ 8.38 - $17.22 1,617,928 6.2 15.89 1,327,030 15.67
$17.23 - $29.94 2,032,064 7.3 24.86 643,082 23.42
$29.95 - $40.06 1,001,600 9.1 37.77 90,740 31.96
- --------------- --------- --- ------ --------- ------
</TABLE>
During 1997, 1996 and 1995, the Company issued, 13,438, 19,740 and 137,438
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 Company'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 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 amortized as a charge to income over the vesting periods.
Effective January 1, 1997, the Stock Incentive Plan provides for
annual increases in the number of shares available for award based on a
percentage of the Company's common shares outstanding. As of January 1, 1998,
the cumulative number of shares which may be issued under the Stock Incentive
Plan for award of stock options, restricted shares and unrestricted shares of
common stock is 8,209,453. The number of shares remaining available for awards
under the Stock Incentive Plan was 2,823,880 at January 1, 1998.
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 3,654 and 7,662 restricted shares to its nonemployee
directors under this plan in 1996 and 1995, respectively. In 1997, 1996 and
1995, the Company granted 27,500, 35,000 and 35,000 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 600,000. The number of shares remaining
available for awards was 429,089 at December 31, 1997.
<PAGE>
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 the state 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 1998, the amount of dividends which can be paid by ReliaStar Life without
Commissioner approval is $186.4 million.
STATUTORY SURPLUS AND NET INCOME
Net income of the insurance subsidiaries, as determined in accordance with
statutory accounting practices, was $185.4 million, $150.4 million and $97.8
million for 1997, 1996 and 1995, respectively. ReliaStar Life's statutory
capital and surplus was $1,031.8 million and $783.4 million at December 31, 1997
and 1996, 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 200,000,000 common shares
and 7,000,000 preferred shares, all with a par value of $.01 per share.
A summary of common share activity is as follows:
<TABLE>
<CAPTION>
Treasury
Issued Stock
---------- -----------
<S> <C> <C>
Balance, December 31, 1994 60,958,468 (1,382,918)
Reissued from Treasury -- 1,075,396
Issued for Acquisition 18,538,196 (3,690,114)
Issued for Benefit Plans 30,228 --
Treasury Stock Acquired -- (2,895,858)
---------- ----------
Balance, December 31, 1995 79,526,892 (6,893,494)
Conversion of ESOP Convertible Preferred Stock 5,112,760 --
Issued for Acquisition -- 1,326,100
Issued for Benefit Plans 146,624 1,060,182
Treasury Stock Acquired -- (245,694)
---------- ----------
Balance, December 31, 1996 84,786,276 (4,752,906)
Issued for Acquisitions 12,667,718 466,199
Issued for Benefit Plans 653,384 581,687
Treasury Stock Acquired -- (3,963,096)
---------- ----------
Balance, December 31, 1997 98,107,378 (7,668,116)
- ------------------------------------------------ ---------- ----------
</TABLE>
10% SENIOR CUMULATIVE PREFERRED STOCK
There were 2.5 million depository shares outstanding at December 31, 1995, each
representing one-quarter share of 10% senior cumulative preferred stock. 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 outstanding ESOP Convertible
Preferred Stock into ReliaStar Common Stock at a rate of four ReliaStar common
shares for each ESOP Convertible Preferred share.
<PAGE>
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. Premium
amounts received for prospective reinsurance that meet conditions for
reinsurance accounting are recorded as unearned premium revenue and amortized
into earned premium revenue ratably over the remaining reinsurance contract
period. 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, 1997 and 1996. 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
Life Insurance Company and ReliaStar Life Insurance Company of New York,
(subsidiaries of ReliaStar Life), the limit is $400,000 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, 1997,
$34.3 billion of life insurance in force was ceded to other companies. The
Company has assumed $43.0 billion of life insurance in force as of December 31,
1997 (including $35.8 billion of reinsurance assumed pertaining to Federal
Employees' Group Life Insurance and Servicemans' Group Life Insurance). Also
included in these amounts are $817.2 million of reinsurance ceded and $7.2
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:
<TABLE>
<CAPTION>
Year Ended December 31 (In Millions) 1997 1996 1995
- -------------------------------------- -------- -------- -------
<S> <C> <C> <C>
Direct Premiums $ 675.6 $ 609.9 $643.8
Reinsurance Assumed 386.2 334.3 297.6
Reinsurance Ceded (173.9) (107.3) (89.9)
------- ------- ------
Net Premiums $ 887.9 $ 836.9 $851.5
- -------------------------------------- ------- ------- ------
Reinsurance Recoveries $ 114.4 $ 96.3 $ 80.4
- -------------------------------------- ------- ------- ------
</TABLE>
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:
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995
- ------------------------------- ------- ------- -------
<S> <C> <C> <C>
Balance at January 1 $383.3 $369.4 $322.9
Less Reinsurance Recoverables 102.6 81.6 59.5
------ ------ ------
Net Balance at January 1 280.7 287.8 263.4
Incurred Related to:
Current Year 178.6 223.5 273.1
Prior Year (3.0) (5.7) (2.7)
------ ------ ------
Total Incurred 175.6 217.8 270.4
Paid Related to:
Current Year 107.4 127.8 157.0
Prior Year 82.1 97.1 89.0
------ ------ ------
Total Paid 189.5 224.9 246.0
Net Balance at December 31 266.8 280.7 287.8
Plus Reinsurance Recoverables 120.2 102.6 81.6
------ ------ ------
Balance at December 31 $387.0 $383.3 $369.4
- ------------------------------- ------ ------ ------
</TABLE>
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.
<PAGE>
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 Company, 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 the financial
position 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 $236.4 million at December
31, 1997) 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 ($604.5 million) 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, interest rate swaps and interest rate
caps. 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
interest rate swap and interest rate cap transactions, the contract or notional
amounts do not represent exposure to credit loss. For swaps and caps, the
Company's exposure to credit loss is limited to those swaps and caps where the
Company has an unrealized gain. The Company has no remaining futures contracts
as of December 31, 1997.
Unless otherwise noted, the Company does not require collateral or other
security to support financial instruments with credit risk.
<TABLE>
<CAPTION>
December 31 (In Millions) 1997 1996
- -------------------------------------------------- -------- --------
<S> <C> <C>
CONTRACT OR NOTIONAL AMOUNT
Financial Instruments Whose Contract
Amounts Represent Credit Risk
Commitments to Extend Credit $ 156.3 $ 181.6
Financial Guarantees 40.0 40.9
Financial Instruments Whose Notional or Contract
Amounts Exceed the Amount of Credit Risk
Futures Contracts -- 76.6
Interest Rate Swap Agreements 1,162.5 1,109.5
Interest Rate Cap Agreements 510.0 --
- -------------------------------------------------- -------- --------
</TABLE>
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.
<PAGE>
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, 1997,
ReliaStar Life had guaranteed repayment of $40.0 million ($40.9 million at
December 31, 1996) 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 their obligations, including operating expenses, tenant improvements and
debt service. Capital contributions during 1997 and 1996 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.
INTEREST RATE SWAP AGREEMENTS The Company 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. The amount subject to credit risk is approximately equal
to the unrealized gain on the agreements which was $13.3 million at December 31,
1997.
INTEREST RATE CAP AGREEMENTS The Company has entered into interest rate cap
agreements as a hedge against the effects of rising interest rates on the
invested assets supporting a portfolio of single premium deferred annuity
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. The amount subject to credit risk is approximately equal
to the unrealized gain on the agreements which was $.2 million at December 31,
1997.
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 were 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.
During 1997, the Company closed out all of its futures contracts and
immediately entered into zero coupon interest rate swaps with similar
maturities. The deferred gain on the closed futures contracts was approximately
$22 million, which is being amortized into income over the life of the
liabilities whose cash flows they supported.
LEASES
The Company has operating leases for office space and certain computer
processing and other equipment. Rental expense for these items was $17.0
million, $14.2 million and $13.8 million for 1997, 1996 and 1995, respectively.
Future minimum aggregate rental commitments at December 31, 1997 for operating
leases were as follows:
<TABLE>
<CAPTION>
(In Millions)
- ----------------------------------------------
<S> <C> <C> <C>
1998 - $11.7 2001 - $ 7.4
1999 - $ 9.7 2002 - $ 4.5
2000 - $ 8.1 2003 and thereafter - $13.7
------ ----- --------------------- -----
</TABLE>
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.
<PAGE>
The fair value estimates presented herein are based on pertinent information
available to Management as of December 31, 1997 and 1996. 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
include participating pension contracts and retirement plan deposits,
approximate those liabilities' fair value.
CLAIN AND OTHER DEPOSIT FUNDS The carrying amounts for claim and other deposit
funds approximate the liabilities' fair value.
NOTES AND MORTGAGE 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 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.
<PAGE>
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
Carrying Fair Carrying Fair
December 31 (In Millions) Amount Value Amount Value
- ------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Instruments Recorded as Assets
Fixed Maturity Securities $11,146.7 $11,146.7 $ 9,298.2 $ 9,298.2
Equity Securities 27.0 27.0 36.9 36.9
Mortgage Loans on Real Estate
Commercial 1,594.9 1,679.1 1,359.6 1,391.9
Residential and Other 675.8 687.3 495.8 507.4
Policy Loans 663.3 663.3 549.0 549.0
Cash and Short-Term Investments 203.6 203.6 151.8 151.8
Other Financial Instruments Recorded as Assets 749.8 749.8 576.5 576.5
Financial Instruments Recorded as Liabilities
Investment Contracts
Deferred Annuities (7,753.1) (7,321.6) (6,970.9) (6,547.9)
GICs (62.5) (90.0) (74.7) (102.0)
Supplementary Contracts and Immediate Annuities (337.1) (330.5) (134.5) (131.4)
Other Investment Contracts (454.9) (454.9) (488.3) (488.3)
Claim and Other Deposit Funds (148.1) (148.1) (123.6) (123.6)
Notes and Mortgages Payable (592.4) (609.8) (406.0) (412.2)
Trust-Originated Preferred Securities (241.9) (256.9) (120.9) (125.0)
Other Financial Instruments Recorded as Liabilities (349.6) (349.6) (289.0) (289.0)
Off-Balance Sheet Financial Instruments
Financial Guarantees -- (3.5) -- (4.5)
Interest Rate Swaps -- 13.3 -- 10.8
- ------------------------------------------------------- --------- --------- --------- ---------
</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 gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
<PAGE>
NOTE 14 EARNINGS PER COMMON SHARE
The following table provides a reconciliation of the numerator and denominator
for the basic and diluted earnings per common share computation:
<TABLE>
<CAPTION>
Year Ended December 31 (In Millions) 1997 1996 1995
- --------------------------------------- ------ ------- -------
<S> <C> <C> <C>
Numerator - Basic
Income from Continuing Operations $222.0 $193.0 $169.1
Net Dividends on ESOP Convertible
Preferred Stock -- (2.0) (2.0)
Dividends on 10% Senior Cumulative
Preferred Stock -- (3.2) (6.3)
------ ------ ------
Income from Continuing Operations
Available to Common
Shareholders (Basic) $222.0 $187.8 $160.8
- --------------------------------------- ------ ------ ------
Numerator - Diluted
Income from Continuing Operations $222.0 $193.0 $169.1
Dividends on 10% Senior Cumulative
Preferred Stock -- (3.2) (6.3)
Additional Compensation Expense
due to Assumed Conversion of
ESOP Convertible Preferred Stock -- -- (.2)
------ ------ ------
Income from Continuing Operations
Available to Common Shareholders
(Diluted) $222.0 $189.8 $162.6
- --------------------------------------- ------ ------ ------
Denominator
Weighted Average Common Shares
During the Period (Basic) 85.6 73.8 72.6
Dilutive Effect of:
Stock Options 1.4 1.0 1.3
ESOP Convertible Preferred Stock -- 5.2 5.2
Other .1 -- --
------ ------ ------
Weighted Average Common Shares
During the Period (Diluted) 87.1 80.0 79.1
- --------------------------------------- ------ ------ ------
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31 (In Millions) 1997 1996 1995
- ------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues
Individual Insurance $ 1,437.4 $ 1,222.8 $ 1,147.0
Employee Benefits 627.2 643.5 661.9
Life and Health Reinsurance 240.7 200.3 180.9
Pension 65.1 68.4 76.6
Other 139.9 55.6 24.0
--------- --------- ---------
Revenues $ 2,510.3 $ 2,190.6 $ 2,090.4
--------- --------- ---------
Pretax Income (Loss) From Continuing Operations
Individual Insurance $ 237.0 $ 212.2 $ 186.0
Employee Benefits 53.3 47.7 46.2
Life and Health Reinsurance 57.8 50.8 43.7
Pension 13.7 12.9 10.1
Other (1.9) (19.5) (26.2)
--------- --------- ---------
Pretax Income From Continuing Operations $ 359.9 $ 304.1 $ 259.8
--------- --------- ---------
Identifiable Assets (as of December 31)
Individual Insurance $16,570.8 $13,022.8 $12,378.0
Employee Benefits 921.2 906.1 883.0
Life and Health Reinsurance 530.0 417.8 357.5
Pension 2,144.3 1,681.9 1,389.5
Other 834.5 678.4 511.2
--------- --------- ---------
Identifiable Assets $21,000.8 $16,707.0 $15,519.2
- ------------------------------------------------- --------- --------- ---------
</TABLE>
Revenues include premiums, net investment income, realized investment gains and
losses, policy and contract charges 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.
<PAGE>
NOTE 16 QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations:
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
(In Millions, Except per Share Data) First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues $563.2 $580.8 $676.4 $689.9
Income Taxes 28.4 30.0 34.7 34.4
Net Income 51.3 51.9 61.5 57.3
- -------------------------------------- ------ ------ ------ ------
Net Income Per Common Share
Basic $ .64 $ .65 $ .67 $ .63
Diluted $ .63 $ .64 $ .66 $ .62
- -------------------------------------- ------ ------ ------ ------
Weighted Average Common Shares
Basic 80.2 80.4 91.3 90.4
Diluted 81.4 81.7 93.0 92.2
- -------------------------------------- ------ ------ ------ ------
1996
------------------------------------------------------------
(In Millions, Except per Share Data) First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------- ------------- -------------- ------------- --------------
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
Basic $ .63 $ .62 $ .64 $ .65
Diluted $ .59 $ .58 $ .59 $ .61
- -------------------------------------- ------ ------ ------ ------
Weighted Average Common Shares
Basic 72.8 73.1 74.6 74.8
Diluted 79.0 79.1 80.6 81.0
- -------------------------------------- ------ ------ ------ ------
</TABLE>
<PAGE>
REPORT OF MANAGEMENT
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 systems are balanced against the expected benefits. During 1997,
the Audit Committee of the Board of Directors, composed solely of outside
directors, met two 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.
/s/ John G. Turner
John G. Turner, FSA
Chairman and Chief Executive Officer
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ReliaStar Financial Corp. and Subsidiaries
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of ReliaStar
Financial Corp. and Subsidiaries as of December 31, 1997 and 1996, and the
related statements of income, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1997. 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, 1997 and 1996 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 3, 1998
<PAGE>
COMMON STOCKHOLDER INFORMATION
MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTER. 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 1996 and 1997. All per share
amounts reflect the 2:1 common stock split that occurred in September 1997.
<TABLE>
<CAPTION>
1996
- ----------------------------------------------------------------
Market Price Dividends
Quarter Per Share Per Share
- ------- ----------------------- ---------
High Low
--------- ------------
<S> <C> <C> <C>
1st $ 25 13/16 $ 20 3/4 $.125
2nd 23 1/2 20 11/16 .14
3rd 24 1/16 20 .14
4th 29 3/16 23 13/16 .14
Year .545
- ----------------------------------------------------------------
1997
- ----------------------------------------------------------------
Market Price Dividends
Quarter Per Share Per Share
- ------- ----------------------- ---------
High Low
--------- ------------
1st $ 32 11/16 $ 27 $ .14
2nd 36 3/4 28 5/8 .155
3rd 40 3/16 35 21/32 .155
4th 41 9/16 33 5/8 .155
Year .605
- ----------------------------------------------------------------
</TABLE>
For restrictions on dividends, see Note 9 of Notes to Consolidated Financial
Statements.
SHAREHOLDERS. There were approximately 22,740 common stockholders of record as
of February 13, 1998.
CORPORATE INFORMATION
EMPLOYEES AND AGENTS. At year-end 1997, ReliaStar Financial Corp. had 4,093
employees and 25,793 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 or (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 SYMBOLS.
RLR PrA, RLR PrB
ANNUAL MEETING. Thursday, May 14, 1998, 10 a.m.,
Central Time, 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 Ruth Weber Kelley, Second Vice President, Corporate
Communications, at (612) 372-5628. For general information, call the company's
main switchboard 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 James R.
Miller, Senior Vice President, Chief Financial Officer and Treasurer, ReliaStar
Financial Corp.,
20 Washington Avenue South, Minneapolis, Minnesota 55401.
<PAGE>
Exhibit 21
SUBSIDIARIES OF RELIASTAR FINANCIAL CORP.
AS OF MARCH 1, 1998
STATE OF
SUBSIDIARIES INCORPORATION
- ------------ -------------
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
Security-Connecticut Life Insurance Company Connecticut
ReliaStar Life Insurance Company of New York New York
North Atlantic Life Agency, Inc. New York
USL Services, Inc. Virginia
Delaware Administrators, Inc. Ohio
ReliaStar Reinsurance Group (UK), Ltd. United Kingdom
Washington Square Advisers, Inc. Minnesota
ReliaStar Investment Research, Inc. Minnesota
Washington Square Securities, Inc. Minnesota
Washington Square Insurance Agency, Inc.
(Massachusetts) Massachusetts
Washington Square Insurance Agency, Inc. (Texas) Texas
Washington Square Insurance Agency, Inc. (Ohio) Ohio
Washington Square Insurance Agency, Inc.
(New Mexico) New Mexico
Northstar Holding, Inc. Delaware
Northstar Investment Management Corporation Delaware
Northstar Distributors, Inc. Minnesota
Northstar Funding, Inc. Delaware
Northstar Administrators Corporation Delaware
<PAGE>
Exhibit 21
SUBSIDIARIES OF RELIASTAR FINANCIAL CORP., CONTINUED
AS OF MARCH 1, 1998
STATE OF
SUBSIDIARIES INCORPORATION
- ------------ -------------
IB Holdings, Inc. Virginia
International Risks Inc. Delaware
The New Providence Insurance Company, Limited Cayman Islands
Northeastern Corporation Connecticut
IB Resolution, Inc. Virginia
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
Arrowhead, Ltd. Bermuda
ReliaStar Bankshares, Inc. Minnesota
ReliaStar Bank
ReliaStar Investment Services, Inc. Minnesota
LaMar & Phillips, Inc. Tennessee
ReliaStar Payroll Agent, Inc. Minnesota
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos. 33-
26416, 33-30348, 33-63258, 33-88498, 333-12825, 333-12833, 333-32069 and 333-
42125 of ReliaStar Financial Corp. on Form S-8 and 333-26881, 333-41575 and 333-
48173 of ReliaStar Financial Corp. on Form S-3 of our reports dated February 3,
1998 appearing in, and incorporated by reference in, the Annual Report on Form
10-K of ReliaStar Financial Corp. for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 16, 1998
<PAGE>
Exhibit 24
RELIASTAR FINANCIAL GROUP
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ Carolyn H. Baldwin
----------------------
Carolyn H. Baldwin
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ David C. Cox
----------------
David C. Cox
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ John H. Flittie
-------------------
John H. Flittie
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ Luella G. Goldberg
----------------------
Luella G. Goldberg
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ William A. Hodder
---------------------
William A. Hodder
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ James J. Howard
-------------------
James J. Howard
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ Randy C. James
------------------
Randy C. James
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ Richard L. Knowlton
-----------------------
Richard L. Knowlton
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ David A. Koch
-----------------
David A. Koch
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ Richard M. Kovacevich
-------------------------
Richard M. Kovacevich
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ Glen D. Nelson
------------------
Glen D. Nelson
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ James J. Renier
-------------------
James J. Renier
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ John G. Turner
------------------
John G. Turner
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ Richard R. Crowl
--------------------
Richard R. Crowl
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ James R. Miller
-------------------
James R. Miller
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a
Delaware corporation, hereby appoints each of John G. Turner, John H. Flittie,
James R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and
lawful attorney-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 a director or officer of the Corporation to an Annual Report on Form 10-
K or other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 12th day
of February, 1998.
/s/ Chris D. Schreier
---------------------
Chris D. Schreier
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 11,146,700,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 27,000,000
<MORTGAGE> 2,270,700,000
<REAL-ESTATE> 74,500,000
<TOTAL-INVEST> 14,420,500,000
<CASH> 46,400,000
<RECOVER-REINSURE> 217,500,000
<DEFERRED-ACQUISITION> 1,091,900,000
<TOTAL-ASSETS> 21,000,800,000
<POLICY-LOSSES> 13,329,400,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 340,500,000
<POLICY-HOLDER-FUNDS> 286,500,000
<NOTES-PAYABLE> 593,500,000
241,900,000
0
<COMMON> 900,000
<OTHER-SE> 2,010,100,000
<TOTAL-LIABILITY-AND-EQUITY> 21,000,800,000
887,900,000
<INVESTMENT-INCOME> 1,025,000,000
<INVESTMENT-GAINS> 11,700,000
<OTHER-INCOME> 585,700,000
<BENEFITS> 1,372,000,000
<UNDERWRITING-AMORTIZATION> 88,900,000
<UNDERWRITING-OTHER> 572,600,000
<INCOME-PRETAX> 359,900,000
<INCOME-TAX> 127,500,000
<INCOME-CONTINUING> 222,000,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 222,000,000
<EPS-PRIMARY> 2.59
<EPS-DILUTED> 2.55
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<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
<DEBT-MARKET-VALUE> 0
<EQUITIES> 36,900,000
<MORTGAGE> 1,855,400,000
<REAL-ESTATE> 77,500,000
<TOTAL-INVEST> 11,996,300,000
<CASH> 32,400,000
<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
<OTHER-SE> 845,400,000
<TOTAL-LIABILITY-AND-EQUITY> 16,707,000,000
836,900,000
<INVESTMENT-INCOME> 940,700,000
<INVESTMENT-GAINS> 11,200,000
<OTHER-INCOME> 401,800,000
<BENEFITS> 1,287,700,000
<UNDERWRITING-AMORTIZATION> 84,800,000
<UNDERWRITING-OTHER> 437,400,000
<INCOME-PRETAX> 304,100,000
<INCOME-TAX> 106,100,000
<INCOME-CONTINUING> 193,000,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 193,000,000
<EPS-PRIMARY> 2.54
<EPS-DILUTED> 2.37
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 11,011,900,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 31,000,000
<MORTGAGE> 2,215,900,000
<REAL-ESTATE> 76,200,000
<TOTAL-INVEST> 14,242,300,000
<CASH> 26,100,000
<RECOVER-REINSURE> 198,900,000
<DEFERRED-ACQUISITION> 1,062,000,000
<TOTAL-ASSETS> 20,605,500,000
<POLICY-LOSSES> 13,243,500,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 341,400,000
<POLICY-HOLDER-FUNDS> 222,900,000
<NOTES-PAYABLE> 581,800,000
241,800,000
0
<COMMON> 900,000
<OTHER-SE> 1,929,900,000
<TOTAL-LIABILITY-AND-EQUITY> 20,605,500,000
648,900,000
<INVESTMENT-INCOME> 749,400,000
<INVESTMENT-GAINS> 5,200,000
<OTHER-INCOME> 416,900,000
<BENEFITS> 1,012,600,000
<UNDERWRITING-AMORTIZATION> 71,500,000
<UNDERWRITING-OTHER> 400,300,000
<INCOME-PRETAX> 265,000,000
<INCOME-TAX> 93,100,000
<INCOME-CONTINUING> 164,700,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 164,700,000
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.93
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 9,340,100,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 24,900,000
<MORTGAGE> 1,992,500,000
<REAL-ESTATE> 74,200,000
<TOTAL-INVEST> 12,246,600,000
<CASH> 27,900,000
<RECOVER-REINSURE> 224,700,000
<DEFERRED-ACQUISITION> 1,065,400,000
<TOTAL-ASSETS> 17,673,400,000
<POLICY-LOSSES> 11,479,400,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 287,700,000
<POLICY-HOLDER-FUNDS> 214,000,000
<NOTES-PAYABLE> 460,000,000
241,700,000
0
<COMMON> 400,000
<OTHER-SE> 1,500,300,000
<TOTAL-LIABILITY-AND-EQUITY> 17,673,400,000
419,800,000
<INVESTMENT-INCOME> 474,700,000
<INVESTMENT-GAINS> 2,500,000
<OTHER-INCOME> 247,000,000
<BENEFITS> 638,400,000
<UNDERWRITING-AMORTIZATION> 47,100,000
<UNDERWRITING-OTHER> 250,700,000
<INCOME-PRETAX> 165,400,000
<INCOME-TAX> 58,400,000
<INCOME-CONTINUING> 103,200,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,200,000
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.26
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<RESTATED>
<CIK> 0000841528
<NAME> RELIASTAR FINANCIAL CORPORTION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 9,212,400,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 25,100,000
<MORTGAGE> 1,859,100,000
<REAL-ESTATE> 76,900,000
<TOTAL-INVEST> 11,920,600,000
<CASH> 19,900,000
<RECOVER-REINSURE> 209,800,000
<DEFERRED-ACQUISITION> 1,064,700,000
<TOTAL-ASSETS> 16,933,900,000
<POLICY-LOSSES> 11,400,500,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 292,700,000
<POLICY-HOLDER-FUNDS> 209,000,000
<NOTES-PAYABLE> 449,100,000
121,000,000
0
<COMMON> 578,900,000
<OTHER-SE> 805,400,000
<TOTAL-LIABILITY-AND-EQUITY> 16,933,900,000
204,700,000
<INVESTMENT-INCOME> 234,700,000
<INVESTMENT-GAINS> 2,200,000
<OTHER-INCOME> 121,600,000
<BENEFITS> 317,500,000
<UNDERWRITING-AMORTIZATION> 21,900,000
<UNDERWRITING-OTHER> 121,400,000
<INCOME-PRETAX> 81,400,000
<INCOME-TAX> 28,400,000
<INCOME-CONTINUING> 51,300,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,300,000
<EPS-PRIMARY> .64
<EPS-DILUTED> .63
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains amended summary financial information extracted from the
condensed consolidated balance sheet and statement of income and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 9,002,700,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 41,000,000
<MORTGAGE> 1,913,100,000
<REAL-ESTATE> 88,800,000
<TOTAL-INVEST> 11,764,800,000
<CASH> 34,000,000
<RECOVER-REINSURE> 179,800,000
<DEFERRED-ACQUISITION> 998,600,000
<TOTAL-ASSETS> 16,219,900,000
<POLICY-LOSSES> 11,207,700,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 284,600,000
<POLICY-HOLDER-FUNDS> 193,400,000
<NOTES-PAYABLE> 407,400,000
120,900,000
6,400,000
<COMMON> 541,500,000
<OTHER-SE> 774,600,000
<TOTAL-LIABILITY-AND-EQUITY> 16,219,900,000
619,200,000
<INVESTMENT-INCOME> 703,200,000
<INVESTMENT-GAINS> 8,700,000
<OTHER-INCOME> 293,600,000
<BENEFITS> 966,900,000
<UNDERWRITING-AMORTIZATION> 60,000,000
<UNDERWRITING-OTHER> 312,000,000
<INCOME-PRETAX> 226,200,000
<INCOME-TAX> 79,200,000
<INCOME-CONTINUING> 143,700,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143,700,000
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.77
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 8,867,400,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 34,000,000
<MORTGAGE> 1,893,200,000
<REAL-ESTATE> 99,700,000
<TOTAL-INVEST> 11,710,500,000
<CASH> 34,600,000
<RECOVER-REINSURE> 168,300,000
<DEFERRED-ACQUISITION> 970,000,000
<TOTAL-ASSETS> 15,945,500,000
<POLICY-LOSSES> 11,153,500,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 269,500,000
<POLICY-HOLDER-FUNDS> 183,900,000
<NOTES-PAYABLE> 395,900,000
120,800,000
69,400,000
<COMMON> 565,900,000
<OTHER-SE> 695,300,000
<TOTAL-LIABILITY-AND-EQUITY> 15,945,500,000
413,600,000
<INVESTMENT-INCOME> 469,500,000
<INVESTMENT-GAINS> 8,700,000
<OTHER-INCOME> 188,300,000
<BENEFITS> 652,300,000
<UNDERWRITING-AMORTIZATION> 43,300,000
<UNDERWRITING-OTHER> 200,900,000
<INCOME-PRETAX> 150,400,000
<INCOME-TAX> 52,900,000
<INCOME-CONTINUING> 95,800,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,800,000
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.17
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet and statement of income and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 8,909,500,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 35,700,000
<MORTGAGE> 1,967,600,000
<REAL-ESTATE> 100,900,000
<TOTAL-INVEST> 11,785,400,000
<CASH> 24,900,000
<RECOVER-REINSURE> 163,200,000
<DEFERRED-ACQUISITION> 925,400,000
<TOTAL-ASSETS> 15,772,300,000
<POLICY-LOSSES> 11,083,900,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 260,300,000
<POLICY-HOLDER-FUNDS> 186,500,000
<NOTES-PAYABLE> 423,300,000
120,800,000
69,000,000
<COMMON> 566,000,000
<OTHER-SE> 709,000,000
<TOTAL-LIABILITY-AND-EQUITY> 15,772,300,000
205,000,000
<INVESTMENT-INCOME> 232,300,000
<INVESTMENT-GAINS> 6,200,000
<OTHER-INCOME> 89,900,000
<BENEFITS> 323,800,000
<UNDERWRITING-AMORTIZATION> 21,000,000
<UNDERWRITING-OTHER> 100,200,000
<INCOME-PRETAX> 74,300,000
<INCOME-TAX> 26,200,000
<INCOME-CONTINUING> 48,000,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,000,000
<EPS-PRIMARY> .63
<EPS-DILUTED> .59
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
