<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from __________________ to _________________.
Commission File Number 1-10640
-------
RELIASTAR FINANCIAL CORP.
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 41-1620373
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 WASHINGTON AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55401
--------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(612) 372-5432
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Number of shares of common stock outstanding as of July 30, 1999 was 85,991,170.
<PAGE>
Part I-Financial Information
Item 1. Financial Statements
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Balance Sheets
(in millions)
(unaudited)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
ASSETS
Fixed Maturity Securities $ 11,271.5 $ 11,625.1
Equity Securities 64.0 60.3
Mortgage Loans on Real Estate 2,233.7 2,154.8
Real Estate and Leases 34.1 53.3
Policy Loans 721.0 702.3
Other Invested Assets 122.3 144.6
Short-Term Investments 134.9 168.7
------------ ------------
Total Investments 14,581.5 14,909.1
Cash 36.3 21.5
Accounts and Notes Receivable 334.4 287.7
Reinsurance Receivable 514.2 417.7
Deferred Policy Acquisition Costs 1,337.4 1,214.9
Present Value of Future Profits 453.7 422.5
Property and Equipment, Net 114.9 117.3
Accrued Investment Income 186.2 196.0
Other Assets 417.9 399.8
Participation Fund Account Assets 310.8 311.6
Assets Held in Separate Accounts 5,058.9 4,310.6
------------ ------------
TOTAL ASSETS $ 23,346.2 $ 22,608.7
============ ============
LIABILITIES
Future Policy and Contract Benefits $ 13,617.3 $ 13,519.8
Pending Policy Claims 478.4 433.5
Other Policyholder Funds 336.1 304.6
Notes and Mortgages Payable 615.7 509.4
Income Taxes 117.1 199.0
Other Liabilities 679.9 663.2
Participation Fund Account Liabilities 310.8 311.6
Liabilities Related to Separate Accounts 5,053.4 4,305.1
------------ ------------
TOTAL LIABILITIES 21,208.7 20,246.2
------------ ------------
Company-Obligated Mandatorily Redeemable Preferred
Securities Issued by Consolidated Subsidiaries 242.5 242.3
------------ ------------
SHAREHOLDERS' EQUITY
Common Stock (Shares Issued: 1999 and 1998, 98.1) .9 .9
Additional Paid-in Capital 995.1 1,003.0
Retained Earnings 1,239.1 1,137.6
Accumulated Other Comprehensive Income 37.8 257.2
Note Receivable from ESOP (18.6) (19.8)
Unamortized Restricted Stock Awards (1.0) (.7)
Treasury Common Stock, at Cost (Shares Held: 1999, 11.6; 1998, 9.2) (358.3) (258.0)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 1,895.0 2,120.2
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 23,346.2 $ 22,608.7
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Statements of Income
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
-------- -------- --------- ----------
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 283.0 $ 257.3 $ 559.4 $ 492.3
Net Investment Income 282.3 274.3 559.6 548.7
Realized Investment Gains (Losses), Net (.9) 10.3 1.6 17.5
Policy and Contract Charges 112.6 102.1 221.8 202.7
Other Income 64.9 77.8 126.6 150.2
-------- -------- --------- ----------
Total 741.9 721.8 1,469.0 1,411.4
-------- -------- --------- ----------
BENEFITS AND EXPENSES
Benefits to Policyholders 397.5 385.0 808.6 765.3
Sales and Operating Expenses 163.3 153.9 316.2 303.1
Amortization of Deferred Policy Acquisition Costs
and Present Value of Future Profits 47.0 48.2 87.5 90.1
Interest Expense 10.1 6.4 19.6 12.9
Dividends and Experience Refunds to Policyholders 6.8 10.6 14.3 16.5
-------- -------- --------- ----------
Total 624.7 604.1 1,246.2 1,187.9
-------- -------- --------- ----------
Income from Continuing Operations Before Income Taxes and
Dividends on Preferred Securities of Subsidiaries 117.2 117.7 222.8 223.5
Income Tax Expense 42.2 41.5 80.1 79.5
Dividends on Preferred Securities of Subsidiaries, Net of Tax 3.3 3.3 6.6 6.6
-------- -------- --------- ----------
Income from Continuing Operations 71.7 72.9 136.1 137.4
Loss from Discontinued Operations, Net of Tax - (3.5) - (3.4)
-------- -------- --------- ----------
Net Income $ 71.7 $ 69.4 $ 136.1 $ 134.0
======== ======== ========= ==========
PER COMMON SHARE
Basic
Income from Continuing Operations $ .82 $ .80 $ 1.54 $ 1.51
Loss from Discontinued Operations - (.04) - (.04)
-------- -------- --------- ----------
Net Income $ .82 $ .76 $ 1.54 $ 1.47
======== ======== ========= ==========
Diluted
Income from Continuing Operations $ .81 $ .79 $ 1.52 $ 1.48
Loss from Discontinued Operations - (.04) - (.04)
-------- -------- --------- ----------
Net Income $ .81 $ .75 $ 1.52 $ 1.44
======== ======== ========= ==========
Weighted Average Common Shares
Basic 87.9 91.2 88.4 91.1
Diluted 89.0 92.9 89.6 92.8
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Statements of Shareholders' Equity
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
-------------------------------------------------
Shareholders' Equity Comprehensive Income
---------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Common Stock
Beginning and End of Period $ .9 $ .9
-------- --------
Additional Paid-in Capital
Beginning of Year 1,003.0 1,019.8
Loss on Treasury Shares Reissued for Benefit Plans (12.7) (18.9)
Loss on Treasury Shares Reissued for Acquisitions - (.9)
Tax Benefit on Stock Options Exercised 4.8 9.1
-------- --------
End of Period 995.1 1,009.1
-------- --------
Retained Earnings
Beginning of Year 1,137.6 964.8
Net Income 136.1 134.0 $136.1 $ 134.0
Common Dividends to Shareholders: (Per Share: 1999,
$.39; 1998, $.34) (34.6) (31.0)
Other, Net - (.2)
-------- --------
End of Period 1,239.1 1,067.6
-------- --------
Accumulated Other Comprehensive Income
Beginning of Year 257.2 226.2
Change for the Period (219.4) 18.8 (219.4) 18.8
-------- -------- ------ -------
End of Period 37.8 245.0
-------- --------
Note Receivable from ESOP
Beginning of Year (19.8) (20.8)
Repayments, Accrued or Paid 1.2 .5
-------- --------
End of Period (18.6) (20.3)
-------- --------
Unamortized Restricted Stock Awards
Beginning of Year (.7) (1.0)
Awards, Net (.4) (.1)
Amortization of Restricted Stock Awards .1 .1
-------- --------
End of Period (1.0) (1.0)
-------- --------
Treasury Common Stock
Beginning of Year (258.0) (178.9)
Acquired (127.2) (33.7)
Reissued for Acquisitions - 21.2
Reissued, Other 26.9 42.4
-------- --------
End of Period (358.3) (149.0)
-------- --------
Comprehensive Income (Loss) $(83.3) $ 152.8
====== =======
Total Shareholders' Equity $1,895.0 $2,152.3
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
-----------------------------------
1999 1998
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 136.1 $ 134.0
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities
Interest Credited to Insurance Contracts 278.4 276.3
Future Policy Benefits (332.6) (217.3)
Capitalization of Policy Acquisition Costs (137.8) (110.9)
Amortization of Deferred Policy Acquisition Costs and Present
Value of Future Profits 87.5 90.1
Deferred Income Taxes 21.8 7.2
Net Change in Receivables and Payables (24.8) (1.9)
Other Assets (8.3) (60.9)
Realized Investment Gains, Net (1.6) (17.5)
Other (.1) (5.7)
------------- --------------
Net Cash Provided by Operating Activities 18.6 93.4
------------- --------------
INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturity Securities 327.2 196.2
Proceeds from Maturities or Repayment of Fixed Maturity Securities 703.1 573.0
Cost of Fixed Maturity Securities Acquired (1,108.7) (956.6)
Sales (Purchases) of Equity Securities, Net 5.0 (18.5)
Proceeds of Mortgage Loans Sold, Matured or Repaid 169.6 309.2
Cost of Mortgage Loans Acquired (248.1) (167.8)
Sales of Real Estate and Leases, Net 21.4 11.8
Policy Loans Issued, Net (18.7) (13.1)
Sales (Purchases) of Other Invested Assets, Net (2.6) .3
Sales (Purchases) of Short-Term Investments, Net 33.8 (95.4)
Cash Acquired with Acquisitions, Net - 1.3
------------- --------------
Net Cash Used by Investing Activities (118.0) (159.6)
------------- --------------
FINANCING ACTIVITIES
Deposits to Insurance Contracts 849.7 722.2
Maturities and Withdrawals from Insurance Contracts (694.2) (699.4)
Increase in Notes and Mortgages Payable 106.4 71.5
Repayment of Notes and Mortgages Payable (.1) (17.5)
Issuance of Common Stock Under Stock Option and Other Plans 14.2 20.1
Dividends on Common Stock (34.6) (31.0)
Acquisition of Treasury Common Stock (127.2) (33.7)
------------- --------------
Net Cash Provided by Financing Activities 114.2 32.2
------------- --------------
Increase (Decrease) in Cash 14.8 (34.0)
Cash at Beginning of Period 21.5 46.4
------------- --------------
Cash at End of Period $ 36.3 $ 12.4
============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
RELIASTAR FINANCIAL CORP.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and such principles were applied
on a basis consistent with that reflected in the Annual Report of ReliaStar
Financial Corp. (the Company or ReliaStar) for the year ended December 31, 1998
filed with the Securities and Exchange Commission (SEC). The financial
information included herein, other than the condensed consolidated balance sheet
as of December 31, 1998, has been prepared by management without audit by
independent certified public accountants. The condensed consolidated balance
sheet as of December 31, 1998 has been derived from, and does not include all of
the disclosures contained in, the audited consolidated financial statements for
the year ended December 31, 1998.
The information furnished includes all adjustments and accruals consisting only
of normal, recurring accrual adjustments which are, in the opinion of
management, necessary for a fair statement of results for the interim period.
The results of operations for any interim period are not necessarily indicative
of results for the full year. The unaudited interim condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto contained in the Company's 1998 Annual Report.
Note 2. Segment Information
The Company operates in four reportable segments which are differentiated by
products and/or marketing focus. The Personal Financial Services (PFS) segment
sells life insurance and annuity products to individuals. The Worksite Financial
Services segment sells group and individual insurance products, 401(k) plans and
financial services to employers and their employees at the worksite. The
Tax-Sheltered and Fixed Annuities (TSA/FA) segment sells 403(b) annuities and
other retirement products, primarily to the K-12 schoolteacher market. The
Reinsurance segment sells group life, health and specialty reinsurance products
in the U.S. and internationally.
In the first quarter of 1999, management responsibility for the closed block of
individual life insurance of Northern Life was transferred from the TSA/FA
segment to the PFS segment. At the same time, management responsibility for the
fixed annuities of Security-Connecticut Life and the former Lincoln Security
Life were transferred from the PFS segment to the TSA/FA segment. Previously
reported segment financial data has been restated to reflect these changes and
conform with current period presentation.
Operations not included in the four reportable segments are classified as Other
Business units and include the Company's mutual fund operation, broker/dealer
operations, banking and trust operations and personal financial education
company. Financing costs, goodwill amortization, unallocated costs and
consolidating/eliminating adjustments are reported in Corporate.
6
<PAGE>
Selected segment data follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
OPERATING INCOME/1/ 1999 1998 1999 1998
- ----------------- -------- --------- ------- --------
<S> <C> <C> <C> <C>
Personal Financial Services $ 27.8 $ 23.6 $ 53.0 $ 46.0
Worksite Financial Services 15.4 13.9 29.9 27.8
Tax-Sheltered and Fixed Annuities 21.0 19.7 41.8 36.5
Reinsurance 12.8 11.6 19.5 21.0
-------- -------- ------- --------
Total Reportable Segments 77.0 68.8 144.2 131.3
Other Business Units 2.0 2.2 4.6 5.9
Corporate (7.2) (3.5) (14.2) (8.6)
-------- -------- ------- --------
Operating Income 71.8 67.5 134.6 128.6
Net Realized Investment Gains (Losses) (.1) 5.4 1.5 8.8
-------- -------- ------- --------
Consolidated Income from Continuing Operations $ 71.7 $ 72.9 $ 136.1 $ 137.4
======== ======== ======= ========
</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).
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
OPERATING REVENUES 1999 1998 1999 1998
- ------------------ -------- ------- ---------- --------
<S> <C> <C> <C> <C>
Personal Financial Services $ 223.6 $ 229.3 $ 441.4 $ 450.4
Worksite Financial Services 194.9 191.1 389.6 387.6
Tax-Sheltered and Fixed Annuities 153.5 149.2 300.6 294.3
Reinsurance 109.5 86.0 220.3 156.8
-------- -------- ---------- ----------
Total Reportable Segments 681.5 655.6 1,351.9 1,289.1
Other Business Units 54.6 51.3 105.2 97.0
Corporate 6.7 4.6 10.3 7.8
-------- -------- ---------- ----------
Operating Revenues 742.8 711.5 1,467.4 1,393.9
Realized Investment Gains (Losses), Net (.9) 10.3 1.6 17.5
-------- -------- ---------- ----------
Consolidated Revenues $ 741.9 $ 721.8 $ 1,469.0 $ 1,411.4
======== ======== ========== ==========
<CAPTION>
June 30 December 31
ASSETS UNDER MANAGEMENT 1999 1998
- ----------------------- ---------- ----------
<S> <C> <C>
Personal Financial Services $ 7,163.5 $ 6,887.0
Worksite Financial Services 3,796.1 3,512.1
Tax-Sheltered and Fixed Annuities 7,848.4 7,594.7
Reinsurance 330.3 309.9
---------- ----------
Total Reportable Segments 19,138.3 18,303.7
Other Business Units 4,427.5 4,018.4
Corporate 420.9 389.8
---------- ----------
Assets Under Management 23,986.7 22,711.9
Net Unrealized Investment Gains 81.2 526.2
Other Balance Sheet Assets 3,705.8 3,389.0
Off-Balance Sheet Mutual Fund Client Assets (4,427.5) (4,018.4)
---------- ----------
Consolidated Assets $ 23,346.2 $ 22,608.7
========== ==========
</TABLE>
Note 3. Subsequent Event - Acquisition
On July 22, 1999, the Company signed a definitive agreement to acquire Pilgrim
Capital Corp. (Pilgrim), a Phoenix-based asset management and mutual fund
company. As of June 30, 1999, Pilgrim had assets under management of $7.6
billion and annual asset sales of $1.1 billion. The acquisition will be effected
through a stock-and-cash transaction valued at $258 million, which includes the
Company's assumption of approximately $31 million of Pilgrim debt. The
acquisition will be accounted for as a purchase.
The definitive agreement provides for Pilgrim shareholders to receive .50 shares
of ReliaStar common stock plus $12.50 in cash for each Pilgrim share, subject to
adjustment at the time of closing. Completion of the acquisition is expected in
the fourth quarter of 1999, and is subject to normal closing conditions,
including approval by Pilgrim's stockholders, fund trustees/directors and fund
shareholders, and various regulatory approvals.
7
<PAGE>
Items 2 and 3.
RELIASTAR FINANCIAL CORP.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Results of operations by operating segment are summarized below (in millions):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------------ --------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating Income (Loss)/1/
Personal Financial Services Segment $ 27.8 $ 23.6 $ 53.0 $ 46.0
Worksite Financial Services Segment 15.4 13.9 29.9 27.8
Tax-Sheltered and Fixed Annuities Segment 21.0 19.7 41.8 36.5
Reinsurance Segment 12.8 11.6 19.5 21.0
Other Business Units 2.0 2.2 4.6 5.9
Corporate (7.2) (3.5) (14.2) (8.6)
------ ------ ------- ------
Operating Income 71.8 67.5 134.6 128.6
Net Realized Investment Gains (Losses), Net of Tax (.1) 5.4 1.5 8.8
------ ------ ------- ------
Income From Continuing Operations 71.7 72.9 136.1 137.4
Loss From Discontinued Operations, Net of Tax - (3.5) - (3.4)
------ ------ ------- ------
Net Income $ 71.7 $ 69.4 $ 136.1 $134.0
====== ====== ======= ======
</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).
ReliaStar Financial Corp. (the Company or ReliaStar) has four reportable
operating segments: Personal Financial Services (PFS), Worksite Financial
Services, Tax-Sheltered and Fixed Annuities (TSA/FA), and Reinsurance; and
conducts its operations primarily through its life insurance subsidiaries:
ReliaStar Life Insurance Company (ReliaStar Life), Northern Life Insurance
Company (Northern), Security-Connecticut Life Insurance Company
(Security-Connecticut), and ReliaStar Life Insurance Company of New York (RLNY).
These subsidiaries are sometimes collectively referred to as the Insurers.
In the first quarter of 1999, management responsibility for the closed block of
individual life insurance of Northern was transferred from the TSA/FA segment to
the PFS segment. At the same time, management responsibility for the fixed
annuities of Security-Connecticut and the former Lincoln Security Life were
transferred from the PFS segment to the TSA/FA segment. Previously reported
segment financial data has been restated to reflect these changes and conform
with current period presentation.
The discussion of segment operating results that follows refers to the above
after-tax segment results and, in each instance, amounts are after-tax unless
otherwise indicated.
Personal Financial Services
- ---------------------------
The Personal Financial Services (PFS) segment sells life insurance and annuity
products to individuals. Operating income of the PFS segment for the second
quarter of 1999 increased $4.2 million, or 18%, compared with the same period in
1998. The increase in operating income was primarily due to favorable interest
spreads, growth in assets under management and ongoing expense management.
Year-to-date operating income increased 15% over the comparable period in 1998
primarily due to growth in assets under management, favorable mortality
experience, favorable interest spreads and lower expense levels.
The interest spread of 250 basis points in the second quarter of 1999 compares
to 241 basis points in the second quarter of 1998. The increase in interest
spread reflects a 7 basis point decrease in the portfolio yield and a 16 basis
point reduction in the average crediting rate. We expect that the average
interest spread for the remainder of 1999 will be lower than the rate
experienced in the first six months of 1999, primarily as a result of declining
portfolio yields. It should be noted that the interest spread calculation is an
annualized measure and can be overly influenced in a particular
8
<PAGE>
period by the level of prepayments, recoveries on problem investments and other
variances in the level of net investment income. For approximately one-half of
the 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. Initial 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 $7.2 billion as of June 30, 1999,
from $6.6 billion as of June 30, 1998. Separate account assets under management
increased to $2.4 billion as of June 30, 1999, from $1.9 billion as of June 30,
1998.
Total sales (annualized new premiums and deposits) decreased 12% for the second
quarter of 1999 and were $87.5 million compared with $99.7 million in the same
period of 1998. The decline in sales is primarily due to a reduction in sales of
PFS variable annuity products. Sales during the second quarter of 1999 of
individual life insurance increased 11% to $29.1 million compared to the second
quarter of last year. Total sales for the first six months of 1999 were $171.0
million compared to $184.2 million in the same period of 1998. The decrease in
sales reflects an 11% decrease in variable annuity sales which was partially
offset by a 12% increase in individual life sales.
Worksite Financial Services
- ---------------------------
The Worksite Financial Services (WFS) segment sells group and individual life
insurance products, retirement plans and financial services to employers and
their employees at the worksite. Operating income of the WFS segment for the
second quarter of 1999 increased $1.5 million, or 11%, compared with the same
period in 1998. Year-to-date operating income increased 8% compared with the
same period in 1998. The increase in quarter and year-to-date operating income
was primarily due to higher investment income and lower operating expense levels
across the segment and growth in assets under management in the retirement plans
unit.
Total sales for the second quarter of 1999 were $144.2 million compared with
$100.7 million in the same period of 1998. Sales for the second quarter of 1999
increased 43% compared with the same period in 1998, reflecting a 58% increase
in retirement plan sales, a 2% increase in group health sales and a 10% decrease
in group life sales. Total sales for the first six months of 1999 were $350.4
million compared to $257.7 million for the same period of 1998. The increase in
sales reflects a 19% increase in individual life sales, a 14% increase in group
life sales, a 33% increase in group health sales and a 42% increase in
retirement plan sales.
Tax-Sheltered and Fixed Annuities
- ---------------------------------
The Tax-Sheltered and Fixed Annuities (TSA/FA) segment sells 403(b) annuities
and other retirement products, primarily to the K-12 schoolteacher market.
Operating income of the TSA/FA segment for the second quarter of 1999 increased
$1.3 million, or 7%, compared with the same period in 1998. Year-to-date
operating income increased 15% over the same period in 1998. The increase for
the quarter and year-to-date was primarily due to increased interest spreads and
growth in assets under management, partially offset by higher expense levels.
The interest spread of 289 basis points in the second quarter of 1999 compares
to 254 basis points in the second quarter of 1998. This increase in interest
spread reflects a 38 basis point reduction in the average crediting rate and a 3
basis point decrease in the portfolio yield. We expect that the average interest
spread for the remainder of 1999 will be lower than the rate experienced in the
first half of 1999, primarily as a result of declining portfolio yields. It
should be noted that the interest spread calculation is an annualized measure
and can be overly influenced in a particular period by the level of prepayments,
recoveries on problem investments and other variances in the level of net
investment income. For most of the business included in the TSA/FA segment,
crediting rates on in force business are reset annually at the beginning of the
calendar year and are guaranteed for one year. The balance of the business has
crediting rates that can be changed on the policy anniversary or some other
date. Initial crediting rates offered on new business can be changed at any time
in response to competition and market interest rates and are guaranteed to the
end of the calendar year on most new deposits received.
Total assets under management increased to $7.8 billion as of June 30, 1999,
from $7.3 billion as of June 30, 1998. Separate account assets under management
increased to $539 million as of June 30, 1999, from $244 million as of June 30,
1998.
9
<PAGE>
Total sales for the second quarter of 1999 were $173.8 million compared with
$150.0 million in the same period of 1998. The increase in sales reflects a 44%
increase in sales of variable annuities, while sales of fixed annuities
increased slightly. Total sales for the first six months of 1999 were $322.2
million compared with $285.9 million for the same period of 1998. The increase
in sales reflects a 49% increase in variable annuity sales and a 4% decrease in
fixed annuity sales.
Reinsurance
- -----------
The Reinsurance segment sells group life, health, and specialty reinsurance
products in the United States and internationally. Operating income of the
Reinsurance segment for the second quarter of 1999 increased $1.2 million, or
10%, compared with the same period in 1998. The increase in operating income was
primarily due to growth in earned premium and lower expense ratios, partially
offset by higher overall claims experience. The ratio of claims to net earned
premium was 63.6% in the second quarter of 1999, compared with 58.7% in the
second quarter of 1998. Less favorable mortality and morbidity loss ratios were
experienced in the group life, group medical, and international lines of
reinsurance business. Claims experience and overall profitability of workers
compensation carve-out reinsurance in the second quarter of 1999 were consistent
with those of the same period in 1998 and in line with the Company's
expectations. Year-to-date operating income decreased 7% compared with the same
period in 1998. The decrease was primarily due to higher overall claims
experience, partially offset by growth in earned premium and lower expense
ratios. Earnings in the reinsurance business can fluctuate based upon a number
of factors, including pricing, market capacity, the availability and pricing of
retrocessional programs, loss experience and the risk profile of the book of
business included in this segment.
Total sales for the second quarter of 1999 were $77.4 million compared with
$48.7 million in the same period of 1998, an increase of 59%, primarily due to
increased sales in the long-term disability line of business. Total sales for
the first half of 1999 were $158.8 million compared to $100.7 million in the
same period of 1998.
Other Business Units
- --------------------
Other Business Units include the Company's mutual fund operation, broker/dealer
operations, banking operation and personal finance education company. These
business units are not large enough to be classified as reportable segments.
Operating income of the Other Business Units for the second quarter of 1999
decreased $.2 million, or 9%, compared with the same period in 1998.
Year-to-date operating income decreased $1.3 million compared with the same
period in 1998. The decrease in year-to-date operating income was primarily due
to lower earnings in the mutual fund operation as a result of a gain recorded in
the first quarter of 1998 on the sale of 12b-1 fees attributable to a portion of
the mutual fund operation's Class B shares, partially offset by growth in assets
under management.
Corporate
- ---------
Corporate includes financing costs, goodwill amortization and other unallocated
costs. Operating losses of Corporate for the second quarter of 1999 and
year-to-date increased $3.7 million and $5.6 million, respectively, compared
with the same periods in 1998. The increase in operating losses was primarily
due to financing costs related to the 1998 and 1999 common stock buyback
programs.
10
<PAGE>
Realized Investment Gains and Losses
The sources of net realized investment gains (losses) were as follows (in
millions):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
----------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Gains (Losses) on Sales of Investments
Fixed Maturity Securities
Gross Gains $5.5 $8.3 $11.5 $9.2
Gross Losses (5.6) (1.5) (8.0) (1.7)
Equity Securities (.1) .3 1.2 .9
Mortgage Loans .5 (.3) .5 (.3)
Foreclosed Real Estate 1.9 3.0 1.7 3.0
Real Estate .3 .3 .9 .3
Other 5.1 4.2 6.1 13.9
Provision for Losses on Investments
Fixed Maturity Securities (.1) (2.8) (3.5) (6.3)
Foreclosed Real Estate - (1.2) (.4) (1.5)
Other (8.4) - (8.4) -
---- ---- ---- ----
Pretax Realized Investment Gains (Losses) (.9) 10.3 1.6 17.5
DAC/PVFP Amortization/1/ .9 (1.8) .8 (3.8)
Income Taxes (.1) (3.1) (.9) (4.9)
---- ---- ---- ----
Net Realized Investment Gains (Losses), Net of Tax $(.1) $5.4 $1.5 $8.8
==== ==== ==== ====
</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.
FINANCIAL CONDITION
Liquidity and Capital Resources - ReliaStar Financial Corp.
ReliaStar, as parent, is dependent upon dividends, interest and payments for
other charges received from its subsidiaries to pay dividends to shareholders,
service its debt and pay other obligations. The payment of dividends, interest
or other charges is subject to restrictions imposed by applicable insurance laws
and regulations.
The payment of future dividends by ReliaStar to its shareholders will be largely
dependent upon the ability of ReliaStar Life to pay dividends to the Company.
Under Minnesota insurance law regulating the payment of dividends by ReliaStar
Life, any such payment must be in an amount deemed prudent by ReliaStar Life's
Board of Directors and, unless otherwise approved by the Commissioner of the
Minnesota Department of Commerce (the Commissioner), must be paid solely from
the adjusted earned surplus of ReliaStar Life. Adjusted earned surplus means the
earned surplus as determined in accordance with statutory accounting practices
(unassigned funds) less 25% of the amount of such earned surplus which is
attributable to net unrealized capital gains. Further, without approval of the
Commissioner, ReliaStar Life may not pay in any calendar year any dividend
which, when combined with other dividends paid within the preceding 12 months,
exceeds the greater of (i) 10% of ReliaStar Life's statutory surplus at the
prior year-end or (ii) 100% of ReliaStar Life's statutory net gain from
operations (not including realized capital gains) for the prior calendar year.
For 1999, the amount of dividends which can be paid by ReliaStar Life without
Commissioner approval is $156.4 million.
On March 3, 1999, the Company filed a shelf registration statement with the
Securities and Exchange Commission (SEC) for the issuance of up to $500 million
of debt and equity securities. The registration statement was declared
11
<PAGE>
effective on April 30, 1999 by the SEC. As of June 30, 1999, $500.0 million of
debt and equity securities were available for issuance under this shelf
registration.
As of June 30, 1999, the Company had an unsecured revolving credit facility with
a group of banks totaling $250.0 million for general corporate purposes and
$145.0 million remained available for borrowing under this facility.
During the second quarter of 1999, the Company terminated a systematic program
it had started in the first quarter of 1999 to repurchase shares of stock in
open market transactions. The Company repurchased 1,095,000 shares under this
program for $47.5 million. The shares were repurchased for the Company's stock
option plans, stock compensation programs and dividend reinvestment program. In
addition, on July 16, 1999, the Company completed a $100 million general common
share repurchase program that was announced on May 13, 1999, whereby 2,354,500
shares of common stock were repurchased.
The Company has agreed to acquire Pilgrim Capital Corporation (see "Known Trends
and Uncertainties Which May Affect Future Reported Results - Subsequent Event-
Acquisition"). In this transaction, which is expected to close in the fourth
quarter of 1999, each outstanding share of Pilgrim common stock will be
exchanged for .50 shares of ReliaStar common stock plus $12.50 in cash (subject
to adjustment at the time of closing). As of July 20, 1999, Pilgrim had
5,084,477 outstanding shares of common stock, along with options to purchase an
additional 1,270,000 shares. ReliaStar will also assume approximately $31
million of debt.
Liquidity and Capital Resources - Insurers
Liquidity for life insurance companies is measured by their ability to pay
scheduled contractual benefits, pay operating expenses and fund investment
commitments. Sources of liquidity include scheduled and unscheduled principal
and interest payments on investments, premium payments and deposits and the sale
of liquid investments. These sources of liquidity for the Insurers significantly
exceed scheduled uses.
Liquidity is also affected by unscheduled benefit payments, including death
benefits, benefits under insured accident and health policies and contract
withdrawals and surrenders. The amount of withdrawals and surrenders is affected
by a variety of factors such as credited interest rates for competing products,
general economic conditions, the Insurers' claims paying ratings and events in
the industry which affect policyholders' confidence.
The Insurers' investment portfolios represent a significant source of liquid
assets. As of June 30, 1999, the Insurers' investment portfolios included $7.8
billion (33% of consolidated assets) of short-term investments and investment
grade marketable bonds. The June 30, 1999 investment portfolio also included
$2.7 billion of investment grade privately placed bonds which, while not
publicly traded, are a source of liquidity.
Some of the policies and annuities issued by the Insurers contain provisions
which allow contractholders to withdraw or surrender their contracts under
defined circumstances. These policies and annuities generally contain provisions
which apply penalties or otherwise restrict the ability of contractholders to
make such withdrawals or surrenders. The Insurers monitor the surrender and
policy loan activity of their insurance products and manage the composition of
their investment portfolios, including liquidity, in light of such activity.
While the Insurers have experienced an increase in withdrawal and surrender
activity attributable to their individual fixed annuity products, the surrender
activity is well below a level which would have a material effect on liquidity.
Changes in interest rates may affect the incidence of policy surrenders and
other withdrawals. In addition to the potential impact on liquidity,
unanticipated withdrawals in a changed interest rate environment could adversely
affect earnings if the Company were required to sell investments at reduced
values in order to meet liquidity demands. The Company seeks assets which have
duration characteristics similar to the liabilities which they support. The
Company also uses derivative instruments, such as interest rate swaps, to adjust
the duration of the asset and liability portfolios (see Investments-Market-
Sensitive Instruments and Risk Management).
The Company's long-term goals contemplate continued growth in its insurance
businesses. To achieve these growth goals, the Insurers will need to increase
their statutory surplus. Statutory surplus is computed according to rules
prescribed by the National Association of Insurance Commissioners (NAIC), as
modified by each Insurer's state of domicile. Statutory accounting rules are
different from generally accepted accounting principles (GAAP) and are intended
to reflect a more conservative perspective by, for example, requiring immediate
recognition of selling expenses. Additional statutory surplus may be secured
through various sources such as internally generated statutory earnings or
equity infusions by ReliaStar with funds generated through debt or equity
offerings.
The state of domicile of each of the Insurers imposes NAIC-developed minimum
risk-based capital requirements on insurance enterprises. The formulas for
determining the amount of risk-based capital specify various weighting factors
that are applied to financial balances and various levels of activity, based
upon the nature and perceived degree of risk associated with such balances and
levels of activity. Regulatory compliance is measured by a company's risk-based
capital ratio, which is calculated as a company's regulatory total adjusted
capital, as defined, divided by its authorized control level risk-based capital,
as defined. Companies with ratios below specific trigger
12
<PAGE>
points are classified within certain regulatory action levels, each of which
requires specified corrective action. The risk-based capital ratio of each of
the Insurers significantly exceeds the ratio at which regulatory corrective
action would be required.
Consolidated Cash Flows
The Company's cash balance at June 30, 1999 was $36.3 million. During the first
six months of 1999, net cash provided by operating and financing activities was
$18.6 million and $114.2 million, respectively, which was offset by net cash
used by investing activities of $118.0 million.
The $18.6 million of net cash provided by operating activities was primarily the
result of positive cash flow from premiums and investment income in excess of
cash outflows for insurance benefits and sales and operating expenses. Net cash
provided by financing activities of $114.2 million was primarily the result of
proceeds from net deposits to insurance contracts and short-term borrowings,
partially offset by the acquisition of ReliaStar 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 during the
remainder of 1999 to the acquisition of investment grade marketable and
privately placed bonds and commercial mortgages. The marketable bonds category
includes both corporate issues and structured finance securities such as
collateralized mortgage obligations (CMOs) and other mortgage-backed securities.
The Company will make new investments in below investment grade bonds subject to
overall limitations.
The assets held by each of the Insurers are legally segregated and support only
their respective contractual obligations. The investment portfolios of each
Insurer are structured to reflect the characteristics of the liabilities which
they support. The Company internally allocates assets within the Insurers to
facilitate segment asset/liability matching. These segment allocations are
solely for portfolio management purposes, and generally all of the assets
allocated to a segment are available to satisfy the respective liabilities of
all segments within each Insurer. Assets within these portfolios are selected to
provide duration, cash flow and return characteristics which are compatible with
the liabilities they support. All of the investments in the Insurers' portfolios
are subject to diversification, quality and reserving requirements of state laws
regulating the Insurers.
13
<PAGE>
The following table provides information regarding the composition of the
Company's invested assets (in millions):
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
--------------------- ---------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Investment Grade Bonds:
Marketables $ 7,632.3 52.3% $ 7,823.4 52.5%
Private Placements 2,677.3 18.4 2,881.6 19.3
--------- ------- --------- -------
Subtotal 10,309.6 70.7 10,705.0 71.8
Below Investment Grade Bonds:
Marketables 460.2 3.2 391.3 2.6
Private Placements 472.8 3.2 510.4 3.4
--------- ------- --------- -------
Subtotal 933.0 6.4 901.7 6.0
Equity Securities 64.0 .4 60.3 .4
Commercial Mortgages 1,802.3 12.4 1,726.8 11.6
Mortgages, Residential and Other 431.4 3.0 428.0 2.9
Real Estate 34.1 .2 53.3 .3
Short-Term Investments 134.9 .9 168.7 1.2
Other 872.2 6.0 865.3 5.8
--------- ------- --------- -------
Total Invested Assets $14,581.5 100.0% $14,909.1 100.0%
========= ======= ========= =======
</TABLE>
Fixed Maturity Securities
The amounts invested in fixed maturity securities as of June 30, 1999 and
December 31, 1998 were $11.3 billion and $11.6 billion, respectively. The
average marketable and private placement bond investments in a single corporate
issuer (excluding structured finance securities such as CMOs, mortgage-backed
pass throughs and asset-backed securities) as of June 30, 1999 were $9.3 million
and $7.6 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 June 30, 1999, the weighted average book yields of the Company's
investment grade portfolio and below investment grade portfolio were 7.5% and
8.3%, respectively. The weighted average book yield is not necessarily
reflective of the net investment income ultimately realized by the Company.
Investments with greater credit risk have a greater risk of default than
investment grade securities, and accordingly, some of the incremental book yield
of the below investment grade portfolio may not be realized.
14
<PAGE>
The following tables identify the amortized cost and the fair value of the
Company's fixed maturity securities with respect to each NAIC credit rating
category (in millions):
<TABLE>
<CAPTION>
June 30, 1999
- ---------------------------------------------------------------------------------------------------
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 $5,156.8 $124.2 $ (49.6) $5,231.4 $ 853.3 $17.0 $ (10.2) $ 860.1
2 2,397.2 44.2 (40.5) 2,400.9 1,820.3 22.5 (25.6) 1,817.2
3 387.7 4.4 (13.8) 378.3 330.4 3.0 (3.2) 330.2
4 86.9 1.5 (8.1) 80.3 114.6 1.8 (5.8) 110.6
5 .1 - - .1 30.7 - (1.6) 29.1
6 2.2 - (.7) 1.5 3.2 - (.3) 2.9
Redeemable
Preferred
Stock 16.7 .5 (.6) 16.6 12.7 - (.4) 12.3
-------- ------ -------- -------- -------- ----- ------- --------
Total $8,047.6 $174.8 $ (113.3) $8,109.1 $3,165.2 $44.3 $ (47.1) $3,162.4
======== ====== ======== ======== ======== ===== ======= ========
<CAPTION>
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
======== ====== ======== ======== ======== ====== ======= ========
</TABLE>
The amortized cost and fair value of fixed maturity securities by contractual
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without prepayment penalties (in millions).
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
-------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Maturing in:
One Year or Less $ 465.3 $ 468.2 $ 459.5 $ 462.9
One to Five Years 3,500.8 3,558.8 3,555.5 3,710.1
Five to Ten Years 2,897.9 2,891.9 3,022.9 3,191.1
Ten Years or Later 1,271.9 1,270.2 1,296.1 1,375.8
Mortgage-Backed/Structured Finance 3,076.9 3,082.4 2,793.0 2,885.2
--------- --------- --------- ---------
Total $11,212.8 $11,271.5 $11,127.0 $11,625.1
========= ========= ========= =========
</TABLE>
The fair values for actively traded marketable bonds are based upon quoted
market prices. The fair values for marketable bonds without an active market are
obtained through several commercial pricing services which provide the estimated
fair values. Fair market values for privately placed bonds which are not
considered problems are determined utilizing a matrix-based pricing model. The
model considers the current level of risk-free interest rates, current corporate
spreads, the credit quality of the issuer and cash flow characteristics of the
security. Using this data, the model generates estimated market values which the
Company considers reflective of the fair value of each privately placed bond.
Fair values for privately placed bonds which are considered problems are
determined through consideration of factors such as the net worth of borrower,
the value of collateral, the capital structure of the
15
<PAGE>
borrower, the presence of guarantees and the Company's evaluation of the
borrower's ability to compete in their relevant market (see Problem
Investments).
Fair values of fixed income securities fluctuate due to a number of factors,
including the market level of interest rates, fluctuations in the corporate
spreads over the risk-free rate and changes in the credit quality of specific
investments.
The Company's marketable and private placement bond portfolios were diversified
by industry (based upon amortized cost) as set forth in the following table:
<TABLE>
<CAPTION>
Marketables Private Placements
------------------------------ -------------------------------
June 30, December 31, June 30, December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Materials 6.4% 6.5% 5.6% 7.0%
Consumer Non-Cyclical 5.2 5.8 15.2 14.6
Consumer Products/Services 9.1 8.4 18.2 18.7
Energy 6.0 6.0 7.9 7.3
Financial Services 19.4 20.2 14.8 15.8
Government 2.2 2.8 .2 .2
Industrial 4.4 5.0 11.2 11.1
Mortgage-Backed/Structured
Finance 33.0 30.8 13.6 11.4
Real Estate 1.3 1.4 2.1 2.2
Retailing 1.7 1.9 4.4 4.7
Technology 2.0 2.0 1.8 2.1
Utilities 9.3 9.2 5.0 4.9
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Below Investment Grade Investments
Issuers of below investment grade debt frequently have relatively high levels of
indebtedness and are more sensitive to adverse economic conditions, such as
recession or increasing interest rates, than are issuers of investment grade
securities.
The largest investment in below investment grade bonds of any one borrower was
approximately one-tenth of one percent of invested assets at June 30, 1999. The
largest investment in below investment grade bonds of any one industry grouping
was approximately 1.7% of invested assets at June 30, 1999. The portfolio of
below investment grade bonds is regularly analyzed and managed in an effort to
avoid concentration risks.
16
<PAGE>
Mortgage-Backed/Structured Finance Securities
The Company's investment policy permits the acquisition of mortgage-backed
securities and collateralized mortgage obligations (collectively referred to as
MBS securities) provided that the Company's aggregate investment in MBS
securities shall not exceed 50% of its statutory assets and the Company shall
not acquire any interests in residual, interest only, principal only or inverse
floater tranches of MBS securities. The Company's investment strategy has been
to invest primarily in actively traded MBS securities which are structured to
reduce prepayment risk as compared to direct investments in the underlying
mortgage collateral. The amortized cost and estimated fair value of investments
in MBS securities, categorized by interest rates on the underlying collateral,
were as follows (in millions):
June 30, 1999
----------------------------------
Amortized
Cost Fair Value
---- ----------
Adjustable Rate Pass Through:
Below 6% $ 34.8 $ 34.8
6% - 7% 52.6 52.1
7% - 8% 53.2 53.0
Fixed Rate Pass Through:
Below 9% 66.0 66.5
Above 9% 5.9 6.1
Planned Amortization Class:
Below 7% 279.2 288.7
7% - 8% 300.1 309.4
8% - 9% 56.6 58.3
Above 9% 1.3 1.4
Other:
Below 7% 303.0 306.3
7% - 8% 87.0 91.4
8% - 9% 15.5 16.2
Above 9% 6.0 6.1
-------- --------
Total $1,261.2 $1,290.3
======== ========
The Company invests in public and private asset-backed securities in addition to
the MBS securities described above. As of June 30, 1999, the Insurers held
asset-backed securities with an amortized cost of $1,815.7 million and a fair
value of $1,792.1 million. These securities are collateralized by diversified
pools of manufactured housing loans, credit card receivables, automobile loans,
home equity loans, commercial mortgage loans, and high yield bank loans and
corporate bonds. The investment strategy has been to purchase primarily senior
structures and tranches that minimize prepayment and default risk. As of June
30, 1999, approximately 98% of the Company's asset-backed securities had
investment grade ratings. Approximately 37% of these securities are
collateralized by manufactured housing loans, 21% by commercial mortgage loans,
20% by high yield bank loans and corporate bonds and 13% by home equity loans.
None of the remaining collateral types exceed, on an individual basis, 10% of
total asset-backed securities.
Mortgage Loans
The Company's commercial mortgage loans range in size from $2 million to $26
million, with the average commercial mortgage loan investment as of June 30,
1999 being approximately $2.9 million.
17
<PAGE>
The commercial mortgage loan portfolio diversification by property type and
geographic region of the United States was as follows:
June 30, December 31,
1999 1998
---- ----
Property Type
- -------------
Apartment 24.6% 24.5%
Industrial 19.3 20.6
Retail 20.4 19.6
Special Purpose 21.1 19.1
Office 12.7 14.1
Hotel/Motel 1.9 2.1
----- -----
Total 100.0% 100.0%
===== =====
June 30, December 31,
1999 1998
---- ----
Geographic Region
- -----------------
Midwest 36.7% 37.4%
Pacific 24.6 24.2
Southeast 15.1 14.7
Northeast 9.6 10.1
Mountain 9.0 8.3
Southwest 5.0 5.3
----- -----
Total 100.0% 100.0%
===== =====
The weighted average yield and the weighted average maturity of the loans in the
commercial mortgage loan portfolio as of June 30, 1999 were 7.9% 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 June 30, 1999 and December 31, 1998, the Insurers held $430.9
million and $427.1 million, respectively, of non-securitized residential
mortgage loans.
Unrealized Investment Gains and Losses
All of the Company's debt and equity securities are classified as
available-for-sale and carried at fair value on the Condensed Consolidated
Balance Sheets with unrealized investment gains and losses excluded from income
and reported as a component of accumulated other comprehensive income in
shareholders' equity.
Unrealized investment gains, net of unrealized investment losses, are reported
net of related DAC, PVFP and tax effects in accumulated other comprehensive
income as shown below (in millions).
June 30, December 31,
1999 1998
-------- ------------
Unrealized Investment Gains $73.7 $526.2
DAC/PVFP Adjustment (19.0) (128.6)
Deferred Income Taxes (16.9) (140.4)
----- ------
Net Unrealized Investment Gains $37.8 $257.2
===== ======
Market-Sensitive Instruments and Risk Management
The Company's market risk-sensitive instruments include those financial
instruments as defined by Statement of Financial Accounting Standards (SFAS) No.
107, "Disclosures about Financial Instruments," and are all considered to be
entered into for other than trading purposes. The Company's primary market risk
exposure associated with these instruments is the risk associated with changes
in market interest rates.
Changes in interest rates impact the market value of fixed interest rate
securities. The change in market value of the Company's fixed maturity
securities is not expected to have a significant effect on results of operations
or liquidity because: (i) the Company has the present intent and practice to
hold most of its available-for-sale fixed maturity 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.
18
<PAGE>
The insurance liabilities of the Company are also sensitive to changes in market
interest rates. Changes in interest rates may affect the incidence of policy
surrenders and other withdrawals. In addition to the potential impact on
liquidity, unanticipated withdrawals in a changed interest rate environment
could adversely affect earnings if the Company were required to sell investments
at reduced values in order to meet liquidity demands.
The Company has established procedures for evaluating these liabilities and
attempts to structure investment asset portfolios with yield, cash flow and
interest rate sensitivities appropriate to support the insurance liabilities.
The Company also uses derivative instruments, such as interest rate swaps, to
adjust the duration of the asset and liability portfolios. In addition, the
Insurers monitor the surrender and policy loan activity of their insurance
products and manage the composition of their investment portfolios in light of
such activity.
The Company manages the composition of its long-term capital by considering
factors such as market conditions and the ratio of long-term debt and
trust-originated preferred securities to total long-term capital.
The Company manages its interest rate risk by managing its assets within target
duration ranges, based on the Company's liability profile. The Company uses
duration analysis to estimate the amount of sensitivity to market interest rate
changes. The duration of a bond or portfolio can be thought of as the life, in
years, of a notional zero-coupon bond whose fair value would change by the same
amount in response to any change in market interest rates. The portfolio
duration includes the duration impact added by interest rate swaps and caps and
equity-indexed call options.
The target duration ranges are determined by the Company based upon the
subjective evaluation of a number of characteristics of the liabilities,
including such factors as the ability of the Company to modify interest
crediting rates, the presence and magnitude of surrender charges, historical and
projected lapse experience, the level of market interest rates and competition.
A goal of this risk control process is to optimize portfolio performance
relative to the product liability requirements.
The following table sets forth the asset duration, portfolio duration and target
duration for the investment portfolio of each business segment (in years):
June 30, 1999
---------------------------------------
Asset Portfolio Target
Duration Duration Duration
-------- -------- --------
Personal Financial Services 4.2 4.3 3.5-5.0
Worksite Financial Services 3.4 3.6 3.0-6.0
Tax-Sheltered and Fixed Annuities 4.0 4.1 4.0-5.5
Reinsurance 4.6 4.6 3.5-8.0
The Company uses interest rate swaps as part of this asset/liability management
program. The Company has acquired a significant amount of certain shorter
duration investments, such as floating rate or adjustable rate investments.
Acquisition of these assets shortens the duration of an asset portfolio. The
Company uses interest rate swaps to extend the duration of these portfolios as
an alternative to purchasing longer duration investments.
At June 30, 1999, the Company had 60 interest rate swap contracts in effect with
a notional amount of $1.04 billion. At December 31, 1998, the Company had 60
interest rate swap contracts in effect with a notional amount of $897.5 million.
During the first six months of 1999, one interest rate swap contract was entered
into with a notional amount of $150.0 million as of June 30, 1999, and one
interest rate swap contract matured with a notional amount of $5.0 million.
There were no terminations of interest rate swap contracts prior to maturity
during the first six months of 1999. The Company had no deferred gains or losses
at June 30, 1999 related to interest rate swap contracts terminated early. The
estimated fair value of the interest rate swap contracts in effect at June 30,
1999 was an unrealized gain of $7.9 million, which is reported with other
invested assets in the Condensed Consolidated Balance Sheets.
19
<PAGE>
Most of the interest rate swap contracts are standard contracts whereby the
Company pays a floating rate of interest (generally based upon the LIBOR rate as
determined from time to time) and receives a fixed rate (generally a specified
contract rate). The following table details the characteristics of the Company's
interest rate swap contracts at June 30, 1999 (dollars in millions).
Notional Range of Fixed
Amount Rates Received
------ --------------
Maturing in:
One Year or Less $ 335.0 5.5 - 6.9%
One to Three Years 482.5 5.3 - 8.2%
Three to Five Years 225.0 6.0 - 7.0%
--------
Total $1,042.5
========
The Company monitors the effect of the swap position on reported income. The
Company's investment portfolio includes a substantial amount of floating rate
investments. Changes in market interest rates have an opposite (and
approximately offsetting) effect on the reported income from the swap portfolio.
Accordingly, the reported investment income (or loss) attributable to the
Company's swap position will be approximately offset by the changed investment
income of the Company's floating or adjustable rate investments in a changing
rate environment. At June 30, 1999, the Company held $1.0 billion of adjustable
rate invested assets, short-term investments and cash.
The Company holds certain call option contracts indexed to the performance of
the S&P 500 Index as part of its asset/liability management strategy for its
equity-indexed annuity products. The Company held 48 call options with a
notional amount of $47.9 million and an estimated fair value of $16.9 million as
of June 30, 1999.
The Company also uses interest rate caps as part of its overall interest rate
risk management strategy for certain annuity products primarily to hedge the
risk of investment losses due to product surrenders in an increasing interest
rate environment. The Company held nine interest rate caps with a notional
amount of $660.0 million and a fair value of $0.1 million as of June 30, 1999.
Problem Investments
The Company classifies invested assets of the Insurers as problem investments
where: (i) an asset is delinquent in a required payment of principal or
interest; (ii) an asset is the subject of a foreclosure action or the borrower
is in bankruptcy; (iii) a loan has been restructured; or (iv) a loan has been
foreclosed and the collateral is owned (Problem Investments). The Company
reports a mortgage loan as delinquent when a required payment of principal or
interest is 60 days past due. Fixed maturity securities are reported as
delinquent following the contractual grace period allowed for any required
payment of principal or interest. The Company generally considers a loan as
restructured when one or more of the following terms is changed for the benefit
of the borrower: (i) interest rate for a specified period of time or for the
life of the loan; (ii) maturity date; (iii) principal face amount or timing of
principal repayments on a contingent or absolute basis; or (iv) amount or timing
of payment of accrued interest.
The amortized cost of Problem Investments, net of related write-offs and
allowances and non-recourse debt, was as follows (in millions):
June 30, December 31,
1999 1998
-------- ------------
Private Placement Bonds $ 10.1 $ 9.5
Marketable Bonds .4 1.1
Commercial Mortgage Loans 4.5 8.7
Residential and Other Mortgage Loans 6.1 6.1
Investment Real Estate/1/ 13.2 8.3
Foreclosed Real Estate 12.7 30.5
Other - .4
------ ------
Total $ 47.0 $ 64.6
====== ======
/1/The amounts shown represent real estate acquired as an investment which the
Company has determined to be Problem Investments.
20
<PAGE>
The amortized cost of Problem Investments in the preceding table reflects
reductions for write-offs and allowances taken by the Company. The cumulative
amounts of such write-offs and allowances on problem invested assets of the
Insurers in the Condensed Consolidated Balance Sheets were as follows (in
millions):
June 30, December 31,
1999 1998
-------- ------------
Private Placement Bonds $10.4 $9.0
Marketable Bonds - 2.0
Commercial Mortgage Loans 3.9 7.6
Residential and Other Mortgage Loans 1.1 1.1
Foreclosed Real Estate 15.2 21.3
Other - 4.4
The Company establishes the carrying value of all Problem Investments. For
problem marketable securities, the fair value is the quoted market value. For
problem private placement debt securities, the fair value is determined through
consideration of factors such as the net worth of the borrower, the value of
collateral, the capital structure of the borrower, the presence of guarantees
and the Company's evaluation of the borrower's ability to compete in their
relevant market.
For problem and potential problem securities, the Company determines whether a
decline in fair value below the amortized cost is other than temporary. If the
decline in fair value is determined to be other than temporary, the Company
writes down the cost basis to fair value and the amount of the write-down is
recorded as a realized loss. Subsequent changes in the fair value of problem
available-for-sale securities which are determined to be temporary are reflected
directly in equity as unrealized investment gains or losses.
Fair value for problem real estate and problem mortgage loans is determined
taking into consideration one or more of the following factors, depending on the
circumstances for each property, including: (i) property valuation techniques
utilizing discounted cash flows at the time of stabilization including capital
expenditures and stabilization costs; (ii) sales of comparable properties; (iii)
geographic location of the property and related market conditions; and (iv)
disposition costs. In many instances, there is not an active market for such
properties. Therefore, the fair value determined by the Company may be greater
than the price which may be realized if the Company were forced to liquidate
such properties on an immediate sale basis. If fair value of a problem mortgage
loan or real estate investment is less than the carrying value, the Company
records a write-off or an increase in the allowance for uncollectible amounts.
Foreclosed properties are managed by the Company in order to maximize net
realizable value. The Company has the intent and ability to hold these assets
until appropriate sales opportunities arise.
The Company also monitors its portfolios in an attempt to identify loans which
are not currently classified as Problem Investments, but where the Company has
knowledge which causes it to have serious doubts as to the ability of borrowers
to comply with the present loan repayment terms. These loans (Potential Problem
Investments) are subject to increased scrutiny and review by the Company. The
amounts of private placements, marketable bonds, and mortgage loan Potential
Problem Investments were $41.0 million, $11.5 million and $.1 million,
respectively, at June 30, 1999.
21
<PAGE>
KNOWN TRENDS AND UNCERTAINTIES WHICH MAY AFFECT FUTURE REPORTED RESULTS
Competition.
ReliaStar competes with all financial service companies in the United States.
Many of these companies are much larger and have more resources than ReliaStar.
The products sold by ReliaStar are similar to those sold by its competitors.
ReliaStar must compete to attract and retain customers and distributors.
Innovative products, strong support for its distributors and excellent customer
service are required to successfully compete in these markets. Aggressive price
competition in insurance premiums or other product fees and commissions could
adversely affect ReliaStar's earnings and ability to retain distributors.
Financial Markets Conditions.
The product sold by ReliaStar provide value to its customers, in part, through
crediting equity gains and losses and fixed interest income. Changes in the
strengths of these markets affect ReliaStar's sales of certain products. For
instance, ReliaStar has experienced a decline in the new sales of fixed income
products in the recent low interest rate environment. ReliaStar seeks to
control this risk by maintaining a mix of products designed to be attractive in
alternative financial market conditions. Changes in market rates also affect
the value of the fixed income assets held by ReliaStar. ReliaStar attempts to
minimize the impact of interest rate changes through asset and liability
management.
Claims Volatility.
Many of ReliaStar's products provide customers with benefits in the event of
death or disability. It is not possible to predict with certainty when claims
will occur. If ReliaStar incurs more claims than expected in any period,
ReliaStar's earnings will be unfavorably affected. ReliaStar maintains
reinsurance and retrocessional arrangements with many reinsurers in an attempt
to minimize these fluctuations.
Claims Paying and Credit Ratings.
ReliaStar's insurance products and debt instruments are rated by a number of
public rating agencies. Favorable ratings are necessary to reach certain
customer product markets and also affect the Company's cost of borrowing. A
reduction in one or more ratings could affect ReliaStar's sales or the cost it
pays to borrow. ReliaStar monitors its businesses and financial condition in an
effort to maintain the ratings required to achieve its business objectives.
Financial Services Regulation.
The United States Congress is considering legislation which would eliminate many
of the restrictions on affiliations among banks, insurers and brokers. It is
possible that larger, diversified financial service companies will have more
resources than ReliaStar's current competitors, which may give them a
competitive advantage. The impact of such legislation, if any, on the Company's
financial condition and prospects cannot be predicted.
Guaranty Funds.
Through a system of state associations, the insurance industry provides
protection to its customers in the event that an insurer becomes insolvent.
These associations assess member insurers to provide for the cost of benefits to
the customers of insolvent insurers. If the industry is affected by a
substantial future insolvency the Insurers would be subjected to assessments
which could be material.
Litigation.
ReliaStar frequently encounters litigation with customers as a routine part of
its business. Some of these cases seek large amounts of punitive damages or
damages on a class basis. Juries considering similar claims in a number of
jurisdictions have awarded large punitive damage awards. While ReliaStar does
not believe it will become liable for such damages, it can make no assurances
that it will not be subjected to such an award.
22
<PAGE>
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. The Company initiated a structured review and reporting system
whereby senior management is regularly advised of the status of the project. As
of June 30, 1999, ReliaStar had converted, tested for Year 2000 compliance and
put into production all of its core business applications.
The Company conducts business with a multitude of business entities whose
ability to comply with Year 2000 systems issues may affect the business
operations of the Company. The Company has made an attempt to determine whether
such entities have adequate plans for Year 2000 compliance, and the Company is
not aware of any instances where a key supplier or vendor will not be compliant.
The Company does not have the ability to assure with any certainty the
compliance capacity of third parties.
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 and actions reflect
the importance of this project. Although the Company has contingency plans in
place, it is not reasonably possible to develop contingency plans which would
comprehensively address widespread systems failures.
Impact of Accounting Pronouncements to be Adopted in the Future
Accounting for Derivative Instruments and Hedging Activities
In June 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. SFAS No. 137, an amendment of SFAS No. 133, was issued in
June of 1999 and defers the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. The Company has not completed its analysis of the
impact on future financial results of applying this pronouncement.
Subsequent Event - Acquisition
On July 22, 1999, the Company signed a definitive agreement to acquire Pilgrim
Capital Corp., a Phoenix-based asset management and mutual fund company. As of
June 30, 1999, Pilgrim had assets under management of $7.6 billion and annual
asset sales of $1.1 billion. The acquisition will be effected through a stock-
and-cash transaction valued at $258 million, which includes the Company's
assumption of approximately $31 million of Pilgrim debt. The acquisition will be
accounted for as a purchase.
The definitive agreement provides for Pilgrim shareholders to receive .50 shares
of ReliaStar common stock plus $12.50 in cash for each Pilgrim share, subject to
adjustment at the time of closing. Completion of the acquisition is expected in
the fourth quarter of 1999, and is subject to normal closing conditions,
including approval by Pilgrim's stockholders, fund trustees/directors and fund
shareholders, and various regulatory approvals.
ReliaStar and Pilgrim will have to integrate Pilgrim's and the Company's
existing mutual fund management teams, operations, distribution channels, and
sales and marketing efforts. If this integration is not successful, the
Company's results of operations could be adversely affected.
Certain Forward-Looking Information
All statements contained in this Form 10-Q, press releases and other public
disclosures relative to markets for the Company's products and trends in the
Company's operations or financial results, as well as other statements including
words such as "anticipate," "believe," "expect," and other similar expressions,
constitute forward-looking statements under the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are subject to known and
unknown risks, uncertainties and other factors that may cause actual results to
be materially different from those contemplated by the forward-looking
statements. Such factors include, among other things: general economic
conditions and other factors, including prevailing interest rate levels and
stock market performance, which may affect the Company's ability to sell its
products, the market value of the Company's investments and the lapse rate and
profitability of the Company's policies; the Company's ability to achieve
anticipated levels of operating efficiencies; mortality and morbidity (including
the effect of the Company's reinsurance and retrocession risk management
programs); changes in federal income tax laws that may affect the relative tax
advantages of some of the Company's products; and regulatory changes or actions,
including those relating to regulation of financial services affecting bank
sales and underwriting of insurance products and regulation of the sale,
underwriting and pricing of insurance products.
23
<PAGE>
Part II. Other Information
RELIASTAR FINANCIAL CORP.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Registrant's annual meeting was held on May 13, 1999.
(b) The following matters were submitted to a vote of security holders:
Proposal 1 - Election of Directors:
<TABLE>
<CAPTION> Expiring
Nominees Votes For Votes Withheld Term
--------------------- ----------- -------------- --------
<S> <C> <C> <C>
Carolyn H. Baldwin 76,926,786 620,590 2002
Richard U. DeSchutter 76,946,542 600,834 2002
James J. Howard 76,976,629 570,747 2002
John H. Flittie 76,921,993 625,383 2000
</TABLE>
David C. Cox, Luella G. Goldberg, William A. Hodder, Randy C.
James, Richard L. Knowlton, David A. Koch, James J. Renier and
John G. Turner continued to serve as directors following the
meeting.
Proposal 2 - Proposal to Ratify the Appointment of Independent
Public Accountants:
Votes for: 76,968,944
Votes against: 370,387
Votes to abstain: 208,045
Proposal 3 - Proposal to Approve the ReliaStar Annual Incentive
Bonus Plan for Designated Executive Officers:
Votes for: 72,273,924
Votes against: 3,688,333
Votes to abstain: 1,585,119
24
<PAGE>
Item 5. Other Information:
On July 9, 1999, Bob Salipante, President and Chief Operating Officer, was
elected to the Board of Directors of Reliastar Financial Corp.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
(10)(a) ReliaStar Annual Incentive Bonus Plan for Designated
Executive Officers effective as of January 1, 1999
(10)(b) The ReliaStar Stock Ownership Plan for NonEmployee
Directors (as amend and restated effective May 13,
1999)
(10)(c) ReliaStar Deferred Compensation Plan for NonEmployee
Directors (as amended and restated effective May 13,
1999)
(11) Statement re Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None for the period of this report.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated August 12, 1999
--------------------------
RELIASTAR FINANCIAL CORP.
/s/ James R. Miller
-------------------------------
by James R. Miller
Senior Vice President, Chief Financial
Officer and Treasurer
26
<PAGE>
Exhibit 10a
RELIASTAR ANNUAL INCENTIVE BONUS PLAN
FOR
DESIGNATED EXECUTIVE OFFICERS
The ReliaStar Annual Incentive Bonus Plan for Designated Executive Officers is
hereby restated and amended, effective January 1, 1999.
1. Definitions. When the following terms are used herein with initial capital
letters, they shall have the following meanings:
1.1. Return on Equity-Operating Income Basis - A ratio, expressed as a
percentage of which the numerator is operating income (income from continuing
operations, excluding realized investment gains and losses and their impact on
the amortization of deferred policy acquisition costs and present value of
future profits, net of tax) available to common shareholders, and the
denominator is beginning-of- year common shareholders' equity, excluding
accumulated other comprehensive income as defined in Statement of Financial
Accounting Standards No. 130, and adjusted for the weighted impact of
significant common shareholder equity transactions that occur during the period.
1.2. Bonus Pool Amount - an amount of a pool from which bonuses as
provided herein may be paid equal to one and one-half (1 1/2%) of the
Corporation's Pre-tax Operating Income for the Plan Year for which the bonuses
are being paid.
1.3. Compensation Committee - a committee comprised solely of two or
more "outside directors" of the Corporation, which satisfies the requirements of
Section 162(m) Code, provided, however, that until the first meeting of
shareholders of the Corporation at which directors are to be elected that occurs
after July 1, 1994, the Compensation Committee may be composed of two or more
disinterested directors within the meaning of Rule 16b-3 promulgated under the
Securities Exchange Act of 1934.
1.4. Code - the Internal Revenue Code of 1986, as it may be amended
from time to time, and any proposed, temporary or final Treasury Regulations
promulgated thereunder.
1.5. Corporate Performance Factor - Achievement of a Return on Equity -
Operating Income Basis for the Plan Year equal to or greater than 10.7%.
1.6. Corporation - ReliaStar Financial Corp., a Delaware corporation,
and any of its Participating Employers that adopt this Plan.
<PAGE>
1.7. Participant - Executive officers of the Corporation who are
designated by the Compensation Committee as Participants in this Plan pursuant
to Section 2.1 hereof.
1.8. Participating Employer - the Corporation and any of its
subsidiaries which has, by action of its Board of Directors, elected to be a
Participating Employer.
1.9. Pre-tax Operating Income - Income from continuing operations
before income taxes, realized investment gains and losses and their impact on
the amortization of deferred policy acquisition costs and present value of
future profits, extraordinary items and the cumulative effect of accounting
changes, determined in accordance with generally accepted accounting principles,
adjusted to eliminate (a) restatements of financial results relating to an
acquisition accounted for as a "pooling-of-interests" and (b) any other unusual
nonrecurring gain or loss which is separately identified and quantified in the
Corporation's financial statements.
1.10. Plan Year - the twelve consecutive month period which coincides
with the Corporation's fiscal year.
1.11. Shares - shares of common stock of ReliaStar Financial Corp.
2. Administration.
2.1. Determinations made prior to each Plan Year. Prior to each Plan
Year or prior to such later date in the Plan Year as may be permitted in
accordance with Section 162(m) of the Code, the Compensation Committee shall
designate Participants for that Plan Year.
2.2. Certification. Following the close of each Plan Year and prior to
payment of any bonus under the Plan, the Compensation Committee must certify in
writing that the Corporate Performance Factor has been attained, and the Bonus
Pool Amount for the Plan Year.
2.3. Shareholder Approval. The material terms of this Plan shall be
disclosed to and approved by shareholders of the Corporation in accordance with
Section 162(m) of the Code. No bonus shall be paid under this Plan unless such
shareholder approval has been obtained.
3. Bonus Payment.
3.1. Formula. The Participants in the Plan shall receive cash bonus
payments each Plan Year in amounts not greater than the following designated
percentages of the Bonus Pool Amount for that Plan Year: The maximum bonuses
which can be paid for any Plan Year to the chief executive officer and to the
chief
-2-
<PAGE>
operating officer shall be 20% and 17%, respectively, of the Bonus Pool Amount
for that Plan Year, and the maximum bonus that each of the other Participants
may be paid for any Plan Year shall be the amount determined by dividing the
remaining 63% of the Bonus Pool Amount by the number of Participants, excluding
the chief executive officer and the chief operating officer, who are covered
under the Plan for that Plan Year.
3.2. Limitations.
(a) No payment if Performance Factor not achieved. In no
event shall any Participant receive a bonus payment
hereunder for a Plan Year if the Corporate
Performance Factor is not achieved during the Plan
Year.
(b) Compensation Committee may reduce bonus payment. The
Compensation Committee retains sole discretion to
reduce the amount of any bonus otherwise payable
under this Plan. To determine such reductions, the
Compensation Committee may, in its sole discretion,
adopt guidelines based on factors including, but not
limited to the Corporation's return on equity and net
income for each plan year compared to planned goals
for these factors, and attainment of business unit
and individual performance goals established for
Participants.
(c) No payment to Participant who terminates employment
prior to close of Plan Year. Except in the event of
death, retirement, disability, transfer to an
affiliate company that does not participate in this
Plan or change in control "Event" as defined in
Section 3.1(b) of the Compensation Trust Agreement
dated as of January 3, 1989 between the Corporation
and Norwest Bank Minnesota, N.A., as from time to
time amended, no bonus payment shall be paid to a
Participant who terminates employment prior to the
last day of the Plan Year.
4. Benefit Payments.
4.1. Time and Form of Payments. Subject to any deferred compensation
election pursuant to any such plans of the Corporation applicable hereto,
benefits shall be paid to the Participant as soon as administratively feasible
after the Compensation Committee has certified that the Corporate Performance
Factor has been attained. As determined from time to time by the Compensation
Committee, bonuses payable hereunder may be paid to Participants in cash or
Shares, except
-3-
<PAGE>
that any bonus payable in respect of a deceased Participant shall be payable
solely in cash to the person or persons designated by the Participant's will or
pursuant to the laws of descent and distribution. Bonuses payable in Shares
shall be subject to Section 4.2 hereof.
4.2. Bonuses Paid in Shares. The dollar amount of any bonus payable in
Shares shall be charged against the Bonus Pool Amount and shall be converted to
a whole number of Shares by dividing the amount by the fair market value of one
Share as of the date the Compensation Committee certifies that the Corporate
Performance Factor has been attained as provided in Section 4.1 hereof. Any
remainder shall be paid to the Participant in cash. Any bonus payable hereunder
in the form of Shares shall be awarded under and subject to all of the terms and
conditions of The ReliaStar 1993 Stock Incentive Plan, as amended from time to
time ("Stock Incentive Plan"). Shares awarded hereunder may, at the
Participant's election and if permitted by the Committee, be deposited with the
Corporation under Section 8.6 of the Stock Incentive Plan.
4.3. Nontransferability. Participants and beneficiaries shall not have
the right to assign, encumber or otherwise anticipate the payments to be made
under this Plan, and the benefits provided hereunder shall not be subject to
seizure for payment of any debts or judgments against any Participant or any
beneficiary.
4.4. Tax Withholding. In order to comply with all applicable federal or
state income tax laws or regulations, the Corporation may take such action as it
deems appropriate to ensure that all applicable federal or state payroll,
withholding, income or other taxes, which are the sole and absolute
responsibility of a Participant, are withheld or collected from such
Participant.
5. Amendment and Termination. The Compensation Committee may amend this Plan
prospectively at any time and for any reason deemed sufficient by it without
notice to any person affected by this Plan and may likewise terminate or curtail
the benefits of this Plan both with regard to persons expecting to receive
benefits hereunder in the future and persons already receiving benefits at the
time of such action.
6. Miscellaneous.
6.1. Effective Date. January 1, 1994.
6.2. Headings. Headings are given to the Sections and subsections of
the Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.
-4-
<PAGE>
6.3. Applicability to Successors. This Plan shall be binding upon and
inure to the benefit of the Corporation and each Participant, the successors and
assigns of the Corporation, and the beneficiaries, personal representatives and
heirs of each Participant. If the Corporation becomes a party to any merger,
consolidation or reorganization, this Plan shall remain in full force and effect
as an obligation of the Corporation or its successors in interest.
6.4. Employment Rights and Other Benefit Programs. The provisions of
this Plan shall not give any Participant any right to be retained in the
employment of the Corporation. This Plan shall not replace any contract of
employment, whether oral or written, between the Corporation and any
Participant, but shall be considered a supplement thereto. This Plan is in
addition to, and not in lieu of, any other employee benefit plan or program in
which any Participant may be or become eligible to participate by reason of
employment with the Corporation. Receipt of benefits hereunder shall have such
effect on contributions to and benefits under such other plans or programs as
the provisions of each such other plan or program may specify.
6.5. Governing Law. The validity, construction and effect of the Plan
or any bonus payable under the Plan shall be determined in accordance with the
laws of the State of Delaware.
6.6. Severability. If any provision of the Plan is or becomes or is
deemed to be invalid, illegal or unenforceable in any jurisdiction such
provision shall be construed or deemed amended to conform to applicable laws, or
if it cannot be so construed or deemed amended without, in the determination of
the Compensation Committee, materially altering the purpose or intent of the
Plan, such provision shall be stricken as to such jurisdiction, and the
remainder of the Plan shall remain in full force and effect.
6.7. Qualified Performance-based Compensation. All of the terms and
conditions of the Plan shall be interpreted in such a fashion as to qualify all
compensation paid hereunder as "qualified performance-based compensation" within
the meaning of Section 162(m) of the Code.
-5-
<PAGE>
Exhibit 10b
THE RELIASTAR STOCK OWNERSHIP PLAN
FOR NONEMPLOYEE DIRECTORS
(as amended and restated effective May 13, 1999)
1. GENERAL.
The name of the amended and restated plan set forth herein is "The
ReliaStar Stock Ownership Plan for Nonemployee Directors" (herein "Plan").
The purpose of the Plan is to promote the interests of ReliaStar Financial
Corp. ("Corporation") and its stockholders by strengthening the Corporation's
ability to attract and retain the services of experienced and knowledgeable
nonemployee Directors and by encouraging such Directors to acquire an increased
ownership interest in the Corporation.
2. EFFECTIVE DATE OF PLAN.
The effective date of the amended and restated Plan is May 13, 1999.
3. SHARES SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 11b., the total number of
shares of common stock ("Shares") of the Corporation that may be delivered or
purchased under the Plan shall not exceed Six Hundred Thousand ( 600,000) Shares
(such number having been adjusted to reflect the September 10, 1997 stock for
stock split) which may be authorized and unissued Shares or issued Shares
reacquired by the Corporation including treasury Shares.
4. DEFINITIONS.
a. Annual Retainer. "Annual Retainer" means the fixed annual fee by which
the Corporation compensates Directors for their services as Directors
of the Corporation for a Board Year, as it may be determined from time
to time by the Committee and Board of Directors.
b. Beneficiary. "Beneficiary" means the person or persons designated as
such by a Director's will or pursuant to the laws of descent and
distribution.
c. Board of Directors. "Board of Directors" or "Board" means the Board of
Directors of the Corporation.
d. Board Year. "Board Year" means the twelve-month period beginning on
the day immediately after the day on which each Annual Meeting of the
Corporation's shareholders concludes and ending on the day of the next
succeeding Annual Meeting.
e. Committee. "Committee" means the Board Affairs Committee of the Board
of Directors.
<PAGE>
f. Corporation. "Corporation" means ReliaStar Financial Corp.
g. Date of Grant. "Date of Grant" means the first day of the Board Year
on which Stock Options are awarded pursuant to Section 9 of this Plan.
h. Director. "Director" means a member of the Board of Directors of the
Corporation who is not an employee of the Corporation or any
subsidiary of the Corporation.
i. Event. "Event" means a change of control "Event" as defined in the
Compensation Trust Agreement dated as of January 3, 1989 between the
Corporation and Norwest Bank Minnesota, National Association, as from
time to time amended.
j. Fair Market Value. "Fair Market Value" as applied to a specific date
means the closing price of one Share as reported on the consolidated
transaction reporting system for New York Stock Exchange issues on
such date or, if Shares were not traded on such date, on the next
preceding day on which the Shares were traded.
k. Restricted Period. "Restricted Period" means the time period beginning
on the date that Restricted Shares are issued and ending on the date
determined as set forth in paragraph b. of Section 7 of this Plan.
l. Restricted Shares. "Restricted Shares" means Shares awarded to a
Director pursuant to Section 7 of this Plan.
m Shares. "Shares" means shares of the Corporation's common stock $.01
per share par value.
n. Stock Options. "Stock Options" means options, which are not intended
to qualify under Section 422 of the Internal Revenue Code, to purchase
Shares from the Corporation which are granted to a Director pursuant
to Section 9 of this Plan.
5. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Committee. Subject to the terms of
the Plan, the Committee shall have the power to construe the provisions of the
Plan and to determine all questions arising thereunder and to adopt and amend
such rules and regulations for administering the Plan as the Committee deems
desirable.
6. PARTICIPATION IN THE PLAN.
Each Director who is not an employee of the Corporation or any subsidiary
of the Corporation shall be eligible to participate in the Plan.
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7. RESTRICTED STOCK.
a. Restrictions on Shares. Restricted Shares issued to Directors under
this Plan may not be sold, assigned, pledged, hypothecated,
transferred or otherwise disposed of (including, without limitation,
transfer by gift or donation) during the Restricted Period.
b. Restricted Period. The restrictions on Shares shall lapse upon the
first to occur of the following events:
(i) Death of the Director;
(ii) Disability of the Director preventing continued service on the
Board;
(iii) Retirement of the Director from the Board which shall be deemed
to have occurred if a Director has served on the Board at least
five years at the time of termination of Board service;
(iv) Termination of service as a Director with the consent of a
majority of the members of the Board other than the terminating
Director; or.
(v) A change in control of the Corporation which shall occur upon
the occurrence of an Event.
Notwithstanding the foregoing, in no event shall the Restricted Period
lapse prior to the expiration of six months after the date of issuance
of the Shares.
c. Certificates for Restricted Shares. The certificates for Shares which
are subject to restrictions shall be held by the Corporation until
lapse of the restrictions as provided in this Section.
d. Dividends and Voting Rights. During the Restricted Period, a Director
shall have the right to receive dividends from and to vote his or her
Restricted Shares.
e. Forfeiture of Restricted Shares. If a Director ceases to be a Director
before the Restrictions on the Restricted Shares lapse as provided in
paragraph b. of this Section, the Restricted Shares issued to such
Director shall be forfeited and shall revert to the Corporation.
f. Fractions of Shares. The Corporation shall not be required to issue
fractions of Shares. Whenever under the terms of the Plan a fractional
Share would be required to be issued, an amount in lieu thereof shall
be paid in cash based on the same Fair Market Value used to determine
the number of Shares to be issued on the relevant issue date.
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8. PAYMENT OF DIRECTORS' ANNUAL RETAINER.
The Corporation's Annual Retainer shall be determined from time to time by
the Board of Directors and shall be paid on the first day of the Board Year. The
Annual Retainer will be paid in cash or deferred cash as elected under the
ReliaStar Deferred Compensation Plan for Nonemployee Directors, unless a
Director elects in writing one of the following alternatives prior to the
commencement of the Board Year for which the Annual Retainer is payable. Such
elections must be made in accordance with procedures established by the
Corporation.
a. Election To Receive Annual Retainer in Shares. A Director may elect to
have the Annual Retainer or a portion thereof paid in Shares. Such
election is (i) irrevocable as to any Board Year which has commenced
while such election is in effect, and (ii) may be changed only as to
Board Years commencing after the date of such change. The number of
Shares issued shall be determined by dividing the dollar amount of the
Annual Retainer elected to be received in Shares by the Fair Market
Value of Shares on the first day of the Board Year. Such Shares shall
be issued promptly. Only whole Shares shall be issued. Any remaining
amount after calculating the whole number of Shares to be issued will
be paid in cash.
b. Election To Receive Annual Retainer in Deferred Share Account Credits.
A director may elect to have any Annual Retainer or a portion thereof
payable for such Board Year credited in Deferred Share Units to a
Deferred Share Account. Such election is (i) irrevocable as to any
Board Year which has commenced while such election is in effect, and
(ii) may be changed only as to Board Years commencing after the date
of such change. On the date the Annual Retainer is payable, the
portion so elected shall be credited to a Deferred Share Account in
the electing Director's name. The number of Deferred Share Units
credited shall be determined as if such units were Shares in the
manner set forth in Section 8a. Fractional amounts will be credited to
a Deferred Share Account.
(i). A Deferred Share Account is an unsecured bookkeeping account in which
the Corporation's obligation is measured by, and payable in, Shares.
On any date that cash dividends are payable on the Corporation's
Shares, additional Deferred Share Units shall be credited to the
Deferred Share Account in a dollar amount equal to the dividends which
would be paid if the units credited to such Account on the dividend
record date were Shares, including fractional amounts.
(ii). Distribution of Deferred Share Account.
(a) Lump Sum. Unless a Director has elected to receive distribution
in installments, all Deferred Share units credited to a
Director's Deferred Share Account shall be converted to an equal
number of Shares and distributed to the Director (together with
cash in lieu of any fractional share) on the first day of the
month (or next business day) following termination of the
Director's Board service or on such other date as elected by the
Director.
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(b) Installments. A Director may elect to have the Director's Deferred
Share Account distributed in ten or fewer annual installments
commencing on a date following termination of the Director's Board
service as elected by the Director with succeeding installments to
be made on the same date (or next business day) of each succeeding
year. The amount of each installment shall be a fraction of the
number of Deferred Share Units in the Director's Deferred Share
Account on the date that is ten days prior to the date the
installment is to be distributed, the numerator of which is one
and denominator of which is the number of annual installments
elected minus the number of installments previously paid (rounded
down, except for the last installment, to the nearest whole unit).
The number of Deferred Share Units thus calculated shall be
converted to an equal number of Shares and distributed to the
Director on the installment payable date (together with cash in
lieu of any fractional unit with the final installment). An
election made pursuant to this paragraph shall be made on forms
provided by the Corporation and shall be made at the time
prescribed for elections as set forth in this Section 8.
(c) Death of Director. If a director dies before receiving full
distribution of the Director's Deferred Share Account,
distribution of the remaining units shall be made by converting
all remaining units to an equal number of whole Shares and
distributing such Shares together with cash in lieu of any
fractional units as soon as administratively feasible to the
Director's estate.
(iii). Trust. Amounts credited to Deferred Share Accounts represent unsecured
contractual obligations of the Corporation, and no participant may assert
any rights under this Plan with respect to Deferred Share Accounts
superior to the rights of an unsecured general creditor of the
Corporation. The Corporation may, but is not obligated to, establish a
trust with an independent trustee to which the Corporation may contribute
cash or Shares equal to part or all of its liability to participants with
respect to the Deferred Share Accounts. The assets of any such trust
shall be subject to the claims of general creditors of the Corporation,
(iv). Nonassignability of Deferred Share Account. No right to receive
distribution or other payment in respect of Deferred Share Accounts nor
any Deferred Share Units credited to a Deferred Share Account shall be
assignable or transferable by a Director other than by will or the laws
of descent and distribution or pursuant to a qualified domestic relations
order as defined by the Internal Revenue Code of 1986, as amended.
c. Election to Receive Value of Annual Retainer in Stock Options. A Director
may elect to have the Annual Retainer or a portion thereof paid in Stock Options
having a value, as determined by the Committee or the Board of Directors, equal
to the amount of cash which otherwise would have been payable as the Annual
Retainer. All Stock Options granted under this Plan shall be subject to Section
9 of this Plan.
9. STOCK OPTIONS.
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a. Annual Grants of Options. The Committee and/or Board of Directors
annually shall make a grant of Stock Options to each Director who will
serve as a Director for the Board Year. The amount of Stock Options
granted shall be equal to the sum of (i) the amount of Stock Options
determined by the Committee and/or the Board as compensation for service
as a Director for the Board Year; plus (ii) the amount of Stock Options a
Director has elected to receive pursuant to Section 8c. of this Plan. All
options granted pursuant to this section shall be effective on the first
day of the Board Year. The Committee and/or the Board of Directors shall
have sole discretion to determine the number of options to grant.
b. All Stock Options granted to Directors under the Plan shall be subject to
the following terms and conditions:
(i). Option Exercise Price. Stock Options granted to Directors shall have an
exercise price equal to the Fair Market Value of the Corporation's Common
Stock on the Date of Grant.
(ii). Option Term. Except as otherwise provided herein, each Stock Option
granted pursuant to this Plan shall expire and all rights to purchase
Shares shall cease ten years and one day after the Date of Grant.
(iii). Vesting. Unless otherwise provided by the Committee, the Board of
Directors, this Plan or as otherwise granted under this Plan prior to May
13, 1999, each Stock Option granted pursuant to this Plan shall vest on,
and be exercisable by the Director on the last day of the Board Year in
which such option was granted. Fifty percent of any annual grant of
options pursuant to Section 9a. of this Plan shall be forfeited
automatically on the last day of the Board Year in which such option was
granted for any Director whose attendance at meetings of the Board of
Directors and Board Committee meetings falls below the attendance level
that requires disclosure in the Corporation's Proxy Statement for the
Annual Meeting falling on the last day of the Board Year. Any Annual
Retainer elected to be received in Stock Options by a Director shall not
be subject to forfeiture under this Section 9b(iii).
(iv). Time and Manner of Exercise of Stock Options. In accordance with the
vesting schedule in paragraph b.(iii) of this Section 9, or any
accelerated vesting pursuant to paragraph b.(vi) or b(vii) of this
Section 9, an individual entitled to exercise a Stock Option may exercise
it in whole or in part at any time by delivering to the Secretary of the
Corporation, at the general offices of the Corporation, written notice of
exercise. Such notice of exercise shall specify the number of whole
Shares with respect to which the Stock Option is being exercised.
(v). Payment of Exercise Price. The individual must make payment in full to
the Corporation in the amount of the exercise price for the Shares to be
purchased, plus the amount, if any, required for withholding as provided
in Section 11f. of this Plan. In lieu of paying the exercise price as
described above, the individual may pay all or part of such exercise
price by delivering to the Corporation owned and unencumbered
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shares having a Fair Market Value as of the date of exercise equal to or
less than the exercise price of the Stock Options exercised, or delivery
of instructions to the Corporation to withhold from the Shares that
would otherwise be issued upon exercise that number of Shares having a
Fair Market Value equal to or less than the exercise price of the Stock
Options being exercised. If the Fair Market Value of the Shares
transferred or withheld in payment of the exercise price is less than
the total exercise price, the individual must pay the remainder of the
exercise price to the Corporation in cash.
(vi). Exercise of Stock Options by Eligible Director. The right to exercise
Stock Options upon termination of the Director's service as a Director
shall be as follows:
(a) Retirement or Disability of Eligible Director. Upon the
Director's retirement from the Board or upon the Director's
termination of service as a Director of the Corporation due to
the onset of the Director's disability which prevents his or her
continued service on the Board, the Director shall have until
the expiration of the Stock Option term to exercise any Stock
Options. Any Director who has served on the Board at least five
years at the time of termination of Board service, shall be
considered to have retired from the Board. Any nonvested portion
of the Stock Options granted to the Director shall immediately
vest on the date of such termination of service as a Director
and shall no longer be subject to the vesting schedule provided
in paragraph b(iii) of this Section 9.
(b) Death of Director. If a Director's termination of service as a
Director is due to the Director's death or the Director's death
occurs subsequent to such termination of service as a Director,
the Director's Beneficiary shall have the Option term remaining
to the Director had he or she lived in which to exercise the
Stock Option. Any nonvested portion of a Stock Option previously
granted to the Director shall immediately vest on the date of
such termination of service due to the Director's death.
(c) Other Termination of Service as a Director. Upon the Director's
termination of service as a Director for any other reason, the
Director shall have until the expiration of the Stock Option
term provided to the Director in paragraph b(ii) of this Section
9 to exercise the vested portion of the Stock Option. Any
portion of the Stock Option in which the Director is not vested
on the date of such termination of service as a Director shall
be forfeited.
(vii). Change of Control of the Corporation. If a change of control Event shall
occur during the term of a Stock Option granted under this Plan, then
any portion of the Stock Option which has not vested shall immediately
vest.
(viii). Unexercised Stock Option. Any portion of a Stock Option not exercised
within the option term as described in paragraph b(ii) of this Section 9
shall terminate and be forfeited.
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(ix). Merger, Dissolution or Transfer of Property. Any portion of a
Stock Option not exercised shall terminate upon the effective
date of the dissolution or liquidation of the Corporation; or
upon the reorganization, merger or consolidation of the
Corporation with one or more corporations if the Corporation is
not the surviving corporation; or upon the transfer of
substantially all of the property of the Corporation.
(x). Replacement Stock Options. A Stock Option granted at any time
-------------------------
under the Plan may, at the Committee's discretion, include the
right to acquire a Replacement Stock Option ("RSO"). The
Committee may also grant separate options ("Separate Options")
which include an RSO feature with respect to Stock Options
issued under the Plan not containing an RSO feature. If a Stock
Option either contains the RSO feature or a Separate Option has
been granted with respect thereto and if a Participant pays all
or part of the purchase price of the Stock Option with Shares
held by the Participant for at least six (6) months or with
cash, then upon exercise of the Stock Option, the Participant is
granted an RSO to purchase, at the Fair Market Value as of the
date of the Stock Option exercise, such number of Shares as
determined by the Committee at the time of granting the Stock
Option, but not in excess of the number of whole Shares used by
the Participant in payment of the purchase price (or would have
been used if Shares had been tendered instead of cash). An RSO
may be exercised between the date six (6) months after the Date
of Grant of the RSO and the date of expiration, which will be
the same as the date of expiration of the Stock Option to which
the RSO is related. An RSO shall not contain an RSO feature and
a Separate Option shall not be granted with respect to an RSO.
The RSO feature of a Stock Option and a Separate Option are
subject to cancellation by the Committee without notice at any
time in the Committee's sole discretion.
10. CONVERSION OF RETIREMENT PLAN BENEFITS
Effective May 13, 1999, the Board of Directors of the Corporation
discontinued any further accruals under the ReliaStar Financial Corp. Retirement
Plan for Nonemployee Directors (amended February 9, 1995) ("Retirement Plan").
The Committee and/or the Board shall credit Deferred Share Units to a Deferred
Share Account for each eligible Director under the Retirement Plan who elected
in writing prior to such date to receive the present value of vested retirement
benefits under the Retirement Plan in Deferred Share Units. The Committee and/or
the Board shall have sole discretion to determine the number of such Deferred
Share Units to be credited. Such Deferred Share Units shall be distributed
according to the election of each Director made prior to May 13, 1999 in
accordance with procedures of the Corporation. Such election shall be
irrevocable. Amounts credited to Deferred Share Units under this Section 10
shall be subject to Sections 1 to 6, 8b(i), 8b(iii) and 8b(iv), and 11 of this
Plan.
11. MISCELLANEOUS PROVISIONS.
a. Rights as a Shareholder. A Director shall have no rights as a
shareholder with respect to Restricted Shares and Stock Options
awarded under this Plan unless and until certificates for such
Shares are issued to the Director. The issuance by the
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Corporation of shares of stock of any class, or securities
convertible into shares of stock of any class, for cash or
property, or for labor or services, either upon direct sale or
upon the exercise of rights or warrants to subscribe therefor,
or upon conversion of shares or obligations of the Corporation
convertible into such shares or other securities, shall not
affect, and no adjustment by reason thereof shall be made with
respect to Restricted Shares or Stock Options awarded hereunder
or Deferred Share Accounts created hereunder.
b. Dilution and Other Adjustments. The aggregate number and class
of Shares subject to and authorized by the Plan, the number and
class of Shares with respect to which Stock Options may be
granted to Directors under the Plan as provided in Section 9 and
the class of Shares subject to each outstanding Stock Option,
the exercise price per Share specified in each such Stock Option
and the number of units credited to any Deferred Share Account
shall be proportionately adjusted for any increase or decrease
in the number of issued Shares resulting from a split-up or
consolidation of Shares or any like capital adjustment or the
payment of any stock dividend, or other increase or decrease in
the number of Shares effected without receipt of consideration
by the Corporation occurring after the May 13, 1999 restatement
and amendment of this Plan. In case of any recapitalization of
the Corporation, any consolidation or merger of the Corporation
with any other corporation, any sale or transfer of all or
substantially all of the assets of the Corporation or any share
exchange transaction pursuant to which (in the case of any such
transaction) all of the outstanding Shares are converted into
other securities or property, the Corporation shall, prior to or
at the time of any such transaction, make appropriate provision
or cause appropriate provision to be made so that Directors
having units in the Deferred Share Account shall be entitled to
receive, in lieu of the related Shares, at the time or times and
in the manner provided for in this Plan, the securities or other
property that would have been receivable with respect to such
Shares had they been outstanding immediately prior to the
effective date of such transaction.
c. Compliance with Law and Approval by Regulatory Bodies. No Stock
Option shall be exercisable, no Deferred Share Units shall be
credited, no Shares shall be issued, no certificates for Shares
shall be delivered, and no payment shall be made except in
compliance with all applicable federal and state laws and
regulations and rules of all domestic stock exchanges on which
the Shares are listed. The Corporation shall have the right to
rely on the opinion of its counsel as to such compliance. If, in
the opinion of the Corporation's counsel, the exercise of any
stock option, the crediting of any Deferred Share Unit, the
transfer, issuance or sale of any Shares under the Plan shall
not be lawful for any reason, including the inability of the
Corporation to obtain from any regulatory body having
jurisdiction the authority deemed by such counsel to be
necessary for such exercise, credit, transfer, issuance or sale,
the Corporation shall not be obligated to credit Deferred Share
Unites or , transfer, issue, sell or engage in such other
transaction. Any Share certificate issued may bear such legends
and statements as the Corporation may deem advisable or
desirable. Further, in connection with any exercise, crediting,
sale, issuance or transfer hereunder, the Director acquiring the
Shares shall, if requested by the Corporation, give satisfactory
assurances to the
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Corporation's counsel that the Shares are being acquired for
investment and not with a view to resale or distribution thereof
and provide any other assurance as the Corporation may deem
desirable.
d. Termination and Amendment of Plan. The Board may amend,
terminate or suspend the Plan at any time, in its sole and
absolute discretion; provided, however, that no such action
shall adversely affect any rights or obligations with respect to
any Restricted Shares or Stock Options previously granted under
the Plan.
e. Rights under the Plan. The Plan confers no right to be nominated
or elected to the Board, nor does it confer any right to
continue to serve on the Board independent of the Corporation's
By-laws and applicable public law.
f. Withholding of Taxes. Whenever under the Plan, Shares are to be
issued, restrictions changed or eliminated or, in the judgment
of the Corporation, it is appropriate, the Corporation shall
have the right to require the recipient to remit to the
Corporation an amount sufficient to satisfy any applicable
federal, state and local withholding tax requirements.
g. Agreements. All Restricted Shares and Stock Options granted
under the Plan and elections to defer Annual Retainers shall be
evidenced by written agreements in such form and containing such
terms and conditions not inconsistent with the Plan as the
Committee may adopt.
h. Governing Law. The Plan is governed in all respects by the laws
of the State of Delaware.
i. Severability. In the event that any provision in the Plan would
invalidate the Plan, the provision shall be deemed null and
void, and the Plan shall be construed as if it did not contain
that provision.
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Exhibit 10c
RELIASTAR
DEFERRED COMPENSATION PLAN
FOR
NONEMPLOYEE DIRECTORS
(as amended and restated effective May 13, 1999)
Section 1. Purpose.
The purpose of this Plan is to provide each eligible Director of ReliaStar
Financial Corp. the opportunity to receive deferred compensation for his/her
services as a Director after such services terminate.
Section 2. Definitions.
(a) "Board" means the Board of Directors of ReliaStar Financial Corp.
(b) "Board Year" means the twelve-month period commencing on the day
immediately following the day the Annual Meeting of the Corporation's
shareholders concludes and ending on the day of the next succeeding Annual
Meeting.
(c) "Corporation" means ReliaStar Financial Corp.
(d) "Deferred Compensation" means Director's Fees deferred pursuant to this
Plan.
(e) "Deferred Compensation Election Form" means the Deferred Compensation
Election Form provided by the Corporation to Directors for the purpose of
making deferral elections under this Plan.
(f) "Deferred Share Account" means a Deferred Share Account established under
this Plan.
(g) "Director" means a member of the Board.
(h) "Directors' Compensation" means all compensation payable to a Director for
service on the Board, excluding any reimbursements for travel expenses.
(i) "Fair Market Value" as applied to a specific date means the closing price
of one Share as reported on the consolidated transaction reporting system
for New York Stock Exchange issues on such date or, if Shares were not
traded on such date, on the next preceding day on which the Shares were
traded.
(j) "Interest" means interest on Deferred Compensation amounts as provided in
Section 5 of this Plan.
(k) "Memorandum Account" means a Deferred Compensation Memorandum Account
established under this Plan.
(l) "Plan" means the Deferred Compensation Plan for Nonemployee Directors as
described herein and as amended from time to time.
(m) "Secretary" means the Corporate Secretary of ReliaStar Financial Corp.
(n) "Share Election Date" means August 16, 1996.
<PAGE>
(o) "Share Election Form" means the form provided by the Corporation to
Directors for the purpose of making the election to convert Deferred
Compensation amounts in the Memorandum Account to Share units in the
Deferred Share Account.
(p) "Share Unit Determination Date" means August 16, 1996.
(q) "Shares" means shares of the Corporation's common stock .01 per share par
value.
Section 3. Eligibility.
Each Director who is not an employee of the Corporation shall be eligible to
participate in the Plan.
Section 4. Participation.
To participate in the Plan, an eligible Director must make a valid election by
executing and filing a Deferred Compensation Election Form with the Secretary.
Such elections shall be subject to the following terms and conditions:
(a) Amount Deferred - An election shall be valid only if it contains a
statement that the Director elects to defer all or a specific portion
of the Director's cash compensation due for services as a Director for
each Board Year to which the election applies.
(b) Term of Election - To become effective for a particular Board Year, an
election must be filed with the Secretary before the commencement of
that Board Year, or, in the case of a new Director, before the first
Board of Directors meeting following the Director's election to
office. An election shall apply to such Board Year and also to each
succeeding Board Year during all or part of which the Director remains
eligible until the earlier of (i) the first day of the Board Year
following the year in which the Director files with the Secretary a
revised Deferred Compensation Election Form which increases the amount
deferred, or (ii) the date the Director files with the Secretary a
revised Deferred Compensation Election Form which decreases the amount
deferred, pursuant to paragraph (a) above.
(c) Revised Deferred Compensation Election Form - A Director may file with
the Secretary at any time a revised Deferred Compensation Election
Form on which he/she elects to increase or decrease the percentage of
Directors' Fees subject to the deferral election. Any such revised
Deferred Compensation Election Form which increases the amount
deferred shall become effective on the first day of the Board Year
following the Board Year in which the
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Director files such revised Deferred Compensation Election Form with
the Secretary. Any such revised Deferred Compensation Election Form
which decreases the amount deferred shall become effective on the date
it is filed with the Secretary and shall apply to Directors' Fees
which have not yet been earned as of that date. The filing of a
revised Deferred Compensation Election Form shall not accelerate the
distribution of any Directors' Fee amounts previously deferred.
(d) Effective May 13, 1999, the Board of Directors discontinued any
further accruals under the ReliaStar Financial Corp. Retirement Plan
for Nonemployee Directors, as amended ("Retirement Plan"). Each active
eligible Director immediately prior to the Annual Shareholder's
meeting on May 13, 1999, may elect in writing prior to such date to
defer receipt of the present value of vested retirement benefits under
the Retirement Plan in cash. Such election shall be irrevocable and in
accordance with procedures of the Corporation. Such deferral shall be
subject to the terms and conditions of this Plan.
Section 5. Account; Interest; Share Units.
(a) Upon receipt of a Director's valid election pursuant to a Deferred
Compensation Election Form, the Corporation shall establish an
individual Memorandum Account for such Director. There shall be
credited to such Memorandum Account all of the Deferred Compensation
which would otherwise have been payable to such Director for the
period to which the election applies. Such Deferred Compensation shall
be credited as of the dates on which the compensation would have been
paid had there not been an election to defer such compensation.
Interest shall be credited to the Memorandum Account on the first day
of each month and immediately preceding any distribution under the
Plan. Such Interest shall be calculated using --
(1) The rate of interest paid by the Corporation as of the first day
of each month under the ReliaStar Success Sharing Plan and ESOP
Fixed Interest Account; and
(2) The Memorandum Account balance as of the last day of the
preceding month, or, if applicable, as of the date of
distribution. All amounts credited to a Memorandum Account shall
be unfunded, and such Memorandum Account shall represent an
unsecured contractual obligation of the Corporation.
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(b) A Director may elect, by submitting to the Corporation an
appropriately completed Share Election Form on or before the Share
Election Date, to have 25%, 50%, 75% or 100% of the total Deferred
Compensation amount contained in such Director's Memorandum Account as
of the Share Unit Determination Date converted to units in a Deferred
Share Account established for such Director. Such election shall be
effective as of the Share Election Date and shall be irrevocable. The
Deferred Share Account is an unsecured bookkeeping account in which
the Corporation's obligation is measured by, payable in, Shares. A
Deferred Share Account shall be established for each Director who has
elected to convert Deferred Compensation amounts in his/her Memorandum
Account to Deferred Share Account units, and such Deferred Share
Account shall be credited with a number of Deferred Share Account
units. The number of such Deferred Share Account units credited to a
Director's Deferred Share Account shall be equal to the number of
Shares having a Fair Market Value on the Share Unit Determination Date
equal to the amount of Deferred Compensation in the Memorandum Account
being converted into Deferred Share Account units. After the Share
Unit Determination Date, on any date that cash dividends are paid on
the Shares, additional Share units shall be credited to the Deferred
Share Account in an amount equal to the number of Shares having a Fair
Market Value on such dividend payment date equal to such cash
dividends.
(c) Amounts credited to Deferred Share Accounts represent unsecured
contractual obligations of the Corporation, and no participant may
assert any rights under this Plan with respect to Deferred Share
Accounts superior to the rights of an unsecured general creditor of
the Corporation. The Corporation may, but is not obligated to,
establish a trust with an independent trustee to which the Corporation
may contribute cash or Shares (which in all cases shall be treasury
shares) equal to part or all of its liability to participants with
respect to the Deferred Share Accounts. The assets of any such trust
shall be subject to the claims of general creditors of the
Corporation.
Section 6. Distribution.
(a) Lump Sum. Unless a Director has elected to receive distribution in
installments, all deferred compensation and interest credited to a
Director's Memorandum Account shall be distributed to the Director on
the first day of the month (or next business day) following
termination of the Director's Board service or on such other date as
elected by the Director.
(b) Installments. A Director may elect to have the Director's Memorandum
Account amount distributed in ten or fewer annual installments
commencing on a date following termination of the Director's Board
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service as elected by the Director. Succeeding installments will be
made on the same date (or next business day) of each succeeding year.
The amount of each installment shall be determined by multiplying the
balance credited to the Memorandum Account as of the first day of the
month in which the distribution is to be made by a fraction as
follows: The numerator of the fraction shall be one (1), and the
denominator shall be the number of installments minus installments
theretofore made to the Director.
If a Director dies prior to commencement of payments of his/her
Memorandum Account, or if a Director dies after such payments have
commenced but before full payment of all amounts credited to his/her
Memorandum Account, the balance of the Memorandum Account as of the
date of death shall be paid to the Director's estate.
(c) As of the initial date of distribution of amounts credited to a
Director's Deferred Share Account, Share units credited to such
Deferred Compensation Account shall be converted to an equal number of
Shares and distributed as provided herein to the Director (together
with cash in lieu of any fractional share). All such Shares shall be
distributed to the Director in five approximately equal annual
installments. The first installment shall be paid on the tenth day of
the calendar year immediately following the calendar year in which the
Director ceases to be a Director of the Corporation. Subsequent
installments shall be made on the tenth day of each succeeding
calendar year until the entire amount of units credited to the
Deferred Share Account shall have been distributed in Shares. The
number of Shares distributed in each installment shall be determined
by multiplying the units credited to the Deferred Share Account as of
the first day of the month in which a distribution is to be made by a
fraction, as follows: The numerator of the fraction shall be one (1),
and the denominator shall be the number of installments minus
installments theretofore made to the Director.
If a Director dies prior to commencement of distribution of Shares
from his/her Deferred Share Account, or if a Director dies after such
distributions have commenced but before full distribution of all such
Shares has been made, the balance of the Deferred Share Account shall
be distributed in Shares to the Director's estate.
Section 7. Assignment.
The right of a Director to any Deferred Compensation, Interest or Shares
shall not be subject to assignment by the Director (other than by will or
the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Internal Revenue Code of 1986, as
amended). If a Director
5
<PAGE>
makes such an assignment (other than as permitted in the preceding
sentence), the Corporation may disregard such assignment and discharge its
obligation hereunder by making payment as though no such assignment had
been made.
Section 8. Administration of Plan.
The Plan shall be administered by the Board Affairs Committee of the Board.
The Board Affairs Committee shall have full power to formulate additional
rules and regulations for carrying out the Plan and to make such amendments
or modifications in the Plan as the Board Affairs Committee may deem proper
from time to time and in the best interests of the Corporation. No such
amendment or modification shall affect the obligation of the Corporation to
pay to a Director the amounts credited to his/her Memorandum Account or
Deferred Share Account. Any decision or interpretation adopted by the Board
Affairs Committee shall be final and conclusive.
Section 9. Dilution and Other Adjustments.
The number of units credited to any Deferred Share Account shall be
proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a split-up or consolidation of Shares or any
like capital adjustment or the payment of any stock dividend, or other
increase or decrease in the number of Shares effected without receipt of
consideration by the Corporation. In case of any recapitalization of the
Corporation, any consolidation or merger of the Corporation with any other
corporation, any sale or transfer of all or substantially all of the assets
of the Corporation or any share exchange transaction pursuant to which (in
the case of any such transaction) all of the outstanding Shares are
converted into other securities or property, the Corporation shall, prior
to or at the time of any such transaction, make appropriate provision or
cause appropriate provision to be made so that Directors having units in
the Deferred Share Account shall be entitled to receive, in lieu of the
related Shares, at the time or times and in the manner provided for in this
Plan, the securities or other property that would have been receivable with
respect to such Shares had they been outstanding immediately prior to the
effective date of such transaction.
Section 10. Compliance with Law and Approval by Regulatory Bodies.
No units shall be credited, no Shares shall be issued, no certificates for
Shares shall be delivered, and no payment or distribution shall be made
except in compliance with all applicable federal and state laws and
regulations and rules of all domestic stock exchanges on which the Shares
are listed. The Corporation shall have the right to rely on the opinion of
its counsel as to such compliance. If, in the opinion of the Corporation's
counsel, the crediting of any units, the transfer, issuance or sale of any
Shares or any related transaction under the
6
<PAGE>
Plan shall not be lawful for any reason, including the inability of the
Corporation to obtain from any regulatory body having jurisdiction the
authority deemed by such counsel to be necessary for such crediting,
transfer, issuance, sale or other transaction, the Corporation shall not be
obligated to credit, transfer, issue, sell or engage in such other
transaction. Any Share certificate issued may bear such legends and
statements as the Board Affairs Committee may deem advisable or desirable.
Further, in connection with any crediting, sale, issuance or transfer
hereunder, the Director acquiring the units or Shares shall, if requested
by the Corporation, give satisfactory assurances to the Corporation's
counsel that the units or Shares are being acquired for investment and not
with a view to resale or distribution thereof and provide any other
assurance as the Corporation may deem desirable.
Transactions under the Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Securities Exchange
Act of 1934. To the extent any provision of the Plan or action of the Board
or any committee thereof fails to so comply, it shall be deemed null and
void to the extent permitted by law and deemed advisable by the Board
Affairs Committee.
Section 11. Withholding.
There shall be deducted from all distributions under this Plan the amount
of any taxes which the Company may be required to withhold by any federal,
state, or local government. The Directors and their personal
representatives shall be responsible for payment of any and all federal,
state, local, foreign, or other taxes imposed on amounts paid under the
Plan. The Corporation assumes no responsibility for the tax consequences to
the Director for his/her participation in the Plan.
Section 12. Consent.
By making an election under Section 4 of this Plan, each Director shall be
deemed conclusively to have consented to all the terms of this Plan and all
actions and decisions made by the Corporation, the Board, or the Board
Affairs Committee with regard to the Plan. Such terms and consent shall
also apply to and be binding upon the personal representative of such
Director.
Section 13. Severability.
In the event that any provision in this Plan would invalidate the Plan,
that provision shall be null and void, and the Plan shall be construed as
if it did not contain the provision.
7
<PAGE>
EXHIBIT 11
ReliaStar Financial Corp.
Computation of Per Share Earnings
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NUMERATOR - BASIC AND DILUTED
Income from Continuing Operations $ 71.7 $ 72.9 $ 136.1 $ 137.4
Loss from Discontinued Operations - (3.5) - (3.4)
-------- -------- -------- --------
Net Income $ 71.7 $ 69.4 $ 136.1 $ 134.0
======== ======== ======== ========
DENOMINATOR
Weighted Average Common Shares Outstanding
During the Period (Basic) 87.9 91.2 88.4 91.1
Dilutive Effect of Stock Options 1.0 1.6 1.1 1.6
Other .1 .1 .1 .1
-------- -------- -------- --------
Weighted Average Common Shares During the Period (Diluted) 89.0 92.9 89.6 92.8
======== ======== ======== ========
PER COMMON SHARE
Basic
Income from Continuing Operations $ .82 $ .80 $ 1.54 $ 1.51
Loss from Discontinued Operations - (.04) - (.04)
-------- -------- -------- --------
Net Income $ .82 $ .76 $ 1.54 $ 1.47
======== ======== ======== ========
Diluted
Income from Continuing Operations $ .81 $ .79 $ 1.52 $ 1.48
Loss from Discontinued Operations - (.04) - (.04)
-------- -------- -------- --------
Net Income $ .81 $ .75 $ 1.52 $ 1.44
======== ======== ======== ========
</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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 11,271,500,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 64,000,000
<MORTGAGE> 2,233,700,000
<REAL-ESTATE> 34,100,000
<TOTAL-INVEST> 14,581,500,000
<CASH> 36,300,000
<RECOVER-REINSURE> 514,200,000
<DEFERRED-ACQUISITION> 1,337,400,000
<TOTAL-ASSETS> 23,346,200,000
<POLICY-LOSSES> 13,617,300,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 478,400,000
<POLICY-HOLDER-FUNDS> 336,100,000
<NOTES-PAYABLE> 615,700,000
242,500,000
0
<COMMON> 900,000
<OTHER-SE> 1,894,100,000
<TOTAL-LIABILITY-AND-EQUITY> 23,346,200,000
559,400,000
<INVESTMENT-INCOME> 559,600,000
<INVESTMENT-GAINS> 1,600,000
<OTHER-INCOME> 348,400,000
<BENEFITS> 808,600,000
<UNDERWRITING-AMORTIZATION> 58,200,000
<UNDERWRITING-OTHER> 316,200,000
<INCOME-PRETAX> 222,800,000
<INCOME-TAX> 80,100,000
<INCOME-CONTINUING> 136,100,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 136,100,000
<EPS-BASIC> 1.54
<EPS-DILUTED> 1.52
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
