<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from __________________ to _________________.
Commission File Number 1-10640
RELIASTAR FINANCIAL CORP.
-------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 41-1620373
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
20 WASHINGTON AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55401
--------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(612) 372-5432
--------------
(Registrant's telephone number, including area code)
--------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Number of shares of common stock outstanding as of April 30, 1999 was
88,474,639.
<PAGE>
Part I-Financial Information
Item 1. Financial Statements
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Balance Sheets
(in millions)
(unaudited)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
ASSETS
Fixed Maturity Securities $ 11,486.5 $ 11,625.1
Equity Securities 61.2 60.3
Mortgage Loans on Real Estate 2,207.7 2,154.8
Real Estate and Leases 50.4 53.3
Policy Loans 709.5 702.3
Other Invested Assets 137.2 144.6
Short-Term Investments 137.8 168.7
------------ ------------
Total Investments 14,790.3 14,909.1
Cash 1.6 21.5
Accounts and Notes Receivable 350.6 287.7
Reinsurance Receivable 458.8 417.7
Deferred Policy Acquisition Costs 1,271.8 1,214.9
Present Value of Future Profits 437.8 422.5
Property and Equipment, Net 114.4 117.3
Accrued Investment Income 206.2 196.0
Other Assets 406.5 399.8
Participation Fund Account Assets 311.2 311.6
Assets Held in Separate Accounts 4,548.8 4,310.6
------------ ------------
TOTAL ASSETS $ 22,898.0 $ 22,608.7
============ ============
LIABILITIES
Future Policy and Contract Benefits $ 13,580.3 $ 13,519.8
Pending Policy Claims 477.6 433.5
Other Policyholder Funds 329.2 304.6
Notes and Mortgages Payable 529.5 509.4
Income Taxes 170.5 199.0
Other Liabilities 662.2 663.2
Participation Fund Account Liabilities 311.2 311.6
Liabilities Related to Separate Accounts 4,543.3 4,305.1
------------ ------------
TOTAL LIABILITIES 20,603.8 20,246.2
------------ ------------
Company-Obligated Mandatorily Redeemable Preferred
Securities Issued by Consolidated Subsidiaries 242.4 242.3
------------ ------------
SHAREHOLDERS' EQUITY
Common Stock (Shares Issued: 1999 and 1998, 98.1) .9 .9
Additional Paid-in Capital 997.0 1,003.0
Retained Earnings 1,185.3 1,137.6
Accumulated Other Comprehensive Income 154.2 257.2
Note Receivable from ESOP (19.2) (19.8)
Unamortized Restricted Stock Awards (1.1) (.7)
Treasury Common Stock, at Cost (Shares Held: 1999, 9.3; 1998, 9.2) (265.3) (258.0)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 2,051.8 2,120.2
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 22,898.0 $ 22,608.7
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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RELIASTAR FINANCIAL CORP.
Condensed Consolidated Statements of Income
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
-------------------------------
1999 1998
------------ -------------
<S> <C> <C>
REVENUES
Premiums $ 276.4 $ 235.0
Net Investment Income 277.3 274.4
Realized Investment Gains, Net 2.5 7.2
Policy and Contract Charges 109.2 100.6
Other Income 61.7 72.4
------------ -------------
Total 727.1 689.6
------------ -------------
BENEFITS AND EXPENSES
Benefits to Policyholders 411.1 380.3
Sales and Operating Expenses 152.9 149.2
Amortization of Deferred Policy Acquisition Costs
and Present Value of Future Profits 40.5 41.9
Interest Expense 9.5 6.5
Dividends and Experience Refunds to Policyholders 7.5 5.9
------------ -------------
Total 621.5 583.8
------------ -------------
Income from Continuing Operations
Before Income Taxes and Dividends on Preferred
Securities of Subsidiaries 105.6 105.8
Income Tax Expense 37.9 38.0
Dividends on Preferred Securities of Subsidiaries, Net of Tax 3.3 3.3
------------ -------------
Income from Continuing Operations 64.4 64.5
Income from Discontinued Operations, Net of Tax - .1
------------ -------------
Net Income $ 64.4 $ 64.6
============ =============
INCOME FROM CONTINUING OPERATIONS AND NET
INCOME PER COMMON SHARE
Basic $ .73 $ 0.71
============ =============
Diluted $ .71 $ 0.70
============ =============
Weighted Average Common Shares
Basic 88.8 91.0
Diluted 90.1 92.8
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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RELIASTAR FINANCIAL CORP.
Condensed Consolidated Statements of Shareholders' Equity
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
-----------------------------------------------
Total Equity Comprehensive Income
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Common Stock
Beginning and End of Period $ .9 $ .9
--------- --------
Additional Paid-in Capital
Beginning of Year 1,003.0 1,019.8
Loss on Treasury Shares Reissued for Benefit Plans (9.9) (13.4)
Loss on Treasury Shares Reissued for Acquisitions - (.9)
Tax Benefit on Stock Options Exercised 3.9 6.9
--------- --------
End of Period 997.0 1,012.4
--------- --------
Retained Earnings
Beginning of Year 1,137.6 964.8
Net Income 64.4 $ 64.6 $ 64.4 $ 64.6
Common Dividends to Shareholders: (Per Share: 1999,
$.185; 1998, $.155) (16.4) (14.1)
Other, Net (.3) (.4)
--------- --------
End of Period 1,185.3 1,014.9
--------- --------
Accumulated Other Comprehensive Income
Beginning of Year 257.2 226.2
Change for the Period (103.0) 2.3 (103.0) 2.3
--------- -------- ------- --------
End of Period 154.2 228.5
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Note Receivable from ESOP
Beginning of Year (19.8) (20.8)
Repayments, Accrued or Paid .6 .4
--------- --------
End of Period (19.2) (20.4)
--------- --------
Unamortized Restricted Stock Awards
Beginning of Year (.7) (1.0)
Awards, Net (.4) (.3)
Amortization of Restricted Stock Awards - .1
-------- --------
End of Period (1.1) (1.2)
--------- --------
Treasury Common Stock
Beginning of Year (258.0) (178.9)
Acquired (27.5) (32.5)
Reissued for Acquisitions - 21.2
Reissued, Other 20.2 28.8
--------- ---------
End of Period (265.3) (161.4)
--------- ---------
Comprehensive Income (Loss) $ (38.6) $ 66.9
======= =======
Total Shareholders' Equity $2,051.8 $2,073.7
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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RELIASTAR FINANCIAL CORP.
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1999 1998
---------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 64.4 $ 64.6
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities
Interest Credited to Insurance Contracts 138.3 145.6
Future Policy Benefits (170.1) (153.4)
Capitalization of Policy Acquisition Costs (66.2) (54.6)
Amortization of Deferred Policy Acquisition Costs and Present
Value of Future Profits 40.5 41.9
Deferred Income Taxes 10.3 3.4
Net Change in Receivables and Payables (10.8) 46.2
Other Assets (16.9) (43.0)
Realized Investment Gains, Net (2.5) (7.2)
Other (.5) (4.7)
-------- ----------
Net Cash Provided by Operating Activities (13.5) 38.8
-------- ----------
INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturity Securities 135.2 73.1
Proceeds from Maturities or Repayment of Fixed Maturity Securities 322.1 279.3
Cost of Fixed Maturity Securities Acquired (520.8) (462.2)
Sales (Purchases) of Equity Securities, Net 1.6 (11.6)
Proceeds of Mortgage Loans Sold, Matured or Repaid 96.8 118.9
Cost of Mortgage Loans Acquired (149.7) (63.0)
Sales of Real Estate and Leases, Net 2.9 .3
Policy Loans Issued, Net (7.2) (6.0)
Sales (Purchases) of Other Invested Assets, Net .4 21.8
Purchases of Short-Term Investments, Net 30.9 (51.4)
Cash Acquired with Acquisitions, Net -- 1.3
-------- ----------
Net Cash Used by Investing Activities (87.8) (99.5)
-------- ----------
FINANCING ACTIVITIES
Deposits to Insurance Contracts 426.4 405.4
Maturities and Withdrawals from Insurance Contracts (331.5) (343.1)
Increase in Notes and Mortgages Payable 20.2 42.6
Repayment of Notes and Mortgages Payable (.1) (6.2)
Issuance of Common Stock Under Stock Option and Other Plans 10.3 12.0
Dividends on Common Stock (16.4) (14.1)
Acquisition of Treasury Common Stock (27.5) (32.5)
-------- ----------
Net Cash Provided by Financing Activities 81.4 64.1
-------- ----------
Increase (Decrease) in Cash (19.9) 3.4
Cash at Beginning of Period 21.5 46.4
-------- ----------
Cash at End of Period $ 1.6 $ 49.8
======== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
RELIASTAR FINANCIAL CORP.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and such principles were applied
on a basis consistent with that reflected in the Annual Report of ReliaStar
Financial Corp. (the Company or ReliaStar) for the year ended December 31, 1998
filed with the Securities and Exchange Commission (SEC). The financial
information included herein, other than the condensed consolidated balance sheet
as of December 31, 1998, has been prepared by management without audit by
independent certified public accountants. The condensed consolidated balance
sheet as of December 31, 1998 has been derived from, and does not include all of
the disclosures contained in, the audited consolidated financial statements for
the year ended December 31, 1998.
The information furnished includes all adjustments and accruals consisting only
of normal, recurring accrual adjustments which are, in the opinion of
management, necessary for a fair statement of results for the interim period.
The results of operations for any interim period are not necessarily indicative
of results for the full year. The unaudited interim condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto contained in the Company's 1998 Annual Report.
Note 2. Segment Information
The Company operates in four reportable segments which are differentiated by
products and/or marketing focus. The Personal Financial Services (PFS) segment
sells life insurance and annuity products to individuals. The Worksite Financial
Services segment sells group and individual insurance products, 401(k) plans and
financial services to employers and their employees at the worksite. The
Tax-Sheltered and Fixed Annuities (TSA/FA) segment sells 403(b) annuities and
other retirement products, primarily to the K-12 schoolteacher market. The
Reinsurance segment sells group life, health and specialty reinsurance products
in the U.S. and internationally.
In the first quarter of 1999, management responsibility for the closed block of
individual life insurance of Northern Life was transferred from the TSA/FA
segment to the PFS segment. At the same time, management responsibility for the
fixed annuities of Security-Connecticut Life and the former Lincoln Security
Life were transferred from the PFS segment to the TSA/FA segment. Previously
reported segment financial data has been restated to reflect these changes and
conform with current period presentation.
Operations not included in the four reportable segments are classified as Other
Business units and include the Company's mutual fund operation, broker/dealer
operations, banking and trust operations and personal financial education
company. Financing costs, goodwill amortization, unallocated costs and
consolidating/eliminating adjustments are reported in Corporate.
Selected segment data follows (in millions):
Three Months Ended March 31
---------------------------
OPERATING INCOME(1) 1999 1998
- ------------------- ------- --------
Personal Financial Services $ 25.2 $ 22.4
Worksite Financial Services 14.5 13.9
Tax-Sheltered and Fixed Annuities 20.8 16.8
Reinsurance 6.7 9.4
------- --------
Total Reportable Segments 67.2 62.5
Other Business Units 2.6 3.7
Corporate (7.0) (5.1)
------- --------
Operating Income 62.8 61.1
Net Realized Investment Gains 1.6 3.4
------- --------
Consolidated Income from Continuing Operations $ 64.4 $ 64.5
======= ========
(1) Operating income is after-tax and excludes realized investment gains
and losses and their impact on the amortization of deferred policy
acquisition costs (DAC) and present value of future profits (PVFP).
6
<PAGE>
Three Months Ended March 31
---------------------------
OPERATING REVENUES 1999 1998
- ------------------ ------- --------
Personal Financial Services $ 217.8 $ 221.1
Worksite Financial Services 194.7 196.5
Tax-Sheltered and Fixed Annuities 147.1 145.1
Reinsurance 110.8 70.8
------- --------
Total Reportable Segments 670.4 633.5
Other Business Units 50.6 45.7
Corporate 3.6 3.2
------- --------
Operating Revenues 724.6 682.4
Net Realized Investment Gains 2.5 7.2
------- --------
Consolidated Revenues $ 727.1 $ 689.6
======= ========
March 31 December 31
ASSETS UNDER MANAGEMENT 1999 1998
- ----------------------- --------- -----------
Personal Financial Services $ 7,037.3 $ 6,887.0
Worksite Financial Services 3,574.9 3,512.1
Tax-Sheltered and Fixed Annuities 7,756.9 7,594.7
Reinsurance 320.4 309.9
--------- ---------
Total Reportable Segments 18,689.5 18,303.7
Other Business Units 4,129.4 4,018.4
Corporate 335.3 389.8
--------- ---------
Assets Under Management 23,154.2 22,711.9
Net Unrealized Investment Gains 314.3 526.2
Other Balance Sheet Assets 3,558.9 3,389.0
Off-Balance Sheet Mutual Fund Client Assets (4,129.4) (4,018.4)
--------- ---------
Consolidated Assets $22,898.0 $22,608.7
========= =========
7
<PAGE>
Items 2 and 3.
RELIASTAR FINANCIAL CORP.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Results of operations by operating segment are summarized below (in millions):
Three Months
Ended March 31
-----------------------
1999 1998
------ -----
Operating Income (Loss)(1)
Personal Financial Services Segment $25.2 $22.4
Worksite Financial Services Segment 14.5 13.9
Tax-Sheltered and Fixed Annuities Segment 20.8 16.8
Reinsurance Segment 6.7 9.4
Other Business Units 2.6 3.7
Corporate (7.0) (5.1)
----- -----
Operating Income 62.8 61.1
Net Realized Investment Gains, Net of Tax 1.6 3.4
----- -----
Income From Continuing Operations 64.4 64.5
Income From Discontinued Operations, Net of Tax - .1
----- -----
Net Income $64.4 $64.6
===== =====
(1) Operating income is after-tax and excludes realized investment gains
and losses and their impact on the amortization of deferred policy
acquisition costs (DAC) and present value of future profits (PVFP).
ReliaStar Financial Corp. (the Company or ReliaStar) has four reportable
operating segments: Personal Financial Services (PFS), Worksite Financial
Services, Tax-Sheltered and Fixed Annuities (TSA/FA), and Reinsurance; and
conducts its operations primarily through its life insurance subsidiaries:
ReliaStar Life Insurance Company (ReliaStar Life), Northern Life Insurance
Company (Northern), Security-Connecticut Life Insurance Company
(Security-Connecticut), and ReliaStar Life Insurance Company of New York (RLNY).
These subsidiaries are sometimes collectively referred to as the Insurers.
In the first quarter of 1999, management responsibility for the closed block of
individual life insurance of Northern Life was transferred from the TSA/FA
segment to the PFS segment. At the same time, management responsibility for the
fixed annuities of Security-Connecticut and the former Lincoln Security Life
were transferred from the PFS segment to the TSA/FA segment. Previously reported
segment financial data has been restated to reflect these changes and conform
with current period presentation.
The discussion of segment operating results that follows refers to the above
after-tax segment results and, in each instance, amounts are after-tax unless
otherwise indicated.
Personal Financial Services
The Personal Financial Services (PFS) segment sells life insurance and annuity
products to individuals. Operating income of the PFS segment for the first three
months of 1999 increased $2.8 million, or 13%, compared with the same period in
1998. The increase in operating income was primarily due to more favorable
mortality experience, lower expenses, and growth in assets under management. The
interest spread of 248 basis points in the first quarter of 1999 compares to 249
basis points in the first quarter of 1998. This decrease in spread reflects a 22
basis point decrease in the portfolio yield and a 21 basis point reduction in
the average crediting rate. We expect that the average interest spread for the
remainder of 1999 will be lower than the rate experienced in the first quarter
of 1999, primarily as a result of declining portfolio yields. It should be noted
that the interest spread calculation is an annualized measure and can be overly
influenced in a particular period by the level of prepayments, recoveries on
problem investments and other variances in the level of net investment income.
For approximately one-half of the
8
<PAGE>
business included in the PFS 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 competition and market interest rates
and are guaranteed to the end of the calendar year on most new premiums
received.
Total assets under management increased to $7.0 billion as of March 31, 1999
from $6.6 billion as of March 31, 1998. Separate account assets under management
increased to $2.2 billion as of March 31, 1999 from $1.8 billion as of March 31,
1998.
Total sales (annualized new premiums and deposits) decreased 3% for the first
three months of 1999 and were $96.8 million compared with $100.0 million in the
same period of 1998. The 3% decline in sales is primarily due to a decline in
sales of fixed annuities due to the Company's efforts to emphasize the sale of
these products through its Tax-Sheltered and Fixed Annuities segment. Sales of
fixed annuities were $.8 million in the first quarter of 1999 compared with $4.3
million in the same period of last year. Sales during the first three months of
1999 of individual life insurance increased 3% to $40.1 million compared to the
first quarter of last year. Sales of variable annuities for the first quarter of
1999 declined 1% to $55.9 million compared to the same period of last year.
Worksite Financial Services
The Worksite Financial Services (WFS) segment sells group and individual life
insurance products, retirement plans and financial services to employers and
their employees at the worksite. Operating income of the WFS segment for the
first three months of 1999 increased $.6 million, or 4%, compared with the same
period in 1998. The increase in operating income was primarily due to higher
sales and lower expense levels in the voluntary payroll deduction unit and
growth in 401(k) plan fees in the retirement plans unit. These factors were
partially offset by less favorable morbidity experience in the insured group
medical line of business which is being transitioned to Trustmark Insurance
Company during 1999; and higher expense ratios in the employee benefits
unit.
Total sales for the first three months of 1999 were $206.2 million compared with
$157.0 million in the same period of 1998. Sales for the first three months of
1999 increased 31% compared with the same period in 1998, reflecting a 25%
increase in group life sales, a 31% increase in retirement plan sales, a 46%
increase in individual life sales, and a 52% increase in group health sales,
primarily due to increased sales of long-term disability and excess loss
products.
Tax-Sheltered and Fixed Annuities
The Tax-Sheltered and Fixed Annuities (TSA/FA) segment sells 403(b) annuities
and other retirement products, primarily to the K-12 schoolteacher market.
Operating income of the TSA/FA segment for the first three months of 1999
increased $4.0 million, or 24%, compared with the same period in 1998. The
increase in operating income was primarily due to increased interest spreads and
growth in assets under management. The interest spread of 282 basis points in
the first quarter of 1999 compares to 258 basis points in the first quarter of
1998. This increase in spread reflects a 40 basis point reduction in the average
crediting rate and a 16 basis point decrease in the portfolio yield. We expect
that the average interest spread for the remainder of 1999 will be lower than
the rate experienced in the first quarter of 1999, primarily as a result of
declining portfolio yields. It should be noted that the interest spread
calculation is an annualized measure and can be overly influenced in a
particular period by the level of prepayments, recoveries on problem investments
and other variances in the level of net investment income. For most of the
business included in the TSA/FA 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 competition and market
interest rates and are guaranteed to the end of the calendar year on most new
deposits received.
Total assets under management increased to $7.8 billion as of March 31, 1999
from $7.2 billion as of March 31, 1998. Separate account assets under management
increased to $439 million as of March 31, 1999 from $195 million as of March 31,
1998.
9
<PAGE>
Total sales for the first three months of 1999 were $148.4 million compared with
$135.9 million in the same period of 1998. The increase in sales reflects a 55%
increase in sales of variable annuities, partially offset by a 9% decrease in
fixed annuity sales.
Reinsurance
The Reinsurance segment sells group life, health, and specialty reinsurance
products in the United States and internationally. Operating income of the
Reinsurance segment for the first three months of 1999 decreased $2.7 million,
or 29%, compared with the same period in 1998. The decrease in operating income
was primarily due to less favorable claims experience. The ratio of claims to
net earned premium was 69.3% in the first quarter of 1999, compared with 58.9%
in the first quarter of 1998. Less favorable mortality and morbidity loss ratios
were experienced in the group life, group medical, and long-term disability
lines of reinsurance business. Claims experience and overall profitability of
workers compensation carve-out reinsurance in the first quarter of 1999 were
consistent with those of the same period in 1998. The less favorable claims
experience was partially offset by a 62% increase in earned premiums in the
first quarter of 1999 compared with the first quarter of 1998. 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.
Total sales for the first three months of 1999 were $81.4 million compared with
$52.0 million in the same period of 1998, an increase of 57%, primarily due to
increased sales of group life, long-term disability and group medical
reinsurance lines, and special insurance product sales.
Other Business Units
Other Business Units include the Company's mutual fund operation, broker/dealer
operations, banking operation and personal finance education company. These
business units are not large enough to be classified as reportable segments.
Operating income of the Other Business Units for the first three months of 1999
decreased $1.1 million, or 30%, compared with the same period in 1998. The
decrease in operating income was primarily due to lower earnings in the mutual
fund operation as a result of a gain recorded in the first quarter of 1998 on
the sale of 12b-1 fees attributable to a portion of the mutual fund operation's
Class B shares.
Corporate
Corporate includes financing costs, goodwill amortization and other unallocated
costs. Operating losses of Corporate for the first three months of 1999
increased $1.9 million compared with the same period in 1998. The increase in
operating losses was primarily due to interest expense related to the $200
million of notes payable issued in the fourth quarter of 1998.
10
<PAGE>
Realized Investment Gains and Losses
The sources of net realized investment gains (losses) were as follows (in
millions):
Three Months
Ended March 31
----------------------
1999 1998
----- -----
Net Gains (Losses) on Sales of Investments
Fixed Maturity Securities
Gross Gains $ 6.0 $ 0.9
Gross Losses (2.4) (0.2)
Equity Securities 1.3 .6
Foreclosed Real Estate (.2) -
Real Estate .6 -
Other 1.0 9.7
Provision for Losses on Investments
Fixed Maturity Securities (3.4) (3.5)
Foreclosed Real Estate (.4) (.3)
----- -----
Pretax Realized Investment Gains 2.5 7.2
DAC/PVFP Amortization(1) (.1) (2.0)
Income Taxes (.8) (1.8)
----- -----
Net Realized Investment Gains, Net of Tax $ 1.6 $ 3.4
===== =====
(1) Due to pretax realized investment gains and losses.
The Company establishes allowances and writes down the value of specific assets
based upon its periodic 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.
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 is subject to restrictions imposed by applicable insurance laws
and regulations.
The payment of future dividends by ReliaStar to its shareholders will be largely
dependent upon the ability of ReliaStar Life to pay dividends to the Company.
Under Minnesota insurance law regulating the payment of dividends by ReliaStar
Life, any such payment must be in an amount deemed prudent by ReliaStar Life's
Board of Directors and, unless otherwise approved by the Commissioner of the
Minnesota Department of Commerce (the Commissioner), must be paid solely from
the adjusted earned surplus of ReliaStar Life. Adjusted earned surplus means the
earned surplus as determined in accordance with statutory accounting practices
(unassigned funds) less 25% of the amount of such earned surplus which is
attributable to net unrealized capital gains. Further, without approval of the
Commissioner, ReliaStar Life may not pay in any calendar year any dividend
which, when combined with other 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 1999, the amount of dividends which can be paid by ReliaStar Life without
Commissioner approval is $156.4 million.
On March 3, 1999, the Company filed a shelf registration statement with the
Securities and Exchange Commission (SEC) for the issuance of up to $500 million
of debt and equity securities. The registration statement was declared
11
<PAGE>
effective on April 30,1999 by the SEC. As of April 30, 1999, $500 million of
debt and equity securities remain available for issuance under this shelf
registration.
As of March 31, 1999, the Company had unsecured revolving credit facilities with
banks totaling $225 million for general corporate purposes and $205 million
remained available for borrowing under these facilities.
During the first quarter of 1999, the Company began a systematic program to
repurchase shares of stock in open market transactions. The shares repurchased
will be used for the Company's stock option plans, stock compensation programs
and dividend reinvestment program. Through March 31, 1999, the Company had
repurchased 515,000 of its common shares at an average price of $46.22 per
share. This program may be terminated at any time.
Liquidity and Capital Resources - Insurers
Liquidity for life insurance companies is measured by their ability to pay
scheduled contractual benefits, pay operating expenses and fund investment
commitments. Sources of liquidity include scheduled and unscheduled principal
and interest payments on investments, premium payments and deposits and the sale
of liquid investments. These sources of liquidity for the Insurers significantly
exceed scheduled uses.
Liquidity is also affected by unscheduled benefit payments, including death
benefits, benefits under insured accident and health policies and contract
withdrawals and surrenders. The amount of withdrawals and surrenders is affected
by a variety of factors such as credited interest rates for competing products,
general economic conditions, the Insurers' claims paying ratings and events in
the industry which affect policyholders' confidence.
The Insurers' investment portfolios represent a significant source of liquid
assets. As of March 31, 1999, the Insurers' investment portfolios included $7.9
billion (34% of consolidated assets) of short-term investments and investment
grade marketable bonds. The March 31, 1999 investment portfolio also included
$2.8 billion of investment grade privately placed bonds which, while not
publicly traded, are a source of liquidity.
Some of the policies and annuities issued by the Insurers contain provisions
which allow contractholders to withdraw or surrender their contracts under
defined circumstances. These policies and annuities generally contain provisions
which apply penalties or otherwise restrict the ability of contractholders to
make such withdrawals or surrenders. The Insurers monitor the surrender and
policy loan activity of their insurance products and manage the composition of
their investment portfolios, including liquidity, in light of such activity.
While the Insurers have 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-Market-Sensitive Instruments and Risk Management).
The Company's long-term goals contemplate continued growth in its insurance
businesses. To achieve these growth goals, the Insurers will need to increase
their statutory surplus. 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. Additional statutory surplus may be secured
through various sources such as internally generated statutory earnings or
equity infusions by ReliaStar 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
12
<PAGE>
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 March 31, 1999 was $1.6 million. During the first
quarter of 1999, net cash used by operating and investing activities was $13.5
million and $87.8 million, respectively, which was offset by net cash provided
by financing activities of $81.4 million.
The $13.5 million of net cash used by operating activities was primarily the
result of cash outflows for insurance benefits and sales and operating expenses
in excess of positive cash flow from premiums and investment income. Net cash
provided by financing activities of $81.4 million was primarily the result of
proceeds from net deposits to insurance contracts.
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 during 1999
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.
13
<PAGE>
The following table provides information regarding the composition of the
Company's invested assets (in millions):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
--------------------- ----------------------
Amount Percent Amount Percent
-------- ------- --------- -------
<S> <C> <C> <C> <C>
Investment Grade Bonds:
Marketables $ 7,730.5 52.3% $ 7,823.4 52.5%
Private Placements 2,795.3 18.9 2,881.6 19.3
--------- ------- --------- -----
Subtotal 10,525.8 71.2 10,705.0 71.8
Below Investment Grade Bonds:
Marketables 448.4 3.0 391.3 2.6
Private Placements 484.0 3.3 510.4 3.4
--------- ------- --------- -----
Subtotal 932.4 6.3 901.7 6.0
Equity Securities 61.2 .4 60.3 .4
Commercial Mortgages 1,767.4 12.0 1,726.8 11.6
Mortgages, Residential and Other 440.3 3.0 428.0 2.9
Real Estate 50.4 .3 53.3 .3
Short-Term Investments 137.8 .9 168.7 1.2
Other 875.0 5.9 865.3 5.8
--------- ------- --------- -----
Total Invested Assets $14,790.3 100.0% $14,909.1 100%
========= ======= ========= =====
</TABLE>
Fixed Maturity Securities
The amounts invested in fixed maturity securities as of March 31, 1999 and
December 31, 1998 were $11.5 billion and $11.6 billion, respectively. The
average marketable and private placement bond investments in a single corporate
issuer (excluding structured finance securities such as CMOs, mortgage-backed
pass throughs and asset-backed securities) as of March 31, 1999 were $9.4
million and $7.4 million, respectively.
All of the Insurers' 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' categories for marketable bonds. NAIC
categories 1 and 2 include bonds considered investment grade (BBB or higher) by
the public rating agencies. Categories 3 through 6 are referred to as below
investment grade (BB or lower).
As of March 31, 1999, the weighted average book yields of the Company's
investment grade portfolio and below investment grade portfolio were 7.5% and
8.6%, 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.
14
<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 rating
category (in millions):
<TABLE>
<CAPTION>
March 31, 1999
- ---------------------------------------------------------------------------------------------------------
Marketables Private Placements
--------------------------------------------- ------------------------------------------
NAIC Amortized Gross Unrealized Gross Unrealized
---------------- Fair Amortized ---------------- Fair
Rating Cost Gains (Losses) Value Cost Gains (Losses) Value
- ------ ---- ----- -------- ----- ---- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $5,170.2 $ 212.6 $ (21.1) $ 5,361.7 $ 878.0 $32.9 $ (4.6) $ 906.3
2 2,311.6 75.8 (18.6) 2,368.8 1,856.0 46.8 (13.8) 1,889.0
3 349.7 5.6 (7.6) 347.7 343.9 4.7 (3.2) 345.4
4 103.5 2.0 (9.5) 96.0 106.6 1.2 (2.9) 104.9
5 9.4 - (5.1) 4.3 32.2 .1 (1.6) 30.7
6 .4 - - .4 3.3 - (.3) 3.0
Redeemable
Preferred
Stock 16.3 .7 (1.0) 16.0 12.7 - (.4) 12.3
-------- ------- ------ --------- --------- ----- ------- --------
Total $7,961.1 $ 296.7 $(62.9) $ 8,194.9 $3,232.7 $85.7 $ (26.8) $3,291.6
======== ======= ====== ========= ======== ===== ======= ========
December 31, 1998
- ---------------------------------------------------------------------------------------------------------
Marketables Private Placements
--------------------------------------------- ------------------------------------------
NAIC Amortized Gross Unrealized Gross Unrealized
---------------- Fair Amortized ---------------- Fair
Rating Cost Gains (Losses) Value Cost Gains (Losses) Value
- ------ ---- ----- -------- ----- ---- ----- -------- -----
1 $5,183.4 $284.8 $(17.1) $5,451.1 $ 849.4 $ 56.1 $ (.6) $ 904.9
2 2,279.0 107.9 (14.6) 2,372.3 1,884.1 93.8 (1.2) 1,976.7
3 301.8 6.9 (5.4) 303.3 352.2 7.1 (1.5) 357.8
4 97.5 1.1 (11.2) 87.4 113.0 1.6 (1.8) 112.8
5 .3 - (.1) .2 35.3 .2 (1.6) 33.9
6 .4 - - .4 6.6 - (.7) 5.9
Redeemable
Preferred
Stock 16.3 .3 (5.9) 10.7 7.7 - - 7.7
-------- ------- ------ --------- -------- ------ ------ --------
Total $7,878.7 $401.0 $(54.3) $8,225.4 $3,248.3 $158.8 $ (7.4) $3,399.7
======== ====== ====== ======== ======== ====== ====== ========
</TABLE>
The amortized cost and fair value of fixed maturity securities by contractual
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without prepayment penalties (in millions).
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
------------------------ ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Maturing in:
One Year or Less $ 485.1 $ 489.1 $ 459.5 $ 462.9
One to Five Years 3,539.8 3,649.8 3,555.5 3,710.1
Five to Ten Years 3,004.0 3,082.9 3,022.9 3,191.1
Ten Years or Later 1,247.1 1,290.7 1,296.1 1,375.8
Mortgage-Backed/Structured Finance 2,917.8 2,974.0 2,793.0 2,885.2
--------- --------- --------- ---------
Total $11,193.8 $11,486.5 $11,127.0 $11,625.1
========= ========= ========= =========
</TABLE>
The fair values for actively traded marketable bonds are based upon quoted
market prices. 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. 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
15
<PAGE>
through consideration of factors such as the net worth of borrower, the value of
collateral, the capital structure of the borrower, the presence of guarantees
and the Company's evaluation of the borrower's ability to compete in 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.
The Company's marketable and private placement bond portfolios were diversified
by industry (based upon amortized cost) as set forth in the following table:
<TABLE>
<CAPTION>
Marketables Private Placements
-------------------------- ---------------------------
March 31, December 31, March 31, December 31,
1999 1998 1999 1998
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Basic Materials 6.7% 6.5% 6.5% 7.0%
Consumer Non-Cyclical 5.4 5.8 14.8 14.6
Consumer Products/Services 8.7 8.4 18.0 18.7
Energy 5.8 6.0 7.9 7.3
Financial Services 20.0 20.2 15.2 15.8
Government 2.6 2.8 .2 .2
Industrial 4.7 5.0 11.0 11.1
Mortgage-Backed/Structured
Finance 31.8 30.8 13.2 11.4
Real Estate 1.4 1.4 2.0 2.2
Retailing 1.8 1.9 4.6 4.7
Technology 2.0 2.0 1.8 2.1
Utilities 9.1 9.2 4.8 4.9
----- ----- ----- -----
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 one-tenth of one percent of invested assets at March 31, 1999. The
largest investment in below investment grade bonds of any one industry grouping
was approximately 1.6% of invested assets at March 31, 1999. The portfolio of
below investment grade bonds is regularly analyzed and managed in an effort to
avoid concentration risks.
16
<PAGE>
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 as follows (in millions):
March 31, 1999
------------------------
Amortized
Cost Fair Value
-------- ----------
Adjustable Rate Pass Through:
Below 6% $ 23.6 $ 23.6
6% - 7% 32.6 32.5
7% - 8% 119.0 118.4
Fixed Rate Pass Through:
Below 9% 72.0 73.9
Above 9% 6.5 6.9
Planned Amortization Class:
Below 7% 322.4 337.8
7% - 8% 362.9 379.2
8% - 9% 23.2 23.7
Above 9% 1.5 1.6
Other:
Below 7% 272.3 284.4
7% - 8% 90.9 97.8
8% - 9% 10.9 11.3
Above 9% 2.8 2.8
-------- --------
Total $1,340.6 $1,393.9
======== ========
The Company invests in public and private asset-backed securities in addition to
the MBS securities described above. As of March 31, 1999, the Insurers held
asset-backed securities with an amortized cost of $1,577.2 million and a fair
value of $1,580.1 million. These securities are collateralized by diversified
pools of manufactured housing loans, credit card receivables, automobile loans,
home equity loans, commercial mortgage loans, and high yield bank loans and
corporate bonds. The investment strategy has been to purchase primarily senior
structures and tranches that minimize prepayment and default risk. As of March
31, 1999, approximately 98% of the Company's asset-backed securities had
investment grade ratings. Approximately 36% of these securities are
collateralized by manufactured housing loans, 21% by commercial mortgage loans,
21% by high yield bank loans and corporate bonds and 10% by home equity loans.
None of the remaining collateral types exceed, on an individual basis, 10% of
total asset-backed securities.
Mortgage Loans
The Company's commercial mortgage loans range in size from $2 million to $26
million, with the average commercial mortgage loan investment as of March 31,
1999 being approximately $2.9 million.
17
<PAGE>
The commercial mortgage loan portfolio diversification by property type and
geographic region of the United States was as follows:
March 31, December 31,
1999 1998
--------- ------------
Property Type
Apartment 24.8% 24.5%
Industrial 19.6 20.6
Retail 20.2 19.6
Special Purpose 19.9 19.1
Office 13.5 14.1
Hotel/Motel 2.0 2.1
----- -----
Total 100.0% 100.0%
===== =====
March 31, December 31,
1999 1998
--------- ------------
Geographic Region
Midwest 37.8% 37.4%
Pacific 23.7 24.2
Southeast 15.1 14.7
Northeast 9.9 10.1
Mountain 8.4 8.3
Southwest 5.1 5.3
----- -----
Total 100.0% 100.0%
===== =====
The weighted average yield and the weighted average maturity of the loans in the
commercial mortgage loan portfolio as of March 31, 1999 were 7.9% and 8.4 years,
respectively.
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 March 31, 1999 and December 31, 1998, the Insurers held $439.8
and $427.1 million, respectively, of non-securitized residential mortgage loans.
Unrealized Investment Gains and Losses
All of the Company's debt and equity securities are classified as
available-for-sale and carried at fair value on the Condensed Consolidated
Balance Sheets with unrealized investment gains and losses excluded from income
and reported as a component of accumulated other comprehensive income in
shareholders' equity.
Unrealized investment gains, net of unrealized investment losses, are reported
net of related DAC, PVFP and tax effects in accumulated other comprehensive
income as shown below (in millions).
March 31, December 31,
1999 1998
--------- ------------
Unrealized Investment Gains $314.3 $526.2
DAC/PVFP Adjustment (79.2) (128.6)
Deferred Income Taxes (80.9) (140.4)
------ ------
Net Unrealized Investment Gains $154.2 $257.2
====== ======
Market-Sensitive Instruments and Risk Management
The Company's market risk-sensitive instruments include those financial
instruments as defined by Statement of Financial Accounting Standards (SFAS) No.
107, "Disclosures about Financial Instruments," and are all considered to be
entered into for other than trading purposes. The Company's primary market risk
exposure associated with these instruments is the risk associated with changes
in market interest rates.
Changes in interest rates 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
18
<PAGE>
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.
The insurance liabilities of the Company are also sensitive to changes in market
interest rates. 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 has established procedures for evaluating these liabilities and
attempts to structure investment asset portfolios with yield, cash flow and
interest rate sensitivities appropriate to support the insurance liabilities.
The Company also uses derivative instruments, such as interest rate swaps, to
adjust the duration of the asset and liability portfolios. In addition, the
Insurers monitor the surrender and policy loan activity of their insurance
products and manage the composition of their investment portfolios in light of
such activity.
The Company manages the composition of its long-term capital by considering
factors such as market conditions and the ratio of long-term debt and
trust-originated preferred securities to total long-term capital.
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 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 and
equity-indexed call options.
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 (in years):
March 31, 1999
--------------------------------------
Asset Portfolio Target
Duration Duration Duration
-------- -------- --------
Personal Financial Services 4.2 4.2 3.5-5.0
Worksite Financial Services 3.1 3.3 3.0-6.0
Tax-Sheltered and Fixed Annuities 3.9 4.1 4.0-5.5
Reinsurance 4.4 4.4 3.5-8.0
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 March 31, 1999, the Company had 60 interest rate swap contracts in effect
with a notional amount of $1.12 billion. At December 31, 1998, the Company had
60 interest rate swap contracts in effect with a notional amount of $897.5
million. During the first quarter of 1999, one interest rate swap contract was
entered into with a notional amount of $275.0 million and one interest rate swap
contract matured with a notional amount of $5.0 million. There were no
terminations of interest rate swap contracts prior to maturity during the first
quarter of 1999. The Company had no deferred gains or losses at March 31, 1999
related to interest rate swap contracts terminated early. The estimated fair
value of the interest rate swap contracts in effect at March 31, 1999 was an
unrealized gain of $17.9 million, which is reported with other invested assets
in the Condensed Consolidated Balance Sheets.
19
<PAGE>
Most of the interest rate swap contracts are standard contracts whereby the
Company pays a floating rate of interest (generally based upon the LIBOR rate as
determined from time to time) and receives a fixed rate (generally a specified
contract rate). The following table details the characteristics of the Company's
interest rate swap contracts at March 31, 1999 (dollars in millions).
Notional Range of Fixed
Amount Rates Received
-------- --------------
Maturing in:
One Year or Less $ 383.0 5.5 - 6.9%
One to Three Years 494.5 5.3 - 8.2%
Three to Five Years 240.0 6.0 - 7.0%
--------
Total $1,117.5
========
The Company monitors the effect of the swap position on reported income. The
Company's investment portfolio includes a substantial amount of floating rate
investments. Changes in market interest rates have an opposite (and
approximately offsetting) effect on the reported income from the swap portfolio.
Accordingly, the reported investment income (or 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 March 31, 1999, the Company held $1.0 billion of adjustable
rate invested assets, short-term investments and cash.
The Company holds certain call option contracts indexed to the performance of
the S&P 500 Index as part of its asset/liability management strategy for its
equity-indexed annuity products. The Company held 40 call options with a
notional amount of $40.2 million and an estimated fair value of $13.6 million as
of March 31, 1999.
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 nine interest rate caps with a notional
amount of $735.0 million and a fair value of less than $0.1 million as of March
31, 1999.
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) principal face amount or timing of
principal repayments on a contingent or absolute basis; or (iv) amount or timing
of payment of accrued interest.
The amortized cost of Problem Investments, net of related write-offs and
allowances and non-recourse debt, was as follows (in millions):
March 31, December 31,
1999 1998
--------- ------------
Private Placement Bonds $ 6.0 $ 9.5
Marketable Bonds .7 1.1
Commercial Mortgage Loans 5.5 8.7
Residential and Other Mortgage Loans 3.8 6.1
Investment Real Estate(1) 8.4 8.3
Foreclosed Real Estate 28.7 30.5
Other .4 .4
------- ------
Total $ 53.5 $ 64.6
======= ======
(1) The amounts shown represent real estate acquired as an investment which the
Company has determined to be Problem Investments.
20
<PAGE>
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 in the Condensed Consolidated Balance Sheets were as follows (in
millions):
March 31, December 31,
1999 1998
--------- ------------
Private Placement Bonds $12.4 $9.0
Marketable Bonds 1.6 2.0
Commercial Mortgage Loans 7.2 7.6
Residential and Other Mortgage Loans 1.1 1.1
Foreclosed Real Estate 20.7 21.3
Other 4.4 4.4
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 $41.6 million, $21.8 million and $.5 million,
respectively, at March 31, 1999.
21
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KNOWN TRENDS AND UNCERTAINTIES WHICH MAY AFFECT FUTURE REPORTED RESULTS
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. Some of the claims seek to be granted class action
status and many of the claims seek both compensatory and punitive damages. It
should be noted that a number of financial services companies have been
subjected to significant awards in connection with punitive damages claims and
the Company can make no assurances that it will not be subjected to such an
award. During the first quarter of 1999, ReliaStar was sued for an alleged
breach of contract to provide workers compensation reinsurance. The Company has
denied the existence of any such contract. The Company believes the results of
litigation will not have a material adverse effect on the financial position of
the Company.
Financial Services Deregulation
The United States Congress is considering legislation which will allow banks and
other financial services companies to affiliate with insurance companies. The
integration of financial services may impact competition for the products
distributed by the Company. The Company cannot predict the impact of these
proposals on the earnings of the Company.
Year 2000 Systems Modifications
The Company's business units utilize data processing systems in the
administration of the insurance and financial services products which they
market. Most of the Company's data processing systems have required
modifications to enable them to process dates including the year 2000 and
beyond.
In 1995, the Company initiated an enterprise wide program of identifying and
modifying systems affected by the year 2000. The Company developed a plan
whereby all systems would be identified, modified and tested for Year 2000
compliance by the end of 1998. The Company initiated a structured review and
reporting system whereby senior management is regularly advised of the status of
the project. As of March 31, 1999, ReliaStar had converted, tested for Year 2000
compliance and put into production 241 (96%) of its 250 core business
applications. Of the remaining core business applications, 5 (2%) were in final
date simulation testing, and 4 (2%) were in the process of being upgraded to, or
replaced with, Year 2000-compliant systems. By the end of the second quarter of
1999, the Company expects that all core business applications will be converted,
tested for Year 2000 compliance and put into production.
The Company conducts business with a multitude of business entities whose
ability to comply with Year 2000 systems issues may affect the business
operations of the Company. The Company has made an attempt to determine whether
such entities have adequate plans for Year 2000 compliance, and the Company is
not aware of any instances where a key supplier or vendor will not be compliant.
The Company does not have the ability to assure with any certainty the
compliance capacity of third parties.
Since the inception of the Year 2000 program and for the remainder of the
program, the Company has and expects to continue to redirect certain internal
and external data processing resources to its Year 2000 efforts. The Company
estimates that during the year ended December 31, 1999, its total Year 2000
project costs will be approximately $2.5 million (pre-tax) for external and
redirected internal resources. The Company believes that the
22
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completion of the Year 2000 project will not have a material impact on the level
of spending for information systems in future periods.
The Company's business would be adversely affected if it does not meet its goals
relative to Year 2000 preparedness, and the Company's plans reflect the
importance of this project. Due to the Company's dependence on data processing
for the operation of its business, the Company cannot reasonably develop
contingency plans which would comprehensively address widespread systems
failures.
Certain Forward-Looking Information
All statements contained in this Form 10-Q, press releases and other public
disclosures relative to markets for the Company's products and trends in the
Company's operations or financial results, as well as other statements including
words such as "anticipate," "believe," "expect," and other similar expressions,
constitute forward-looking statements under the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are subject to known and
unknown risks, uncertainties and other factors that may cause actual results to
be materially different from those contemplated by the forward-looking
statements. Such factors include, among other things: general economic
conditions and other factors, including prevailing interest rate levels and
stock market performance, which may affect the Company's ability to sell its
products, the market value of the Company's investments and the lapse rate and
profitability of the Company's policies; the Company's ability to achieve
anticipated levels of operating efficiencies; mortality and morbidity; changes
in federal income tax laws that may affect the relative tax advantages of some
of the Company's products; and regulatory changes or actions, including those
relating to regulation of financial services affecting bank sales and
underwriting of insurance products and regulation of the sale, underwriting and
pricing of insurance products.
23
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Part II. Other Information
RELIASTAR FINANCIAL CORP.
Item 5. Other Information:
ReliaStar announced on April 8, 1999 that the board of directors named Robert C.
Salipante president and chief operating officer, effective July 1, 1999. Mr.
Salipante has been head of the Personal Financial Services (PFS) division since
1996. Mr. Salipante joined ReliaStar in 1992 as chief financial officer and was
named head of strategic marketing and technology in 1994. He succeeds John H.
Flittie, who announced in December that he would retire on June 30, 1999.
ReliaStar announced on April 15, 1999 that Wayne R. Huneke has been named senior
executive vice president of the Company. In addition to his current
responsibilities as head of ReliaStar Financial Markets, Mr. Huneke's role
within the enterprise has been expended to include Corporate Financial and
Information Technology. ReliaStar Financial Markets includes Successful Money
Management Seminars, ReliaStar Bank, ReliaStar Trust, ReliaStar Financial
Lifeline (our direct services operation), Washington Square Securities and
PRIMEVEST. Mr. Huneke joined ReliaStar in 1986 and was named chief financial
officer in 1994. He was given the responsibilities of chief information officer
in 1996. He moved to his current position in ReliaStar Financial Markets in
1997.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
(3) Bylaws
(11) Statement re Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated May 13, 1999
RELIASTAR FINANCIAL CORP.
/s/ James R. Miller
-------------------------
by James R. Miller
Senior Vice President, Chief Financial
Officer and Treasurer
<PAGE>
RELIASTAR FINANCIAL CORP.
BY-LAWS
(As amended and restated April 9, 1999)
ARTICLE I
OFFICES
Section 1.01. Registered Office. The registered office of the
Corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware.
Section 1.02. Other Offices. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.01. Place of Meetings. Each meeting of shareholders shall be
held at such time and at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors and
stated in the notice of the meeting.
Section 2.02. Annual Meetings. An annual meeting of shareholders shall
be held annually on such date and at such time as shall be designated from time
to time by the Board of Directors and stated in the notice of the meeting, at
which the shareholders shall elect by a plurality vote the directors to be
elected at such meeting and transact such other business as may properly be
brought before the meeting.
Section 2.03. Special Meetings. Unless otherwise specifically provided
by law or the Certificate of Incorporation, a special meeting of shareholders,
for any purpose or purposes, may be called only by the Chairman, if there be
one, the President or the Secretary and shall be called by any such officer at
the request in writing of a majority of the Board of Directors or a majority of
the Executive Committee of the Board of Directors, if there be one. Such request
shall state the purpose or purposes of the proposed meeting.
Section 2.04. Notice of Meetings. A written notice, stating that the
place, date and hour of any meeting of shareholders, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called, shall
<PAGE>
be delivered or mailed, at least ten days and not more than sixty days before
the date of the meeting, to each shareholder entitled to vote at the meeting at
such address as appears upon the records of the Corporation.
Section 2.05. Quorum. Unless otherwise specifically provided by law or
the Certificate of Incorporation, the holders of a majority (after giving
effect, if applicable, to Article Eight of the Certificate of Incorporation) of
the outstanding capital stock entitled to vote at the meeting, present in person
or by proxy, shall constitute a quorum. In the absence of a quorum, the
shareholders so present may, by majority vote, adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present. At such adjourned meeting at which a quorum shall be present,
any business may be transacted which might have been transacted at the meeting
as originally noticed. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each shareholder entitled to
vote at the meeting. (Amended October 11, 1990.)
Section 2.06. Voting: Proxies. Unless otherwise specifically provided
by law, the Certificate of Incorporation or these By-Laws, any question brought
before a meeting of shareholders shall be decided by the vote of the holders of
a majority of the shares present in person or by proxy at the meeting and
entitled to vote. Such votes may be cast in person or by proxy, but no proxy
shall be voted on or after three years from its date unless such proxy provides
for a longer period. The Board of Directors, in its discretion, or the officer
of the Corporation presiding at the meeting, in such officer's discretion, may
require that any votes cast at the meeting shall be cast by written ballot.
Section 2.07. Proper Business at Annual Meetings. At an annual meeting
of shareholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be specified in the notice of meeting (or a supplement
thereto) given by or at the direction of the Board of Directors, or otherwise
properly brought before the meeting by or at the direction of a shareholder. For
business to be properly brought before an annual meeting by a shareholder, the
shareholder must have given timely notice thereof in writing to the Secretary of
the Corporation. In addition to any applicable requirements under the proxy
rules promulgated from time to time by the Securities and Exchange Commission,
to be timely, a shareholder's notice must be delivered to, or mailed to and
received at, the principal executive offices of the Corporation not less than
sixty days prior to the date fixed for the annual meeting; provided, however,
that in the event that less than seventy-five days' prior public disclosure of
the date of the meeting is given or made to shareholders, notice by the
shareholder to be timely must be received not later than the close of business
on the fifteenth day following the day on which such public disclosure was made.
A shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (a) brief description of
the business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (b) the name and record address
of the shareholder proposing such business, (c) the class and number of shares
of the Corporation which are beneficially owned by the shareholder and (d) any
material interest of the shareholder in such business.
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Section 2.08. Fixing Date for Determination of Shareholders of Record.
In order that the Corporation may determine the shareholders entitled to notice
of or to vote at any meeting of shareholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
less than ten nor more than sixty days before the date of such meeting, nor more
than sixty days prior to any other action. If no record date is fixed: (1) the
record date for determining shareholders entitled to notice of or to vote at a
meeting of shareholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; and (2) the record date for determining shareholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto. A determination of shareholders of
record entitled to notice of or to vote at a meeting of shareholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
Section 2.09. List of Shareholders Entitled to Vote. The Secretary
shall prepare and make, at least ten days before each meeting of shareholders, a
complete list of the shareholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each shareholder and the number
of shares registered in the name of each shareholder. Such list shall be open to
the examination of any shareholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the place of the meeting during the whole time thereof and
may be inspected by any shareholder who is present.
Section 2.10. Stock Ledger. The stock ledger of the Corporation shall
be the only evidence as to shareholders who are entitled to examine the stock
ledger, the list required by Section 2.09 of shareholders entitled to vote or
the books of the Corporation, or to vote in person or by proxy at any meeting of
shareholders.
ARTICLE III
DIRECTORS
Section 3.01. Number, Election and Qualifications of Directors. The
number of directors constituting the Board of Directors shall be fixed from time
to time by the Board of Directors in the manner prescribed in the Certificate of
Incorporation. Except as provided in Section 3.03, the directors to be elected
at each annual meeting of shareholders shall be elected by a plurality of the
votes cast at the meeting, and each director so elected shall hold office for
the term elected and until such director's successor is duly elected and
qualified, or until
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such director's earlier resignation, retirement or removal. Any director may
resign at any time upon notice to the Corporation. Directors need not be
shareholders. A majority of the directors shall be citizens and residents of the
State of Minnesota.
Section 3.02. Nomination Procedures. No person (other than a person
nominated by or at the Direction of the Board of Directors) shall be eligible
for election as a director at any annual or special meeting unless timely notice
is given in writing of such nomination by a shareholder of record to the
Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to, or mailed to and received at, the principal executive offices of
the Corporation not less than sixty days prior to the date fixed for the
meeting; provided, however, that in the event that less than seventy-five days'
prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be received not later
than the close of business on the fifteenth day following the day on which such
public disclosure was made.
Section 3.03. Vacancies. Subject to the provisions of the Certificate
of Incorporation, vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next election
of the class for which such directors shall have been chosen and until their
successors are duly elected and qualified, or until their earlier resignation,
retirement or removal.
Section 3.04. Duties and Powers. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors, which may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by law, the Certificate of Incorporation or
these By-Laws directed or required to be exercised or done by the shareholders.
Section 3.05. Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and at such place as may be
designated from time to time by the Board of Directors.
Section 3.06. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman, if there be one, or the President and,
upon request by any two directors, shall be called by the Chairman or the
President.
Section 3.07. Notice of Special Meetings. Notice of each special
meeting stating the place, date and hour of the meeting shall be given to each
director by mail not less than forty-eight hours before the date of the meeting
or personally or by telephone, telegram, telex or cable on twenty-four hours
notice.
Section 3.08. Quorum: Actions of Board. Unless otherwise specifically
provided by law, the Certificate of Incorporation or these By-Laws, at all
meetings of the Board of Directors, a majority of the entire Board of Directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors. If a quorum shall not be present at
any meeting of
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the Board of Directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
Section 3.09. Actions in Writing. Unless otherwise specifically
provided by the Certificate of Incorporation or these By-Laws, any action
required or permitted to be taken at any meeting of the Board of Directors or
any committee thereof may be taken without a meeting if all the members of the
Board of Directors or the committee consent thereto in writing and the writing
or writings are filed with the minutes of proceedings of the Board of Directors
or the committee.
Section 3.10. Meetings by Means of Conference Telephone. Members of the
Board of Directors or any committee thereof may participate in a meeting of the
Board of Directors or the Committee by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to this
section shall constitute presence in person at the meeting.
Section 3.11. Committees. The Board of Directors may, by resolution
passed by a majority of the entire Board of Directors, designate an Executive
Committee and one or more other committees, each committee to consist of one or
more directors of the Corporation. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, and in the absence of a designation
by the Board of Directors of an alternate member to replace the absent or
disqualified member, the member or members thereof present at any meeting and
not disqualified from voting, whether or not constituting a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any absent or disqualified member. Any committee, to the
extent allowed by law and provided in the resolution designating the committee,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation. Each
committee shall keep regular minutes and report to the Board of Directors when
required.
Section 3.12. Committee Rules. Unless the Board of Directors otherwise
provides, each committee designated by the Board may make, alter and repeal
rules for conduct of its business. In the absence of such rules, each committee
shall conduct its business in the same manner as the Board of Directors conducts
its business.
Section 3.13. Compensation. The Board of Directors shall have the
authority to fix the compensation of directors.
Section 3.14. Interested Directors. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the
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meeting of the Board of Directors or committee thereof which authorizes the
contract or transaction, or solely because his, her or their votes are counted
for such purpose if (i) the material facts as to his, her or their relationship
or interest and as to the contract or transaction are disclosed or are known to
the Board of Directors or the committee, and the Board of Directors or committee
in good faith authorizes the contract or transaction by the affirmative vote of
a majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or (ii) the material facts as to his, her or
their relationship or interest and as to the contract or transaction are
disclosed or are known to the shareholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
shareholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified by the Board of Directors,
a committee thereof or the shareholders. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or committee which authorizes the contract or transaction.
ARTICLE IV
OFFICERS
Section 4.01. General. The officers of the Corporation shall be elected
by the Board of Directors and shall be a Chairman, who shall be a director and
who shall be designated by the Board of Directors as the Chairman or the
Chairman of the Board, a President, a Secretary and a Treasurer. The Board of
Directors, in its discretion, may also choose one or more Vice Presidents,
Assistant Secretaries, Assistant Treasurers and other officers. Any number of
offices may be held by the same person, unless otherwise prohibited by law, the
Certificate of Incorporation or these By-Laws. The officers of the Corporation
need not be shareholders of the Corporation nor, except in the case of the
Chairman, directors of the Corporation.
Section 4.02. Election. The Board of Directors shall elect the officers
of the Corporation who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the Board of Directors. All officers of the Corporation shall hold
office until their respective successors are chosen and qualified, or until
their earlier resignation, retirement or removal. The Board of Directors may
remove any officer with or without cause at any time, but such removal shall be
without prejudice to the contract rights of such officer, if any, with the
Corporation. Any vacancy occurring in any office of the Corporation may be
filled by the Board of Directors.
Section 4.03. Voting Securities Owned by the Corporation. Power of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the Chairman, the President or any Vice
President, and any such officer may, in the name of and on behalf of the
Corporation, take all such action as such officer may deem advisable to vote in
person or by proxy at any meeting of security holders of any corporation in
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which the Corporation may own securities and at any such meeting shall possess
and may exercise any and all rights and powers incident to the ownership of such
securities and which, as the owner thereof, the Corporation might have exercised
and possessed if present. The Board of Directors may, by resolution, from time
to time confer like powers upon any other person or persons.
Section 4.04. Chief Executive Officer. The Board of Directors shall
designate the Chairman or the President as the chief executive officer of the
Corporation. If there be no Chairman, the President shall be the chief executive
officer. The chief executive officer shall have the general powers and duties of
management and supervision usually vested in and imposed upon the chief
executive officer of a corporation. The chief executive officer shall preside at
all meetings of shareholders.
Section 4.05. Chairman. The Chairman, if there be one, shall preside at
all meetings of the Board of Directors. During the absence or disability of the
President, the Chairman shall exercise all the powers and discharge all the
duties of the President. The Chairman shall also perform such other duties and
may exercise such other powers as from time to time may be assigned to the
Chairman by these By-Laws or by the Board of Directors.
Section 4.06. President. The President shall, subject to the control of
the Board of Directors, the Executive Committee and, if there be one, the
Chairman, if the Chairman is the chief executive officer of the Corporation,
have general supervision of the business of the Corporation and shall see that
all orders and resolutions of the Board of Directors are carried into effect. In
the absence or disability of the Chairman or if there be none, the President
shall preside at all meetings of the Board of Directors. The President shall
also perform such other duties and may exercise such other powers as from time
to time may be assigned to the President by these By-Laws or by the Board of
Directors.
Section 4.07. Vice Presidents. The Vice Presidents shall perform such
duties and have such powers as the Board of Directors, the Executive Committee,
or the chief executive officer of the Corporation may from time to time
prescribe. In the absence of the Chairman and the President, Vice Presidents
shall perform the duties and have the authority of the President in the order
prescribed by the Board of Directors or the Executive Committee.
Section 4.08. Secretary. The Secretary shall keep the minutes of the
meetings of the Corporation and of the Board of Directors and its committees,
and shall cause all notices of meetings of the shareholders and of the Board of
Directors and its committees to be duly given in accordance with the provisions
of these By-Laws or as required by law. The Secretary shall in general perform
all duties usually incident to the office of secretary.
Section 4.09. Treasurer. The Treasurer shall have the custody of the
funds and securities of the Corporation under the direction of the Board of
Directors and the Executive Committee, shall deposit all moneys of the
Corporation that may come into the Treasurer's hands to the credit of the
Corporation in such depositories as are authorized or approved by the Board of
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Directors or the Executive Committee and shall see that all expenditures are
duly authorized and evidenced by proper receipts and vouchers. The Treasurer
shall in general perform all duties usually incident to the office of the
treasurer.
Section 4.10. Assistant Secretaries. The Board of Directors or the
Executive Committee may elect one or more Assistant Secretaries, who shall
perform such duties as the Board of Directors, the Executive Committee, or the
chief executive officer of the Corporation may from time to time prescribe. In
the absence of the Secretary, the Secretary's duties shall devolve upon such
officer or officers as designated by the chief executive officer of the
Corporation.
Section 4.11. Assistant Treasurers. The Board of Directors or the
Executive Committee may elect one or more Assistant Treasurers who shall perform
such duties as the Board of Directors, the Executive Committee or the chief
executive officer of the Corporation may from time to time prescribe. In the
absence of the Treasurer, the Treasurer's duties shall devolve upon such officer
or officers as designated by the chief executive officer of the Corporation.
Section 4.12. Duties and Authority. All officers of the Corporation
shall be subject to the supervision and direction of the Board of Directors and
the Executive Committee and, in addition to the foregoing duties and authority,
shall perform such duties and have such authority as the Board of Directors, the
Executive Committee or the chief executive officer of the Corporation may from
time to time prescribe.
ARTICLE V
STOCK
Section 5.01. Certificates. Every holder of stock in the Corporation
shall be entitled to have a certificate signed, in the name of the Corporation,
(i) by the Chairman, the President or a Vice President and (ii) by the Treasurer
or an Assistant Treasurer or the Secretary or an Assistant Secretary of the
Corporation, certifying the number of shares owned by such holder in the
Corporation. Any or all of the signatures on the certificate may be facsimile
signatures. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of issue.
Section 5.02. Lost, Stolen or Destroyed Certificates. The Corporation
may issue a new certificate in place of any certificate of stock theretofore
issued by it alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of the person claiming the certificate of stock to be lost, stolen
or destroyed. The Corporation may require the owner of such certificate alleged
to have been lost, stolen or destroyed, or the owner's legal representative, to
give the Corporation a bond in such sum as it may direct as indemnity against
any claim that may be made against the Corporation on account of the certificate
alleged to have been lost, stolen or destroyed or the
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issuance of such new certificate.
Section 5.03. Transfers. Stock of the Corporation shall be transferable
in the manner prescribed by law and these By-Laws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the certificate
or by such person's attorney lawfully constituted in writing and upon the
surrender of the certificate therefore, which shall be canceled before a new
certificate shall be issued.
ARTICLE VI
NOTICES
Section 6.01. Notices. Whenever written notice is required by law, the
Certificate of Incorporation or these By-Laws to be given to any director,
member of a committee or shareholder, such notice may be given by mail,
addressed to such director, member of a committee or shareholder, as his or her
address as it appears on the records of the Corporation, with postage thereon
prepaid, and such notice shall be deemed to be given at the time when the same
shall be deposited in the United States mail. Written notice may be also given
personally or by telegram, telex or cable.
Section 6.02. Waivers of Notice. Whenever any notice is required by
law, the Certificate of Incorporation or these By-Laws to be given to any
director, member of a committee or shareholder, a waiver thereof in writing,
signed by the person or persons entitled to such notice, whether before or after
the time stated therein, shall be deemed equivalent thereto. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of any regular or special meeting of shareholders, the Board of
Directors or a committee thereof need be specified in any written waiver of
notice.
ARTICLE VII
GENERAL PROVISIONS
Section 7.01. Dividends. Dividends upon the capital stock of the
Corporation, subject to applicable provisions, if any, of the Certificate of
Incorporation may be declared by the Board of Directors at any regular or
special meeting and may be paid in cash, in property or in shares of capital
stock. Before payment of any dividend, there may be set aside out of any funds
of the Corporation available for dividends such sum or sums as the Board of
Directors from time to time, in its absolute discretion, deems proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or
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<PAGE>
maintaining any property of the Corporation, or for any proper purpose, and
Board of Directors may modify or abolish any such reserve.
Section 7.02. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 7.03. Corporate Seal. The Corporation shall have no corporate
seal.
Section 7.04. Execution of Instruments. All contracts, deeds,
mortgages, notes, checks, conveyances, releases of mortgages and other
instruments shall be signed on behalf of the Corporation by the Chairman, the
President, the Secretary, the Treasurer or any Vice President, or by such other
person or persons as may be designated or authorized from time to time by the
Board of Directors, the Executive Committee, or the chief executive officer.
ARTICLE VIII
INDEMNIFICATION
Section 8.01. Indemnification in Actions, Suits, or Proceedings Other
Than Those by or in the Right of the Corporation. Subject to Section 8.03, the
Corporation shall indemnify each person who is or was, or is threatened to be
made, a party to or witness in any threatened, pending or completed action,
suit, proceeding or claim, whether civil, criminal, administrative or
investigative (other than one by or in the right of the Corporation), by reason
of the fact that he or she is or was a director, officer or employee of the
Corporation or of Northwestern National Life Insurance Company, a Minnesota
corporation ("NWNL"), or is or was serving at the request of the Corporation or
NWNL as a director, officer, employee or trustee of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorney's fees and expenses), judgments, fines,
penalties, and amounts paid in settlement, incurred by him or her in connection
with defending, investigating, preparing to defend, or being or preparing to be
a witness in, such action, suit, proceeding or claim, if he or she acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interest of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
Section 8.02. Indemnification in Actions, Suits or Proceedings by or in
the Right of the Corporation. Subject to Section 8.03, the Corporation shall
indemnify each person who is or was, or is threatened to be made, a party to or
witness in any threatened, pending or completed action, suit, proceeding or
claim by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that he or she is or was a director, officer or employee
of the Corporation or of NWNL or is or was serving at the request of the
Corporation or NWNL as a director, officer, employee or trustee of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees and expenses), and, if
and to the extent permitted by applicable law, judgments, fines, penalties and
amounts paid
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<PAGE>
in settlement, incurred by him or her in connection with defending,
investigating, preparing to defend, or being or preparing to be a witness in,
such action, suit, proceeding or claim, if he or she acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the best
interest of the Corporation; provided, however, that no indemnification shall be
made in respect of any such claim or any issue or matter in any such action,
suit or proceeding as to which such person shall have been adjudged to be liable
to the Corporation unless (and only to the extent that) the Court of Chancery or
the court in which such claim, action, suit or proceeding was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnification for such expenses and amounts which the Court of
Chancery or such other court shall deem proper.
Section 8.03. Authorization of Indemnification.
(a) Any indemnification under Section 8.01 or 8.02 (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific case
upon a determination that indemnification of the person seeking indemnification
is proper in the circumstances because he or she has met the applicable standard
of conduct set forth in Section 8.01 or 8.02, as the case may be. Such
determination (and determinations under Sections 8.05 and 8.06) shall be made
(i) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to the action, suit, proceeding or claim with
respect to which indemnification is sought ("disinterested directors"), or (ii)
if such a quorum is not obtainable, or if a quorum of disinterested directors so
directs, in a written opinion of independent legal counsel chosen by the Board
of Directors or (iii) by the shareholders; provided, however, that if a Change
in Control (as defined in this Section 8.03) has occurred and the person seeking
indemnification so requests, such determination (and determinations under
Sections 8.05 and 8.06) shall be made in a written opinion rendered by
independent legal counsel chosen by the person seeking indemnification and not
reasonably objected to by the Board of Directors (whose fees and expenses shall
be paid by the Corporation). To the extent, however, that a director, officer,
employee or trustee or former director, officer, employee or trustee has been
successful on the merits or otherwise in defense of any action, suit, proceeding
or claim described above, or in defense of any claim, issue or matter therein,
he or she shall be indemnified against expenses (including attorneys' fees and
expenses) incurred by him or her in connection therewith, without the necessity
of authorization in the specific case.
(b) For purposes of the second sentence of Section 8.03 (a),
"independent legal counsel" shall mean legal counsel other than an attorney, or
a firm having associated with it an attorney, who has been retained by or has
performed services for the Corporation, NWNL or the person seeking
indemnification within the previous three years.
(c) For purposes of the proviso to the second sentence of Section 8.03
(a), a "Change in Control" shall be deemed to have occurred if:
(i) a majority of the directors of the Corporation shall be
persons other than persons (A) who were directors of the Corporation or
NWNL at September 1, 1988, (B) for whose election proxies shall have
been solicited by the Board of
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<PAGE>
Directors or (C) who are then serving as directors appointed by the
Board of Directors to fill vacancies on the Board of Directors caused
by death or resignation (but not by removal) or to fill newly-created
directorships;
(ii) thirty percent or more of the outstanding shares of
Voting Stock (as such term is defined in the Certificate of
Incorporation) of the Corporation is acquired or beneficially owned (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, or any successor rule thereto) by any person (other than the
Corporation, NWNL, a subsidiary of the Corporation or the person
seeking indemnification) or group of persons, not including the person
seeking indemnification, acting in concert;
(iii) the shareholders of the Corporation approve a definitive
agreement or plan to (A) merge or consolidate the Corporation with or
into another corporation (other than (1) a merger or consolidation with
a subsidiary of the Corporation, (2) a merger in which the Corporation
is the surviving corporation and no outstanding Voting Stock of the
Corporation (other than fractional shares) held by shareholders
immediately prior to the merger is converted into cash, securities, or
other property or (3) a merger of a subsidiary of the Corporation into
NWNL pursuant to which NWNL first becomes a subsidiary of the
Corporation, (B) exchange, pursuant to a statutory exchange of shares
of Voting Stock of the Corporation held by shareholders of the
Corporation immediately prior to the exchange, shares of one or more
classes or series of Voting Stock of the Corporation for shares of
another corporation, (C) sell or otherwise dispose of all or
substantially all of the assets of the Corporation (in one transaction
or a series of transactions) or (D) liquidate or dissolve the
Corporation, unless a majority of the voting stock (or the voting
equity interest) of the surviving corporation or of any corporation (or
other entity) acquiring all or substantially all of the assets of the
Corporation (in the case of a merger, consolidation or disposition of
assets) or the Corporation (in the case of a statutory share exchange)
is, immediately following the merger, consolidation, statutory share
exchange or disposition of assets, beneficially owned by the person
seeking indemnification, or a group of persons, including the person
seeking indemnification, acting in concert; or
(iv) the Corporation enters into an agreement in principle or
a definitive agreement relating to an event described in clause (i),
(ii) or (iii) above which ultimately results in an event described
therein or a tender or exchange offer or proxy contest is commenced
which ultimately results in an event described therein.
Section 8.04. Good Faith Defined. Etc.
(a) For purposes of any determination under this Article VIII, a person
shall be deemed to have acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Corporation, or,
with respect to any criminal action or proceeding, to have had no reasonable
cause to believe his or her conduct was unlawful, if such person relied on the
records or books of account of the Corporation, NWNL or other enterprise, or on
information supplied to him or her by the officers of the Corporation, NWNL or
other enterprise, or on information or records given or reports made to the
Corporation or other enterprise by an independent certified public accountant or
by an appraiser or other expert selected with reasonable
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<PAGE>
care by the Corporation or other enterprise. The term "other enterprise" as used
in this Section 8.04 shall mean any enterprise other than the Corporation or
NWNL, including any corporation, partnership, join venture, trust, employee
benefit plan or other enterprise as to which such person is or was serving at
the request of the Corporation as a director, officer, employee or trustee.
(b) The termination of any action, suit, proceeding or claim by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, that he or she had reasonable cause to
believe that his or her conduct was unlawful.
(c) References in this Article VIII to "penalties" include any excise
taxes assessed on a person with respect to an employee benefit plan; references
to "serving at the request of the Corporation or NWNL" include any service as a
director, officer or employee or former director, officer or employee of the
Corporation or NWNL which imposes duties on, or involves services by, such
person with respect to an employee benefit plan or its participants or
beneficiaries; and a person who acted in good faith an in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
participants or beneficiaries of such an employee benefit plan shall be deemed
to have acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Corporation.
(d) The provisions of this Section 8.04 shall not be deemed to be
exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth in Section 8.01
or 8.02, as the case may be.
Section 8.05. Right to Indemnification Upon Application: Procedure Upon
Application: Etc. Except as otherwise provided in the proviso to Section 8.02:
(a) any indemnification under Section 8.01 or 8.02 shall be made no
later than 45 days after receipt by the Corporation of the written request of
the director, officer, employee or trustee or former director, officer, employee
or trustee unless a determination is made within said 45-day period in
accordance with Section 8.03 that such person has not met the applicable
standard of conduct set forth in Section 8.01 or 8.02.
(b) The right to indemnification under Section 8.01 or 8.02 or advances
under Section 8.06 shall be enforceable by the director, officer, employee or
trustee or former director, officer, employee or trustee in any court of
competent jurisdiction. Following a Change in Control, the burden of proving
that indemnification is not appropriate shall be on the Corporation. Neither the
absence of any prior determination that indemnification is proper in the
circumstances, nor a prior determination that indemnification is not proper in
the circumstances, shall be a defense to the action or create a presumption that
the director, officer, employee or trustee or former director, officer, employee
or trustee has not met the applicable standard of conduct. The expenses
(including
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<PAGE>
Attorneys' fees and expenses) incurred by the director, officer, employee or
trustee or former director, officer, employee or trustee in connection with
successfully establishing his or her right to indemnification, in whole or in
part, in any such action (or in any action or claim brought by him or her to
recover under any insurance policy or policies referred to in Section 8.09)
shall also be indemnified by the Corporation.
(c) If any person is entitled under any provision of these By-Laws to
indemnification by the Corporation for some or a portion of expenses, judgments,
fines, penalties or amounts paid in settlement incurred by him or her, but not,
however, for the total amount thereof, the Corporation shall nevertheless
indemnify such person for the portion of such expenses, judgments, fines,
penalties and amounts to which he or she is entitled.
Section 8.06. Expenses Payable in Advance. Expenses (including
attorneys' fees and expenses) incurred by a director, officer, employee or
trustee or a former director, officer, employee or trustee in defending,
investigating, preparing to defend, or being or preparing to be a witness in, a
threatened or pending action, suit, proceeding or claim against him or her,
whether civil or criminal, shall be paid by the Corporation in advance of the
final disposition of such action, suit proceeding or claim upon receipt by the
Corporation of a request therefor and an undertaking by or on behalf of the
director, officer, employee or trustee or former director, officer, employee or
trustee to repay such amounts if it shall be determined in accordance with
Section 8.03 that he or she is not entitled to be indemnified by the
Corporation; provided, however, that if he or she seeks to enforce his or her
rights in a court of competent jurisdiction pursuant to Section 8.05(b), said
undertaking to repay shall not be applicable or enforceable unless and until
there is a final court determination that he or she is not entitled to
indemnification as to which all rights of appeal have been exhausted or have
expired.
Section 8.07. Certain Persons Not Entitled to Indemnification.
Notwithstanding any other provision of these By-Laws, no person shall be
entitled to indemnification under this Article VIII or to advances under Section
8.06 with respect to any action, suit, proceeding or claim brought or made by
him or her against the Corporation or NWNL, other than an action, suit,
proceeding or claim seeking, or defending such person's right to,
indemnification and/or expense advances pursuant to this Article VIII or
otherwise.
Section 8.08. Non-Exclusivity and Survival of Indemnification. The
provisions of this Article VIII shall not be deemed exclusive of any other
rights to which the person seeking indemnification or expense advances may be
entitled under any agreement, contract, or vote of shareholders or disinterested
directors, or pursuant to the direction (howsoever embodied) of any court of
competent jurisdiction, or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office. Except
as otherwise provided in Section 8.07, but notwithstanding any other provision
of this Article VIII, it is the policy of the Corporation that indemnification
of and expense advances to the persons specified in Section 8.01 and 8.02 shall
be made to the fullest extent permitted by law, and, accordingly, in the event
of any change in law, by legislation or otherwise, permitting greater
indemnification of and/or expense advances to any such person, the provisions of
this Article VIII shall be construed so as to require such greater
indemnification and/or expense
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<PAGE>
advances. The provisions of this Article VIII shall not be deemed to preclude
the indemnification of any person who is not specified in Section 8.01 or 8.02
but whom the Corporation has the power to indemnify under the provisions of the
General Corporation Law of the State of Delaware or otherwise. The provisions of
this Article VIII shall continue as to a person who has ceased to be a director,
officer, employee or trustee and shall inure to the benefit of the heirs,
executors and administrators of such person. All rights to indemnification and
advancement of expenses under this Article VIII shall be deemed to be provided
by a contract between the Corporation and the director, officer, employee or
trustee who serves in such capacity at any time while this Article VIII is in
effect. Any repeal or modification of this Article VIII shall not affect any
rights or obligations then existing.
Section 8.09. Insurance. The Corporation may purchase and maintain at
its expense insurance on behalf of any person who is or was a director, officer
or employee of the Corporation or NWNL or is or was serving at the request of
the Corporation or NWNL as a director, officer, employee or trustee of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against any liability or expense asserted against or incurred by him
or her in any such capacity, or arising out of his or her status as such,
whether or not the Corporation would have the power or the obligation to
indemnify him or her against such liability or expense under the provisions of
this Article VIII or the provisions of Section 145 of the General Corporation
Law of the State of Delaware. The Company shall not be obligated under this
Article VIII to make any payment in connection with any claim made against any
person if and to the extent that such person has actually received payment
therefor under any insurance policy or policies.
Section 8.10. Successors: Meaning of "Corporation." This Article VIII
shall be binding upon and enforceable against any direct or indirect successor
by purchase, merger, consolidation or otherwise to all or substantially all of
the business and/or assets of the Corporation. For purposes of this Article
VIII, but subject to the provisions of any agreement relating to any merger or
consolidation of the kind referred to in clause (i) below or of any agreement
relating to the acquisition of any corporation of the kind referred to in clause
(ii) below, references to "the Corporation" shall include (i) any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger with the Corporation which, if its separate existence
had continued, would have had power and authority to indemnify its directors,
officers and employees, so that any person who is or was a director, officer or
employee of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or trustee of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, shall stand in the same position under the provisions of this
Article VIII with respect to the Corporation as he or she would have with
respect to such constituent corporation if its separate existence had continued;
and (ii) any corporation of which at least a majority of the voting power (as
represented by its outstanding stock having voting power generally in the
election of directors) is owned directly or indirectly by the Corporation.
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<PAGE>
Section 8.11. Severability. The provisions of this Article VIII shall
be severable in the event that any provision hereof (including any provision
within a single section, subsection, clause, paragraph or sentence) is held
invalid, void or otherwise unenforceable on any ground by any court of competent
jurisdiction. In the event of any such holding, the remaining provisions of this
Article VIII shall continue in effect and be enforceable to the fullest extent
permitted by law.
ARTICLE IX
AMENDMENT
Section 9.01. Power to Amend. The Board of Directors shall have
concurrent power with the shareholders as set forth in the Certificate of
Incorporation and the By-Laws to make, alter, amend, change, add to or repeal
the By-Laws.
Section 9.02. Required Vote. The Board of Directors may amend the
By-Laws upon the affirmative vote of the number of directors which shall
constitute, under the terms of the By-Laws, the action of the Board of
Directors. Shareholders may not amend the By-Laws except upon the affirmative
vote of at least seventy-five percent of the votes entitled to be cast by the
holders of all outstanding shares of Voting Stock (as such term is defined in
the Certificate of Incorporation), voting together as a single class.
-16-
<PAGE>
EXHIBIT 11
ReliaStar Financial Corp.
Computation of Per Share Earnings
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended March 31
-------------------------
1999 1998
-------- --------
<S> <C> <C>
NUMERATOR - BASIC AND DILUTED
Income from Continuing Operations $ 64.4 $ 64.5
Income from Discontinued Operations - .1
-------- --------
Net Income $ 64.4 $ 64.6
======== ========
DENOMINATOR
Weighted Average Common Shares Outstanding During the Period (Basic) 88.8 91.0
Dilutive Effect of Stock Options 1.2 1.7
Other .1 .1
-------- --------
Weighted Average Common Shares During the Period (Diluted) 90.1 92.8
======== ========
PER COMMON SHARE
Basic
Income from Continuing Operations $ .73 $ .71
Income from Discontinued Operations - -
-------- --------
Net Income $ .73 $ .71
======== ========
Diluted
Income from Continuing Operations $ .71 $ .70
Income from Discontinued Operations - -
-------- --------
Net Income $ .71 $ .70
======== ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 11,486,500
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 61,200
<MORTGAGE> 2,207,700
<REAL-ESTATE> 50,400
<TOTAL-INVEST> 14,790,300
<CASH> 1,600
<RECOVER-REINSURE> 458,800
<DEFERRED-ACQUISITION> 1,271,800
<TOTAL-ASSETS> 22,898,000
<POLICY-LOSSES> 13,580,300
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 477,600
<POLICY-HOLDER-FUNDS> 329,200
<NOTES-PAYABLE> 529,500
242,400
0
<COMMON> 900
<OTHER-SE> 2,050,900
<TOTAL-LIABILITY-AND-EQUITY> 22,898,000
276,400
<INVESTMENT-INCOME> 277,300
<INVESTMENT-GAINS> 2,500
<OTHER-INCOME> 170,900
<BENEFITS> 411,100
<UNDERWRITING-AMORTIZATION> 26,600
<UNDERWRITING-OTHER> 152,900
<INCOME-PRETAX> 105,600
<INCOME-TAX> 37,900
<INCOME-CONTINUING> 64,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,400
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.71
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
