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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ______________________
Commission file number 1-10640
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RELIASTAR FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 41-1620373
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 WASHINGTON AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612)372-5432
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------------------------------------ ------------------------
Common Stock, $.01 Par Value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
8.20% Trust-Originated Preferred Securities New York Stock Exchange
8.10% Trust-Originated Preferred Securities New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting common equity held by non-affiliates of the
registrant as of February 26, 1999, was $4,003,128,720.
The number of shares outstanding of the registrant's common stock as of February
26, 1999, was 88,835,034.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts of the Registrant's Annual Report for the year ended December 31, 1998,
are incorporated by reference in Part II of this Form 10-K.
Parts of the Registrant's Proxy Statement to be dated March 26, 1999, are
incorporated by reference in Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS.
ReliaStar Financial Corp. ("Registrant" or "ReliaStar") is a holding company
whose subsidiaries specialize in life insurance and related financial services.
Through ReliaStar Life Insurance Company ("ReliaStar Life"), Minneapolis,
Minnesota, and other subsidiaries, the Registrant provides and distributes
individual life insurance and annuities, employee benefits products and
services, life and health reinsurance, retirement plans, mutual funds, personal
finance education and bank products.
ReliaStar's strategy is to offer, principally through education-based marketing,
a wide variety of products and services designed to address customers' needs for
financial security. ReliaStar currently operates in four reportable operating
segments: Personal Financial Services, Worksite Financial Services, Tax-
Sheltered and Fixed Annuities, and Reinsurance.
Other life insurance subsidiaries, each of which is owned directly or indirectly
by ReliaStar Life, are Northern Life Insurance Company ("Northern"), Seattle,
Washington; Security-Connecticut Life Insurance Company ("Security-
Connecticut"), Avon, Connecticut; and ReliaStar Life Insurance Company of New
York ("RLNY"), Woodbury, New York. Effective December 31, 1998, ReliaStar United
Services Life Insurance Company was merged with and into ReliaStar Life
Insurance Company. These subsidiaries are sometimes collectively referred to as
the "Insurers". RLNY serves as the New York outlet for certain insurance
products of the other Insurers and sells individual life insurance and annuity
products in the State of New York, where none of the other Insurers are
licensed, and throughout the United States.
Additional subsidiaries include Washington Square Securities, Inc., Minneapolis,
Minnesota, a broker/dealer; PrimeVest Financial Services, Inc., St. Cloud,
Minnesota, a broker/dealer which targets the sale of financial products and
services, through unaffiliated banks; Successful Money Management Seminars,
Inc., Portland, Oregon, a producer of financial-education seminar systems;
ReliaStar Bank, St. Cloud, Minnesota, a federal savings bank, which offers
consumer credit and deposit products, and Northstar Investment Management
Corporation, Stamford, Connecticut, the investment adviser to a proprietary
family of fixed-income and equity mutual funds.
Financial information by business segment may be found in "Note Sixteen" on
pages 50 and 51 of the Registrant's Annual Report for the year ended December
31, 1998, attached hereto as Exhibit 13 and which is incorporated herein by
reference.
Additional information concerning the Registrant may be found in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" from
the Registrant's Annual Report for the year ended December 31, 1998, attached
hereto as Exhibit 13 and which is incorporated herein by reference.
PERSONAL FINANCIAL SERVICES
The Registrant's individual life insurance and annuity operations are conducted
by the Personal Financial Services (PFS) segment through the Insurers. The PFS
segment serves individual customers who prefer to purchase insurance and
investment products from a personal financial adviser. This segment principally
targets middle-and upper-income families and niche markets including U.S.
military personnel and small-business owners. The PFS segment offers a wide
range of products, including term, universal life, second-to-die universal life,
variable universal life, as well as fixed and variable annuities through a
nationwide network of independent agents and financial professionals.
Washington Square Securities, Inc. provides broker/dealer services to PFS
product distributors. Unaffiliated broker/dealers also provide additional
distribution for PFS products. ReliaStar seeks to encourage the sale of
products of each Insurer by the distribution forces of the other Insurers.
ReliaStar provides oversight to these operations and seeks
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to achieve efficiencies through shared access to actuarial data, product design,
investment origination and portfolio management, capital allocation, systems and
administrative support and seeks further opportunities for synergistic benefits.
The PFS segment maintains relationships with its independent agents through a
network of regional managers who recruit, train and support the distributors in
their region. Compensation of these agents and the regional managers is on a
variable basis, dependent upon their sales performance, which is designed to
minimize the PFS segment's fixed distribution costs. The PFS segment attempts
to maintain relationships with its sales force by striving to provide high
quality service to its independent agents. The ability of the Insurers to
retain their agents is affected by the competitive position of the Insurers'
products, the commission structure and the support services provided.
Variable universal life and fixed universal life insurance represents a
significant portion of the statutory individual life insurance premium volume of
the Insurers. Variable universal life insurance policies contain alternative
investment options (generally mutual funds) and policy values which will vary
based upon the investment returns of the fund(s) selected by the policyholder.
Fixed universal life policies provide for guaranteed levels of insurance
protection and minimum interest rate guarantees. The Insurers also distribute
fixed and variable annuities. The fixed annuity products provide for interest
crediting rates which, for most of the business, are guaranteed for an initial
period and may be adjusted annually thereafter. The Insurers adjust the
crediting rates on these policies and annuities based upon their investment
performance, market interest rates and competitive factors. Profits recognized
on interest-sensitive products are affected by mortality experience, the margin
between interest rates earned on investments and interest credited to
policyholders, as well as capital gains and losses on investments, persistency
and expenses. The variable annuity products contain alternative investment
options (generally mutual funds) and policy values which will vary based upon
the investment returns of the fund(s) selected by the policyholder.
The Insurers discourage premature surrenders of interest-sensitive products
through contractual surrender charges and the adjustment of interest crediting
rates. The policies and annuities sold by the PFS segment contain provisions
which allow the contractholder to withdraw or surrender their contracts under
defined circumstances. These contracts generally contain provisions which apply
penalties or otherwise limit the ability of contractholders to make such
withdrawals or surrenders. The interest rates that the Insurers might be
required to credit under their interest-sensitive insurance products to
forestall surrenders, particularly in a time of rapidly rising market interest
rates, could have an adverse effect on operating income.
The Insurers' individual life insurance business is subject to risks in the
event that the Insurers' mortality experience deviates from the assumptions used
in establishing its premium rates.
The Registrant, which was incorporated in Delaware in 1988, became the parent of
ReliaStar Life and its subsidiaries pursuant to a Plan of Conversion and
Reorganization (the "Plan") which became effective on January 3, 1989. Pursuant
to the Plan, ReliaStar Life was converted from a combined stock and mutual life
insurance company to a stock life insurance company. Participating whole life
and term insurance policies and annuities issued by ReliaStar Life prior to the
effective date of the Plan are segregated as a closed book of business in a
Participation Fund Account ("PFA"). The PFA was established to provide for the
continued maintenance of ReliaStar Life's policyholder dividend practices
relative to these lines of business. Earnings derived from the operation of the
PFA will inure solely to the benefit of the policyholders covered by the PFA,
and no benefit will inure to ReliaStar Life. ReliaStar Life is not obligated to
support or maintain a minimum level of dividends on the policies in the PFA.
However, in the event the assets ($311.6 million as of December 31, 1998) of the
PFA are insufficient to provide the contractual benefits guaranteed by the
affected policies, ReliaStar Life must provide the contractual benefits from the
general assets of ReliaStar Life.
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WORKSITE FINANCIAL SERVICES
The Worksite Financial Services (WFS) segment targets, principally through
ReliaStar Life, the sale of employee-benefits and financial-service products to
medium and large corporate employers and affinity groups. Building on these
relationships, the WFS segment also sells individual and payroll-deduction
products to employees of our corporate clients. Principal products include
group and individual life insurance, non-medical group insurance products, and
401(k) retirement plans.
The WFS segment offers group life and disability insurance and employee benefit
related services. The WFS segment employee benefits products are marketed
through major brokerage operations and through direct sales to employers by 94
marketing professionals employed full-time by ReliaStar Life and located in 24
regional offices throughout the United States.
The WFS segment markets group term life insurance to employer groups in its
target market. Premiums for these policies are based largely upon the
experience of the WFS segment and, in some instances, on the experience of the
particular group policyholder. The primary risks related to this line of
business include deviations from expected mortality, expenses and investment
income. The WFS segment seeks to control the mortality risk through reinsurance
treaties that protect the WFS segment from catastrophic losses.
The WFS segment also markets group disability income insurance. This coverage
compensates employees for loss of income due to sickness or injury. The
profitability of this business is affected by morbidity experience and the
investment return on assets supporting the policy reserves.
The WFS segment markets individual life insurance policies to employees at the
worksite and to members of affinity groups. The products delivered to these
markets include universal life insurance policies and individual term life
policies.
The WFS segment markets a package of products and services for the employee
retirement needs of small and mid-sized companies through the 401(k) Retirement
Plan division of ReliaStar Life. The division was organized in 1991 and had
sales (estimated first year deposits on new contracts) of $453.1 million during
1998. The division seeks to achieve a competitive advantage through simplicity
of product design, flexibility and quality service provided at a very
competitive cost.
The WFS segment manages a closed block of ReliaStar Life participating pension
contracts with total contract liabilities of $324.5 million at December 31,
1998. Few contracts of this type have been issued since 1982, and currently
ReliaStar Life does not market this product line. ReliaStar Life does, however,
receive additional deposits under some outstanding contracts. ReliaStar Life
has issued certain participating group annuity contracts jointly with another
insurance company. ReliaStar Life has entered into an arrangement with this
issuer whereby ReliaStar Life will gradually transfer these liabilities
(approximately $192.0 million at December 31, 1998) to the other insurer over a
ten-year period which commenced in 1993. The terms of the arrangement specify
the interest rate on the liabilities and provide for a transfer of assets and
liabilities scheduled in a manner consistent with the expected cash flows of the
assets allocated to support the attendant liabilities. Management does not
expect this arrangement to have a material effect on the earnings of the
Company.
TAX-SHELTERED AND FIXED ANNUITIES
This segment, primarily through Northern Life Insurance Company, focuses on the
retirement security needs of K-12 public and private school teachers.
Northern's sales force is comprised of independent agents who specialize in the
sale of tax-sheltered 403(b) annuities (TSA), providing both fixed and variable
annuities.
The TSA products provide for significant penalties for early withdrawal which,
when coupled with the
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provisions of the tax code, act to minimize the risk of early surrender. The
surrender fees gradually reduce and generally expire five to fourteen years
following issuance. Northern distributes these products through a specialty
field force of independent agents, including former teachers, that focuses
exclusively on TSA sales. Northern sells TSA's to teachers after securing the
approval of a school district. The school district generally provides a payroll
deduction facility for premium payments and facilitates access to the individual
teachers. Northern's agents meet with prospective customers on a face-to-face
basis. Northern's compensation structure of level commission payments and,
starting in 1996, an asset based bonus rewards agents for persistency in the
long-term retention of these contracts. Nonqualified annuities are sold through
independent agents and banks.
REINSURANCE
The Reinsurance segment operations are primarily conducted through ReliaStar
Life which provides specialized life and health reinsurance, including group and
special-risk reinsurance products, in the United States and internationally.
Target customers of the Reinsurance segment are medium and large life insurance
and selected non-life insurance companies such as worker's compensation insurers
and managed care and healthcare provider organizations. The Reinsurance segment
also offers specialty group insurance products on a direct basis and value-added
services, like catastrophic medical case management.
Earnings in the reinsurance business can fluctuate based upon a number of
factors, including pricing, market capacity, the availability and pricing of
retrocessional programs, loss experience and the risk profile of the book of
business.
ReliaStar Life has a strategy of maintaining a significant capacity to assume
reinsurance risks from its customers. ReliaStar Life maintains the capacity to
assume comparatively large risk positions from its reinsurance customers through
its retrocession program. ReliaStar Life's retrocession program consists of a
series of reinsurance contracts and treaties under which portions of reinsurance
risks assumed by ReliaStar Life are automatically retroceded to other
reinsurers. These secondary reinsurers (retrocessionaires) are selected by
ReliaStar Life based upon their financial capacity and stability. In addition
to this retrocession program, ReliaStar Life maintains reinsurance to provide
protection from catastrophic events. ReliaStar Life also maintains a
diversified portfolio of risks in an attempt to avoid concentrations in any
business line.
ReliaStar Life markets both treaty (covering portfolios of policies as
underwritten by ceding insurers) and facultative (covering a specific pre-
identified risk) reinsurance. Special risk coverage involves underwriting
unusual accident or accidental death coverages in niche markets less affected by
cyclical competitive pressures. These products are marketed through reinsurance
brokers and through direct sales by employees of ReliaStar Life.
ReliaStar Life reinsures excess of loss major medical risks of insurers and
health maintenance organizations and maintains expertise in the management of
individual claims involving very large medical expenses. The Company believes
that through active intervention in a medical claim it may minimize large losses
and maintain strong relationships with its customers.
ReliaStar Life also participates in the international reinsurance market place.
The segment has branch offices in Toronto, Copenhagen, Mexico City and
Amsterdam. During 1997, ReliaStar Life formed a subsidiary located in London to
provide an additional presence in the international reinsurance market place.
ReliaStar Life writes business in over 40 countries worldwide and is expanding
relationships in Europe and in other non-U.S. markets.
REGULATION
Insurance companies are subject to regulation and supervision by the states in
which they are domiciled
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and transact business. The Insurers are domiciled in Minnesota, Washington,
Connecticut and New York. The laws of the various states establish supervisory
agencies with broad administrative and supervisory powers relative to granting
and revoking licenses to transact business, regulating trade practices,
licensing agents, approving policy forms, filing certain premium rates, setting
insurance liability and investment reserve requirements, determining the form
and content of required financial statements, determining the reasonableness and
adequacy of capital and surplus and prescribing the types and amounts of
investments permitted. Insurance companies are subject to periodic examinations
by the regulatory agencies. A number of states require insurance companies to
participate in assigned risk or other pools providing insurance for people who
cannot qualify in the regular markets.
The state of domicile of each of the Insurers imposes National Association of
Insurance Commissioners (NAIC) developed minimum risk-based capital requirements
on insurance enterprises. The formulas for determining the amount of risk-based
capital specify various weighting factors that are applied to financial balances
and various levels of activity, based upon the nature and perceived degree of
risk associated with such balances and levels of activity. Regulatory
compliance is measured by a company's risk-based capital ratio, which is
calculated as a company's regulatory total adjusted capital, as defined, divided
by its authorized control level risk-based capital, as defined. Companies with
ratios below specific trigger points are classified within certain regulatory
action levels, each of which requires specified corrective action. The risk-
based capital ratio of each of the Insurers significantly exceeds the ratio at
which regulatory corrective action would be required.
The Registrant is primarily a holding company owning, directly or indirectly,
the capital stock of its subsidiaries. Although the Registrant is not regulated
as an insurance company, it is subject to state insurance holding company
statutes as well as certain other laws. All holding company statutes require
disclosing or in certain cases, prior approval of material transactions between
an insurance company and an affiliate. There are legal limitations on the
extent to which ReliaStar Life and the Registrant's other insurance company
subsidiaries may pay dividends, lend or otherwise supply funds to the Registrant
or ReliaStar Life. State insurance regulatory laws also require advance
approval by state agencies of any change in control of an insurance company
domiciled in that state. "Control" is generally presumed to exist through the
ownership of 10% or more of the voting securities of an insurance company or of
any company that controls an insurance company.
From time to time, the United States Congress considers legislation which, if
enacted, could have an adverse impact on the life insurance industry. The
Clinton administration's 1999 budget proposals contain recommendations that if
enacted could increase taxes on some life insurance companies. The Registrant
cannot predict whether these, or any other changes, may be enacted.
In addition to state insurance laws, the Registrant is also subject to general
business and corporation laws, federal and state securities laws, consumer
protection laws, fair credit reporting acts and other laws. Some of the
Registrant's subsidiaries are registered broker-dealers and/or investment
advisors and are therefore subject to unique federal and/or state regulation.
Through the ownership of ReliaStar Bank, the Registrant is also a thrift holding
company subject to regulation by the Office of Thrift Supervision (OTS).
ReliaStar Bank is subject to extensive regulations concerning its lending and
deposit taking activity, management, and capital structure by the OTS, the
Federal Reserve Deposit Insurance Corporation and various federal and state
banking laws.
OTHER
Competition
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The businesses in which the Insurers engage are each highly competitive. The
PFS segment competes in a marketplace characterized by a large number of
competitors with similar products. Competition is based
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largely upon the crediting rates under the policies, the credit and claims
paying ratings of competing insurers, the commission structures of competing
insurers and the levels of service afforded distributors. Competing investment
opportunities are also made available by mutual funds, banks and other financial
intermediaries, many of which have greater resources than the Registrant. The
products which the Insurers offer are not generally eligible for legal
protection from being copied by others, and capital is the most significant
barrier to entry by new competitors. The Insurers have obtained claims paying
ratings from public rating agencies. The Standard & Poor's claims paying rating
for all of the Insurers is AA; and the Duff & Phelps claims paying rating for
all of the Insurers is AA. The Moody's claims paying rating for ReliaStar Life,
Northern, and RLNY is A1, and is A2 for Security-Connecticut. The A.M. Best
claims paying rating for ReliaStar Life, Northern and RLNY is A+, while
Security-Connecticut is A. Reductions in the claims paying ratings of an Insurer
could adversely affect its operations or liquidity position.
The markets served by the WFS segment are all highly competitive. Group life
insurance is a homogeneous product sold in a highly competitive market.
ReliaStar Life's competitors include all of the largest insurers doing business
in the United States.
The life and health reinsurance business is also highly competitive, and is
affected by cyclical pressures as supply and demand for reinsurance changes from
year to year.
Reinsurance
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The Insurers are members of reinsurance associations established for the purpose
of ceding the excess of life insurance over retention limits. The Insurers'
retention limit is $500,000 per life for individual coverage and, to the extent
that ReliaStar Life reinsures life policies written by Northern and RLNY, the
limit is $400,000 per life. For group coverage and reinsurance assumed, the
retention is $500,000 per life with per occurrence limitations, subject to
certain maximums. As of December 31, 1998, $44.0 billion of life insurance in
force was ceded to other companies. Additionally, the Insurer's maintain
catastrophe reinsurance which provides reinsurance protection (in addition to
the individual life coverages) in the event of a catastrophe resulting in
multiple deaths. While these reinsurers are selected based upon their capacity
and financial stability, a contingent liability exists with respect to the
amount of such reinsurance in the event reinsuring companies are unable to meet
their obligations.
Acquired Immune Deficiency Syndrome (AIDS)
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The Insurers may be affected by morbidity and mortality related to AIDS. While
the Insurers' pricing assumptions and underwriting criteria take into
consideration expected morbidity and mortality attributable to AIDS, experience
beyond that anticipated could adversely affect earnings.
Geographic Distribution
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The Registrant, through the Insurers, conducts business in all 50 states. The
distribution of the Insurers' premium volume, by state, for the year ended
December 31, 1998 for life insurance, individual annuities and accident and
health insurance, on a statutory accounting basis, was as follows:
California 12% Washington 4%
New York 7 Georgia 3
Texas 5 Massachusetts 3
Minnesota 5 Virginia 3
Ohio 5 Pennsylvania 3
Florida 5 Michigan 3
Illinois 4 Connecticut 3
North Carolina 4 All Other (1) 31
(1) states with 2% or less of total premium volume
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Employees
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At December 31, 1998, the Registrant and its subsidiaries employed approximately
3,500 persons. None of the Registrant's employees are covered by collective
bargaining agreements.
Additional information concerning the Registrant may be found in "Known Trends
and Uncertainties" from the Registrant's Annual Report for the year ended
December 31, 1998, attached hereto on Exhibit 13 and which is incorporated
herein by reference.
ITEM 2. PROPERTIES.
The Registrant owns three office buildings in downtown Minneapolis, Minnesota,
which serve as its home offices. Space in the home office buildings not used by
the Registrant is rented to other tenants. Additional office space is leased in
Seattle, Washington; Arlington, Virginia; Avon, Connecticut; and Woodbury, New
York, to conduct the operations of the Insurers. In addition, the Registrant
owns the headquarters of ReliaStar Bank in St. Cloud, Minnesota and leases space
in various cities of the United States and Europe for regional group,
reinsurance, pension and claims offices and other business units.
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information entitled "Common Stockholder Information" from page 54 of the
Registrant's Annual Report for the year ended December 31, 1998, is attached as
Exhibit 13 hereto and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information entitled "Revenues and Earnings" and "Financial Position" from
page 15 of the Registrant's Annual Report for the year ended December 31, 1998,
is attached as Exhibit 13 hereto and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" from pages 16 through 28 of the
Registrant's Annual Report for the year ended December 31, 1998, is attached as
Exhibit 13 hereto and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information entitled "Market-Sensitive Instruments and Risk Management" from
pages 25 through 26 of the Registrant's Annual Report for the year ended
December 31, 1998 is attached as Exhibit 13 hereto and is incorporated by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data from pages 29
through 53, but not including the Report of Management from page 53 included in
the Registrant's Annual Report for the year ended December 31, 1998, is attached
as Exhibit 13 hereto and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Except for the information set forth below, the information entitled "Board of
Directors" from pages 8 and 9 and the information entitled "Compliance with
Section 16(a) Reporting" from page 27 of the Registrant's 1999 Proxy Statement
is incorporated herein by reference in response to this item.
EXECUTIVE OFFICERS OF THE REGISTRANT ARE AS FOLLOWS:
<TABLE>
<CAPTION>
First
Elected
As
Name Position with Company Age Officer
- --------------------- ------------------------------------------------------------ --- -------
<S> <C> <C> <C>
John G. Turner Chairman and Chief Executive Officer 59 1972
John H. Flittie President and Chief Operating Officer 62 1985
Richard R. Crowl Senior Vice President, General Counsel and Secretary 51 1982
James R. Miller Senior Vice President, Chief Financial Officer and Treasurer 51 1985
Dewette Ingham Senior Vice President, Human Resources 49 1998
Michael J. Dubes Senior Vice President 56 1984
Wayne R. Huneke Senior Vice President 47 1986
Kenneth U. Kuk Senior Vice President 52 1990
Robert C. Salipante Senior Vice President 42 1992
</TABLE>
Mr. Crowl has been Senior Vice President, General Counsel and Secretary of the
Registrant since 1996. Mr. Crowl was Vice President and Associate General
Counsel of the Registrant from 1989 to 1996. Mr. Crowl has been associated with
the Registrant since 1974.
Mr. Miller has been Senior Vice President, Chief Financial Officer and Treasurer
of the Registrant since November 1997. From 1992 to 1997, Mr. Miller was
Executive Vice President and Chief Operating Officer of Northern. Mr. Miller
has been associated with the Registrant since 1985.
Mr. Ingham has been Senior Vice President, Human Resources of the Registrant
since 1998. Prior to being associated with the Registrant, Mr. Ingham was
Corporate Vice President, Compensation and Benefits with RR Donnelly and Sons
Company.
Mr. Dubes has been Senior Vice President of the Registrant since 1996 and
President and Chief Executive Officer of Northern since 1994. From 1987 to
1994, Mr. Dubes was Senior Vice President of Individual Insurance Operations of
ReliaStar Life. Mr. Dubes has been associated with Registrant since 1984.
Mr. Huneke has been Senior Vice President of the Registrant since 1994, and
since November 1997 has been responsible for the Financial Markets business of
the Registrant. From 1994 to 1997, Mr. Huneke was Senior Vice President, Chief
Financial Officer and Treasurer of the Registrant. From 1990 to 1994, Mr.
Huneke was Vice President, Treasurer and Chief Accounting Officer of the
Registrant. Mr. Huneke has been associated with the Registrant since 1986.
Mr. Kuk has been a Senior Vice President of the Registrant since 1996. In 1998,
Mr. Kuk assumed responsibility of the Registrant's Worksite Financial Services.
From 1996 to 1997, Mr. Kuk was responsible for strategic marketing. From 1991
to 1996, Mr. Kuk was Vice President, Investments of the Registrant. Mr. Kuk has
been associated with the Registrant since 1985.
Mr. Salipante has been Senior Vice President of the Registrant since 1992, and
since 1997, has been
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responsible for the Registrant's Personal Financial Services. From 1996 to 1997,
Mr. Salipante served as Senior Vice President of Individual Insurance and
Technology, from 1994 to 1996, as Senior Vice President of Strategic Marketing
and Technology, and from 1992 to 1994, Senior Vice President and Chief Financial
Officer of the Registrant. Mr. Salipante has been associated with the Registrant
since 1992.
Officers are elected annually by the Board of Directors for one-year terms,
subject to removal by the Board.
ITEM 11. EXECUTIVE COMPENSATION.
The information entitled "Board Compensation" from pages 10 and 11 and the
information from the section entitled "Executive Compensation" from pages 20
through 27, of the Registrant's 1999 Proxy Statement, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information entitled "Beneficial Ownership" from pages 14 through 15 of the
Registrant's 1999 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information from page 11 of the Registrant's 1999 Proxy Statement is
incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS:
The following financial statements, included from the Annual Report
for the year ended December 31, 1998, are incorporated by reference in
Item 8.
a. Consolidated Balance Sheets as of December 31, 1998 and 1997
b. Consolidated Statements of Income for the years ended December
31, 1998, 1997 and 1996
c. Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996
d. Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
e. Notes to Consolidated Financial Statements
f. Independent Auditors' Report
2. FINANCIAL STATEMENT SCHEDULES:
The following financial statement schedules are filed as part of this
Form 10-K:
Independent Auditors' Report
Schedule I - Summary of Investments - Other than Investments in
Related Parties
Schedule II - Condensed Financial Information of Registrant
Schedule III - Supplementary Insurance Information
Schedule IV - Reinsurance
Schedule V - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements
or notes thereto.
3. EXHIBITS:
3(a) - Certificate of Incorporation, as amended, of the
Registrant (incorporated by reference to Exhibit 4(a)
to the Registrant's Registration Statement on Form S-8,
Registration No. 333-42125).
3(b) - By-Laws, as amended, of the Registrant (incorporated by
reference to Exhibit 3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1990, File No. 1-10640).
4(a) - Certificate of Incorporation, as amended, of the
Registrant (incorporated by reference to Exhibit 4(a)
to the Registrant's Registration Statement on Form S-8,
Registration No. 333-42125).
4(b) - By-Laws, as amended, of the Registrant (incorporated by
reference to Exhibit 3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1990, File No. 1-10640).
12
<PAGE>
4(c) - Surplus Note (incorporated by reference to Exhibit 4(e) to
the Registrant's Registration Statement on Form S-3,
Registration No. 33-87588).
4(d) - Rights Agreement dated as of October 7, 1988 (incorporated
by reference to Exhibit 1 to the Registrant's
Registration Statement on Form 8-A dated October 4,
1989, File No. 0-17441).
4(e) - Amendment to Rights Agreement dated as of February 8, 1990
(incorporated by reference to Exhibit 1 to the
Registrant's Amendment on Form 8 dated February 15,
1990 to Registration Statement on Form 8-A dated
October 4, 1989, File No. 0-17441).
4(f) - Amendment to Rights Agreement dated as of September 10,
1994 (incorporated by reference to Exhibit 1 to the
Registrant's Amendment on Form 8-A/A dated September
12, 1994 to Registration Statement on Form 8-A dated
October 4, 1989, File No. 0-17441).
4(g) - Amendment to Rights Agreement dated as of February 11,
1999 (incorporated by reference to Exhibit 1 to the
Registrant's Amendment on Form 8-A/A dated February 26,
1999, to Registration Statement on Form 8-A dated
October 4, 1989, File No. 0-17441).
10 - Material contracts:
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to
Form 10-K for Fiscal Year Ended December 31, 1998:
. Amendment No. 1 to ReliaStar 1993 Stock Incentive Plan
(effective as of November 12, 1998)
. Form of Restricted Stock Agreement
. Consulting Agreement effective January 1, 1999 between
Northern Life Insurance Company and Randy James
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1997:
. Amendment No. 1 ReliaStar Stock Ownership Plan for
Nonemployee Directors
. ReliaStar 1993 Stock Incentive Plan (as amended and
restated effective as of February 11, 1998)
. Form of Management Employment Agreement
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1996:
. ReliaStar Stock Ownership Plan for Nonemployee
Directors (as amended and restated effective May 9,
1996)
. ReliaStar Financial Corp. Retirement Plan for
Nonemployee Directors (as amended on February 9, 1995)
. ReliaStar Deferred Compensation Plan for Nonemployee
Directors (as amended effective as of August 16, 1996)
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1995:
. ReliaStar Financial Corp. Supplemental Executive
Retirement Plan
. ReliaStar Executives' Long-term Incentive Compensation
Program (as amended and restated effective January 1,
1996)
. Form of Deposit Share Agreement issued under the
ReliaStar 1993 Stock Incentive Plan
. Form of Nonqualified Stock Option Agreement issued
under the ReliaStar Stock Ownership Plan for
Nonemployee Directors
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1994:
13
<PAGE>
. ReliaStar Executives' Annual Incentive Compensation
Program
. ReliaStar Annual Incentive Bonus Plan For Designated
Executive Officers
. ReliaStar Supplemental 401(k) Plan
. ReliaStar Supplemental Profit Sharing Plan
. First Amendment to Compensation Trust Agreement
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1993:
. Form of Incentive Stock Option Agreement issued under
The NWNL Companies 1993 Stock Incentive Plan
. Form of Nonqualified Stock Option Agreement issued
under The NWNL Companies 1993 Stock Incentive Plan
. Form of Nonqualified Stock Option Agreement
(Replacement Stock Grant) issued under The NWNL
Companies 1993 Option Stock Incentive Plan
. Form of Incentive Stock Option Agreement (Replacement
Stock Option Grant) issued under The NWNL Companies
1993 Stock Incentive Plan
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1992:
. Nonqualified Stock Option Agreement issued under The
NWNL Companies Stock Incentive Plan
. Incentive Stock Option Agreement issued under The NWNL
Companies Stock Incentive Plan
. Deferred Compensation Agreement (for Supplemental
Retirement Benefits)
. Form of Split Dollar Agreement
. Confidential Cash Payment and Deferred Compensation
Agreement between NWNL and Executive Officer, as
amended
. Confidential Deferred Compensation Agreement between
NWNL and Executive Officer, as amended
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to
previous Form 10-K as noted:
. The NWNL Companies Stock Incentive Plan - filed as
exhibit to Form 10-K for Fiscal Year Ended December
31, 1991
. The NWNL Companies, Inc., Restricted Stock Plan for
Nonemployee Directors -filed as exhibit to Form 10-K
for Fiscal Year Ended December 31, 1991
. The NWNL Companies Deferred Compensation Plan for
Nonemployee Directors (as amended effective May 10,
1991) - filed as exhibit to Form 10-K for Fiscal Year
Ended December 31, 1991
. The NWNL Companies Stock Incentive Plan Restricted
Stock Agreement - filed as exhibit to Form 10-K for
Fiscal Year Ended December 31, 1991
. The NWNL Companies Supplemental Profit Sharing Plan as
amended on December 14, 1989 - filed as exhibit to
Form 10-K for Fiscal Year Ended December 31, 1989
. Compensation Trust Agreement - filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1988
13 - Registrant's Annual Report for the year ended December 31,
1998, is filed as an exhibit to the extent incorporated by
reference herein
21 - Subsidiaries
23 - Consent
24 - Powers of attorney
27 - Supplemental Data Schedule
(B) REPORTS ON FORM 8-K:
Current Report on Form 8-K dated December 1, 1998. File No. 1-17441
disclosing the retirement of John H. Flittie, President and COO of the
Registrant to be effective June 30, 1999.
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ReliaStar Financial Corp. and Subsidiaries
Minneapolis, Minnesota
We have audited the consolidated financial statements of ReliaStar Financial
Corp. and Subsidiaries (the Company) as of December 31, 1998 and 1997, and for
each of the three years in the period ended December 31, 1998, and have issued
our report thereon dated February 4, 1999, such consolidated financial
statements and report are included in the Company's 1998 Annual Report to
Shareholders and are incorporated herein by reference. Our audits also included
the consolidated financial statement schedules of ReliaStar Financial Corp. and
Subsidiaries, listed in Item 14(A)2 of this Report on Form 10-K. These
consolidated financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 4, 1999
15
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE I-CONSOLIDATED SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D
-------- -------- -------- --------
Amount at which
shown in the
Type of Investment Cost Value balance sheet
------------------ ---- ----- ---------------
<S> <C> <C> <C>
Fixed Maturities
Bonds
United States Government and
Government Agencies and
Authorities $ 798.4 $ 846.8 $ 846.8
States, Municipalities and
Political Subdivisions 49.9 54.0 54.0
Foreign Governments 88.5 97.4 97.4
Public Utilities 643.0 699.4 699.4
All Other Corporate Bonds 9,523.2 9,909.1 9,909.1
Redeemable Preferred Stocks 24.0 18.4 18.4
--------- --------- ---------
Total Fixed Maturities 11,127.0 11,625.1 11,625.1
--------- --------- ---------
Equity Securities
Industrial, Miscellaneous and
all Other Common Stocks 19.0 19.7 19.7
Nonredeemable Preferred Stocks 40.2 40.6 40.6
--------- --------- ---------
Total Equity Securities 59.2 60.3 60.3
--------- --------- ---------
Mortgage Loans on Real Estate /1/ 2,165.3 2,154.8
Real Estate /1/ 25.5 23.3
Real Estate Acquired in
Satisfaction of Debt /1/ 36.8 30.0
Policy Loans 702.3 702.3
Other Long-Term Investments /1/ 150.6 144.6
Short-Term Investments 168.7 168.7
--------- ---------
Total Investments $14,435.4 $14,909.1
========= =========
</TABLE>
/1/ Amounts in Column D differ from amounts shown in Column B because they are
net of allowances and write-downs for losses.
16
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
ASSETS 1998 1997
-------- --------
<S> <C> <C>
Investments
Investment in and Advances to Subsidiaries $2,812.0 $2,606.8
Other Invested Assets 50.8 -
Short-Term Investments 23.5 7.9
-------- --------
Total Investments 2,886.2 2,614.7
Accounts and Notes Receivable 9.3 8.3
Other Assets 8.3 10.9
-------- --------
TOTAL ASSETS $2,903.8 $2,633.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other Liabilities $ 44.0 $ 36.7
Bank Borrowings - 37.0
Notes Payable 751.2 553.2
Income Taxes Payable (11.6) (4.0)
-------- --------
TOTAL LIABILITIES 783.6 622.9
-------- --------
SHAREHOLDERS' EQUITY
Common Stock .9 .9
Additional Paid-in Capital 1,003.0 1,019.8
Retained Earnings 1,137.6 964.8
Accumulated Other Comprehensive Income 257.2 226.2
Note Receivable from ESOP (19.8) (20.8)
Unamortized Restricted Stock Awards (.7) (1.0)
Less Treasury Common Stock, at Cost (258.0) (178.9)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 2,120.2 2,011.0
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,903.8 $2,633.9
======== ========
</TABLE>
See page 19 for Notes to Condensed Financial Information of Registrant.
17
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
REVENUES
Net Investment Income $ 10.3 $ 11.6 $ 10.2
Realized Investment Gains .3 - -
Other Income 2.8 2.9 3.1
------ ------ ------
TOTAL 13.4 14.5 13.3
------ ------ ------
BENEFITS AND EXPENSES
Sales and Operating Expenses (6.9) (2.4) (1.9)
Interest Expense 48.1 38.0 26.7
------ ------ ------
TOTAL 41.2 35.6 24.8
------ ------ ------
Loss from Continuing Operations
Before Income Taxes (27.9) (21.1) (11.5)
Income Tax - - -
------ ------ ------
Loss of Parent Only (27.9) (21.1) (11.5)
Equity in Net Income from Continuing
Subsidiaries Operations 272.8 239.9 202.4
------ ------ ------
Income from Continuing Operations 244.9 218.8 190.9
Equity in Net Income (Loss) from Discontinued Operations (7.2) 3.2 2.1
------ ------ ------
NET INCOME $ 237.7 $222.0 $193.0
====== ====== ======
PER COMMON SHARE
Basic
Income from Continuing Operations $ 2.69 $ 2.55 $ 2.51
Income (Loss) from Discontinued Operations (.08) .04 .03
------ ------ ------
Net Income $ 2.61 $ 2.59 $ 2.54
====== ====== ======
Diluted
Income from Continuing Operations $ 2.64 $ 2.51 $ 2.35
Income (Loss) from Discontinued Operations (.08) .04 .02
----- ------ ------
Net Income $ 2.56 $ 2.55 $ 2.37
===== ====== ======
Net Income Available to Common Shareholders $ 237.7 $222.0 $187.8
====== ====== ======
</TABLE>
See page 19 for Notes to Condensed Financial Information of Registrant.
18
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Cash Used by Operating Activities $ (20.6) $ (3.5) $ (3.8)
-------- ------- -------
INVESTING ACTIVITIES
Sales (Purchases) of Short-Term Investments, Net (68.9) (5.9) 2.7
Dividends Received from Subsidiaries 92.7 68.5 55.1
Repayments from (Investments in or Advances to) Subsidiaries 29.7 (40.7) (41.7)
Cash Acquired with Acquisition of Security-Connecticut Corp. - 7.7 -
-------- ------- -------
Net Cash Provided by Investing Activities 53.5 29.6 16.1
-------- ------- -------
FINANCING ACTIVITIES
Redemption of 10% Senior Cumulative Preferred Stock - - (63.2)
Increase in Notes and Mortgages Payable 197.4 174.9 148.9
Repayment of Notes and Mortgages Payable (37.0) (19.9) (65.6)
Payments Received on Note Receivable from ESOP - .1 .4
Issuance of Common Stock under Stock Option
and Other Plans 35.4 21.8 18.5
Dividends on 10% Senior Cumulative Preferred Stock - - (3.2)
Dividends on ESOP Convertible Preferred Stock - - (2.8)
Dividends on Common Stock (64.8) (52.0) (40.0)
Acquisition of Treasury Common Stock (163.9) (151.0) (5.6)
-------- ------- -------
Net Cash Used by Financing Activities (32.9) (26.1) (12.6)
-------- ------- -------
Decrease in Cash - - (.3)
Cash at Beginning of Year - - .3
-------- ------- -------
Cash at End of Year $ - $ - $ -
======== ======= =======
</TABLE>
See page 19 for Notes to Condensed Financial Information of Registrant.
19
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
1. Accounting Policies
The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes included in the ReliaStar
Financial Corp. 1998 Annual Report to Shareholders.
2. Dividends from Subsidiaries
The cash dividends paid to ReliaStar for 1998, 1997 and 1996 by its subsidiaries
were $92.7 million, $68.5 million and $55.1 million, respectively.
20
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(IN MILLIONS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
- -------- -------- -------- --------- -------- -------- -------- --------
Deferred Pending Policy Amortization of
Policy Future Policy Claims and Other Net Benefits Deferred Policy
Acquisition and Contract Policyholder Investment to Acquisition
Segment Costs Benefits Funds Premiums Income Policyholders Costs
- ------- ----------- ------------- --------------- -------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
- ----
Personal Financial Services $ 576.1 $ 5,007.9 $154.2 $ 143.6 $ 405.1 $ 471.4 $ 78.7
Worksite Financial Services 98.1 1,307.0 215.6 533.3 141.9 507.9 3.6
Tax-Sheltered and Fixed
Annuities 532.8 7,032.9 39.8 16.9 532.6 378.6 34.2
Reinsurance 4.4 182.6 328.5 320.3 21.1 194.8 2.3
Other Business Units - - - - 0.4 - -
Corporate 3.5 (10.6) - - 15.8 (0.7) 0.9
-------- --------- ------ -------- -------- -------- ------
Total $1,214.9 $13,519.8 $738.1 $1,014.1 $1,116.9 $1,552.0 $119.7
======== ========= ====== ======== ======== ======== ======
1997
- ----
Personal Financial Services $ 500.2 $ 5,100.6 $177.1 $ 123.7 $ 332.9 $ 387.1 $ 78.6
Worksite Financial Services 77.4 1,328.5 205.9 524.4 135.3 504.1 2.6
Tax-Sheltered and Fixed
Annuities 503.4 6,758.8 39.4 17.9 509.6 365.0 6.4
Reinsurance 6.0 144.0 204.6 221.9 18.0 121.8 0.5
Other Business Units - - - - .1 - -
Corporate 4.9 (2.5) - - 10.4 (0.7) 0.8
-------- --------- ------ -------- -------- -------- ------
Total $1,091.9 $13,329.4 $627.0 $ 887.9 $1,006.3 $1,377.3 $ 88.9
======== ========= ====== ======== ======== ======== ======
1996
- ----
Personal Financial Services $ 480.8 $ 3,514.7 $ 61.6 $ 99.4 $ 277.2 $ 303.4 $ 57.1
Worksite Financial Services 55.9 1,358.5 206.8 535.2 142.6 531.5 0.7
Tax-Sheltered and Fixed
Annuities 461.0 6,344.0 37.7 18.6 486.9 346.4 25.7
Reinsurance 2.5 118.8 172.1 183.7 16.1 107.4 0.4
Other Business Units - - - - 0.2 - -
Corporate 5.8 (3.8) - - 6.6 (1.0) 0.9
-------- --------- ------ -------- -------- -------- ------
Total $1,006.0 $11,332.2 $478.2 $ 836.9 $ 929.6 $1,287.7 $ 84.8
======== ========= ====== ======== ======== ======== ======
<CAPTION>
COLUMN I
--------
Sales
and
Operating
Segment Expenses
- ------- ---------
<S> <C>
1998
- ----
Personal Financial Services $169.8
Worksite Financial Services 173.4
Tax-Sheltered and Fixed
Annuities 60.8
Reinsurance 76.3
Other Business Units 172.0
Corporate (7.1)
------
Total $645.2
======
1997
- ----
Personal Financial Services $116.3
Worksite Financial Services 178.6
Tax-Sheltered and Fixed
Annuities 56.4
Reinsurance 51.3
Other Business Units 142.5
Corporate 7.1
------
Total $552.2
======
1996
- ----
Personal Financial Services $ 85.9
Worksite Financial Services 173.2
Tax-Sheltered and Fixed
Annuities 51.4
Reinsurance 37.9
Other Business Units 67.4
Corporate 10.3
------
Total $426.1
======
</TABLE>
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE IV - REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ---------- -------- -------- -------- -------- --------
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed to
Amount Companies Companies Amount Net
-------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
1998
- ----
Life Insurance In Force $248,361.8 $44,037.8 $48,164.3 $252,488.3 19.1%
========== ========= ========= ==========
Premiums
Life Insurance 587.1 145.6 285.4 726.9 39.3
Accident and Health Insurance 192.9 125.3 219.6 287.2 76.5
---------- --------- --------- ----------
Total Premiums $ 780.0 $ 270.9 $ 505.0 $ 1,014.1 49.8%
========== ========= ========= ==========
1997
- ----
Life Insurance In Force $223,972.0 $34,305.4 $43,052.9 $232,719.5 18.5%
========== ========= ========= ==========
Premiums
Life Insurance $ 486.1 $ 78.6 $ 235.7 $ 643.2 36.6
Accident and Health Insurance 189.5 95.3 150.5 244.7 61.5
---------- --------- --------- ----------
Total Premiums $ 675.6 $ 173.9 $ 386.2 $ 887.9 43.5%
========== ========= ========= ==========
1996
- ----
Life Insurance In Force $151,717.2 $12,464.3 $38,498.0 $177,750.9 21.7%
========== ========= ========= ==========
Premiums
Life Insurance $ 383.1 $ 49.3 $ 219.7 $ 553.5 39.7
Accident and Health Insurance 226.8 58.0 114.6 283.4 40.4
---------- --------- --------- ----------
Total Premiums $ 609.9 $ 107.3 $ 334.3 $ 836.9 39.9%
========== ========= ========= ==========
</TABLE>
22
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
AS OF DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- --------- -------- -------- --------
Additions
--------------------------
Balance at Charged to Balance
Beginning Costs and Charged to at End of
Description Of Period Expenses Other Accounts Deductions/1/ Period
- --------- ---------- -------- -------------- ---------- --------
<S> <C> <C> <C> <C> <C>
1998
- ----
Commercial Mortgage Loans $ 9.4 - - - $ 9.4
Residential Mortgage Loans 1.1 - - - 1.1
Foreclosed Real Estate 9.1 $1.9 - $(4.2) 6.8
Real Estate 2.8 .2 - (.8) 2.2
Other Invested Assets 2.7 3.3 - - 6.0
Accounts and Notes Receivable
and Other Assets 2.1 1.0 - (.6) 2.5
1997
- ----
Commercial Mortgage Loans $11.0 $2.0 - $(3.6) $ 9.4
Residential Mortgage Loans .7 .4 - - 1.1
Foreclosed Real Estate 11.2 1.6 - (3.7) 9.1
Real Estate 2.1 .7 - - 2.8
Other Invested Assets 2.6 .1 - - 2.7
Accounts and Notes Receivable 2.2 .1 - (.2) 2.1
1996
- ----
Commercial Mortgage Loans $12.0 $2.6 - $(3.6) $11.0
Residential Mortgage Loans .4 .3 - - .7
Foreclosed Real Estate 10.6 4.1 - (3.5) 11.2
Real Estate 1.0 1.1 - - 2.1
Other Invested Assets 2.3 .3 - - 2.6
Accounts and Notes Receivable 2.5 .5 - (.8) 2.2
</TABLE>
/1/ The deductions are for reserves released upon disposal of the related asset
or upon foreclosure of the property underlying the loan at which time the
foreclosed property is recorded at fair value.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis
and the State of Minnesota, on the 18th day of March 1999.
RELIASTAR FINANCIAL CORP.
By JOHN G. TURNER*
-------------------------------
John G. Turner, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on the 18th day of March 1999 by the following persons on behalf
of the Registrant and in the capacities indicated.
JOHN G. TURNER* Chairman and Chief Executive Officer
- -----------------------
John G. Turner (Principal Executive Officer)
JAMES R. MILLER* Senior Vice President, Chief Financial Officer and
- -----------------------
James R. Miller Treasurer
(Principal Financial Officer)
CHRIS D. SCHREIER* Vice President and Controller
- -----------------------
Chris D. Schreier (Principal Accounting Officer)
CAROLYN H. BALDWIN
DAVID C. COX
JOHN H. FLITTIE
LUELLA GROSS GOLDBERG A majority of the
WILLIAM A. HODDER Board of Directors*
JAMES J. HOWARD, III
RANDY C. JAMES
RICHARD L. KNOWLTON
DAVID A. KOCH
RICHARD M. KOVACEVICH
GLEN D. NELSON, M.D.
JAMES J. RENIER
JOHN G. TURNER
* Richard R. Crowl, by signing his name hereto, does hereby sign this document
on behalf of the above named directors and officers of the Registrant pursuant
to powers of attorney duly executed by such persons.
/s/ RICHARD R. CROWL
------------------------------------
Richard R. Crowl, Attorney-in-Fact
24
<PAGE>
ReliaStar Financial Corp.
Exhibit Index
Exhibit No. Description Page
- ----------- ----------- ----
10 Material Contracts:
Amendment No. 1 to ReliaStar 1993 Stock Incentive Plan
(effective as of November 12, 1998) 25
Form of Restricted Stock Agreement 26
Consulting Agreement effective January 1, 1999 between
Northern Life Insurance Company and Randy James 31
13 Registrant's Annual Report for the year ended December
31, 1998 is filed as an exhibit to the extent
incorporated by reference herein 34
21 Subsidiaries 75
23 Consent 77
24 Powers of Attorney 78
27 Financial Data Schedules 95
<PAGE>
EXHIBIT 10.1
AMENDMENT NO. 1 TO
RELIASTAR 1993 STOCK INCENTIVE PLAN
Pursuant to action of the Personnel and Compensation Policy Committee of the
Board of Directors of ReliaStar Financial Corp. effective November 12, 1998,
Section 6.5 Nonqualified Stock Options (a) Option Period of the ReliaStar 1993
Stock Incentive Plan, as amended and restated effective February 11, 1998, is
amended in its entirety to read as follows:
Sec. 6.5 Nonqualified Stock Options. Nonqualified Stock are Stock
Options that are not intended to qualify under Code Section 422.
Nonqualified Stock Options shall be subject to the following:
(a) Option Period. Except as provided below, each option granted
shall expire and all rights to purchase shares shall cease ten
years and one day after the Date of Grant of the Nonqualified
Stock Option or on such other date as may be fixed by the
Committee. In the event of a plan termination or Company
reorganization, Nonqualified Stock Options shall be exercisable
pursuant to the rules set forth in Sec. 5.5 and Sec. 6.6.
- -------------------------------------
John G. Turner
Chairman and Chief Executive Officer
ReliaStar Financial Corp.
<PAGE>
EXHIBIT 10.2
FORM OF RESTRICTED STOCK AGREEMENT
Upon execution of this agreement ("Agreement") with ReliaStar Financial Corp.,
("Corporation), the Personnel and Compensation Policy Committee ("Committee") of
the Board of Directors of the Corporation hereby awards to ______________
("Participant") _______ restricted shares of the Corporation's Common Stock (the
"Shares"), effective __________, ____(the "Award Date"), upon the following
terms and conditions:
1. Certificate for Restricted Shares. The Shares shall be fully paid and
---------------------------------
nonassessable and shall be represented by a certificate registered in the
Participant's name and stamped with the following legend:
"The sale or other transfer of the shares of stock
represented by this certificate, whether voluntary or
involuntary, or by operation of law, is subject to certain
restrictions on transfer set forth in the ReliaStar 1993
Stock Incentive Plan, as amended, ("Plan") in any rules and
administrative interpretations adopted pursuant to such
Plan, and in a Restricted Stock Agreement dated _________,
____. A copy of the Plan, such rules, and such Restricted
Stock Agreement may be obtained from the Secretary of
ReliaStar Financial Corp."
The Corporation shall retain such Certificate until the expiration of the
"Restricted Period" as defined in paragraph 2 hereof.
2. Restricted Period. Except as otherwise provided in paragraph 6 of this
-----------------
Agreement, the Restricted Period shall begin on the Award Date and shall
end on ______________, ______.
3. Restrictions. The Shares shall not be sold, exchanged, assigned,
------------
transferred discounted, pledged or otherwise disposed of by the Participant
prior to the end of the Restricted Period. Such Shares shall be subject to
all of the restrictions, terms and conditions specified in the Plan, this
Agreement and the restricted stock certificates to be issued, and all such
restrictions, terms and conditions are hereby incorporated by reference
into this Agreement. To the extent there is any conflict between any terms
or provisions of the Plan and any terms or provisions of this Agreement,
the terms or provisions of the Plan shall control.
4. Rights as a Shareholder. The Participant shall have all rights as a
-----------------------
shareholder with respect to the Shares, including the right to vote the
Shares and to receive all dividends and distributions paid or made with
respect to the Shares, except as set forth in paragraph 3 of this
Agreement. If any such dividends or distributions are paid in shares of
Common Stock of the Corporation, the shares shall be subject to the same
restrictions on transferability as the Shares to which they relate.
<PAGE>
5. Lapse of Restrictions. Except as otherwise provided in the Plan or as
---------------------
required by law, upon the expiration of the Restricted Period, the
Participant shall be entitled to have the legend required by paragraph 1
hereof removed from his common stock certificate, and the Shares shall
become freely transferable.
6. Termination of Employment for Death, Disability or Retirement. In the event
-------------------------------------------------------------
the Participant's employment with the Corporation and its subsidiaries is
terminated during the Restricted Period by the reason of the Participant's
death, "Disability" or "Retirement", the Restricted Period shall end upon
the date of such termination of employment. For purposes of this paragraph
6, "Disability" shall mean the cessation of employment of the Participant
under circumstances where the Participant is eligible to receive a monthly
disability benefit pursuant to the group long-term disability insurance
program sponsored by the Corporation or subsidiary which employs the
Participant in the program. For purposes of this paragraph 6, "Retirement"
shall mean the Participant's Normal Retirement as defined in the qualified
retirement plan of the Corporation or subsidiary which employs the
Participant.
7. Forfeiture of Award. In the event of Participant's termination of
-------------------
employment with the Corporation and its subsidiaries during the Restricted
Period for any reason other than those set forth in paragraph 6 hereof, the
Shares automatically shall be forfeited and returned to the Corporation
unless the Committee shall, in its sole discretion, otherwise provide.
8. Change in Control. If any change in control "Event": shall occur, then any
-----------------
portion of the Restricted Shares which have not vested shall immediately
vest. A change in control "Event" shall mean the occurrence of any of the
following:
(a) An acquisition (other than directly from the Corporation) of any
voting securities of the Corporation (the "Voting Securities") by any
"Person" (as the term person is used for purposes of Section 13(d) or
14(d) of the Securities Exchange Act of 1934, as amended (the "1934
Act")) immediately after which such Person is the "Beneficial Owner"
(within the meaning of Rule 13d-3 promulgated under the 1934 Act) of
twenty percent (20%) or more of the combined voting power of the then
outstanding Voting Securities; provided, however, in determining
whether an Event has occurred, Voting Securities which are acquired in
a "Non-Control Acquisition" shall not constitute an acquisition which
would cause an Event. A "Non-Control Acquisition" shall mean (1) an
acquisition by an employee benefit plan (or a trust forming a part
thereof) maintained by the Corporation or any corporation or other
Person of which a majority of its voting power or its equity
securities or equity interest is owned directly or indirectly by the
Corporation (a "Subsidiary"), (2) an acquisition by the Corporation or
any Subsidiary, (3) a transaction in which any Person became the
Beneficial Owner of more than twenty percent (20%) of the outstanding
Voting
<PAGE>
Securities as a result of an acquisition of Voting Securities by the
Corporation which, by reducing the number of Voting Securities
outstanding, increased the percentage of the outstanding Voting
Securities Beneficially Owned by such Person, provided that if an
Event would occur (but for the operation of this sentence) and after
such share acquisition by the Corporation, such Person becomes the
Beneficial Owner of any additional Voting Securities which increases
the percentage of the then outstanding Voting Securities Beneficially
Owned by such Person then an Event shall occur, or (4) an acquisition
by any Person in connection with a "Non-Control Transaction" (as
defined in subsection (c) hereof).
(b) The individuals who, as of the date of this Agreement is approved by
the Board, are members of the Board (the "Incumbent Board"), cease for
any reason to constitute at least two-thirds of the Board; provided,
however, that if the election, or nomination for election by the
Corporation's stockholders, of any new director was approved by a vote
of at least a two-thirds majority of the Incumbent Board, such new
director shall, for purposes of the Program, be considered as a member
of the Incumbent Board; provided further, however, that no individual
shall be considered a member of the Incumbent Board if such individual
initially assumed office as a result of either an actual or threatened
"Election Contest" (as described in Rule 14a-11 promulgated under the
1934 Act) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board (a "Proxy
Contest") including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest; or
(c) Approval by stockholders of the Corporation of:
(1) A merger, consolidation or reorganization involving the
Corporation, unless such merger, consolidation or reorganization
is a "Non-Control Transaction" which is defined as a transaction
in which:
(A) the stockholders of the Corporation, immediately before such
merger, consolidation or reorganization, own, directly or
indirectly immediately following such merger, consolidation
or reorganization, at least fifty-one percent (51%) of the
combined voting power of the outstanding voting securities
of the corporation resulting from such merger or
consolidation or reorganization (the "Surviving
Corporation") in substantially the same proportion as their
ownership of the Voting Securities immediately before such
merger, consolidation or reorganization,
(B) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement
providing
<PAGE>
for such merger, consolidation or reorganization constitute
at least two-thirds of the members of the board of directors
of the Surviving Corporation, and
(C) no person (other that the Corporation or any Subsidiary, any
employee benefit plan (or any trust forming a part thereof)
maintained by the Corporation, the Surviving Corporation or
any Subsidiary, or any Person who, immediately prior to such
merger, consolidation or reorganization had Beneficial
Ownership of twenty percent (20%) or more of the then
outstanding Voting Securities) has Beneficial Ownership of
twenty percent (20%) or more of the combined voting power of
the Surviving Corporation's then outstanding voting
securities;
(2) A complete liquidation or dissolution of the Corporation; or
(3) An agreement for the sale or other disposition of all or
substantially all of the assets of the Corporation to any Person
(other than a transfer to a Subsidiary).
(d) The Corporation enters into an agreement in principle or a definitive
agreement relating to an Event described in subsection (a), (b) or (c)
hereof which ultimately results in such Event occurring or a tender or
exchange offer or proxy contest is commenced which ultimately results
in an Event described in subsection (a) or (b) hereof occurring.
9. Recapitalization. In the event of any change in the Common Stock of the
----------------
Corporation through the declaration of stock dividends or recapitalization
resulting in stock split-ups or through merger, consolidation or exchange
of shares or otherwise, the number of Shares shall be equitably adjusted by
the Committee, in its sole discretion, to prevent dilution or enlargement
of rights.
10. Tax Matters. The Participant shall immediately notify the Corporation of
-----------
any election he may make under Section 83 of the Internal Revenue Code with
respect to the issuance of any Shares pursuant to the Plan. The Corporation
reserves the right to withhold from any transfer or payment under this Plan
or from any other payment due to the Participant from the Corporation any
taxes as may be required pursuant to law and the Participant shall provide
any documentation necessary with respect to such withholding. The
Participant shall, if required by the Corporation in its discretion, pay to
the Corporation in cash any amount required to be withheld for any
applicable employment or withholding taxes, and the Corporation may
condition delivery of vested, nonrestricted stock certificates upon receipt
of such payment.
<PAGE>
11. Not an Employment Contract. Neither this Agreement nor participation in the
--------------------------
Plan shall be construed as creating any agreement or promise with regard to
the Participant's continued employment with the Corporation or its
subsidiaries.
12. Compliance with Law and Approval by Regulatory Bodies. No Shares shall be
-----------------------------------------------------
issued and no certificates therefor shall be delivered except in compliance
with all applicable federal and state laws and regulations and rules of all
domestic stock exchanges on which the Corporation's shares are listed. The
Corporation shall have the right to rely on the opinion of its counsel as
to such compliance. Any share certificate issued may bear such legends and
statements as the Committee may deem advisable or desirable.
13. Miscellaneous. The terms and provisions of this Agreement shall be binding
-------------
on and shall inure to the benefit of the Participant and his executors or
administrators, heirs, and personal and legal representatives. This
Agreement shall be construed and enforced in accordance with the laws of
the State of Delaware. In the event of the invalidity of any provisions of
this Agreement, such invalidity shall not affect the validity of any other
provisions of the Agreement or Plan.
IN WITNESS WHEREOF, the parities have caused this Agreement to be executed in
Minneapolis, Minnesota as of the Award Date.
RELIASTAR FINANCIAL CORP.
__________________________ By:___________________________
Plan Administrator
<PAGE>
EXHIBIT 10.3
CONSULTING AGREEMENT
This Consulting Agreement ("Agreement") is effective January 1, 1999, between
Northern Life Insurance Company, Seattle, Washington ("Company") and Randy
James, of Maple Valley, Washington ("Consultant").
Company assigns to Consultant and Consultant agrees to perform the services
shown in Section 1 below under the terms and conditions set forth in this
Agreement.
In consideration of the mutual promises set forth in this Agreement, it is
agreed by and between Company and Consultant:
1. Description of Services
-----------------------
Consultant shall serve as a member and Chairman of Company's Educators
Advisory Board and provide services to Company on an as-needed basis with
regard thereto. In addition, consultant shall serve as a consultant to
Company's Board of Directors.
2. Payment for Services
--------------------
A. The terms and conditions for payment are as follows:
Annual retainer for services with regard to the Educators Advisory
Board: $6,500 per year.
For attendance at meetings of the Educators Advisory Board or
Company's Board of Directors: $1,000 per meeting.
B. Any expenses for which Consultant seeks reimbursement must be
approved by Company and must be submitted to Company for payment
within 60 days of the date incurred. Reimbursed expenses submitted
later than 60 days shall be treated as income to Consultant.
3. Relationship of Parties to this Agreement
-----------------------------------------
Company and Consultant intend that the relationship of independent
contractor-employer be created by this Agreement. The Company is
interested in the result achieved. Control of the work and the manner and
means by which it is accomplished lie solely with the Consultant. Neither
Consultant nor Consultant's employees, if any, are agents or employees of
Company for any purpose. It is the understanding of the parties that
Company does not agree to use Consultant exclusively and that Consultant is
free to contract for similar services with or be employed by other
companies while under contract with Company.
<PAGE>
4. Duration of Contract; Termination
---------------------------------
A. This Agreement will commence on the date shown in the first
paragraph when signed by both Company and Consultant. This Agreement
will automatically terminate December 31, 1999, subject to Section
4.B. It may be continued beyond such date by subsequent written
agreement.
B. Either party may cancel this Agreement upon 30 days written
notice to the other party.
5. Miscellaneous
-------------
A. Since the relationship of independent contractor-employer is
intended, it is understood that neither Consultant nor Consultant's
employees, if any, will be entitled to benefits normally extended to
Company's employees. These benefits include, but are not limited to,
insurance, vacation, pension or profit sharing, and other fringe
benefits.
B. Company will not withhold for Social Security; Consultant will
file and pay Social Security as a self-employed person. With regard to
income tax withholding, Consultant will maintain his/her own records
for tax purposes and make appropriate filings and tax payments.
C. Company does not insure Consultant for Worker's Compensation
coverage.
D. Company does not insure Consultant for unemployment insurance.
E. Any works and their copyright produced by Consultant or employees
of Consultant pursuant to this Agreement are by this Agreement
assigned to and become the property of Company and may not be
reproduced, removed, marketed, retrieved or used without the written
consent of an authorized officer of Company.
F. Consultant agrees to hold in strict confidence any and all
Confidential Information and knowledge obtained by him/her during the
term of this Agreement relative to Company's business. For purposes of
this Agreement, the term "Confidential Information" shall mean not
only confidential information of third parties in the possession of
Company, but also all proprietary, technical and financial data,
information, processes and trade secrets which have been developed or
acquired exclusively by the Company or its affiliates, are unique to
the business of the Company, are not generally known to competitors of
the Company, are treated as
2
<PAGE>
confidential by the Company, and were not known to Consultant prior to
Consultant's performance of the services hereunder. Except as may be
authorized by the Company in writing, Consultant and its employees
shall not copy, use and/or disclose any such Confidential Information
to any person. Consultant will include a notice to this effect in a
written agreement with each Consultant employee that performs services
for Company.
G. This Agreement contains the entire understanding between the
parties hereto and supersedes all other oral and written agreements or
understandings between them. No modification or addition hereto or
waiver or cancellation of any provision hereof shall be valid except
by a writing signed by the parties hereto.
H. This Agreement is deemed to be made under and shall be governed
by and construed according to the laws of the State of Washington.
I. The invalidity, illegality or unenforceability of any provision
of this Agreement shall not affect the validity, legality or
enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Consulting Agreement.
Consultant Northern Life Insurance Company
_____________________________ By:_________________________________
Date:________________________ Its:________________________________
Date:_______________________________
By:_________________________________
Its:________________________________
Date:_______________________________
3
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================================
EXHIBIT 13
Five-Year Consolidated Financial Highlights
ReliaStar Financial Corp. and Subsidiaries
(In millions, except per share data) 1998 1997 1996 1995 1994
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Revenues and Earnings
Premiums $ 1,014.1 $ 887.9 $ 836.9 $ 851.5 $ 726.9
Net Investment Income 1,116.9 1,006.3 929.6 884.3 613.4
Realized Investment Gains (Losses) 17.6 11.7 11.2 4.9 (27.4)
Policy and Contract Charges 427.6 332.9 245.9 218.5 136.2
Other Income 272.0 238.8 143.4 114.4 102.4
- ------------------------------------------------------------------------------------------------------------------------------
Total Revenues 2,848.2 2,477.6 2,167.0 2,073.6 1,551.5
Benefits and Expenses 2,447.1 2,122.7 1,866.1 1,816.7 1,391.5
Income Tax Expense 143.0 125.7 105.0 89.7 56.6
Dividends on Preferred Securities of Subsidiaries,
Net of Tax 13.2 10.4 5.0 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 244.9 218.8 190.9 167.2 103.4
Income (Loss) from Discontinued Operations,
Net of Tax (7.2) 3.2 2.1 (3.5) 1.7
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 237.7 $ 222.0 $ 193.0 $ 163.7 $ 105.1
- ------------------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $ 237.7 $ 222.0 $ 187.8 $ 155.4 $ 96.8
- ------------------------------------------------------------------------------------------------------------------------------
Per Common Share
Income from Continuing Operations (Diluted) $ 2.64 $ 2.51 $ 2.35 $ 2.04 $ 1.47
Net Income (Diluted) 2.56 2.55 2.37 1.99 1.50
Dividends Paid .710 .605 .545 .488 .438
Financial Position
Assets $ 22,608.7 $ 21,000.8 $ 16,707.0 $ 15,519.2 $ 10,366.8
Notes and Mortgages Payable 509.4 593.5 407.5 422.3 194.6
Trust-Originated Preferred Securities 242.3 241.9 120.9 -- --
Other Liabilities 19,736.8 18,154.4 14,760.9 13,676.8 9,373.7
Common Shareholders' Equity 2,120.2 2,011.0 1,417.7 1,351.4 730.6
Preferred Shareholders' Equity -- -- -- 68.7 67.9
Other Data
Operating Income/1/ $ 235.2 $ 212.8 $ 185.5 $ 164.7 $ 120.1
Operating Income Before Special Charges/1, 2/ 269.5 226.8 185.5 164.7 120.1
Operating Income Per Diluted Common Share/1/ 2.54 2.44 2.28 2.00 1.73
Operating Income Before Special Charges
Per Diluted Common Share/1, 2/ 2.91 2.60 2.28 2.00 1.73
Statutory Premiums and Deposits and Fee Revenues/3/ $ 3,543.2 $ 3,211.1 $ 2,726.7 $ 2,560.2 $ 1,896.7
Return on Equity--Operating Income/1, 4/ 13.3% 14.7% 16.4% 16.0% 15.4%
Return on Equity--Operating Income
Before Special Charges/1, 2, 4/ 15.2% 15.7% 16.4% 16.0% 15.4%
Year-End Market Price Per Common Share $ 46 1/8 $ 41 3/16 $ 28 7/8 $ 22 3/16 $ 14 1/2
Book Value Per Common Share/4/ 20.96 19.74 15.95 14.27 12.57
Assets Under Management/5/ 22,711.9 20,336.9 18,141.0 15,826.5 10,602.4
Common Shareholders' Equity, Excluding
Accumulated Other Comprehensive Income 1,863.0 1,784.8 1,276.9 1,104.6 810.0
Insurance Product Sales/6/
Individual Life $ 192.7 $ 140.6 $ 119.0 $ 104.2 $ 74.2
Individual Annuity 840.7 762.3 643.3 669.6 427.8
Group Life 66.0 64.7 43.5 23.0 30.5
Group Health 16.9 16.7 32.1 49.1 68.3
Life and Health Reinsurance 205.6 98.1 70.2 46.5 57.5
Retirement Plans 453.1 405.8 315.7 255.2 201.3
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 1,775.0 $ 1,488.2 $ 1,223.8 $ 1,147.6 $ 859.6
- ------------------------------------------------------------------------------------------------------------------------------
Life Insurance in Force
Individual $123,947.9 $118,485.2 $ 67,653.1 $ 66,399.5 $ 27,808.3
Group 166,979.7 141,311.4 117,342.1 106,873.7 96,503.8
Reinsurance 5,598.5 7,228.3 5,220.0 4,715.4 5,319.3
- ------------------------------------------------------------------------------------------------------------------------------
Total $296,526.1 $267,024.9 $190,215.2 $177,988.6 $129,631.4
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: ReliaStar Mortgage Corporation was sold during 1998, and accordingly,
previously reported financial data has been restated to present our former
mortgage banking company's results as discontinued operations.
Security-Connecticut Corporation and USLICO Corporation were acquired effective
July 1, 1997, and January 1, 1995, respectively. The financial data includes the
contributions of the acquired entities subsequent to their respective
acquisition dates.
/1/Operating Income excludes realized investment gains and losses and their
impact on deferred policy acquisition costs and present value of future profits.
/2/Excludes special charges of $34.3 million (after-tax) and $14.0 million
(after-tax) recorded in the fourth quarter of 1998 and fourth quarter of 1997,
respectively.
/3/Premiums and deposits of life insurance subsidiaries are presented on a
statutory insurance accounting basis. Fee revenues are presented in accordance
with generally accepted accounting principles.
/4/Amounts exclude the accumulated other comprehensive income component of
shareholders' equity.
/5/Amounts exclude unrealized investment gains and losses on invested assets
recorded in accordance with SFAS No. 115.
/6/Represents annualized amounts of new premiums and deposits.
15
<PAGE>
================================================================================
Management's Discussion and Analysis
of Financial Condition and Results of Operations
ReliaStar Financial Corp. and Subsidiaries
RESULTS OF OPERATIONS
Results of operations by operating segment are summarized below:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
(In millions) 1998 1997 1996
===============================================================================
<S> <C> <C> <C>
Operating Income (Loss) Before Special Charges/1/
Reportable Segments:
Personal Financial Services $ 97.8 $ 71.2 $ 50.5
Worksite Financial Services 60.5 51.4 44.1
Tax-Sheltered and Fixed Annuities 76.5 74.3 72.9
Reinsurance 42.4 37.2 32.9
Other Business Units 11.4 9.4 (.1)
Corporate (19.1) (16.7) (14.8)
- -------------------------------------------------------------------------------
269.5 226.8 185.5
Special Charges (34.3) (14.0) --
- -------------------------------------------------------------------------------
Operating Income 235.2 212.8 185.5
Net Realized Investment Gains, Net of Tax 9.7 6.0 5.4
- -------------------------------------------------------------------------------
Income From Continuing Operations 244.9 218.8 190.9
Income (Loss) From Discontinued Operations, Net of Tax (7.2) 3.2 2.1
- -------------------------------------------------------------------------------
Net Income $237.7 $222.0 $193.0
- -------------------------------------------------------------------------------
</TABLE>
/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). Special charges are
presented separately to be consistent with the presentation of operating
segment results for internal management purposes.
Effective January 1, 1998, ReliaStar Financial Corp. (the Company or ReliaStar)
adopted Statement of Financial Accounting Standard (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information." As a result, the
Company now reports its segment results consistent with the way it manages its
businesses. The Company has four reportable operating segments: Personal
Financial Services, Worksite Financial Services, Tax-Sheltered and Fixed
Annuities, and Reinsurance. The Personal Financial Services segment sells life
insurance and annuity products to individuals. The Worksite Financial Services
segment sells group and individual life insurance products, retirement plans and
financial services to employers and their employees at the worksite. The Tax-
Sheltered and Fixed Annuities segment sells 403(b) annuities and other
retirement products, primarily to the K-12 schoolteacher market. The Reinsurance
segment sells group life, health and special risk reinsurance and special
insurance products in the United States and internationally. 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. Prior period
segment information has been restated to conform to the current presentation.
The Company 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).
Effective December 31, 1998, ReliaStar United Services Life Insurance Company
was merged with and into ReliaStar Life. These subsidiaries are sometimes
collectively referred to as the Insurers.
During the fourth quarter of 1998, the Company recorded $34.3 million (after-
tax) of special charges related to updating certain assumptions affecting
deferred acquisition costs for interest sensitive products (primarily lapse
assumptions for fixed annuities), an accrual for life insurance litigation
settlement costs and certain costs associated with restructuring activities. The
restructuring charges relate to the Company's decision to consolidate certain
activities, primarily customer service functions. Accrued costs associated with
these restructuring activities are primarily employee related termination costs
and non-cancellable lease contract costs associated with vacated facilities.
During the fourth quarter of 1997, the Company recorded $14.0 million (after-
tax) of special charges related to updating certain assumptions affecting
deferred acquisition costs for interest sensitive products and for costs related
to restructuring and other activities. The costs related to restructuring and
other activities were primarily related to the Company's decision to consolidate
certain financial, underwriting and claims activities. Costs associated with
these restructuring activities were primarily employee related termination costs
and non-cancellable lease contract costs associated with vacated facilities.
These restructuring actions were substantially complete as of December 31, 1998,
and the remaining accrued costs are considered adequate for remaining
obligations.
Special charges are presented separately in the "Results of Operations" table
to be consistent with the presentation of operating segment results for internal
management purposes.
On July 1, 1997, ReliaStar completed the acquisition of Security-Connecticut
Corporation (SCC). The acquisition was accounted for using the purchase method
of accounting and, accordingly, the results of operations prior to July 1, 1997
do not include the results of SCC or its former subsidiaries.
16
<PAGE>
===============================================================================
Management's Discussion and Analysis
of Financial Condition and Results of Operations
ReliaStar Financial Corp. and Subsidiaries
The discussion of segment operating results that follows refers to the above
after-tax segment results and, in each instance, amounts are after-tax and
before special charges unless otherwise indicated.
1998 COMPARED WITH 1997
Personal Financial Services
Operating income before special charges of the Personal Financial Services (PFS)
segment for 1998 increased $26.6 million, or 37%, compared with 1997. Of the
total increase, $18.4 million was due to including twelve months of 1998
earnings from the SCC life insurance subsidiaries compared with including six
months of 1997 earnings from the SCC life insurance subsidiaries. The remaining
$8.2 million increase in operating income before special charges was primarily
due to an increase in interest spreads, growth in assets under management and
lower expense levels, partially offset by less favorable mortality experience.
The interest spread for the PFS segment, excluding the former SCC life
insurance subsidiaries, was 257 basis points in 1998 compared to 231 basis
points in 1997. This increase in spreads reflects an 18 basis point increase in
the portfolio yield and an 8 basis point reduction in the average crediting
rate. For approximately one-half of the 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 $7.1 billion as of December 31,
1998, from $6.7 billion as of December 31, 1997. Separate account assets under
management increased to $2.1 billion as of December 31, 1998, from $1.6 billion
as of December 31, 1997.
Total sales (annualized new premiums and deposits) for 1998 were $457.3
million compared to $362.0 million in 1997. The increase in sales reflects a 41%
increase in individual life insurance sales and a 37% increase in fixed annuity
sales. Variable annuity sales increased 15% in 1998 compared to 1997. Included
in the sales results are $34.1 million of sales from the SCC life insurance
subsidiaries in the first six months of 1998 for which there are no comparable
sales in the first six months of 1997, as SCC was acquired on July 1, 1997.
During the fourth quarter of 1998, special charges totaling $25.2 million
were recorded by the PFS segment related to updating certain assumptions
(primarily lapse assumptions for fixed annuities) affecting deferred acquisition
costs for interest sensitive products ($3.2 million), an accrual for life
insurance litigation settlement costs ($10.0 million) and certain costs
associated with restructuring activities ($12.0 million).
Worksite Financial Services
Operating income before special charges of the Worksite Financial Services (WFS)
segment for 1998 increased $9.1 million, or 18%, compared with 1997. The
increase in operating income before special charges was primarily due to
increased investment income and lower expenses in the employee benefits unit;
higher fee income in the retirement plans unit, reflecting growth in assets
under management; favorable mortality experience and lower expenses in the
pension lines of business; partially offset by increased start-up costs in the
Worksite Advisory Services unit.
Total sales for 1998 were $551.7 million compared with $502.7 million in
1997. The increase in sales was primarily due to higher retirement plan sales.
During the fourth quarter of 1998, special charges totaling $1.3 million were
recorded by the WFS segment related to certain costs associated with
restructuring activities.
During September 1998, the Company entered into a strategic alliance with
Trustmark Insurance Co. (Trustmark) related to its insured group medical and
Administrative Services Only (ASO) product lines. Under the alliance, ReliaStar
transferred to Trustmark the claims processing and administration for its
insured group medical, ASO and split risk product lines. The group medical
contracts will continue to be underwritten by ReliaStar Life until a future
renewal date, at which time Trustmark will directly provide products and
services to these customers, in addition to handling claims processing and
administration. As a result of the alliance, approximately 380 ReliaStar
employees were terminated and most were hired by Trustmark. The termination and
other costs incurred were offset by payments to ReliaStar as part of this
alliance. The alliance did not materially impact 1998 operating earnings of this
segment and it is not expected to materially impact future operating results.
Tax-Sheltered and Fixed Annuities
Operating income before special charges of the Tax-Sheltered and Fixed Annuities
(TSA/FA) segment for 1998 increased $2.2 million, or 3%, compared with 1997. The
increase in operating income before special charges was primarily due to
increased interest spreads and growth in assets under management.
The interest spread for the TSA/FA segment was 256 basis points in 1998
compared to 252 basis points in 1997. This increase in spreads reflects a 14
basis point reduction in the average crediting rate and a 10 basis point
decrease in the portfolio yield. 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
on most new deposits received to the end of the calendar year.
Total assets under management increased to $7.4 billion as of December 31,
1998 from $6.8 billion as of December 31, 1997. Separate account assets under
management increased to $378 million at December 31, 1998 from $142 million at
December 31, 1997.
Total sales for 1998 were $560.4 million compared with $525.4 million in
1997. The increase in sales reflects a
17
<PAGE>
================================================================================
Management's Discussion and Analysis
of Financial Condition and Results of Operations
ReliaStar Financial Corp. and Subsidiaries
74% increase in sales of variable annuities partially offset by an 11% decrease
in fixed annuity sales.
During the fourth quarter of 1998, special charges totaling $7.8 million were
recorded by the TSA/FA segment related to updating certain assumptions
(primarily lapse assumptions for fixed annuities) affecting deferred acquisition
costs and present value of future profits (PVFP) for interest sensitive products
($5.0 million) and certain costs associated with restructuring activities ($2.8
million).
Reinsurance
Operating income before special charges of the Reinsurance segment for 1998
increased $5.2 million, or 14%, compared with 1997. The increase in operating
income before special charges was primarily due to a 44% increase in net earned
premiums, partially offset by higher commission expenses and a higher overall
loss ratio. 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 1998 were $205.6 million compared with $98.1 million in 1997,
an increase of 110%, primarily due to strong sales of group life and managed
care reinsurance.
Other Business Units
These business units are not large enough to be classified as reportable
segments. Other Business Units include the Company's mutual fund operation,
broker/dealer operations, banking operation and personal finance education
company. Operating income before special charges of the Other Business Units for
1998 increased $2.0 million compared with 1997. The increase in operating income
before special charges was primarily due to higher revenues from increased
broker/dealer volume.
Corporate
Corporate includes financing costs, goodwill amortization and other unallocated
costs. Operating losses before special charges of Corporate for 1998 increased
$2.4 million compared with 1997. The increase in operating losses before special
charges was primarily due to increased financing costs and goodwill amortization
related to purchase acquisitions and the financing costs associated with common
stock buybacks completed in 1998.
1997 COMPARED WITH 1996
Personal Financial Services
Operating income before special charges of the Personal Financial Services
segment for 1997 increased $20.7 million, or 41%, compared with 1996. The
increase in operating income before special charges was primarily due to the
$19.3 million of additional 1997 operating income from the acquired SCC life
insurance subsidiaries. The remaining $1.4 million increase in operating income
before special charges was primarily due to more favorable mortality experience
and increased interest spreads, partially offset by increased noncapitalized
expenses, including expenses related to new product development and
introduction, and information technology.
The interest spread for the Personal Financial Services segment, excluding
the SCC life insurance subsidiaries, was 231 basis points in 1997 compared to
230 basis points in 1996. This increase in spreads reflects a 14 basis point
decrease in the average crediting rate and a 13 basis point reduction in the
portfolio yield.
Total assets under management increased to $6.7 billion as of December 31,
1997, from $4.5 billion as of December 31, 1996. This increase includes $1.8
billion of assets under management related to the acquisition of SCC. Separate
account assets under management increased to $1.6 billion as of December 31,
1997, from $1.1 billion as of December 31, 1996.
Total sales, excluding the former SCC life insurance subsidiaries, for 1997
were $330.9 million compared to $324.0 million in 1996. The increase in sales
reflects a 10% increase in variable annuity sales. Fixed annuity sales declined
by 29% in 1997 compared with 1996. Sales of individual life insurance were
essentially unchanged in 1997 compared with 1996. Sales by the former SCC life
insurance subsidiaries in 1997 subsequent to the completion of the acquisition
totaled $31.1 million.
During the fourth quarter of 1997, special charges totaling $12.3 million
were recorded by the PFS segment related to updating certain assumptions
(primarily lapse and mortality) affecting deferred acquisition costs for
interest sensitive products ($6.8 million) and restructuring and other non-
recurring costs ($5.5 million).
Worksite Financial Services
Operating income before special charges of the Worksite Financial Services
segment for 1997 increased $7.3 million, or 17%, compared with 1996. The
increase in operating income before special charges was primarily due to
improved mortality and morbidity experience in the employee benefits unit and
higher fee income, reflecting growth in assets under management in the
retirement plans unit. Partially offsetting these variances were lower earnings
from the Company's closed block of pension contract liabilities.
Total sales for 1997 were $502.7 million compared with $403.5 million in
1996. The increase in sales was primarily due to a 29% increase in retirement
plan sales, a 49% increase in group life sales and a 27% increase in individual
life insurance sales.
During the fourth quarter of 1997, special charges totaling $8.1 million were
recorded by the WFS segment related to updating certain assumptions (primarily
mortality) affecting deferred acquisition costs and PVFP for interest sensitive
products ($4.9 million) and restructuring and other non-recurring costs
($3.2 million).
Tax-Sheltered and Fixed Annuities
Operating income before special charges of the Tax-Sheltered and Fixed Annuities
segment for 1997 increased $1.4 million, or 2%, compared with 1996. The increase
in operating income before special charges was primarily due to growth in assets
under management, partially offset by lower interest spreads.
18
<PAGE>
================================================================================
Management's Discussion and Analysis
of Financial Condition and Results of Operations
ReliaStar Financial Corp. and Subsidiaries
The interest spread for the TSA/FA segment was 252 basis points in 1997
compared to 267 basis points in 1996. This decrease in spreads reflects an 18
basis point decrease in the portfolio yield, partially offset by a 3 basis point
reduction in the average crediting rate.
Total assets under management increased to $6.8 billion as of December 31,
1997, from $6.3 billion as of December 31, 1996. Separate account assets under
management increased to $142 million at December 31, 1997, from $38 million at
December 31, 1996.
Total sales for 1997 were $525.4 million compared with $426.1 million in
1996. The increase in sales reflects a 171% increase in sales of variable
annuities and an 8% increase in fixed annuity sales.
During the fourth quarter of 1997, the TSA/FA segment recorded a charge to
earnings for restructuring and other non-recurring costs ($1.4 million) and a
benefit to earnings related to updating certain assumptions (primarily
mortality) affecting deferred acquisition costs for interest sensitive products
($10.4 million). These items were included in the special charges.
Reinsurance
Operating income before special charges of the Reinsurance segment for 1997
increased $4.3 million, or 13%, compared with 1996. The increase in operating
income before special charges was primarily due to a 21% increase in earned
premiums, partially offset by higher experience rating refunds and higher
commission expenses.
Total sales for 1997 were $98.1 million compared with $70.2 million in 1996,
an increase of 40%, primarily due to increased sales of group medical and
special risks products.
Other Business Units
Operating income before special charges of the Other Business Units for 1997
increased $9.5 million compared with 1996. The increase in operating income was
primarily due to increased earnings from the Company's mutual fund operations,
which included a $4.6 million pretax gain on the sale of 12b-1 fees attributable
to a portion of their Class B shares and increased earnings from PrimeVest
Financial Services, Inc., the Company's broker/dealer specializing in bank
marketing of insurance and other investment products, that was acquired in the
fourth quarter of 1996. Partially offsetting these favorable items were lower
operating results from Successful Money Management Seminars, Inc, the Company's
personal finance education provider. During the fourth quarter of 1997, special
charges of $1.3 million were recorded related to restructuring and other non-
recurring costs.
Corporate
Operating losses before special charges for 1997 increased $1.9 million compared
with 1996. The increase in operating losses before special charges was primarily
due to increased financing costs and goodwill amortization related to purchase
acquisitions, partially offset by a $2.9 million gain on the sale of
substantially all of the assets of Washington Square Advisers, Inc., the
Company's fixed income fund investment manager for unaffiliated institutions,
and increased recovery of corporate costs from other business units. During the
fourth quarter of 1997, special charges of $1.3 million were recorded related to
restructuring and other non-recurring costs.
REALIZED INVESTMENT GAINS AND LOSSES
The sources of pretax net realized investment gains (losses) were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
(In millions) 1998 1997 1996
===============================================================================
<S> <C> <C> <C>
Net Gains (Losses) on
Sales of Investments
Fixed Maturity Securities
Gross Gains $ 26.3 $10.3 $ 8.7
Gross Losses (13.2) (6.4) (5.5)
Equity Securities (.3) 5.1 1.3
Mortgage Loans (.2) -- .1
Foreclosed Real Estate 2.8 .1 1.8
Real Estate 2.1 .6 2.7
Other 15.3 9.8 13.2
Provisions for Losses on Investments
Fixed Maturity Securities (8.4) (3.0) (2.6)
Equity Securities -- (.1) --
Mortgage Loans -- (2.4) (3.5)
Foreclosed Real Estate (2.2) (1.6) (3.5)
Real Estate (.2) (.7) (1.1)
Other (4.4) -- (.4)
- -------------------------------------------------------------------------------
Pretax Realized Investment Gains 17.6 11.7 11.2
DAC/PVFP Amortization/1/ (2.7) (2.5) (3.0)
- -------------------------------------------------------------------------------
Pretax Net Realized Investment Gains $ 14.9 $ 9.2 $ 8.2
- -------------------------------------------------------------------------------
</TABLE>
/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.
INCOME TAXES
The Company's effective tax rate was 35.7% for 1998, 35.4% for 1997 and 34.9%
for 1996 compared to the federal tax rate of 35.0%. The Company's effective tax
rate for 1998 and 1997 is higher than the federal tax rate primarily due to non-
deductible goodwill amortization.
DISCONTINUED OPERATIONS
In December 1998, the Company completed the sale of its mortgage banking
subsidiary. The results of the mortgage banking subsidiary are presented as
discontinued operations in the Consolidated Statements of Income and prior
period financial information has been restated to reflect this presentation.
19
<PAGE>
================================================================================
Management's Discussion and Analysis
of Financial Condition and Results of Operations
ReliaStar Financial Corp. and Subsidiaries
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 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.
ReliaStar has loaned $100.0 million to ReliaStar Life under a surplus note
with a stated interest rate of 6.625%. The surplus note was issued in connection
with ReliaStar Life's demutualization and was used to offset the surplus
reduction related to the cash distribution to the mutual policyholders in the
demutualization. The surplus note provides that there may be no payment of
interest or principal without the express approval of the Minnesota Department
of Commerce.
The Company has unsecured revolving credit facilities with banks totaling
$225.0 million for general corporate purposes. As of December 31, 1998, all
$225.0 million remained available for borrowing under these facilities.
The Company also maintains a Dividend Reinvestment and Optional Cash Payment
Plan. The plan provides shareholders with an opportunity to reinvest the
dividends on their shares of the common stock of the Company and to make
additional purchases of shares at a discount from the market based price. The
amount of the discount may be changed or eliminated from time to time at the
option of the Company. Pursuant to this program, the Company has issued 207,527,
258,637 and 245,650 shares for an aggregate purchase price of $8.9 million,
$8.3 million and $5.5 million during the years ended December 31, 1998, 1997 and
1996, respectively.
During February 1999, the Company announced that it would begin 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 the dividend reinvestment program. The Company
estimates it will repurchase shares systematically in amounts initially ranging
from 100,000 to 300,000 shares per month.
On May 9, 1997, the Company filed a shelf registration with the Securities
and Exchange Commission for the issuance of up to $400.0 million of debt
securities and other securities. As of December 31, 1998, $75.0 million of debt
securities and other securities remain available for issuance under this shelf
registration.
On November 18, 1998, the Company completed the issuance of $200.0 million of
6.5% Notes (6.5% Notes) due November 15, 2008. The Company used the proceeds
from this offering to repurchase 2,889,400 of its common shares in a $125.0
million common stock buyback program that was completed during the fourth
quarter of 1998, to repay short-term bank debt and for general corporate
purposes.
During the first quarter of 1998, the Company repurchased 560,000 of its
common shares at an average price of $46.58 per share in a common stock buyback
program completed in conjunction with the acquisitions of ReliaStar Managing
Underwriters, Inc. and ReliaStar Bancshares, Inc.
During December 1997, the Company repurchased 466,000 of its common shares at
an average price of $39.21 per share in a common stock buyback program completed
in conjunction with the acquisition of the common stock held by the minority
interest shareholders of the Company's mutual fund company.
On June 3, 1997, the Company completed the issuance of $125.0 million of 8.1%
Trust-Originated Preferred Securities due June 3, 2027. The Company used the
proceeds from this offering to repurchase 3,252,200 of its common shares in a
$125.0 million common stock buyback program that was completed during the third
quarter of 1997 in conjunction with the acquisition of SCC.
Also in conjunction with the acquisition of SCC, the Company assumed
$75.0 million of 7.125% notes due March 1, 2003.
On March 29, 1996, the Company completed the issuance of $125.0 million of
8.2% Trust-Originated Preferred Securities due March 15, 2016. The Company used
the proceeds from this offering to redeem, at par, all of the outstanding shares
of its 10% Senior Cumulative Preferred Stock on July 1, 1996, repay short-term
bank debt and for general corporate purposes.
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.
20
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
ReliaStar Financial Corp. and Subsidiaries
Liquidity is also affected by unscheduled benefit payments, including death
benefits, benefits under insured accident and health policies and contract
withdrawals and surrenders. The amount of withdrawals and surrenders is affected
by a variety of factors such as credited interest rates for competing products,
general economic conditions, the Insurers' claims paying ratings and events in
the industry which affect policyholders' confidence.
The Insurers' investment portfolios represent a significant source of
liquid assets. As of December 31, 1998, the Insurers' investment portfolios
included $8.0 billion (35.3% of consolidated assets) of short-term investments
and investment grade marketable bonds. The December 31, 1998 investment
portfolio also included $2.9 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 contract holders to withdraw or surrender their contracts
under defined circumstances. These policies and annuities generally contain
provisions which apply penalties or otherwise restrict the ability of contract
holders to make such withdrawals or surrenders. The Insurers monitor the
surrender and policy loan activity of their insurance products and manage the
composition of their investment portfolios, including liquidity, in light of
such activity. While the 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 points are
classified within certain regulatory action levels, each of which requires
specified corrective action. The risk-based capital ratio of each of the
Insurers significantly exceeds the ratio at which regulatory corrective action
would be required.
CONSOLIDATED CASH FLOWS
The Company's cash balance at December 31, 1998 was $21.5 million. During 1998,
net cash provided by operating and financing activities was $378.0 million and
$6.2 million, respectively, which was offset by net cash used by investing
activities of $409.1 million.
The $378.0 million of net cash provided by operating activities was
primarily due to the impact, on net operating assets, of the sale of the
Company's former mortgage banking subsidiary; and the result of positive cash
flow from premiums and investment income in excess of cash outflows for
insurance benefits and sales and operating expenses. Net cash provided by
financing activities of $6.2 million was primarily the result of net deposits to
insurance contracts and the issuance of the 6.5% Notes, partially offset by the
repayment of commercial paper previously issued by our former mortgage banking
subsidiary and the repurchase of common stock.
INVESTMENTS
The current investment strategy for the Company is designed to maintain the
overall quality of the portfolios, to maintain an appropriate liquidity
position, to assure appropriate asset/liability structures, to achieve asset
type diversification and to avoid issuer concentration.
The Company intends to direct most of its new investment cash flow for 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
21
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
ReliaStar Financial Corp. and Subsidiaries
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.
The following table provides information regarding the composition of the
Company's invested assets:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------
(IN MILLIONS) 1998 1997
===================================================================
<S> <C> <C> <C> <C>
Investment Grade Bonds
Marketables $ 7,823.4 52.5% $ 7,824.4 54.2%
Private Placements 2,881.6 19.3 2,619.4 18.2
- -------------------------------------------------------------------
10,705.0 71.8 10,443.8 72.4
- -------------------------------------------------------------------
Below Investment Grade Bonds
Marketables 391.3 2.6 296.7 2.0
Private Placements 510.4 3.4 400.6 2.8
- -------------------------------------------------------------------
901.7 6.0 697.3 4.8
- -------------------------------------------------------------------
Equity Securities 60.3 .4 27.0 .2
Commercial Mortgages 1,726.8 11.6 1,594.9 11.1
Residential and
Other Mortgages 428.0 2.9 675.8 4.7
Real Estate 53.3 .3 74.5 .5
Short-Term Investments 168.7 1.2 157.2 1.1
Other 865.3 5.8 750.0 5.2
- -------------------------------------------------------------------
TOTAL INVESTED
ASSETS $14,909.1 100.0% $14,420.5 100.0%
- -------------------------------------------------------------------
</TABLE>
FIXED MATURITY SECURITIES
The amounts invested in fixed maturity securities as of December 31, 1998 and
1997 were $11.6 billion and $11.1 billion, respectively. The average marketable
and private placement bond investments in a single corporate issuer (excluding
structured finance securities such as CMOs, mortgage-backed pass throughs and
asset-backed securities) as of December 31, 1998 were $9.3 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 December 31, 1998, the weighted average book yields of the Company's
investment grade portfolio and below investment grade portfolio were 7.5% and
8.4%, respectively. The weighted average book yield is not necessarily
reflective of the net investment income ultimately realized by the Company.
Investments with greater credit risk have a greater risk of default than
investment grade securities, and accordingly, some of the incremental book yield
of the below investment grade portfolio may not be realized.
The following tables identify the amortized cost and the fair value of the
Company's fixed maturity securities with respect to each NAIC credit rating
category.
<TABLE>
<CAPTION>
(IN MILLIONS) DECEMBER 31, 1998
------------------------------------------------------------------------------
MARKETABLES PRIVATE PLACEMENTS
-------------------------------------- --------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
NAIC AMORTIZED ---------------- FAIR AMORTIZED ---------------- FAIR
RATING COST GAINS (LOSSES) VALUE COST GAINS (LOSSES) VALUE
============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
============================================================================================================
(IN MILLIONS) DECEMBER 31, 1997
------------------------------------------------------------------------------
MARKETABLES PRIVATE PLACEMENTS
-------------------------------------- --------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
NAIC AMORTIZED ---------------- FAIR AMORTIZED ---------------- FAIR
RATING COST GAINS (LOSSES) VALUE COST GAINS (LOSSES) VALUE
============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $5,306.0 $260.8 $ (6.6) $5,560.2 $ 877.0 $ 41.6 $(2.0) $ 916.6
2 2,154.5 114.1 (4.4) 2,264.2 1,634.2 71.7 (3.1) 1,702.8
3 264.2 11.5 (.8) 274.9 244.7 5.2 (.6) 249.3
4 19.0 .5 (.2) 19.3 137.5 3.9 (1.2) 140.2
5 1.6 .1 (.1) 1.6 10.2 .1 (.1) 10.2
6 .9 -- -- .9 .9 -- -- .9
Redeemable Preferred Stock 3.7 .4 -- 4.1 1.5 -- -- 1.5
- ------------------------------------------------------------------------------------------------------------
TOTAL $7,749.9 $387.4 $(12.1) $8,125.2 $2,906.0 $122.5 $(7.0) $3,021.5
============================================================================================================
</TABLE>
22
<PAGE>
===============================================================================
Management's Discussion and Analysis
of Financial Condition and Results of Operations
ReliaStar Financial Corp. and Subsidiaries
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.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------- --------------------
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
================================================================================
<S> <C> <C> <C> <C>
Maturing in:
One Year or Less $ 459.5 $ 462.9 $ 199.9 $ 200.9
One to Five Years 3,555.5 3,710.1 3,651.3 3,789.2
Five to Ten Years 3,022.9 3,191.1 3,006.4 3,180.7
Ten Years or Later 1,296.1 1,375.8 1,244.0 1,324.4
Mortgage-Backed/Structured Finance 2,793.0 2,885.2 2,554.3 2,651.5
- --------------------------------------------------------------------------------
Total $11,127.0 $11,625.1 $10,655.9 $11,146.7
- --------------------------------------------------------------------------------
</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 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 corporate spreads
over the risk-free rate and changes in the credit quality of specific
investments.
The Company's marketable and private placement bond portfolios were
diversified by industry (based upon amortized cost) as of the indicated dates as
set forth in the following table:
<TABLE>
<CAPTION>
Private
Marketables Placements
----------- -------------
December 31 1998 1997 1998 1997
===================================================================
<S> <C> <C> <C> <C>
Basic Materials 6.5% 6.7% 7.0% 8.9%
Consumer Non-Cyclical 5.8 5.7 14.6 18.0
Consumer Products/Services 8.4 7.5 18.7 16.8
Energy 6.0 5.7 7.3 6.6
Financial Services 20.2 20.8 15.8 17.0
Government 2.8 3.2 .2 .6
Industrial 5.0 4.3 11.1 9.5
Mortgage-Backed/
Structured Finance 30.8 31.0 11.4 7.6
Real Estate 1.4 .7 2.2 1.5
Retailing 1.9 2.1 4.7 5.6
Technology 2.0 1.8 2.1 2.5
Utilities 9.2 10.5 4.9 5.4
- -------------------------------------------------------------------
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 December 31,
1998. The largest investment in below investment grade bonds of any one industry
grouping was approximately 1.6% of invested assets at December 31, 1998. The
portfolio of below investment grade bonds is regularly analyzed and managed in
an effort to avoid concentration risks.
MORTGAGE-BACKED/STRUCTURED FINANCE SECURITIES
The Company's investment policy permits the acquisition of mortgage-backed
securities and collateralized mortgage obligations (collectively referred to as
MBS securities) provided that the Company's aggregate investment in MBS
securities shall not exceed 50% of its statutory assets and the Company shall
not acquire any interests in residual, interest only, principal only or inverse
floater tranches of MBS securities. The Company's investment strategy has been
to invest primarily in actively traded MBS securities which are structured to
reduce prepayment risk as compared to direct investments in the underlying
mortgage collateral.
23
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
ReliaStar Financial Corp. and Subsidiaries
The amortized cost and estimated fair value of investments in MBS
securities, categorized by interest rates on the underlying collateral, were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
AMORTIZED FAIR
(IN MILLIONS) COST VALUE
===================================================
<S> <C> <C>
Adjustable Rate Pass Through
Below 6% $ 28.0 $ 28.0
6% - 7% 41.3 41.2
7% - 8% 137.3 136.3
Fixed Rate Pass Through
Below 9% 77.8 80.2
Above 9% 7.2 7.5
Planned Amortization Class
Below 7% 293.1 310.9
7% - 8% 387.7 406.0
8% - 9% 26.5 27.2
Above 9% 1.7 1.8
Other
Below 7% 279.9 294.7
7% - 8% 98.0 106.1
8% - 9% 11.8 12.3
Above 9% 3.4 3.4
- ---------------------------------------------------
TOTAL $1,393.7 $1,455.6
- ---------------------------------------------------
</TABLE>
The Company invests in public and private asset-backed securities in addition to
the MBS securities described above. As of December 31, 1998, the Insurers held
asset-backed securities with an amortized cost of $1,399.3 million and a fair
value of $1,429.6 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
December 31, 1998, approximately 98% of the Company's asset-backed securities
had investment grade ratings. Approximately 34% of these securities are
collateralized by manufactured housing loans, 22% by commercial mortgage loans,
and 20% by high yield bank loans and corporate bonds. 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 December 31,
1998 being approximately $2.9 million.
The commercial mortgage loan portfolio diversification by property type and
geographic region of the United States was as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
==================================
<S> <C> <C>
PROPERTY TYPE
Apartment 24.5% 20.9%
Industrial 20.6 20.8
Retail 19.6 18.4
Special Purpose 19.1 18.2
Office 14.1 20.4
Hotel/Motel 2.1 1.3
- ----------------------------------
TOTAL 100.0% 100.0%
- ----------------------------------
DECEMBER 31 1998 1997
==================================
GEOGRAPHIC REGION
Midwest 37.4% 32.7%
Pacific 24.2 25.3
Southeast 14.7 18.5
Northeast 10.1 9.9
Mountain 8.3 7.5
Southwest 5.3 6.1
- ----------------------------------
TOTAL 100.0% 100.0%
- ----------------------------------
</TABLE>
The weighted average yield and the weighted average maturity of the loans in the
commercial mortgage loan portfolio as of December 31, 1998 were 8.0% and 8.3
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 December 31, 1998 and 1997, the Insurers held
$427.1 million and $674.6 million, respectively, of non-securitized residential
mortgage loans.
UNREALIZED INVESTMENT GAINS AND LOSSES
The Company's debt and equity securities are classified as available-for-sale
and carried at fair value on the Consolidated Balance Sheets with unrealized
investment gains and losses excluded from income and reported as a 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:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
(IN MILLIONS) 1998 1997
================================================
<S> <C> <C>
Unrealized Investment Gains $ 526.2 $ 489.1
DAC/PVFP Adjustment (128.6) (138.8)
Deferred Income Taxes (140.4) (124.1)
- ------------------------------------------------
TOTAL $ 257.2 $ 226.2
- ------------------------------------------------
</TABLE>
24
<PAGE>
================================================================================
Management's Discussion and Analysis
of Financial Condition and Results of Operations
ReliaStar Financial Corp. and Subsidiaries
MARKET-SENSITIVE INSTRUMENTS
AND RISK MANAGEMENT
The Company's market risk-sensitive instruments include those financial
instruments as defined by 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 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.
As an illustration of the impact interest rate changes have on the fair value
of the Company's financial instruments, a hypothetical 10% increase in the level
of risk-free interest rates from their December 31, 1998 levels would result in
an estimated net decline in fair value of the Company's financial instruments of
approximately $250 million.
In determining the estimated impact of this hypothetical change in market
interest rates, the Company used duration analysis and discounted cash flow
models. These analyses are significantly impacted by the assumptions and
estimates used and assume an immediate change in market interest rates without
any adjustment of other assumptions and without any other management of
market-sensitive instruments in reaction to such an assumed change in market
interest rates. Because the modeling approach only considers a change in one of
the assumptions affecting fair values, actual changes in the fair value of
market-sensitive instruments due to such a change in market interest rates may
differ significantly from the illustrated results.
The Company manages its interest rate risk by managing its assets within
target duration ranges, based on the Company's liability profile. The Company
uses duration analysis to estimate the amount of sensitivity to market interest
rate changes. The duration of a bond or a portfolio can be thought of as the
life in years of a notional zero-coupon bond whose fair value would change by
the same amount in response to any change in market interest rates. The
portfolio duration includes the duration impact of 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 at
December 31, 1998:
<TABLE>
<CAPTION>
Asset Portfolio Target
(In years) Duration Duration Duration
===============================================================================
<S> <C> <C> <C>
Personal Financial Services 4.0 4.0 3.5 - 5.0
Worksite Financial Services 3.1 3.4 3.0 - 6.0
Tax-Sheltered and Fixed Annuities 4.0 4.1 4.0 - 5.5
Reinsurance 4.4 4.5 3.5 - 8.0
- -------------------------------------------------------------------------------
</TABLE>
The Company uses interest rate swaps as part of this asset/liability management
program. The Company has acquired a significant amount of certain shorter
duration investments, such as floating rate or adjustable rate investments.
Acquisition of these assets shortens the duration of an asset portfolio. The
Company uses interest rate swaps to extend the duration of these portfolios as
an alternative to purchasing longer duration investments.
At December 31, 1998, the Company had 60 interest rate swap contracts in
effect with a notional amount of $897.5 million. At December 31, 1997, the
Company had 71 interest rate swap contracts in effect with a notional amount of
$1.16 billion. During the twelve months ended December 31, 1998, two interest
rate swap contracts were entered into with a notional amount of $50.0 million
and 13 interest rate swap contracts matured with a notional amount of $315.0
million. There were no terminations of interest rate swap contracts prior to
maturity during 1998. The Company had no deferred gains or losses as of December
31, 1998 related to interest rate swap contracts terminated early. The estimated
fair value of the interest rate swap contracts in effect at December 31, 1998,
was an unrealized gain of $27.3 million, which is reported with other invested
assets in the Consolidated Balance Sheet.
25
<PAGE>
================================================================================
Management's Discussion and Analysis
of Financial Condition and Results of Operations
ReliaStar Financial Corp. and Subsidiaries
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 December 31, 1998.
<TABLE>
<CAPTION>
RANGE OF
NOTIONAL FIXED RATES
(DOLLARS IN MILLIONS) AMOUNT RECEIVED
=================================================
<S> <C> <C>
Maturing in:
One Year or Less $107.0 5.2 - 6.9%
One to Three Years 510.5 5.3 - 8.1%
Three to Five Years 255.0 6.0 - 8.2%
Five to Seven Years 25.0 6.0%
- -------------------------------------------------
TOTAL NOTIONAL AMOUNT $897.5
- -------------------------------------------------
</TABLE>
The Company monitors the effect of the swap position on reported income. The
Company's investment portfolio includes a substantial amount of floating rate
investments. Changes in market interest rates have an opposite (and
approximately offsetting) effect on the reported income from the swap portfolio.
Accordingly, the reported investment income (or loss) attributable to the
Company's swap position will be approximately offset by the changed investment
income of the Company's floating or adjustable rate investments in a changing
rate environment. At December 31, 1998, the Company held $1.1 billion of
adjustable rate invested assets, short-term investments and cash.
The Company holds certain call options 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 25 call options with a notional
amount of $28.7 million and an estimated fair value of $9.8 million as of
December 31, 1998.
The Company also uses interest rate caps as part of its overall interest
rate risk management strategy for certain annuity products primarily to hedge
the risk of investment losses due to product surrenders in an increasing
interest rate environment. The Company held eight interest rate caps with a
notional amount of $510.0 million and a fair value of less than $.1 million as
of December 31, 1998.
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:
<TABLE>
<CAPTION>
DECEMBER 31
-------------
(IN MILLIONS) 1998 1997
====================================================
<S> <C> <C>
Private Placement Bonds $ 9.5 $ 6.2
Marketable Bonds 1.1 2.7
Commercial Mortgage Loans 8.7 12.5
Residential and Other Mortgage Loans 6.1 7.3
Investment Real Estate/1/ 8.3 8.4
Foreclosed Real Estate 30.5 42.3
Other .4 --
- ----------------------------------------------------
TOTAL $64.6 $79.4
- ----------------------------------------------------
</TABLE>
/1/ The amounts shown represent real estate acquired as an investment which the
Company has determined to be Problem Investments.
The amortized cost of Problem Investments in the preceding table reflects
reductions for write-offs and allowances taken by the Company. The cumulative
amounts of such write-offs and allowances on problem invested assets of the
Insurers in the Consolidated Balance Sheets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------
(IN MILLIONS) 1998 1997
====================================================
<S> <C> <C>
Private Placement Bonds $ 9.0 $ 6.0
Marketable Bonds 2.0 .8
Commercial Mortgage Loans 7.6 9.0
Residential and Other Mortgage Loans 1.1 1.1
Foreclosed Real Estate 21.3 23.6
Other 4.4 --
- ----------------------------------------------------
</TABLE>
The Company establishes the carrying value of all Problem Investments. For
problem marketable securities, the fair value is the quoted market value. For
problem private placement debt securities, the fair value is determined through
consideration of factors such as the net worth of the borrower, the value of
collateral, the capital structure of the borrower, the presence of guarantees
and the Company's evaluation of the borrower's ability to compete in their
relevant market.
For problem and potential problem securities, the Company determines
whether a decline in fair value below the amortized cost is other than
temporary. If the decline in fair value is determined to be other than
temporary, the Company writes down the cost basis to fair value and the amount
of the write-down is recorded as a realized loss. Subsequent changes in the fair
value of problem available-for-sale securities which are determined to be
temporary are reflected directly in equity as unrealized investment gains or
losses.
Fair value for problem real estate and problem mortgage loans is determined
taking into consideration one or
26
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
ReliaStar Financial Corp. and Subsidiaries
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 $42.3 million, $14.6 million and $0.3
million, respectively, at December 31, 1998.
INFLATION
The primary direct effect on the Company of inflation is the increase in
operating expenses. A large portion of the Company's operating expenses consists
of salaries which are subject to wage increases at least partly affected by the
rate of inflation. The Company attempts to minimize the impact of inflation on
operating expenses through programs to improve productivity.
The rate of inflation also has an indirect effect on the Company. To the
extent that the government's policies to control the level of inflation results
in changes in interest rates, the Company's new sales of insurance products and
investment income are affected. Changes in the level of interest rates also have
an effect on interest spreads, as investment earnings are reinvested.
KNOWN TRENDS AND UNCERTAINTIES WHICH MAY AFFECT FUTURE REPORTED RESULTS
GUARANTY ASSOCIATION ASSESSMENTS
The Insurers are subject to state guaranty association assessments in all states
in which they conduct business. Generally, these associations guarantee
specified amounts (commonly $100,000 of surrender values or $300,000 of other
benefits) payable to residents of the state under policies of insolvent
insurers. State laws vary widely on coverage (and inclusion in the assessment
base) of GICs. Most state laws permit assessments or some portion thereof to be
credited against future premium taxes. However, several states do not permit
such a credit. While the Company believes that it has accrued appropriate
amounts based upon currently available information, the Company could be subject
to additional future assessments in amounts which may be material.
LITIGATION
The Company is a defendant in a number of lawsuits arising out of the normal
course of its businesses, including several class action suits which seek both
compensatory and punitive damages. The Company believes the results of
litigation will not have a material adverse effect on the financial position of
the Company. Some financial services companies have recently been subjected to
significant awards in connection with class actions and/or suits seeking
punitive damages. The Company has recently recorded an increase in its
litigation reserves attributable to life insurance litigation settlement costs.
While the Company is not aware of any actions or allegations which should
reasonably give rise to any material adverse effect, it is possible that the
Company could be subjected to such a claim in an amount which could be material.
FINANCIAL SERVICES DEREGULATION
The United States Congress, from time to time, considers legislative proposals
intended to reduce or eliminate restrictions on affiliations among financial
services organizations. Proposals are extant which would allow banks to own or
affiliate with insurers and securities firms. An increased presence of banks in
the life insurance and annuity businesses may increase competition in these
markets. The Company cannot predict the impact of these proposals on 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 December 31, 1998, ReliaStar had converted, tested for Year
2000 compliance and put into production 211 (84%) of our 251 core business
applications. Of the remaining core business applications, 29 (12%) were in
final date simulation testing, and 11 (4%) were in the process of being upgraded
to, or replaced with, Year 2000-compliant systems. By the end of the second
quarter of 1999, we expect all 251 of our core business applications will be
converted, tested for Year 2000 compliance and put into production.
27
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
ReliaStar Financial Corp. and Subsidiaries
The Company does 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. Certain
technology initiatives have been deferred to meet resource needs for Year 2000
objectives. The Company estimates that its total Year 2000 project costs from
inception in 1995 to December 31, 1998 were approximately $27 million (pre-tax)
for external and redirected internal resources. The Company believes the level
of its information systems spending during this time period was not materially
increased by the Year 2000 project, however, certain resources were redirected
to the Year 2000 project. 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 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.
IMPACT OF ACCOUNTING PRONOUNCEMENTS
TO BE ADOPTED IN THE FUTURE
In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. This pronouncement is effective for fiscal years beginning
after September 15, 1999. The Company has not completed its analysis of the
impact on future financial results of applying this pronouncement.
CERTAIN FORWARD-LOOKING INFORMATION
All statements contained in this Annual Report, 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.
28
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================
Consolidated Balance Sheets
ReliaStar Financial Corp. and Subsidiaries
December 31
-----------------------
(In Millions) 1998 1997
====================================================================================================================
<S> <C> <C>
ASSETS
Fixed Maturity Securities (Amortized Cost: 1998, $11,127.0; 1997, $10,655.9) $11,625.1 $11,146.7
Equity Securities (Cost: 1998, $57.6; 1997, $25.2) 60.3 27.0
Mortgage Loans on Real Estate 2,154.8 2,270.7
Real Estate and Leases 53.3 74.5
Policy Loans 702.3 663.3
Other Invested Assets 144.6 81.1
Short-Term Investments 168.7 157.2
- --------------------------------------------------------------------------------------------------------------------
Total Investments 14,909.1 14,420.5
Cash 21.5 46.4
Accounts and Notes Receivable 287.7 217.5
Reinsurance Receivable 417.7 324.4
Deferred Policy Acquisition Costs 1,214.9 1,091.9
Present Value of Future Profits 422.5 480.0
Property and Equipment, Net 117.3 112.4
Accrued Investment Income 196.0 200.6
Other Assets 399.8 641.2
Participation Fund Account Assets 311.6 316.6
Assets Held in Separate Accounts 4,310.6 3,149.3
- --------------------------------------------------------------------------------------------------------------------
Total Assets $22,608.7 $21,000.8
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES
Future Policy and Contract Benefits $13,519.8 $13,329.4
Pending Policy Claims 433.5 340.5
Other Policyholder Funds 304.6 286.5
Notes and Mortgages Payable 509.4 593.5
Income Taxes 199.0 192.1
Other Liabilities 663.2 545.5
Participation Fund Account Liabilities 311.6 316.6
Liabilities Related to Separate Accounts 4,305.1 3,143.8
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities 20,246.2 18,747.9
- --------------------------------------------------------------------------------------------------------------------
Company-Obligated Mandatorily Redeemable Preferred Securities
Issued by Consolidated Subsidiaries 242.3 241.9
- --------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common Stock (Shares Issued: 1998 and 1997, 98.1) .9 .9
Additional Paid-in Capital 1,003.0 1,019.8
Retained Earnings 1,137.6 964.8
Accumulated Other Comprehensive Income 257.2 226.2
Note Receivable from ESOP (19.8) (20.8)
Unamortized Restricted Stock Awards (.7) (1.0)
Less Treasury Common Stock, at Cost (Shares Held: 1998, 9.2; 1997, 7.7) (258.0) (178.9)
- --------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,120.2 2,011.0
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $22,608.7 $21,000.8
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
================================================================================
Consolidated Statements of Income
ReliaStar Financial Corp. and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------
(In millions, except per share data) 1998 1997 1996
==========================================================================================================================
<S> <C> <C> <C>
REVENUES
Premiums $1,014.1 $ 887.9 $ 836.9
Net Investment Income 1,116.9 1,006.3 929.6
Realized Investment Gains, Net 17.6 11.7 11.2
Policy and Contract Charges 427.6 332.9 245.9
Other Income 272.0 238.8 143.4
- --------------------------------------------------------------------------------------------------------------------------
Total 2,848.2 2,477.6 2,167.0
- --------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Benefits to Policyholders 1,552.0 1,377.3 1,287.7
Sales and Operating Expenses 645.2 552.2 426.1
Amortization of Deferred Policy Acquisition Costs
and Present Value of Future Profits 192.4 146.1 113.0
Interest Expense 28.1 22.3 19.6
Dividends and Experience Refunds to Policyholders 29.4 24.8 19.7
- --------------------------------------------------------------------------------------------------------------------------
Total 2,447.1 2,122.7 1,866.1
- --------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Income Taxes
and Dividends on Preferred Securities of Subsidiaries 401.1 354.9 300.9
Income Tax Expense 143.0 125.7 105.0
Dividends on Preferred Securities of Subsidiaries, Net of Tax 13.2 10.4 5.0
- --------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 244.9 218.8 190.9
Income (Loss) from Discontinued Operations, Net of Tax (7.2) 3.2 2.1
- --------------------------------------------------------------------------------------------------------------------------
Net Income $ 237.7 $ 222.0 $ 193.0
- --------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Basic
Income from Continuing Operations $ 2.69 $ 2.55 $ 2.51
Income (Loss) from Discontinued Operations (.08) .04 .03
- --------------------------------------------------------------------------------------------------------------------------
Net Income $ 2.61 $ 2.59 $ 2.54
- --------------------------------------------------------------------------------------------------------------------------
Diluted
Income from Continuing Operations $ 2.64 $ 2.51 $ 2.35
Income (Loss) from Discontinued Operations (.08) .04 .02
- --------------------------------------------------------------------------------------------------------------------------
Net Income $ 2.56 $ 2.55 $ 2.37
- --------------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $ 237.7 $ 222.0 $ 187.8
- --------------------------------------------------------------------------------------------------------------------------
Weighted Average Common Shares
Basic 91.1 85.6 73.8
Diluted 92.7 87.1 80.0
- --------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
30
<PAGE>
Consolidated Statements of Shareholders' Equity
ReliaStar Financial Corp. and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
COMPRE- COMPRE- COMPRE-
TOTAL HENSIVE TOTAL HENSIVE TOTAL HENSIVE
(IN MILLIONS, EXCEPT PER SHARE DATA) EQUITY INCOME EQUITY INCOME EQUITY INCOME
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
Beginning of Year $ .9 $ .4 $ .4
Issued for Acquisition -- .1 --
Issued for Common Stock Split -- .4 --
- ---------------------------------------------------------------------------------------------------------------------------------
End of Year .9 .9 .4
- ---------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Beginning of Year 1,019.8 571.9 566.1
Issued for Acquisition -- 428.3 --
Issued for Benefit Plans -- 11.7 2.4
Loss on Treasury Shares Reissued for Benefit Plans (28.2) (8.1) (4.1)
Gain (Loss) on Treasury Shares Reissued for Acquisitions (.9) 9.5 (23.9)
Tax Benefit on Stock Options Exercised 12.3 6.9 2.7
Conversion of ESOP Convertible Preferred Stock -- -- 28.7
Other -- (.4) --
- ---------------------------------------------------------------------------------------------------------------------------------
End of Year 1,003.0 1,019.8 571.9
- ---------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Beginning of Year 964.8 794.2 647.2
Net Income 237.7 $237.7 222.0 $222.0 193.0 $ 193.0
Dividends to Shareholders
10% Senior Cumulative Preferred Stock ($5.00 Per Share) -- -- (3.2)
ESOP Convertible Preferred Stock ($2.19 Per Share) -- -- (2.8)
Common Stock
(Per Share: 1998, $.710; 1997, $.605; 1996, $.545) (64.8) (52.0) (40.0)
Other, Net (.1) .6 --
- ---------------------------------------------------------------------------------------------------------------------------------
End of Year 1,137.6 964.8 794.2
- ---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of Year 226.2 140.8 246.8
Change for the Year 31.0 31.0 85.4 85.4 (106.0) (106.0)
- ---------------------------------------------------------------------------------------------------------------------------------
End of Year 257.2 226.2 140.8
- ---------------------------------------------------------------------------------------------------------------------------------
10% SENIOR CUMULATIVE PREFERRED STOCK
Beginning of Year -- -- 63.2
Redeemed -- -- (63.2)
- ---------------------------------------------------------------------------------------------------------------------------------
End of Year -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
ESOP CONVERTIBLE PREFERRED STOCK
Beginning of Year -- -- 28.9
Redeemed -- -- (.2)
Conversion to Common Stock -- -- (28.7)
- ---------------------------------------------------------------------------------------------------------------------------------
End of Year -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NOTE RECEIVABLE FROM ESOP
Beginning of Year (20.8) (21.6) (23.4)
Repayments, Accrued or Paid 1.0 .8 1.8
- ---------------------------------------------------------------------------------------------------------------------------------
End of Year (19.8) (20.8) (21.6)
- ---------------------------------------------------------------------------------------------------------------------------------
UNAMORTIZED RESTRICTED STOCK AWARDS
Beginning of Year (1.0) (1.8) (3.0)
(Awards) and Forfeitures, Net .1 (.1) (.1)
Amortization of Restricted Stock Awards .2 .9 1.3
- ---------------------------------------------------------------------------------------------------------------------------------
End of Year (.7) (1.0) (1.8)
- ---------------------------------------------------------------------------------------------------------------------------------
TREASURY COMMON STOCK
Beginning of Year (178.9) (66.2) (106.1)
Acquired (163.9) (151.0) (5.6)
Reissued for Acquisitions 21.2 17.6 25.2
Reissued, Other 63.6 20.7 20.3
- ---------------------------------------------------------------------------------------------------------------------------------
End of Year (258.0) (178.9) (66.2)
- ---------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $268.7 $307.4 $ 87.0
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $2,120.2 $2,011.0 $1,417.7
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE>
Consolidated Statements of Cash Flow
ReliaStar Financial Corp. and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
(IN MILLIONS) 1998 1997 1996
===============================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 237.7 $ 222.0 $ 193.0
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Interest Credited to Insurance Contracts 586.8 548.9 500.1
Future Policy Benefits (685.6) (396.9) (238.9)
Capitalization of Policy Acquisition Costs (258.7) (212.7) (196.2)
Amortization of Deferred Policy Acquisition Costs and
Present Value of Future Profits 192.4 146.1 113.0
Deferred Income Taxes 13.8 7.7 20.6
Net Change in Receivables and Payables 19.9 7.0 63.8
Other Assets 315.1 (91.5) (84.8)
Realized Investment Gains, Net (17.6) (11.7) (11.2)
Other (25.8) 1.7 1.8
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 378.0 220.6 361.2
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturity Securities 535.8 474.0 204.1
Proceeds from Maturities or Repayment of Fixed Maturity Securities 1,096.6 910.7 882.3
Cost of Fixed Maturity Securities Acquired (2,083.5) (1,431.6) (1,594.7)
Sales (Purchases) of Equity Securities, Net (30.9) 14.8 5.6
Proceeds of Mortgage Loans Sold, Matured or Repaid 654.4 350.4 483.8
Cost of Mortgage Loans Acquired (539.9) (649.4) (407.3)
Sales of Real Estate and Leases, Net 23.7 14.1 35.7
Policy Loans Issued, Net (39.0) (41.5) (49.2)
Purchases of Other Invested Assets, Net (16.8) (10.1) (.1)
Sales (Purchases) of Short-Term Investments, Net (10.8) (37.8) 12.1
Cash Acquired with Acquisitions 1.3 18.5 --
- ---------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (409.1) (387.9) (427.7)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Deposits to Insurance Contracts 1,634.9 1,429.3 1,173.3
Maturities and Withdrawals from Insurance Contracts (1,350.9) (1,299.5) (1,133.0)
Redemption of 10% Senior Cumulative Preferred Stock -- -- (63.2)
Net Proceeds from Issuance of Trust-Originated Preferred Securities -- 120.8 120.8
Increase in Notes and Mortgages Payable 261.3 132.2 51.5
Repayment of Notes and Mortgages Payable (345.8) (20.4) (66.3)
Payments Received on Note Receivable from ESOP -- .1 .4
Issuance of Common Stock Under Stock Option and Other Plans 35.4 21.8 18.5
Dividends on 10% Senior Cumulative Preferred Stock -- -- (3.2)
Dividends on ESOP Convertible Preferred Stock -- -- (2.8)
Dividends on Common Stock (64.8) (52.0) (40.0)
Acquisition of Treasury Common Stock (163.9) (151.0) (5.6)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 6.2 181.3 50.4
- ---------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash (24.9) 14.0 (16.1)
Cash at Beginning of Year 46.4 32.4 48.5
- ---------------------------------------------------------------------------------------------------------------
Cash at End of Year $ 21.5 $ 46.4 $ 32.4
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
NOTE ONE: CHANGES IN ACCOUNTING PRINCIPLES
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
Effective for transactions occurring on or after January 1, 1998, ReliaStar
Financial Corp. (ReliaStar or the Company) adopted those provisions of Statement
of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which were
deferred by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125." Effective for transactions occurring on or after
January 1, 1997, the Company adopted those provisions of SFAS No. 125 which were
not deferred by SFAS No. 127. SFAS No. 125 requires a company to recognize the
financial and servicing assets it controls and the liabilities it has incurred
and to derecognize financial assets when control has been surrendered in
accordance with the criteria provided in SFAS No. 125. The adoption of this
standard had no effect on the financial results of the Company.
REPORTING COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a company's full set of
financial statements. Comprehensive income encompasses all changes in
shareholders' equity from transactions and other events and circumstances from
nonowner sources. Adoption of this standard had no effect on the financial
results of the Company.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the way that a company reports information about operating
segments in financial statements using a "management approach" to aggregate
operating segments. Adoption of this standard had no effect on the financial
results of the Company.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132
requires new disclosures relating to a company's pension and other
postretirement benefit plans. Adoption of this standard had no effect on the
financial results of the Company.
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE
Effective January 1, 1998, the Company adopted Statement of Position (SOP) No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP No. 98-1 provides guidance on accounting for costs associated
with computer software developed or obtained for internal use. Adoption of this
standard did not have a significant effect on the financial results of the
Company.
EARNINGS PER SHARE
During the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings
per Share." SFAS No. 128 requires the computation and disclosure of basic and
diluted earnings per share (EPS). Basic EPS is computed by dividing income
available to common stockholders (the numerator) by the weighted-average number
of common shares outstanding (the denominator) during the period. Shares issued
during the period and shares reacquired during the period are weighted for the
portion of the period that they were outstanding. Income available to common
stockholders is computed by deducting both the dividends declared in the period
on preferred stock (whether or not paid) and the dividends accumulated for the
period on cumulative preferred stock (whether or not earned) from income from
continuing operations and also from net income. The computation of diluted EPS
is similar to the computation of basic EPS except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if all dilutive potential common shares had been issued. In
addition, in computing the dilutive effect of convertible securities, the
numerator is adjusted to add back any convertible preferred dividends and any
other changes in income or loss that would result from the assumed conversion of
those potential common shares. All EPS amounts for all periods presented have
been computed in accordance with the provisions of SFAS No. 128.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, goodwill related to assets to be held
and used and long-lived assets and certain identifiable intangibles to be
disposed of. This Statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Measurement of an impairment
loss for long-lived assets and identifiable intangibles that an entity expects
to hold and use should
33
<PAGE>
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
be based on the fair value of the asset. Long-lived assets and certain
identifiable intangibles to be disposed of must be reported at the lower of
carrying amount or fair value less estimated costs to sell. The adoption of this
standard did not have a significant effect on the financial results of the
Company.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 requires expanded disclosures of stock-
based compensation arrangements with employees and encourages (but does not
require) compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company applies APB Opinion No. 25 to its
stock-based compensation awards to employees and directors.
NOTE TWO: NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is principally engaged in the business of providing life insurance
and related financial services products. Through its subsidiaries, the Company
provides and distributes individual life insurance and annuities; employee
benefit products and services; life and health reinsurance; retirement plans;
mutual funds; personal finance education and bank products. The Company operates
primarily in the United States and, through its subsidiaries, is authorized to
conduct business in all 50 states.
The Company primarily operates in four reportable operating segments:
Personal Financial Services, Worksite Financial Services, Tax-Sheltered and
Fixed Annuities, and Reinsurance.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. References to the Company relate to ReliaStar and all
subsidiaries. These consolidated financial statements exclude the effects of all
material intercompany transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVESTMENTS
Fixed maturity securities (bonds and redeemable preferred stocks) are classified
as available-for-sale and are carried at fair value.
Equity securities (common stocks and nonredeemable preferred stocks) are
carried at fair value.
Mortgage loans on real estate are carried at amortized cost less an
impairment allowance for estimated uncollectible amounts.
Investment real estate owned directly by the Company is carried at cost
less accumulated depreciation and allowances for estimated losses. Investments
in real estate joint ventures are accounted for using the equity method. Real
estate acquired through foreclosure is carried at the lower of fair value less
estimated costs to sell or cost.
Short-term investments are carried at amortized cost, which approximates
fair value.
Unrealized investment gains and losses of equity securities and fixed
maturity securities, net of related deferred policy acquisition costs (DAC),
present value of future profits (PVFP) and tax effects, are accounted for as a
direct increase or decrease to the accumulated other comprehensive income
component of shareholders' equity.
Realized investment gains and losses enter into the determination of net
income. Realized investment gains and losses on sales of securities are
determined on the specific identification method. Write-offs of investments that
decline in value below cost on other than a temporary basis and the change in
the allowance for mortgage loans and wholly owned real estate are included with
realized investment gains and losses in the Consolidated Statements of Income.
The Company records write-offs or allowances for its investments based upon
an evaluation of specific problem investments. The Company periodically reviews
all invested assets (including marketable bonds, private placements, mortgage
loans and real estate investments) to identify investments where the Company has
credit concerns. Investments with credit concerns include those the Company has
identified as problem investments, which are issues delinquent in a required
payment of principal or interest, issues in bankruptcy or foreclosure and
restructured or foreclosed assets. The Company also identifies investments as
potential problem investments, which are investments where the Company has
serious doubts as to the ability of the borrowers to comply with the present
loan repayment terms.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, net of accumulated depreciation of
$106.1 million and $102.2 million at December 31, 1998 and 1997, respectively.
The Company provides for depreciation of property and equipment using straight-
line and accelerated methods over the estimated useful lives of the assets.
Buildings are generally depreciated over 35 to 50 years. Depreciation expense
for the years ending
34
<PAGE>
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
December 31, 1998, 1997 and 1996 totaled $7.9 million, $7.1 million and $6.6
million, respectively.
PARTICIPATION FUND ACCOUNT
On January 3, 1989, the Commissioner of Commerce of the State of Minnesota
approved a Plan of Conversion and Reorganization (the Plan) which provided,
among other things, for the conversion of ReliaStar Life Insurance Company
(ReliaStar Life) from a combined stock and mutual life insurance company to a
stock life insurance company.
The Plan provided for the establishment of a Participation Fund Account
(PFA) for the benefit of certain participating individual life insurance
policies and annuities issued by ReliaStar Life prior to the effective date of
the Plan. Under the terms of the PFA, the insurance liabilities and assets with
respect to such policies are segregated in the accounting records of ReliaStar
Life to assure the continuation of policyholder dividend practices. Assets and
liabilities of the PFA are presented in accordance with statutory accounting
practices. Earnings derived from the operation of the PFA inure solely to the
benefit of the policies covered by the PFA and no benefit will inure to the
Company. Accordingly, results of operations for the PFA are excluded from the
Company's Consolidated Statements of Income. In the event that the assets of the
PFA are insufficient to provide the contractual benefits guaranteed by the
affected policies, ReliaStar Life must provide such contractual benefits from
its general assets.
SEPARATE ACCOUNTS
The Company operates separate accounts. The assets and liabilities of the
separate accounts are primarily related to variable annuity, variable life and
401(k) contracts and represent policyholder-directed funds that are separately
administered. The assets (primarily investments) and liabilities (primarily to
contractholders) of each account are clearly identifiable and distinguishable
from other assets and liabilities of the Company. Assets are carried at fair
value. Revenues from these separate account contracts consist primarily of
charges for mortality risk and expenses, cost of insurance, contract
administration and surrender charges. Revenue for these products is recognized
when due.
PREMIUM REVENUE AND BENEFITS TO POLICYHOLDERS
Recognition of Traditional Life, Group and Annuity Premium Revenue and Benefits
to Policyholders
Traditional life insurance products include those products with fixed and
guaranteed premiums and benefits and consist principally of term and whole life
insurance policies and certain annuities with life contingencies (immediate
annuities). Life insurance premiums and immediate annuity premiums are
recognized as premium revenue when due. Group insurance premiums are recognized
as premium revenue over the time period to which the premiums relate. Benefits
and expenses are associated with earned premiums so as to result in recognition
of profits over the life of the contracts. This association is accomplished by
means of the provision for liabilities for future policy benefits and the
amortization of DAC and PVFP.
Recognition of Universal Life-Type Contract Revenue and Benefits to
Policyholders
Universal life-type policies are insurance contracts with terms that are not
fixed and guaranteed. The terms that may be changed could include one or more of
the amounts assessed the policyholder, premiums paid by the policyholder or
interest accrued to policyholder balances. Amounts received as deposits to such
contracts are not reported as premium revenues.
Revenues for universal life-type policies consist of charges assessed
against policy account values for deferred policy loading and the cost of
insurance and policy administration. Policy benefits and claims that are charged
to expense include interest credited to contracts and benefit claims incurred in
the period in excess of related policy account balances.
Recognition of Investment Contract Revenue and Benefits to Policyholders
Contracts that do not subject the Company to risks arising from policyholder
mortality or morbidity are referred to as investment contracts. Guaranteed
Investment Contracts (GICs) and certain deferred annuities are considered
investment contracts. Amounts received as deposits to such contracts are not
reported as premium revenues.
Revenues for investment products consist of investment income and charges
assessed against contract account values for policy administration. Contract
benefits that are charged to expense include benefit claims incurred in the
period in excess of related contract balances, and interest credited to contract
balances.
POLICY ACQUISITION COSTS
Those costs of acquiring new business, which vary with and are primarily related
to the production of new business, have been deferred to the extent that such
costs are deemed recoverable. Such costs include commissions, certain costs of
policy issuance and underwriting and certain variable agency expenses.
Costs deferred related to traditional life insurance products are amortized
over the premium paying period of the related policies, in proportion to the
ratio of annual premium revenues to total anticipated premium revenues. Such
anticipated premium revenues are estimated using the same assumptions used for
computing liabilities for future policy benefits.
Costs deferred related to universal life-type policies and investment
contracts are amortized over the lives of the policies, in relation to the
present value of estimated gross profits from mortality, investment, surrender
and expense margins.
35
<PAGE>
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
PRESENT VALUE OF FUTURE PROFITS
The present value of future profits reflects the estimated fair value of
acquired insurance business in force and represents the portion of the
acquisition cost that was allocated to the value of future cash flows from
insurance contracts existing at the date of acquisition. Such value is the
present value of the actuarially determined projected net cash flows from the
acquired insurance contracts.
An analysis of the PVFP asset is presented below:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------
(in millions) 1998 1997 1996
========================================================
<S> <C> <C> <C>
Balance, Beginning of Year $480.0 $220.2 $192.0
Acquisition (7.3) 323.6 --
Imputed Interest 31.0 25.5 16.4
Amortization (90.1) (66.0) (37.5)
Impact of Net Unrealized
Investment Gains and Losses 8.9 (23.3) 49.3
- --------------------------------------------------------
Balance, End of Year $422.5 $480.0 $220.2
- --------------------------------------------------------
</TABLE>
Based on current conditions and assumptions as to future events on acquired
policies in force, the Company expects that the net amortization of the December
31, 1998 PVFP balance will be between 6% and 9% in each of the years 1999
through 2003. The interest rates used to determine the amount of imputed
interest on the unamortized PVFP balance ranged from 5% to 8%.
GOODWILL
Goodwill is the excess of the amount paid to acquire a company over the fair
value of the net assets acquired and is amortized on straight-line basis over 15
to 40 years. The carrying value of goodwill is monitored for indicators of
impairment of value. No events or circumstances were identified which warrant
consideration of impairment or a revised estimate of useful lives.
FUTURE POLICY AND CONTRACT BENEFITS
Liabilities for future policy benefits for traditional life contracts are
calculated using the net level premium method and assumptions as to investment
yields, mortality, withdrawals and dividends. The assumptions are based on
projections of past experience and include provisions for possible unfavorable
deviation. These assumptions are made at the time the contract is issued or, for
purchased contracts, at the date of acquisition.
Liabilities for future policy and contract benefits on universal life-type
and investment contracts are based on the policy account balance.
The liabilities for future policy and contract benefits for group disabled
life reserves and long-term disability reserves are based upon interest rate
assumptions and morbidity and termination rates from published tables, modified
for Company experience.
INCOME TAXES
The provision for income taxes includes amounts currently payable and deferred
income taxes resulting from the cumulative temporary differences in the assets
and liabilities determined on a tax return and financial statement basis.
STOCK-BASED COMPENSATION
The Company recognizes compensation cost for its stock-based compensation plans
based on the intrinsic value of the equity instrument awarded in accordance with
APB Opinion No. 25.
INTEREST RATE SWAP AGREEMENTS
Interest rate swap agreements are used as hedges for asset/liability management
of adjustable rate and short-term invested assets. The Company does not enter
into any interest rate swap agreements for trading purposes. The interest rate
swap transactions involve the exchange of fixed and floating rate interest
payments without the exchange of underlying principal amounts and do not contain
other optional provisions. The Company utilizes the settlement method of
accounting for its interest rate swap agreements whereby the difference between
amounts paid and amounts received or accrued on interest rate swap agreements is
reflected in net investment income.
The characteristics (notional amount, maturity and payment dates) of the
interest rate swap agreements are similar to the characteristics of the
designated hedged assets. Interest rate swaps are carried at fair value, and
changes in fair value are recorded as a direct increase or decrease in the
accumulated other comprehensive income component of shareholders' equity. In the
event an interest rate swap agreement would cease to qualify for hedge
accounting, changes in fair value of the affected swap would be recorded as
income or expense. There were no terminations of interest rate swap agreements
during 1998, 1997 and 1996.
EQUITY INDEX CALL OPTIONS
Equity index call options are tied to the performance of the S&P 500 Index and
are used as hedges for asset/liability management related to equity-indexed
annuity products. The Company does not purchase options for trading purposes.
The notional amounts and other characteristics of the options correspond to the
characteristics of the policyholder obligations related to deposits received for
equity-indexed annuities. The change in the fair value of the call options
approximates the change in the corresponding equity-indexed annuity account
value. The call options are carried at fair value, and changes in fair value are
recorded as income or expense, consistent with the hedged item.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
NOTE THREE: ACQUISITIONS
In January 1998, the Company completed the acquisitions of ReliaStar Bancshares,
Inc., formerly known as Citizens Community Bancshares Co., and ReliaStar
Managing Underwriters, Inc., formerly known as LaMar & Phillips, Inc.
ReliaStar Bancshares, Inc. is a thrift holding company whose subsidiary,
ReliaStar Bank, is based in St. Cloud, Minnesota. ReliaStar Bank is a federally
chartered savings bank
36
<PAGE>
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
that provides consumer banking products. This acquisition was accounted for
using the purchase method of accounting and was effected through a stock-for-
stock exchange whereby the Company issued approximately 228,000 shares of
ReliaStar common stock from treasury. Goodwill recorded as a result of this
transaction was approximately $3 million.
ReliaStar Managing Underwriters, Inc. is a managing general underwriter
located in Brentwood, Tennessee, specializing in the HMO reinsurance and
provider excess business. This acquisition was accounted for using the purchase
method of accounting and was effected through a stock-for-stock exchange whereby
the Company issued approximately 330,000 shares of ReliaStar common stock from
treasury. Goodwill recorded as a result of this transaction was approximately
$14 million.
The pro forma effect of these two transactions on prior period consolidated
results is not material.
On July 1, 1997, the Company completed the acquisition of Security-
Connecticut Corporation (SCC). SCC was a holding company with two primary
subsidiaries: Security-Connecticut Life Insurance Company (Security-Connecticut)
of Avon, Connecticut, and Lincoln Security Life Insurance Company (Lincoln
Security) of Brewster, New York.
The acquisition was accounted for using the purchase method of accounting.
Therefore, the consolidated financial statements include the accounts of SCC
since the date of acquisition. The acquisition was effected through a stock-for-
stock exchange whereby the Company issued approximately 12.7 million additional
shares of ReliaStar common stock. The purchase price was approximately $433
million and included approximately $4 million of other direct costs of
acquisition. Goodwill of approximately $150 million was recorded.
During December 1997, the Company acquired the common stock of Northstar
Holding, Inc. (Northstar) held by minority shareholders. Prior to the
acquisition, the Company was the majority shareholder and held 80% of
Northstar's common stock. Northstar's principal subsidiary, Northstar Investment
Management Corporation, is the investment advisor, manager, and distributor of
the Company's mutual fund family, the Northstar Funds. The acquisition was
effected through a stock-for-stock exchange whereby the Company issued
approximately .5 million shares of common stock from treasury. The acquisition
was accounted for using the purchase method of accounting. Goodwill recorded as
a result of this transaction was approximately $27 million.
During October 1996, the Company completed the acquisition of PrimeVest
Financial Services, Inc. (PrimeVest). PrimeVest is a full-service, third party
marketing firm located in St. Cloud, Minnesota, which specializes in
distributing mutual funds, stocks and bonds, variable and fixed annuities and
other financial products and services through a network of financial
institutions. The acquisition was accounted for using the purchase method of
accounting. The cash purchase price was approximately $16 million and goodwill
of approximately $11 million was recorded.
During September 1996, the Company acquired Successful Money Management
Seminars, Inc. (SMMS). SMMS, headquartered in Portland, Oregon, develops and
distributes educational materials used primarily in the presentation of seminars
to consumers on personal financial planning. The acquisition was effected
through an exchange of stock whereby the Company issued approximately 1.3
million shares of common stock from treasury. The acquisition was accounted for
using the pooling of interests method of accounting. Prior period financial
statements were not restated due to immateriality.
NOTE FOUR: INVESTMENTS
Investment income summarized by type of investment was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
(IN MILLIONS) 1998 1997 1996
==============================================================================================
<S> <C> <C> <C>
Fixed Maturity Securities $ 866.7 $ 787.9 $709.4
Equity Securities 2.1 2.2 4.1
Mortgage Loans on Real Estate 181.6 178.9 176.5
Real Estate and Leases 21.6 16.1 18.0
Policy Loans 41.8 34.3 32.2
Other Invested Assets 12.8 3.6 7.3
Short-Term Investments 14.6 9.3 9.2
- ----------------------------------------------------------------------------------------------
Gross Investment Income 1,141.2 1,032.3 956.7
Investment Expenses 24.3 26.0 27.1
- ----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $1,116.9 $1,006.3 $929.6
- ----------------------------------------------------------------------------------------------
Net pretax realized investment gains (losses) were as follows:
YEAR ENDED DECEMBER 31
----------------------------
(IN MILLIONS) 1998 1997 1996
==============================================================================================
Net Gains (Losses) on Sales
Fixed Maturity Securities
Gross Gains $ 26.3 $ 10.3 $ 8.7
Gross Losses (13.2) (6.4) (5.5)
Equity Securities (.3) 5.1 1.3
Mortgage Loans (.2) -- .1
Foreclosed Real Estate 2.8 .1 1.8
Real Estate 2.1 .6 2.7
Other 15.3 9.8 13.2
- ----------------------------------------------------------------------------------------------
32.8 19.5 22.3
- ----------------------------------------------------------------------------------------------
Provisions for Losses
Fixed Maturity Securities (8.4) (3.0) (2.6)
Equity Securities -- (.1) --
Mortgage Loans -- (2.4) (3.5)
Foreclosed Real Estate (2.2) (1.6) (3.5)
Real Estate (.2) (.7) (1.1)
Other (4.4) -- (.4)
- ----------------------------------------------------------------------------------------------
(15.2) (7.8) (11.1)
- ----------------------------------------------------------------------------------------------
PRETAX REALIZED
INVESTMENT GAINS $ 17.6 $ 11.7 $ 11.2
- ----------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
The amortized cost and fair value of investments in fixed maturity securities by
type of investment were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------
GROSS UNREALIZED
AMORTIZED -------------------- FAIR
(IN MILLIONS) COST GAINS (LOSSES) VALUE
======================================================================================================================
<S> <C> <C> <C> <C>
United States Government and Government Agencies and Authorities $ 103.6 $ 11.5 -- $ 115.1
States, Municipalities and Political Subdivisions 49.9 4.1 -- 54.0
Foreign Governments 88.5 8.9 -- 97.4
Public Utilities 643.0 56.6 $ (.2) 699.4
Corporate Securities 7,425.0 378.5 (47.9) 7,755.6
Mortgage-Backed/Structured Finance 2,793.0 99.9 (7.7) 2,885.2
Redeemable Preferred Stock 24.0 .3 (5.9) 18.4
- ----------------------------------------------------------------------------------------------------------------------
TOTAL $11,127.0 $559.8 $(61.7) $11,625.1
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
GROSS UNREALIZED
AMORTIZED -------------------- FAIR
(IN MILLIONS) COST GAINS (LOSSES) VALUE
======================================================================================================================
<S> <C> <C> <C> <C>
United States Government and Government Agencies and Authorities $ 128.8 $ 9.3 $ (.3) $ 137.8
States, Municipalities and Political Subdivisions 66.8 4.5 (.3) 71.0
Foreign Governments 94.8 7.3 (.1) 102.0
Public Utilities 895.0 61.4 (.9) 955.5
Corporate Securities 6,911.0 327.2 (14.9) 7,223.3
Mortgage-Backed/Structured Finance 2,554.3 99.8 (2.6) 2,651.5
Redeemable Preferred Stock 5.2 .4 -- 5.6
- ----------------------------------------------------------------------------------------------------------------------
TOTAL $10,655.9 $509.9 $(19.1) $11,146.7
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of fixed maturity securities by contractual
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR
(IN MILLIONS) COST VALUE COST VALUE
============================================================================================
<S> <C> <C> <C> <C>
Maturing in:
One Year or Less $ 459.5 $ 462.9 $ 199.9 $ 200.9
One to Five Years 3,555.5 3,710.1 3,651.3 3,789.2
Five to Ten Years 3,022.9 3,191.1 3,006.4 3,180.7
Ten Years or Later 1,296.1 1,375.8 1,244.0 1,324.4
Mortgage-Backed/Structured Finance 2,793.0 2,885.2 2,554.3 2,651.5
- --------------------------------------------------------------------------------------------
TOTAL $11,127.0 $11,625.1 $10,655.9 $11,146.7
- --------------------------------------------------------------------------------------------
</TABLE>
The fair values for actively traded marketable bonds are determined 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 values of privately placed bonds which are not
considered problems are determined using a matrix-based pricing model. The model
considers the current level of risk-free interest rates, current corporate
spreads, the credit quality of the issuer and cash flow characteristics of the
security. Using this data, the model generates estimated market values which the
Company considers reflective of the fair value of each privately placed bond.
Fair values for privately placed bonds which are considered problems are
determined through consideration of factors such as the net worth of borrower,
the value of collateral, the capital structure of the borrower, the presence of
guarantees and the Company's evaluation of the borrower's ability to compete in
their relevant market.
At December 31, 1998, the largest industry concentration in the private
placement portfolio was consumer products and services, where 18.7% of the
portfolio was invested, and the largest industry concentration in the marketable
bond portfolio was mortgage backed/structured finance, where 30.8% of the
portfolio was invested. At December 31, 1998, the largest geographic
concentration of commercial mortgage loans was in the Midwest region of the
United States, where approximately 37.4% of the commercial mortgage loan
portfolio was invested.
At December 31, 1998 and 1997, gross unrealized appreciation of equity
securities was $3.9 million and $2.3 million, respectively, and gross unrealized
depreciation was $1.2 million and $.5 million, respectively.
38
<PAGE>
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
Invested assets which were nonincome producing (no income received for the 12
months preceding the balance sheet date) were as follows:
DECEMBER 31
----------------
(IN MILLIONS) 1998 1997
=======================================================
Fixed Maturity Securities $ 3.9 $ 1.5
Mortgage Loans on Real Estate 1.5 1.1
Real Estate and Leases 18.9 21.5
- -------------------------------------------------------
TOTAL $24.3 $24.1
- -------------------------------------------------------
Allowances for losses on investments are reflected on the Consolidated Balance
Sheets as a reduction of the related assets and were as follows:
DECEMBER 31
----------------
(IN MILLIONS) 1998 1997
=======================================================
Mortgage Loans $10.5 $10.5
Foreclosed Real Estate 6.8 9.1
Investment Real Estate 2.2 2.8
Other Invested Assets 6.0 2.7
- -------------------------------------------------------
At December 31, 1998 and 1997, the total investment in impaired mortgage loans
(before allowances for credit losses), the related allowance for credit losses
and the average investment related to impaired mortgage loans were as follows:
DECEMBER 31
----------------
(IN MILLIONS) 1998 1997
=======================================================
Impaired Mortgage Loans
Total Investment $13.0 $14.4
Allowance for Credit Losses 10.5 10.5
Average Investment 1.6 1.6
- -------------------------------------------------------
There were no increases or decreases in the allowance for credit losses during
1998. An increase of $2.4 million and a decrease of $3.6 million were recorded
in 1997. Interest income recognized on impaired mortgage loans during 1998 and
1997 was $.9 million and $1.3 million, respectively. The Company does not accrue
interest income on impaired mortgage loans when the likelihood of collection is
doubtful. Cash receipts for interest payments are recognized as income in the
period received.
Noncash investing activities consisted of the following:
YEAR ENDED DECEMBER 31
--------------------------
(IN MILLIONS) 1998 1997 1996
=================================================================
Real Estate Assets Acquired
Through Foreclosure -- $11.3 $14.8
Mortgage Loans Acquired in
Sales of Real Estate Assets -- -- 11.2
- -----------------------------------------------------------------
The components of net unrealized investment gains included in the accumulated
other comprehensive income component of shareholders' equity are shown below:
DECEMBER 31
---------------------
(IN MILLIONS) 1998 1997
============================================================
Unrealized Investment Gains $ 526.2 $ 489.1
DAC/PVFP Adjustment (128.6) (138.8)
Deferred Income Taxes (140.4) (124.1)
- ------------------------------------------------------------
TOTAL $ 257.2 $ 226.2
- ------------------------------------------------------------
The change in net unrealized investment gains and losses included in the change
in accumulated other comprehensive income consisted of the following:
YEAR ENDED DECEMBER 31
-------------------------------
(IN MILLIONS) 1998 1997 1996
======================================================================
Unrealized Investment Gains
(Losses) Arising During
The Period/1/ $32.7 $119.9 $(165.0)
Reclassification
Adjustments/2/ (8.4) (5.8) (2.9)
Change in DAC/PVFP Adjustment/3/ 6.7 (28.7) 61.9
- ----------------------------------------------------------------------
TOTAL $31.0 $ 85.4 $(106.0)
- ----------------------------------------------------------------------
/1/Net of income tax expense (benefit) totaling $17.2 million, $67.7 million and
$(89.9) million for 1998, 1997 and 1996, respectively.
/2/Net of income tax expense (benefit) totaling $(4.4) million, $(3.2) million
and $(1.6) million for 1998, 1997 and 1996, respectively.
/3/Net of income tax expense (benefit) totaling $3.5 million, $(16.3) million
and $33.7 million for 1998, 1997 and 1996, respectively.
NOTE FIVE: INCOME TAXES
The income tax liability reported on the Consolidated Balance Sheets consisted
of the following:
DECEMBER 31
-------------------
(IN MILLIONS) 1998 1997
==========================================================
Current Income Taxes $ (1.9) $ 14.8
Deferred Income Taxes 200.9 177.3
- ----------------------------------------------------------
TOTAL $199.0 $192.1
- ----------------------------------------------------------
The provision for income taxes reported on the Consolidated Statements of Income
consisted of the following:
YEAR ENDED DECEMBER 31
----------------------------
(IN MILLIONS) 1998 1997 1996
===================================================================
Currently Payable $128.1 $117.9 $ 84.7
Deferred 14.9 7.8 20.3
- -------------------------------------------------------------------
TOTAL $143.0 $125.7 $105.0
- -------------------------------------------------------------------
The Internal Revenue Service has completed its review of the Company's tax
returns for all years through 1995.
39
<PAGE>
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
Deferred income taxes reflect the impact for financial statement reporting
purposes of "temporary differences" between the financial statement carrying
amounts and tax bases of assets and liabilities. The "temporary differences"
that give rise to the net deferred tax liability relate to the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
(IN MILLIONS) 1998 1997
===================================================================
<S> <C> <C>
Future Policy and Contract Benefits $(303.5) $(363.6)
Investment Write-Offs and Allowances (34.4) (41.4)
Pension and Other Postretirement Benefit Plans (7.8) (7.7)
Employee Benefits (12.9) (12.8)
Other (106.4) (73.6)
- -------------------------------------------------------------------
Gross Deferred Tax Asset (465.0) (499.1)
- -------------------------------------------------------------------
Deferred Policy Acquisition Costs 326.6 322.9
Present Value of Future Profits 157.3 142.8
Net Unrealized Investment Gains 119.3 95.6
Property and Equipment 24.4 22.9
Real Estate Joint Ventures 15.5 16.5
Other 22.8 75.7
- -------------------------------------------------------------------
Gross Deferred Tax Liability 665.9 676.4
- -------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $ 200.9 $ 177.3
- -------------------------------------------------------------------
</TABLE>
Federal income tax regulations allowed certain special deductions for 1983 and
prior years which are accumulated in a memorandum tax account designated as
"policyholders' surplus." Generally, this policyholders' surplus account will
become subject to tax at the then current rates only if the accumulated balance
exceeds certain maximum limitations or if certain cash distributions are deemed
to be paid out of the account. At December 31, 1998, ReliaStar Life and its life
insurance subsidiaries have accumulated approximately $51.0 million in their
separate policyholders' surplus accounts. Deferred taxes have not been provided
on this temporary difference.
There have been no deferred taxes recorded for the unremitted equity in
subsidiaries as the earnings are considered to be permanently invested or will
be remitted only when tax effective to do so.
The difference between the U.S. federal income tax rate and the consolidated
tax provision rate is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1998 1997 1996
===============================================
<S> <C> <C> <C>
Statutory Tax Rate 35.0% 35.0% 35.0%
Other .7 .4 (.1)
- -----------------------------------------------
EFFECTIVE TAX RATE 35.7% 35.4% 34.9%
- -----------------------------------------------
</TABLE>
The Company had approximately $47.7 million of non-life net operating loss
carryforwards for tax purposes available as of December 31, 1998.
Cash paid for federal income taxes was $122.1 million, $88.2 million and
$71.0 million for 1998, 1997 and 1996, respectively.
NOTE SIX: NOTES AND MORTGAGES PAYABLE
A summary of notes and mortgages payable is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------
(IN MILLIONS) 1998 1997
==========================================================
<S> <C> <C>
Commercial Paper -- $218.5
Bank Borrowings -- 63.0
Other Indebtedness--Current Portion $ .2 .3
- ----------------------------------------------------------
Short-Term Debt .2 281.8
- ----------------------------------------------------------
6 1/2% Notes Payable 197.4 --
6 5/8% Notes Payable 119.9 119.9
8 5/8% Notes Payable 109.5 109.4
7 1/8% Notes Payable 74.4 74.2
Other Indebtedness--Noncurrent Portion 8.0 8.2
- ----------------------------------------------------------
Long-Term Debt 509.2 311.7
- ----------------------------------------------------------
TOTAL $509.4 $593.5
- ----------------------------------------------------------
</TABLE>
In November 1998, the Company issued $200.0 million of 6 1/2% notes payable at a
price of 99.407% (the 6 1/2% Notes). The 6 1/2% Notes are due on November 15,
2008.
In September 1993, the Company issued $120.0 million of 6 5/8% notes payable
at a price of 99.829% (the 6 5/8% Notes). The 6 5/8% Notes are due on September
15, 2003.
In February 1995, the Company issued $110.0 million of 8 5/8% notes payable
at a price of 99.274% (the 8 5/8% Notes). The 8 5/8% Notes are due on February
15, 2005.
In conjunction with the acquisition of SCC, the Company assumed $75.0 million
of 7 1/8% notes payable (the 7 1/8% Notes). The 7 1/8% Notes are due on March 1,
2003.
At December 31, 1998 and 1997, other indebtedness is primarily mortgage notes
assumed in connection with certain real estate investments with interest rates
ranging from 6.2% to 9.6%.
The Company has unsecured revolving credit facilities with banks totaling
$225.0 million for general corporate purposes. As of December 31, 1998, all
$225.0 million remained available for borrowing. The facilities require annual
commitment fees ranging from 1/10% to 15/100%. The weighted average interest
rate on the commercial paper outstanding at December 31, 1997 was 6.18%.
Principal payments required in each of the next five years and thereafter are
as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
===========================================================
<S> <C>
1999 - $ .2 2002 - $ .1
2000 - $5.8 2003 - $195.1
2001 - $1.9 2004 and thereafter - $310.1
- -----------------------------------------------------------
</TABLE>
Interest paid on debt was $25.9 million, $32.5 million and
$28.0 million for 1998, 1997 and 1996, respectively.
40
<PAGE>
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
NOTE SEVEN: COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES ISSUED
BY CONSOLIDATED SUBSIDIARIES
On June 3, 1997, ReliaStar Financing II (Subsidiary Trust II) issued $125.0
million (5 million shares) of 8.10% Trust-Originated Preferred Securities (the
8.10% Preferred Securities). In connection with Subsidiary Trust II's issuance
of the 8.10% Preferred Securities and the related purchase by ReliaStar of all
of Subsidiary Trust II's common securities (Common Securities II), ReliaStar
issued to Subsidiary Trust II $128.9 million principal amount of its 8.10%
Subordinated Deferrable Interest Notes, due June 3, 2027, (the Junior
Subordinated Debt Securities II). ReliaStar, at its option, may extend the
maturity date of the Junior Subordinated Debt Securities II to a date not later
than June 3, 2046. All issued shares remain outstanding.
On March 29, 1996, ReliaStar Financing I (Subsidiary Trust I), issued $125.0
million (5 million shares) of 8.20% Trust-Originated Preferred Securities (the
8.20% Preferred Securities). In connection with Subsidiary Trust I's issuance of
the 8.20% Preferred Securities and the related purchase by ReliaStar of all of
Subsidiary Trust I's common securities (Common Securities I), ReliaStar issued
to Subsidiary Trust I $128.9 million principal amount of its 8.20% Subordinated
Deferrable Interest Notes, due March 15, 2016 (Junior Subordinated Debt
Securities I). All issued shares remain outstanding.
Subsidiary Trust I and II (the Subsidiary Trusts) are wholly owned
subsidiaries of ReliaStar. The sole assets of Subsidiary Trusts I and II are and
will be the Junior Subordinated Debt Securities I & II (the Junior Subordinated
Debt Securities). The interest and other payment dates on the Junior
Subordinated Debt Securities correspond to the distribution and other payment
dates on the 8.20% and 8.10% Preferred Securities (the Preferred Securities) and
the Common Securities I and II (the Common Securities). Under certain
circumstances, the Junior Subordinated Debt Securities may be distributed to
holders of Preferred Securities and holders of the Common Securities in
liquidation of the Subsidiary Trusts.
The Junior Subordinated Debt Securities I are redeemable at the option of
ReliaStar on or after March 29, 2001, at a redemption price of $25 per Junior
Subordinated Debt Securities I plus accrued and unpaid interest. The Junior
Subordinated Debt Securities II are redeemable at the option of ReliaStar on or
after June 3, 2002 at a redemption price of $25 per Junior Subordinated Debt
Securities II plus accrued and unpaid interest. The Preferred Securities and the
Common Securities will be redeemed on a pro rata basis to the same extent that
the Junior Subordinated Debt Securities are repaid, at $25 per Preferred
Security and Common Security plus accumulated and unpaid distributions.
ReliaStar's obligations under the Junior Subordinated Debt Securities and
related agreements, taken together, constitute a full and unconditional
guarantee by ReliaStar of payments due on the Preferred Securities.
NOTE EIGHT: EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company has funded and unfunded noncontributory defined benefit retirement
plans covering substantially all employees which provide benefits to employees
upon retirement (Pension Plans). Effective December 31, 1998, the Company's
qualified defined benefit retirement plan was amended to suspend the accrual of
additional benefits for future services. Employees will retain all of their
accrued benefits as of December 31, 1998, which will be paid monthly at
retirement according to the provisions of the plan. Employees meeting certain
age and service requirements will receive certain transition benefits until
retirement. A curtailment gain was recorded in 1998 to reflect the impact of
this plan amendment and the impact of employee reductions resulting from the
transfer of certain accident and health administrative operations to a third
party.
The Company provides certain health care and life insurance benefits to
retired employees and their eligible dependents (Other Plans). The
postretirement health care plan is contributory, with retiree contribution
levels adjusted annually; the life insurance plan provides a flat amount of
noncontributory coverage and optional contributory coverage. During 1996, the
Company amended its postretirement plan to reduce the level of benefits provided
to current and future retirees.
Net periodic expense or benefit for the Company's pension and other plans
included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
(IN MILLIONS) 1998 1997 1996
=================================================================
<S> <C> <C> <C>
PENSION PLANS
Service Cost $ 3.2 $ 4.9 $ 3.8
Interest Cost 16.7 15.2 13.6
Expected Return on Plan Assets (20.9) (17.0) (16.1)
Amortization of Prior Service Cost .8 1.1 1.1
Amortization of Transition Asset (.1) (.3) (.3)
Curtailment Gain (3.7) -- --
Actuarial Loss 1.6 1.8 .7
- -----------------------------------------------------------------
NET EXPENSE (BENEFIT) $ (2.4) $ 5.7 $ 2.8
- -----------------------------------------------------------------
Year Ended December 31
------------------------
(IN MILLIONS) 1998 1997 1996
=================================================================
OTHER PLANS
Service Cost $ .5 $ .4 $ .6
Interest Cost .7 .7 1.0
Amortization of Prior Service Cost (1.5) (1.6) (1.2)
Curtailment Gain (1.7) -- --
Actuarial Gain (.1) (.1) --
- -----------------------------------------------------------------
NET EXPENSE (BENEFIT) $ (2.1) $ (.6) $ .4
- -----------------------------------------------------------------
</TABLE>
41
<PAGE>
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
The funded status of the plans and net amounts recognized in the
Consolidated Balance Sheets were as follows:
<TABLE>
<CAPTION>
PENSION PLANS OTHER PLANS
------------------ -------------------
DECEMBER 31 (IN MILLIONS) 1998 1997 1998 1997
========================================================================================================================
<S> <C> <C> <C> <C>
Benefit Obligation at Beginning of Year $237.1 $195.8 $ 10.9 $ 9.8
Service Cost 3.2 4.9 .5 .4
Interest Cost 16.7 15.2 .7 .7
Actuarial (Gain) Loss 14.9 25.6 (.2) .3
SCC Acquisition -- 8.6 -- .6
Benefits Paid (15.4) (13.0) (.4) (.9)
Plan Amendments 2.0 -- -- --
Termination Cost 1.0 -- -- --
Curtailment (20.8) -- (.7) --
- ------------------------------------------------------------------------------------------------------------------------
Benefit Obligation at End of Year 238.7 237.1 10.8 10.9
- ------------------------------------------------------------------------------------------------------------------------
Fair Value of Plan Assets at Beginning of Year 229.1 184.9 -- --
Actual Return on Plan Assets 36.6 45.2 -- --
SCC Acquisition -- 9.2 -- --
Employer Contributions 1.4 2.8 .4 .4
Participant Contributions -- -- .5 .5
Benefits Paid (15.4) (13.0) (.9) (.9)
- ------------------------------------------------------------------------------------------------------------------------
Fair Value of Plan Assets at End of Year 251.7 229.1 -- --
- ------------------------------------------------------------------------------------------------------------------------
Funded Status 13.0 (8.0) (10.8) (10.9)
Unrecognized Net (Gain) Loss (2.2) 10.3 (1.8) (1.7)
Unrecognized Prior Service Cost 3.6 8.5 (4.7) (7.2)
Unrecognized Transition Asset -- (.1) -- --
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET (LIABILITY) RECOGNIZED $ 14.4 $ 10.7 $(17.3) $(19.8)
- ------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the Consolidated Balance Sheets were as follows:
PENSION PLANS OTHER PLANS
----------------- -------------------
DECEMBER 31 (IN MILLIONS) 1998 1997 1998 1997
========================================================================================================================
Prepaid Benefit Cost $ 28.2 $ 22.5 -- --
Accrued Benefit Liability (19.1) (15.7) $(17.3) $(19.8)
Intangible Asset 5.3 3.9 -- --
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET (LIABILITY) RECOGNIZED $ 14.4 $ 10.7 $(17.3) $(19.8)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The aggregate projected benefit obligation and aggregate accumulated benefit
obligation for the unfunded pension plans were $19.4 million and $19.1 million,
respectively, as of December 31, 1998; and $17.2 million and $15.7 million,
respectively, as of December 31, 1997. As of December 31, 1998 and 1997, pension
plan assets included 1,232,982 shares of Company common stock with a fair value
of $56.9 million and $50.8 million, respectively. The benefit obligations for
the pension and other postretirement plans were determined using assumed
discount rates of 7.0% and 7.25% as of January 1, 1999 and 1998, respectively. A
weighted-average long-term rate of compensation increase of 4.5% was used for
the pension benefit obligation. The assumed long-term rate of return on pension
plan assets was 10.5% in 1998 and 10.0% in 1997. The assumed health care cost
trend rate for 1999 and thereafter used in measuring the postretirement health
care benefit obligation was 5.0%. The assumed health care cost trend rate has an
effect on the amounts reported. For example, a one-percentage-point increase in
the rate would increase the 1998 total service and interest cost by $.1 million
and the postretirement health care benefit obligation by $.4 million. A one-
percentage-point decrease in the rate would decrease the 1998 total service and
interest cost by $.1 million and the postretirement health care benefit
obligation by $.4 million.
SUCCESS SHARING PLAN AND ESOP
The Success Sharing Plan and ESOP (Success Sharing Plan) was designed to
increase employee ownership and reward employees when certain Company
performance objectives are met. Essentially all employees are eligible to
participate in the Success Sharing Plan. The Success Sharing Plan has both
qualified and nonqualified components. The nonqualified component is equal to
25% of the annual award and is paid in cash to employees. The qualified
component is equal to 75% of the annual award which is contributed to the ESOP
portion of the Success Sharing Plan.
In 1991, the Company issued to the ESOP 1.3 million shares of a new series of
preferred stock in exchange for a $30.0 million note. On December 31, 1996, all
of the outstanding shares of the ESOP Convertible Preferred Stock were
42
<PAGE>
Notes to Consolidated Financial Statements
RELIASTAR FINANCIAL CORP. AND SUBSIDIARIES
converted into 5,112,760 shares of the Company's common stock. The stock portion
of the Company's Success Sharing Plan contributions was met through an
allocation of stock to participants accounts of 146,016, 139,594 and 105,704
shares in 1998, 1997 and 1996, respectively.
Costs charged to expense for the Success Sharing Plan were $.9 million,
$2.8 million and $4.2 million in 1998, 1997 and 1996, respectively.
STOCK INCENTIVE PLAN
The ReliaStar 1993 Stock Incentive Plan (Stock Incentive Plan) provides for
awards of stock options and restricted and unrestricted shares of the Company's
common stock to officers and key employees in connection with the Company's
incentive compensation programs.
The Stock Incentive Plan authorizes the grant of Incentive Stock Options
(ISO) or nonqualified options with such vesting provisions as may be determined
at the time of grant. The exercise price for all options granted was the market
price of the common stock at the date of grant. The options must be exercised
within 10 years of the date of grant.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans other than for restricted
stock and performance-based awards. Had compensation cost for the Company's
stock option plans been determined based upon the fair value at the grant date
for awards under these plans, consistent with the optional accounting
methodology prescribed under SFAS No. 123, the Company's net income would have
been reduced by approximately $8.1 million, $4.9 million, and $2.3 million or
approximately $.08, $.05 and $.03 per diluted common share for 1998, 1997 and
1996, respectively. The pro forma effect on net income for 1996 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration the pro forma compensation expense related to
grants prior to 1995. The weighted average fair value per option granted during
1998, 1997 and 1996 was $11.74, $9.17 and $4.72, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: annual dividend yield ranging from 1.6% to 2.0%, volatility factors
ranging from .1868 to .2470, risk-free interest rates of 5.3% for 1998, 6.2% for
1997 and 5.1% to 5.3% for 1996, and an expected life of 2.7 to 5.8 years.
Stock option transactions are shown in the table below:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
===============================================================
<S> <C> <C>
Balance, December 31, 1995 3,804,498 $12.96
Granted 1,451,296 23.53
Exercised (841,628) 12.42
Canceled (194,166) 20.20
- ---------------------------------------------------------------
Balance, December 31, 1996 4,220,000 16.32
Granted 2,662,745 26.98
Exercised (934,903) 14.42
Canceled (177,479) 29.92
- ---------------------------------------------------------------
Balance, December 31, 1997 5,770,363 21.12
Granted 1,646,178 45.80
Exercised (1,373,731) 15.81
Canceled (390,313) 36.67
- ---------------------------------------------------------------
Balance, December 31, 1998 5,652,497 $28.50
- ---------------------------------------------------------------
Options Exercisable
December 31, 1996 2,349,408 $12.57
December 31, 1997 3,032,472 15.12
December 31, 1998 3,015,613 19.60
- ---------------------------------------------------------------
</TABLE>
The following table summarizes information concerning options outstanding and
options exercisable as of December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- --------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF REMAINING CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES NUMBER LIFE (IN YEARS) PRICE NUMBER PRICE
======================================================================================================================
<S> <C> <C> <C> <C> <C>
$4.83 - $11.00 662,785 3.3 $ 6.53 662,785 $ 6.53
$11.01 - $21.00 1,200,703 5.0 16.22 1,180,488 16.22
$21.01 - $31.00 1,481,870 7.0 25.26 758,931 24.83
$31.01 - $41.00 778,859 7.8 37.96 212,298 35.95
$41.01 - $51.19 1,528,280 8.7 46.01 201,111 45.52
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
During 1998, 1997 and 1996, respectively, the Company issued 11,379, 13,438 and
19,740 restricted shares of common stock to officers under the terms of the
Company's Deposit Share Program. This program, which is part of the Company's
incentive compensation arrangements, allows eligible officers to deposit certain
unrestricted shares of the Company's common stock with the Company and receive
up to one share of restricted stock for each share deposited. One-half of the
matching restricted shares vests in three years and the remainder vests five
years after the date of issue. The restricted shares may not be sold, exchanged,
transferred or otherwise disposed of prior to vesting. The value of restricted
shares at issuance has been recorded as unearned compensation and is reflected
as a reduction in equity as unamortized restricted stock awards. The unearned
compensation is amortized as a charge to income over the vesting periods.
Effective January 1, 1997, the Stock Incentive Plan provides for annual
increases in the number of shares available for award based on a percentage of
the Company's common shares outstanding. As of January 1, 1999, the cumulative
number of shares which could have been issued under the Stock Incentive Plan for
awards of stock options, restricted shares and unrestricted shares of common
stock was 9,986,878. The number of shares remaining available for awards under
the Stock Incentive Plan was 3,368,258 at January 1, 1999.
STOCK OWNERSHIP PLAN FOR NONEMPLOYEE DIRECTORS
Under the ReliaStar Stock Ownership Plan for Nonemployee Directors, the Company
pays certain amounts of each non-employee director's retainer in the form of
restricted shares of the Company's common stock and nonqualified stock options.
The Company issued 3,654 restricted shares to its nonemployee directors under
this plan in 1996. In 1998, 1997 and 1996, the Company granted 38,500, 27,500
and 35,000 nonqualified stock options, respectively, to its nonemployee
directors. The exercise price for all stock options granted was the market price
at the date of the grant and no compensation expense was recorded. The stock
options must be exercised within 10 years and vest at the rate of one-third of
the grant on each of the first three anniversaries of the grant. The total
number of shares which may be issued under the ReliaStar Stock Ownership Plan
for Nonemployee Directors for awards of stock options and restricted shares is
600,000. The number of shares remaining available for awards was 390,589 as of
December 31, 1998.
NOTE NINE: SHAREHOLDERS' EQUITY
DIVIDEND RESTRICTIONS
The ability of ReliaStar to pay cash dividends to shareholders is primarily
dependent upon the amount of dividends received from ReliaStar Life. ReliaStar
Life's ability to pay cash dividends to ReliaStar is, in turn, restricted by law
or subject to approval of the insurance regulatory authorities of Minnesota.
These authorities recognize only statutory accounting practices for the ability
of an insurer to pay dividends to its shareholders.
Under Minnesota insurance law regulating the payment of dividends by
ReliaStar Life, any such payment must be an amount deemed prudent by ReliaStar
Life's Board of Directors and, unless otherwise approved by the Commissioner of
the Minnesota Department of Commerce (the Commissioner), must be paid solely
from the adjusted earned surplus of ReliaStar Life. Adjusted earned surplus
means the earned surplus as determined in accordance with statutory accounting
practices (unassigned funds) less 25% of the amount of such earned surplus which
is attributable to unrealized capital gains. Further, without approval of the
Commissioner, ReliaStar Life may not pay in any calendar year any dividend
which, when combined with other dividends paid within the preceding 12 months,
exceeds the greater of (i) 10% of ReliaStar Life's statutory surplus at the
prior year-end or (ii) 100% of ReliaStar Life's statutory net gain from
operations (not including realized capital gains) for the prior calendar year.
For 1999, the amount of dividends which can be paid by ReliaStar Life without
Commissioner approval is $156.4 million.
STATUTORY SURPLUS AND NET INCOME
Net income of the insurance subsidiaries, as determined in accordance with
statutory accounting practices, was $153.3 million, $185.4 million and $150.4
million for 1998, 1997 and 1996, respectively. ReliaStar Life's statutory
capital and surplus was $1,063.4 million and $1,031.8 million at December 31,
1998 and 1997, respectively.
SHARE RIGHTS PLAN
ReliaStar has a share rights plan which provides for one preferred share
purchase right for each outstanding share of common stock. Each right entitles
the holder to buy one-twentieth of a share of a new series of junior
participating preferred stock at an exercise price of $100, subject to
adjustment.
The rights, which are attached to the common stock, will be detached and
become exercisable only after a person or group (Acquirer) acquires ownership of
20% or more of the common stock or announces a tender offer which, if
consummated, would give the offerer ownership of 20% or more of the common
stock. The rights will expire September 8, 2004, and ReliaStar may redeem the
rights under certain circumstances. The share rights plan also provides for the
right of shareholders, other than an Acquirer, to acquire additional common
shares of ReliaStar or an Acquirer in certain merger or similar transactions.
SHARE DATA
The authorized capital stock of ReliaStar consists of 200,000,000 common shares
and 7,000,000 preferred shares, all with a par value of $.01 per share.
44
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
A summary of common share activity is as follows:
TREASURY
ISSUED STOCK
====================================================================
Balance, December 31, 1995 79,526,892 (6,893,494)
Conversion of ESOP Convertible
Preferred Stock 5,112,760 --
Issued for Acquisition -- 1,326,100
Issued for Benefit Plans 146,624 1,060,182
Treasury Stock Acquired -- (245,694)
- --------------------------------------------------------------------
Balance, December 31, 1996 84,786,276 (4,752,906)
Issued for Acquisitions 12,667,718 466,199
Issued for Benefit Plans 653,384 581,687
Treasury Stock Acquired -- (3,963,096)
- --------------------------------------------------------------------
Balance, December 31, 1997 98,107,378 (7,668,116)
Issued for Acquisitions -- 558,272
Issued for Benefit Plans -- 1,604,756
Treasury Stock Acquired -- (3,731,024)
- --------------------------------------------------------------------
Balance, December 31, 1998 98,107,378 (9,236,112)
- --------------------------------------------------------------------
10% SENIOR CUMULATIVE PREFERRED STOCK
There were 2.5 million depositary shares outstanding at December 31, 1995, each
representing one-quarter share of 10% senior cumulative preferred stock. The
Company redeemed, at par, all of the outstanding shares on July 1, 1996.
ESOP CONVERTIBLE PREFERRED STOCK
On December 31, 1996, the ESOP converted all outstanding ESOP Convertible
Preferred Stock into ReliaStar Common Stock at a rate of four ReliaStar common
shares for each ESOP Convertible Preferred share.
NOTE RECEIVABLE FROM ESOP
To finance the purchase of shares held by the ESOP, the ESOP borrowed $30.0
million from the Company under a 20-year, 9.5% note. The Company will pay
dividends on the shares held by the ESOP plus additional cash contributions in
amounts necessary to enable the ESOP to meet its obligations under the note.
NOTE TEN: REINSURANCE
The Company is a member of reinsurance associations established for the purpose
of ceding the excess of life insurance over retention limits. In addition, the
Life and Health Reinsurance Division of ReliaStar Life assumes and cedes
reinsurance on certain life and health risks as its primary business. Premium
amounts received for prospective reinsurance that meet conditions for
reinsurance accounting are recorded as unearned premium revenue and amortized
into earned premium ratably over the remaining reinsurance contract period.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The amount of the allowance for uncollectible reinsurance
receivables was immaterial at December 31, 1998 and 1997. The Company evaluates
the financial condition of its reinsurers and monitors concentrations of credit
risk to minimize its exposure to significant losses from reinsurer insolvencies.
The Company's retention limit is $500,000 per life for individual coverage and,
to the extent that ReliaStar Life reinsures life policies written by Northern
Life Insurance Company and ReliaStar Life Insurance Company of New York,
(subsidiaries of ReliaStar Life), the limit is $400,000 per life. For group
coverage and reinsurance assumed, the retention is $500,000 per life with per
occurrence limitations, subject to certain maximums. As of December 31, 1998,
$44.0 billion of life insurance in force was ceded to other companies. The
Company had assumed $48.2 billion of life insurance in force as of December 31,
1998 (including $42.6 billion of reinsurance assumed pertaining to Federal
Employees' Group Life Insurance and Servicemans' Group Life Insurance). Also
included in these amounts are $683.2 million of reinsurance ceded and $5.6
billion of reinsurance assumed by the Life and Health Reinsurance Division of
ReliaStar Life.
The effect of reinsurance on premiums and recoveries was as follows:
YEAR ENDED DECEMBER 31
--------------------------------
(IN MILLIONS) 1998 1997 1996
=====================================================================
Direct Premiums $ 780.0 $ 675.6 $ 609.9
Reinsurance Assumed 505.0 386.2 334.3
Reinsurance Ceded (270.9) (173.9) (107.3)
- ---------------------------------------------------------------------
NET PREMIUMS $1,014.1 $ 887.9 $ 836.9
- ---------------------------------------------------------------------
REINSURANCE RECOVERIES $ 218.7 $ 114.4 $ 96.3
- ---------------------------------------------------------------------
NOTE ELEVEN: LIABILITY FOR UNPAID
ACCIDENT AND HEALTH CLAIMS AND
CLAIM ADJUSTMENT EXPENSES
The change in the liability for unpaid accident and health claims and claim
adjustment expenses is summarized as follows:
(IN MILLIONS) 1998 1997 1996
===============================================================
Balance at January 1 $387.0 $383.3 $369.4
Less Reinsurance Recoverables 120.2 102.6 81.6
- ---------------------------------------------------------------
Net Balance at January 1 266.8 280.7 287.8
Incurred Related to:
Current Year 204.4 178.6 223.5
Prior Year 8.2 (3.0) (5.7)
- ---------------------------------------------------------------
Total Incurred 212.6 175.6 217.8
Paid Related to:
Current Year 84.2 107.4 127.8
Prior Year 95.8 82.1 97.1
- ---------------------------------------------------------------
Total Paid 180.0 189.5 224.9
Net Balance at December 31 299.4 266.8 280.7
Plus Reinsurance Recoverables 180.9 120.2 102.6
- ---------------------------------------------------------------
BALANCE AT DECEMBER 31 $480.3 $387.0 $383.3
- ---------------------------------------------------------------
45
<PAGE>
===============================================================================
Notes to Consolidated Financial Statements
Reliastar Financial Corp. and Subsidiaries
The liability for unpaid accident and health claims and claim adjustment
expenses is included in Future Policy and Contract Benefits on the Consolidated
Balance Sheets.
NOTE TWELVE: COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a defendant in a number of lawsuits arising out of the normal
course of the business of the Company, some of which include claims for punitive
damages. In the opinion of management, the ultimate resolution of such
litigation will not result in any material adverse impact to the financial
position of the Company.
JOINT GROUP LIFE AND ANNUITY CONTRACTS
ReliaStar Life has issued certain participating group annuity and group life
insurance contracts jointly with another insurance company. ReliaStar Life has
entered into an arrangement with this insurer whereby ReliaStar Life will
gradually transfer its liabilities (approximately $192.0 million at December 31,
1998) to the other insurer over a ten year period which commenced in 1993. The
terms of the arrangement specify the interest rate on the liabilities and
provide for a transfer of assets and liabilities scheduled in a manner
consistent with the expected cash flows of the assets allocated to support the
liabilities. A contingent liability exists with respect to the joint obligor's
portion of the contractual liabilities attributable to contributions received
prior to July 1, 1993 ($626.9 million) in the event the joint obligor is unable
to meet its obligations.
FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with on and off-balance-sheet
risk in the normal course of business to reduce its exposure to fluctuations in
interest rates. These financial instruments include commitments to extend
credit, financial guarantees, futures contracts, interest rate swaps, interest
rate caps and equity-indexed call options. Those instruments involve, to varying
degrees, elements of credit, interest rate or liquidity risk in excess of the
amount recognized in the Consolidated Balance Sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
financial guarantees written is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. For
interest rate swap and interest rate cap transactions, the contract or notional
amounts do not represent exposure to credit loss. For swaps and caps, the
Company's exposure to credit loss is limited to those swaps and caps where the
Company has an unrealized gain. The Company has no futures contracts as of
December 31, 1998.
Unless otherwise noted, the Company does not require collateral or other
security to support financial instruments with credit risk.
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1998 1997
============================================================================
<S> <C> <C>
CONTRACT OR NOTIONAL AMOUNT
Financial Instruments Whose
Contract Amounts Represent
Credit Risk
Commitments to Extend Credit $101.0 $ 156.3
Financial Guarantees 28.8 40.0
Financial Instruments Whose
Notional or Contract Amounts
Exceed the Amount of Credit Risk
Interest Rate Swap Agreements 897.5 1,162.5
Interest Rate Cap Agreements 510.0 510.0
Equity-Indexed Call Options 28.7 2.0
- ----------------------------------------------------------------------------
</TABLE>
Commitments to Extend Credit
Commitments to extend credit are legally binding agreements to lend to a
customer. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. They generally may be terminated by
the Company in the event of deterioration in the financial condition of the
borrower. Since some of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
liquidity requirements. The Company evaluates each customer's creditworthiness
on a case-by-case basis.
Financial Guarantees
Financial guarantees are conditional commitments issued by the Company
guaranteeing the performance of the borrower to a third party. Those guarantees
are primarily issued to support public and private commercial mortgage borrowing
arrangements. The credit risk involved is essentially the same as that involved
in issuing commercial mortgage loans.
ReliaStar Life is a partner in six real estate joint ventures where it has
guaranteed the repayment of loans of the partnership. As of December 31, 1998,
ReliaStar Life had guaranteed repayment of $28.8 million ($40.0 million at
December 31, 1997) of such loans including the portion allocable to the PFA. If
any payment were made under these guarantees, ReliaStar Life would be allowed to
make a claim for repayment from the joint venture, foreclose on the assets of
the joint venture, including its real estate investment and, in certain
instances, make a claim against the joint venture's general partner.
For certain of these partnerships, ReliaStar Life has made capital
contributions from time to time to provide the partnerships with sufficient cash
to meet its obligations, including operating expenses, tenant improvements and
debt service. Capital contributions during 1998 and 1997 were insignificant.
Further capital contributions may be required in future periods for certain of
the joint ventures. The Company cannot predict the amount of such future
contributions.
46
<PAGE>
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
Interest Rate Swap Agreements
The Company enters into interest rate swap agreements to manage interest rate
exposure. The primary reason for the interest rate swap agreements is to extend
the duration of adjustable rate investments. Interest rate swap transactions
generally involve the exchange of fixed and floating rate interest payment
obligations without the exchange of the underlying principal amounts. Changes in
market interest rates impact income from adjustable rate investments and have an
opposite (and approximately offsetting) effect on the reported income from the
swap portfolio. The risks under interest rate swap agreements are generally
similar to those of futures contracts. Notional principal amounts are often used
to express the volume of these transactions but do not represent the much
smaller amounts potentially subject to credit risk. The amount subject to credit
risk is approximately equal to the unrealized gain on the agreements which was
$27.3 million as of December 31, 1998.
Interest Rate Cap Agreements
The Company has entered into interest rate cap agreements as a hedge against the
effects of rising interest rates on the invested assets supporting a portfolio
of single premium deferred annuity contracts. Notional principal amounts are
often used to express the volume of these transactions but do not represent the
much smaller amounts potentially subject to credit risk. The amount subject to
credit risk is approximately equal to the unrealized gain on the agreements
which was less than $.1 million at December 31, 1998.
Equity-Indexed Call Options
The Company holds certain call options 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 25 call options with a notional amount of
$28.7 million and an estimated fair value of $9.8 million as of December 31,
1998.
Futures Contracts
Futures contracts are contracts for delayed delivery of securities or money
market instruments in which the seller agrees to make delivery at a specified
future date of a specified instrument, at a specified price or yield. These
contracts were entered into to manage interest rate risk as part of the
Company's asset and liability management. Risks arise from the movements in
securities values and interest rates.
During 1997, the Company closed out all of its futures contracts and
immediately entered into zero coupon interest rate swaps with similar
maturities. The remaining deferred gain on the closed futures contracts of
approximately $20 million is being amortized into income over the life of the
liabilities whose cash flows they supported.
LEASES
The Company has operating leases for office space and certain computer
processing and other equipment. Rental expense for these items was $15.9
million, $17.0 million and $14.2 million for 1998, 1997 and 1996, respectively.
Future minimum aggregate rental commitments at December 31, 1998 for
operating leases were as follows:
<TABLE>
<CAPTION>
(in millions)
==============================================================================
<S> <C> <C>
1999--$8.9 2002 -- $ 5.0
2000--$7.8 2003 -- $ 3.9
2001--$6.5 2004 and thereafter -- $11.4
- ------------------------------------------------------------------------------
</TABLE>
NOTE THIRTEEN: DISCONTINUED OPERATIONS AND OTHER
In December 1998, the Company completed the sale of its mortgage banking
subsidiary, ReliaStar Mortgage Corporation (RMC), for approximately $19 million
in cash. The results of RMC are presented as discontinued operations in the
Consolidated Statements of Income.
Revenues and income from operations prior to the date RMC was first
presented as discontinued operations, and the loss on disposal were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(in millions) 1998 1997 1996
===============================================================================
<S> <C> <C> <C>
Revenues $18.9 $32.7 $23.6
Income from Operations/1/ .1 3.2 2.1
Loss on Disposal/2/ (7.3) -- --
- -------------------------------------------------------------------------------
</TABLE>
1 Net of tax expense of $1.8 million and $1.1 million in 1997 and 1996,
respectively.
2 Includes a $2.8 million pretax loss from operations during the phase-out
period and is net of a tax benefit of $4.3 million.
During December 1998, the Company approved a plan to consolidate its five
individual life insurance and annuity service center operations into one new
center. This consolidation is expected to be substantially complete by the end
of the year 2000 and anticipates the termination of approximately 700 positions
at the Company's current service center operations. The transitioning of
operations to the new center is scheduled to begin during 1999. Estimated costs
related to this plan of approximately $24.8 million (pre-tax) were recorded and
are primarily related to employee-related termination costs and non-cancellable
lease contracts costs associated with vacated facilities.
During 1997, the Company approved a plan to eliminate redundancies and
create operational efficiencies in its Personal Financial Services segment
operations through consolidation of certain financial, underwriting and claims
functions. The plan was substantially completed by December 31, 1998. The
remaining costs accrued as of December 31, 1998 ($3.6 million) are primarily
related to remaining unpaid severance benefits and non-cancellable lease
contracts costs associated with vacated facilities and are considered adequate
for all remaining obligations. Certain initial accrual estimates related to non-
cancellable lease contract costs were in excess of actual costs. The reversal of
the excess accrued costs during 1998 increased net income by approximately $1
million.
47
<PAGE>
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
NOTE FOURTEEN: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures are made in accordance with the requirements of SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS No. 107
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates, in many cases, could not be realized in immediate
settlement of the instrument.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The fair value estimates presented herein are based on pertinent
information available to Management as of December 31, 1998 and 1997,
respectively. Although Management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
those dates; therefore, current estimates of fair value may differ significantly
from the amounts presented herein.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
FIXED MATURITY SECURITIES
The estimated fair value disclosures for debt securities satisfy the fair value
disclosure requirements of SFAS No. 107. (See Note 4.)
EQUITY SECURITIES
Fair value equals carrying value as these securities are carried at quoted
market value.
MORTGAGE LOANS ON REAL ESTATE
The fair values for mortgage loans on real estate are estimated using discounted
cash flow analyses and interest rates currently being offered in the marketplace
for similar loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
CASH,SHORT-TERM INVESTMENTS AND POLICY LOANS
The carrying amounts for these assets approximate the assets' fair values.
OTHER FINANCIAL INSTRUMENTS REPORTED AS ASSETS
The carrying amounts for these financial instruments (primarily premiums and
other accounts receivable and accrued investment income) approximate those
assets' fair values
INVESTMENT CONTRACT LIABILITIES
The fair value for deferred annuities was estimated to be the amount payable on
demand at the reporting date, as those investment contracts have no defined
maturity and are similar to a deposit liability. The amount payable at the
reporting date was calculated as the account balance less applicable surrender
charges.
The fair value for GICs was estimated using discounted cash flow analyses.
The discount rate used was based upon current industry offering rates on GICs of
similar durations.
The fair values for supplementary contracts without life contingencies and
immediate annuities were estimated using discounted cash flow analyses. The
discount rate was based upon treasury rates plus a pricing margin.
The carrying amounts reported for other investment contracts, which
includes participating pension contracts and retirement plan deposits,
approximate those liabilities' fair value.
CLAIMS AND OTHER DEPOSIT FUNDS
The carrying amounts for claim and other deposit funds approximate the
liabilities' fair value.
NOTES AND MORTGAGES PAYABLE
The fair value for publicly traded debt was based upon quoted market prices. For
other debt obligations, discounted cash flow analyses were used. The discount
rate was based upon the Company's estimated current incremental borrowing rates.
TRUST-ORIENTED PREFERRED SECURITIES
The fair value was based upon quoted market prices.
OTHER FINANCIAL INSTRUMENTS REPORTED AS LIABILITIES
The carrying amounts for other financial instruments (primarily normal payables
of a short-term nature) approximate those liabilities' fair values.
FINANCIAL GUARANTEES
The fair values of financial guarantees were estimated using discounted cash
flow analyses based upon the expected future net amounts to be expended. The
estimated net amounts to be expended were determined based on projected cash
flows and a valuation of the underlying collateral.
48
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
(IN MILLIONS) AMOUNT VALUE AMOUNT VALUE
=================================================================================================================
<S> <C> <C> <C> <C>
FINANCIAL INSTRUMENTS RECORDED AS ASSETS
Fixed Maturity Securities $11,625.1 $11,625.1 $11,146.7 $11,146.7
Equity Securities 60.3 60.3 27.0 27.0
Mortgage Loans on Real Estate
Commercial 1,726.8 1,841.8 1,594.9 1,679.1
Residential and Other 428.0 436.7 675.8 687.3
Policy Loans 702.3 702.3 663.3 663.3
Cash and Short-Term Investments 190.2 190.2 203.6 203.6
Other Financial Instruments Recorded as Assets 630.9 630.9 749.8 749.8
FINANCIAL INSTRUMENTS RECORDED AS LIABILITIES
Investment Contracts
Deferred Annuities (7,784.5) (7,366.3) (7,753.1) (7,321.6)
GICs (70.3) (98.2) (62.5) (90.0)
Supplementary Contracts and Immediate Annuities (414.8) (416.5) (337.1) (330.5)
Other Investment Contracts (396.4) (396.4) (454.9) (454.9)
Claim and Other Deposit Funds (154.4) (154.4) (148.1) (148.1)
Notes and Mortgages Payable (508.4) (534.3) (592.4) (609.8)
Trust-Originated Preferred Securities (242.3) (257.5) (241.9) (256.9)
Other Financial Instruments Recorded as Liabilities (545.2) (545.2) (349.6) (349.6)
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Financial Guarantees -- (2.1) -- (3.5)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
49
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
NOTE FIFTEEN: EARNINGS PER
COMMON SHARE
The following table provides a reconciliation of the numerator and denominator
for the basic and diluted earnings per common share computation:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
(IN MILLIONS) 1998 1997 1996
=================================================================
<S> <C> <C> <C>
NUMERATOR -- BASIC
Income from Continuing
Operations $244.9 $218.8 $190.9
Net Dividends on ESOP
Convertible Preferred Stock -- -- (2.0)
Dividends on 10% Senior
Cumulative Preferred Stock -- -- (3.2)
- -----------------------------------------------------------------
Income from Continuing
Operations Available to
Common Shareholders (Basic) $244.9 $218.8 $185.7
- -----------------------------------------------------------------
NUMERATOR -- DILUTED
Income from Continuing
Operations $244.9 $218.8 $190.9
Dividends on 10% Senior
Cumulative Preferred Stock -- -- (3.2)
- -----------------------------------------------------------------
Income from Continuing
Operations Available to
Common Shareholders (Diluted) $244.9 $218.8 $187.7
- -----------------------------------------------------------------
DENOMINATOR
Weighted Average Common Shares
During the Period (Basic) 91.1 85.6 73.8
Dilutive Effect of:
Stock Options 1.5 1.4 1.0
ESOP Convertible Preferred Stock -- -- 5.2
Other .1 .1 --
- -----------------------------------------------------------------
Weighted Average Common Shares
During the Period (Diluted) 92.7 87.1 80.0
- -----------------------------------------------------------------
</TABLE>
NOTE SIXTEEN: SEGMENT INFORMATION
The Company operates in four reportable segments which are differentiated by
products and/or marketing focus. The Personal Financial Services 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 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.
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 operation and personal financial education
company. Financing costs, goodwill amortization, unallocated costs and
consolidating/eliminating adjustments are reported in Corporate. Intersegment
transactions are accounted for on a third-party basis.
50
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
Selected financial information by reportable segment is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
(IN MILLIONS) 1998 1997 1996
=========================================================================
<S> <C> <C> <C>
OPERATING INCOME BEFORE SPECIAL CHARGES
Personal Financial Services $ 97.8 $ 71.2 $ 50.5
Worksite Financial Services 60.5 51.4 44.1
Tax-Sheltered and Fixed Annuities 76.5 74.3 72.9
Reinsurance 42.4 37.2 32.9
- -------------------------------------------------------------------------
Total Reportable Segments 277.2 234.1 200.4
Other Business Units 11.4 9.4 (.1)
Corporate (19.1) (16.7) (14.8)
- -------------------------------------------------------------------------
Operating Income Before
Special Charges 269.5 226.8 185.5
Net Realized Investment Gains/1/ 9.7 6.0 5.4
Special Charges/2/ (34.3) (14.0) --
- -------------------------------------------------------------------------
Consolidated Income from
Continuing Operations $ 244.9 $ 218.8 $ 190.9
- -------------------------------------------------------------------------
OPERATING REVENUES
Personal Financial Services $ 891.7 $ 716.0 $ 550.7
Worksite Financial Services 795.2 772.0 783.8
Tax-Sheltered and Fixed Annuities 591.2 563.1 539.0
Reinsurance 346.4 240.4 200.2
- -------------------------------------------------------------------------
Total Reportable Segments 2,624.5 2,291.5 2,073.7
Other Business Units 190.6 154.5 70.3
Corporate 15.5 19.9 11.8
- -------------------------------------------------------------------------
Operating Revenues 2,830.6 2,465.9 2,155.8
Net Realized Investment Gains 17.6 11.7 11.2
- -------------------------------------------------------------------------
Consolidated Revenues $2,848.2 $2,477.6 $2,167.0
- -------------------------------------------------------------------------
NET INVESTMENT INCOME
Personal Financial Services $ 405.1 $ 332.9 $ 277.2
Worksite Financial Services 141.9 135.3 142.6
Tax-Sheltered and Fixed Annuities 532.6 509.6 486.9
Reinsurance 21.1 18.0 16.1
- -------------------------------------------------------------------------
Total Reportable Segments 1,100.7 995.8 922.8
Other Business Units .4 .1 .2
Corporate 15.8 10.4 6.6
- -------------------------------------------------------------------------
Consolidated Net
Investment Income $1,116.9 $1,006.3 $ 929.6
- -------------------------------------------------------------------------
OPERATING INCOME TAX EXPENSE (BENEFIT)
Personal Financial Services $ 51.9 $ 38.4 $ 26.4
Worksite Financial Services 32.6 27.3 23.4
Tax-Sheltered and Fixed Annuities 41.3 40.1 39.3
Reinsurance 22.9 20.3 17.8
- -------------------------------------------------------------------------
Total Reportable Segments 148.7 126.1 106.9
Other Business Units 5.8 1.0 0.7
Corporate 1.7 3.0 (5.4)
- -------------------------------------------------------------------------
Operating Income Tax Expense 156.2 130.1 102.2
Net Realized Investment Gains/1/ 5.2 3.2 2.8
Special Charges/2/ (18.4) (7.6) --
- -------------------------------------------------------------------------
Consolidated Income Tax Expense $ 143.0 $ 125.7 $ 105.0
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
(IN MILLIONS) 1998 1997 1996
===================================================================
<S> <C> <C> <C>
AMORTIZATION OF DAC AND PVFP
Personal Financial Services $126.1 $ 103.7 $ 77.4
Worksite Financial Services 10.1 7.8 2.8
Tax-Sheltered and Fixed Annuities 37.7 29.0 28.4
Reinsurance 2.3 .5 .4
- -------------------------------------------------------------------
Total Reportable Segments 176.2 141.0 109.0
Corporate .9 .7 1.0
- -------------------------------------------------------------------
177.1 141.7 110.0
Special Charges/2/ 12.6 1.9 --
Net Realized Investment Gains 2.7 2.5 3.0
- -------------------------------------------------------------------
Consolidated Total $192.4 $ 146.1 $ 113.0
- -------------------------------------------------------------------
DECEMBER 31
---------------------
(IN MILLIONS) 1998 1997
===================================================================
ASSETS UNDER MANAGEMENT
Personal Financial Services $ 7,099.0 $ 6,653.8
Worksite Financial Services 3,512.1 3,070.1
Tax-Sheltered and Fixed Annuities 7,382.7 6,786.7
Reinsurance 309.9 264.3
- -------------------------------------------------------------------
Total Reportable Segments 18,303.7 16,774.9
Other Business Units 4,018.4 3,256.1
Corporate 389.8 305.9
- -------------------------------------------------------------------
Assets Under Management 22,711.9 20,336.9
Net Unrealized Investment Gains 526.2 489.1
Other Balance Sheet Assets 3,389.0 3,430.9
Off-Balance Sheet Mutual Fund
Client Assets (4,018.4) (3,256.1)
- -------------------------------------------------------------------
Consolidated Assets $22,608.7 $21,000.8
- -------------------------------------------------------------------
</TABLE>
/1/ Amounts are after-tax and include the impact of net realized investment
gains on the amortization of deferred policy acquisition costs and present
value of future profits.
/2/ The Company recorded $34.3 million (after-tax) and $14.0 million (after-tax)
of special charges in 1998 and 1997, respectively. These special charges are
excluded from operating segment results for internal management purposes and
therefore, are presented separately.
51
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
ReliaStar Financial Corp. and Subsidiaries
NOTE SEVENTEEN: QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
===========================================================================================================
<S> <C> <C> <C> <C>
Revenues $689.6 $721.8 $708.9 $727.9
Income Taxes 38.0 41.5 40.0 23.5
Income from Continuing Operations $ 64.5 $ 72.9 $ 68.6 $ 38.9
Income (Loss) from Discontinued Operations .1 (3.5) -- (3.8)
- -----------------------------------------------------------------------------------------------------------
Net Income $ 64.6 $ 69.4 $ 68.6 $ 35.1
- -----------------------------------------------------------------------------------------------------------
Per Common Share--Basic
Income from Continuing Operations $ .71 $ .80 $ .75 $ .43
Loss from Discontinued Operations -- (.04) -- (.04)
- -----------------------------------------------------------------------------------------------------------
Net Income $ .71 $ .76 $ .75 $ .39
- -----------------------------------------------------------------------------------------------------------
Per Common Share--Diluted
Income from Continuing Operations $ .70 $ .79 $ .74 $ .42
Loss from Discontinued Operations -- (.04) -- (.04)
- -----------------------------------------------------------------------------------------------------------
Net Income $ .70 $ .75 $ .74 $ .38
- -----------------------------------------------------------------------------------------------------------
Weighted Average Common Shares
Basic 91.0 91.2 91.5 90.6
Diluted 92.8 92.9 93.1 92.0
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
===========================================================================================================
<S> <C> <C> <C> <C>
Revenues $557.1 $572.3 $667.5 $680.7
Income Taxes 28.3 29.4 34.3 33.7
Income from Continuing Operations $ 51.1 $ 50.7 $ 60.8 $ 56.2
Income from Discontinued Operations .2 1.2 .7 1.1
- -----------------------------------------------------------------------------------------------------------
Net Income $ 51.3 $ 51.9 $ 61.5 $ 57.3
- -----------------------------------------------------------------------------------------------------------
Per Common Share--Basic
Income from Continuing Operations $ .64 $ .63 $ .66 $ .62
Income from Discontinued Operations -- .02 .01 .01
- -----------------------------------------------------------------------------------------------------------
Net Income $ .64 $ .65 $ .67 $ .63
- -----------------------------------------------------------------------------------------------------------
Per Common Share--Diluted
Income from Continuing Operations $ .63 $ .62 $ .65 $ .61
Income from Discontinued Operations -- .02 .01 .01
- -----------------------------------------------------------------------------------------------------------
Net Income $ .63 $ .64 $ .66 $ .62
- -----------------------------------------------------------------------------------------------------------
Weighted Average Common Shares
Basic 80.2 80.4 91.3 90.4
Diluted 81.4 81.7 93.0 92.2
- -----------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
Report of Management
RELIASTAR FINANCIAL CORP. AND SUBSIDIARIES
Management of the Company is responsible for the financial information and
representations contained in the consolidated financial statements and other
sections of the Annual Report. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles to reflect
in all material respects the substance of transactions that should be included,
and the other information in the Annual Report is consistent with those
statements. In preparing the consolidated financial statements, Management makes
informed estimates and judgments based on currently available information of the
effects of certain events and transactions.
The Company maintains accounting and other control systems which Management
believes provide reasonable assurance that transactions are properly recorded in
the books and records and that the assets are properly safeguarded. The systems
of internal control include the careful selection and training of qualified
personnel, appropriate segregation of responsibilities, communication of written
policies and procedures and a broad program of internal audits. The costs of the
control systems are balanced against the expected benefits. During 1998, the
Audit Committee of the Board of Directors, composed solely of outside directors,
met three times with Management, the Company's internal auditors and the
independent auditors to review the scope of the audits, discuss the evaluation
of internal accounting controls and discuss financial reporting matters. The
independent auditors and internal auditors have free access to the Audit
Committee and meet with it, without Management present, to discuss any
appropriate matters.
The independent auditors are responsible for expressing an informed judgment
as to whether the consolidated financial statements present fairly, in
accordance with generally accepted accounting principles, the financial
position, results of operations and cash flows of the Company. They obtain an
understanding of the Company's internal accounting controls and conduct such
tests and related procedures as they deem necessary to provide reasonable
assurance, giving due consideration to materiality, that the consolidated
financial statements contain neither misleading nor erroneous data.
/s/ John G. Turner
John G. Turner, FSA
Chairman and Chief Executive Officer
Independent Auditors' Report
Board of Directors and Shareholders
ReliaStar Financial Corp. and Subsidiaries
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of ReliaStar
Financial Corp. and Subsidiaries as of December 31, 1998 and 1997, and the
related statements of income, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ReliaStar
Financial Corp. and Subsidiaries as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 4, 1999
53
<PAGE>
Common Stockholder Information
MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of ReliaStar Financial Corp. is traded on the New York Stock
Exchange under the symbol RLR. The following table sets forth the amounts of
cash dividends per common share and the high and low prices of ReliaStar
Financial Corp. common stock for each quarter of 1998 and 1997.
<TABLE>
<CAPTION>
1998
- ----------------------------------------------------------------
MARKET PRICE DIVIDENDS
QUARTER PER SHARE PER SHARE
- ----------------------------------------------------------------
HIGH LOW
================================================================
<S> <C> <C> <C>
1st $48 3/4 $39 3/4 $.155
2nd 49 15/16 41 3/4 .185
3rd 52 7/16 36 7/16 .185
4th 48 7/16 29 .185
Year .710
1997
- ----------------------------------------------------------------
MARKET PRICE DIVIDENDS
QUARTER PER SHARE PER SHARE
- ----------------------------------------------------------------
HIGH LOW
================================================================
1st $32 11/16 $27 $ .14
2nd 36 3/4 28 5/8 .155
3rd 40 3/16 35 21/32 .155
4th 41 9/16 33 5/8 .155
Year .605
</TABLE>
For restrictions on dividends, see Note Nine of Notes to
Consolidated Financial Statements.
SHAREHOLDERS
There were 22,347 common stockholders of record as of February 22, 1999.
Corporate Information
EMPLOYEES AND AGENTS
At year-end 1998, ReliaStar Financial Corp. had 3,500 employees and 31,600
agents under contract.
AUDITORS
Deloitte & Touche LLP
STOCK TRANSFER AGENT
Norwest Bank Minnesota, N.A., P.O. Box 64854, St. Paul, Minnesota 55164-0854,
(651) 450-4064 or (800) 468-9716. Communications regarding stock transfer
requirements, lost certificates, dividend payments and change of address should
be directed to the transfer agent or to the Office of the Corporate Secretary,
ReliaStar Financial Corp., 20 Washington Avenue South, Minneapolis, Minnesota
55401.
TRADING MARKET
New York Stock Exchange
COMMON STOCK TRADING SYMBOL
RLR
TRUST-ORIGINATED PREFERRED SECURITIES
TRADING SYMBOLS
RLR PrA, RLR PrB
ANNUAL MEETING
Thursday, May 13, 1999, 10 a.m. Central Time, ReliaStar Financial Corp. Home
Office, 20 Washington Avenue South, Minneapolis, Minnesota.
INVESTOR RELATIONS
Securities analysts, investment professionals and shareholders should direct
their inquiries about financial performance to Karin E. Glasgow, Director,
Investor Relations, at (612) 342-3979.
MEDIA RELATIONS AND GENERAL INFORMATION
Members of the news media should direct their inquiries to Ruth A. Weber
Kelley, Second Vice President, Corporate Communications, at (612) 372-5628. For
general information, call the company's main switchboard at (612) 372-5432.
RELIASTAR LINE
Consumers who have questions about ReliaStar products or about financial needs
in general should call the ReliaStar Line toll-free at (888) 757-5757.
FORM 10-K REPORT
Shareholders may obtain a copy of the current Form 10-K report without charge
upon written request to James R. Miller, Senior Vice President, Chief Financial
Officer and Treasurer, ReliaStar Financial Corp., 20 Washington Avenue South,
Minneapolis, Minnesota 55401.
54
<PAGE>
EXHIBIT 21
Exhibit 21
SUBSIDIARIES OF RELIASTAR FINANCIAL CORP.
AS OF MARCH 1, 1999
<TABLE>
<CAPTION>
STATE OF
SUBSIDIARIES INCORPORATION
- ------------ -------------
<S> <C>
ReliaStar Life Insurance Company Minnesota
Northern Life Insurance Company Washington
Norlic, Inc. Washington
NWNL Benefits Corporation Minnesota
Security-Connecticut Life Insurance Company Connecticut
ReliaStar Life Insurance Company of New York New York
North Atlantic Life Agency, Inc. New York
ReliaStar Reinsurance Group (UK), Ltd. United Kingdom
ReliaStar Investment Research, Inc. Minnesota
Washington Square Securities, Inc. Minnesota
Washington Square Insurance Agency, Inc.
(Massachusetts) Massachusetts
Washington Square Insurance Agency, Inc. (Texas) Texas
Washington Square Insurance Agency, Inc. (Ohio) Ohio
Washington Square Insurance Agency, Inc.
(New Mexico) New Mexico
Northstar Holding, Inc. Delaware
Northstar Investment Management Corporation Delaware
Northstar Distributors, Inc. Minnesota
Northstar Funding, Inc. Delaware
Northstar Administrators Corporation Delaware
IB Holdings, Inc. Virginia
The New Providence Insurance Company, Limited Cayman Islands
Northeastern Corporation Connecticut
Successful Money Management Seminars, Inc. Oregon
PrimeVest Financial Services, Inc. Minnesota
PrimeVest Insurance Agency Alabama, Inc. Alabama
PrimeVest Insurance Agency of New Mexico, Inc. New Mexico
PrimeVest Insurance Agency of Oklahoma, Inc. Oklahoma
PrimeVest Insurance Agency of Texas, Inc. Texas
PrimeVest Insurance Agency of Ohio, Inc. Ohio
Branson Insurance Agency, Inc. Massachusetts
Granite Investment Services, Inc. Minnesota
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
SUBSIDIARIES INCORPORATION
- ------------ -------------
<S> <C>
Arrowhead, Ltd. Bermuda
ReliaStar Bancshares, Inc. Minnesota
ReliaStar Bank Federal
ReliaStar Investment Services, Inc. Minnesota
ReliaStar Managing General Underwriters, Inc. Tennessee
ReliaStar Payroll Agent, Inc. Minnesota
</TABLE>
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos. 33-
26416, 33-30348, 33-63258, 33-88498, 333-12825, 333-12833, 333-32069 and 333-
42125 of ReliaStar Financial Corp. on Form S-8 and 333-26881, 333-41575 and 333-
73245 of ReliaStar Financial Corp. on Form S-3 of our reports dated February 4,
1999 appearing in, and incorporated by reference in, the Annual Report on Form
10-K of ReliaStar Financial Corp. for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 18, 1999
<PAGE>
EXHIBIT 24
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ Carolyn H. Baldwin
----------------------------
Carolyn H. Baldwin
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ David C. Cox
-------------------------
David C. Cox
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ John H. Flittie
--------------------------
John H. Flittie
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ Luella G. Goldberg
----------------------------------
Luella G. Goldberg
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ William A. Hodder
--------------------------
William A. Hodder
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ James J. Howard
---------------------------
James J. Howard
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ Randy C. James
--------------------------
Randy C. James
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ Richard L. Knowlton
----------------------------
Richard L. Knowlton
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ David A. Koch
-----------------------
David A. Koch
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ Richard M. Kovacevich
------------------------------
Richard M. Kovacevich
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ James J. Renier
---------------------------
James J. Renier
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ John G. Turner
--------------------------
John G. Turner
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ James R. Miller
----------------------------
James R. Miller
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ Chris D. Schreier
----------------------------
Chris D. Schreier
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ Richard R. Crowl
--------------------------
Richard R. Crowl
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, John H. Flittie, James R.
Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 11/th/ day of
February, 1999.
/s/ Glen D. Nelson
-----------------------------
Glen D. Nelson
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 11,625,100
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 60,300
<MORTGAGE> 2,154,800
<REAL-ESTATE> 53,300
<TOTAL-INVEST> 14,909,100
<CASH> 21,500
<RECOVER-REINSURE> 417,700
<DEFERRED-ACQUISITION> 1,214,900
<TOTAL-ASSETS> 22,608,700
<POLICY-LOSSES> 13,519,800
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 433,500
<POLICY-HOLDER-FUNDS> 304,600
<NOTES-PAYABLE> 509,400
242,300
0
<COMMON> 900
<OTHER-SE> 2,119,300
<TOTAL-LIABILITY-AND-EQUITY> 22,608,700
1,014,100
<INVESTMENT-INCOME> 1,116,900
<INVESTMENT-GAINS> 17,600
<OTHER-INCOME> 699,600
<BENEFITS> 1,552,000
<UNDERWRITING-AMORTIZATION> 119,700
<UNDERWRITING-OTHER> 645,200
<INCOME-PRETAX> 401,100
<INCOME-TAX> 143,000
<INCOME-CONTINUING> 244,900
<DISCONTINUED> (7,200)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 237,700
<EPS-PRIMARY> 2.61
<EPS-DILUTED> 2.56
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 11,246,300,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 40,400,000
<MORTGAGE> 2,214,100,000
<REAL-ESTATE> 75,100,000
<TOTAL-INVEST> 14,530,500,000
<CASH> 49,800,000
<RECOVER-REINSURE> 330,700,000
<DEFERRED-ACQUISITION> 1,119,600,000
<TOTAL-ASSETS> 21,732,800,000
<POLICY-LOSSES> 13,383,800,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 352,500,000
<POLICY-HOLDER-FUNDS> 293,200,000
<NOTES-PAYABLE> 630,300,000
242,000,000
0
<COMMON> 900,000
<OTHER-SE> 2,072,800,000
<TOTAL-LIABILITY-AND-EQUITY> 21,732,800,000
235,000,000
<INVESTMENT-INCOME> 274,400,000
<INVESTMENT-GAINS> 7,200,000
<OTHER-INCOME> 173,000,000
<BENEFITS> 380,300,000
<UNDERWRITING-AMORTIZATION> 24,000,000
<UNDERWRITING-OTHER> 149,200,000
<INCOME-PRETAX> 105,800,000
<INCOME-TAX> 38,000,000
<INCOME-CONTINUING> 64,500,000
<DISCONTINUED> 100,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,600,000
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.70
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 11,146,700,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 27,000,000
<MORTGAGE> 2,270,700,000
<REAL-ESTATE> 74,500,000
<TOTAL-INVEST> 14,420,500,000
<CASH> 46,400,000
<RECOVER-REINSURE> 217,500,000
<DEFERRED-ACQUISITION> 1,091,900,000
<TOTAL-ASSETS> 21,000,800,000
<POLICY-LOSSES> 13,329,400,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 340,500,000
<POLICY-HOLDER-FUNDS> 286,500,000
<NOTES-PAYABLE> 593,500,000
241,900,000
0
<COMMON> 900,000
<OTHER-SE> 2,010,100,000
<TOTAL-LIABILITY-AND-EQUITY> 21,000,800,000
887,900,000
<INVESTMENT-INCOME> 1,006,300,000
<INVESTMENT-GAINS> 11,700,000
<OTHER-INCOME> 571,700,000
<BENEFITS> 1,377,300,000
<UNDERWRITING-AMORTIZATION> 88,900,000
<UNDERWRITING-OTHER> 552,200,000
<INCOME-PRETAX> 354,900,000
<INCOME-TAX> 125,700,000
<INCOME-CONTINUING> 218,800,000
<DISCONTINUED> 3,200,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 222,000,000
<EPS-PRIMARY> 2.59
<EPS-DILUTED> 2.55
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 11,011,900,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 31,000,000
<MORTGAGE> 2,215,900,000
<REAL-ESTATE> 76,200,000
<TOTAL-INVEST> 14,242,300,000
<CASH> 26,100,000
<RECOVER-REINSURE> 198,900,000
<DEFERRED-ACQUISITION> 1,062,000,000
<TOTAL-ASSETS> 20,605,500,000
<POLICY-LOSSES> 13,243,500,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 341,400,000
<POLICY-HOLDER-FUNDS> 222,900,000
<NOTES-PAYABLE> 581,800,000
241,800,000
0
<COMMON> 900,000
<OTHER-SE> 1,929,900,000
<TOTAL-LIABILITY-AND-EQUITY> 20,605,500,000
648,900,000
<INVESTMENT-INCOME> 737,000,000
<INVESTMENT-GAINS> 5,200,000
<OTHER-INCOME> 405,800,000
<BENEFITS> 1,012,600,000
<UNDERWRITING-AMORTIZATION> 76,200,000
<UNDERWRITING-OTHER> 384,300,000
<INCOME-PRETAX> 261,800,000
<INCOME-TAX> 92,000,000
<INCOME-CONTINUING> 162,600,000
<DISCONTINUED> 2,100,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 164,700,000
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.93
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 9,340,100,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 24,900,000
<MORTGAGE> 1,992,500,000
<REAL-ESTATE> 74,200,000
<TOTAL-INVEST> 12,246,600,000
<CASH> 27,900,000
<RECOVER-REINSURE> 224,700,000
<DEFERRED-ACQUISITION> 1,065,400,000
<TOTAL-ASSETS> 17,673,400,000
<POLICY-LOSSES> 11,479,400,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 287,700,000
<POLICY-HOLDER-FUNDS> 214,000,000
<NOTES-PAYABLE> 460,000,000
241,700,000
0
<COMMON> 400,000
<OTHER-SE> 1,500,300,000
<TOTAL-LIABILITY-AND-EQUITY> 17,673,400,000
419,800,000
<INVESTMENT-INCOME> 467,400,000
<INVESTMENT-GAINS> 2,500,000
<OTHER-INCOME> 239,700,000
<BENEFITS> 638,400,000
<UNDERWRITING-AMORTIZATION> 47,100,000
<UNDERWRITING-OTHER> 243,600,000
<INCOME-PRETAX> 163,300,000
<INCOME-TAX> 57,700,000
<INCOME-CONTINUING> 101,800,000
<DISCONTINUED> 1,400,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,200,000
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.26
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000841528
<NAME> RELIASTAR FINANCIAL CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 9,212,400,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 25,100,000
<MORTGAGE> 1,859,100,000
<REAL-ESTATE> 76,900,000
<TOTAL-INVEST> 11,920,600,000
<CASH> 19,900,000
<RECOVER-REINSURE> 209,800,000
<DEFERRED-ACQUISITION> 1,064,700,000
<TOTAL-ASSETS> 16,933,900,000
<POLICY-LOSSES> 11,400,500,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 292,700,000
<POLICY-HOLDER-FUNDS> 209,000,000
<NOTES-PAYABLE> 449,100,000
121,000,000
0
<COMMON> 578,900,000
<OTHER-SE> 805,400,000
<TOTAL-LIABILITY-AND-EQUITY> 16,933,900,000
204,700,000
<INVESTMENT-INCOME> 231,500,000
<INVESTMENT-GAINS> 2,200,000
<OTHER-INCOME> 118,700,000
<BENEFITS> 317,500,000
<UNDERWRITING-AMORTIZATION> 21,900,000
<UNDERWRITING-OTHER> 118,200,000
<INCOME-PRETAX> 81,100,000
<INCOME-TAX> 28,300,000
<INCOME-CONTINUING> 51,100,000
<DISCONTINUED> 200,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,300,000
<EPS-PRIMARY> .64
<EPS-DILUTED> .63
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 9,298,200,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 36,900,000
<MORTGAGE> 1,855,400,000
<REAL-ESTATE> 77,500,000
<TOTAL-INVEST> 11,996,300,000
<CASH> 32,400,000
<RECOVER-REINSURE> 199,000,000
<DEFERRED-ACQUISITION> 1,006,000,000
<TOTAL-ASSETS> 16,707,000,000
<POLICY-LOSSES> 11,332,200,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 287,600,000
<POLICY-HOLDER-FUNDS> 190,600,000
<NOTES-PAYABLE> 407,500,000
120,900,000
0
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836,900,000
<INVESTMENT-INCOME> 929,600,000
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<OTHER-INCOME> 389,300,000
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<UNDERWRITING-OTHER> 426,100,000
<INCOME-PRETAX> 300,900,000
<INCOME-TAX> 105,000,000
<INCOME-CONTINUING> 190,900,000
<DISCONTINUED> 2,100,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 193,000,000
<EPS-PRIMARY> 2.54
<EPS-DILUTED> 2.37
<RESERVE-OPEN> 0
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<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
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<CUMULATIVE-DEFICIENCY> 0
</TABLE>
