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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________________
Commission file number 1-10640
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RELIASTAR FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1620373
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 WASHINGTON AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612)372-5432
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, $.01 Par Value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
8.20% Trust-Originated Preferred Securities New York Stock Exchange
8.10% Trust-Originated Preferred Securities New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 29, 2000, was $2,498,714,690.
The number of shares outstanding of the registrant's common stock as of February
29, 2000, was 89,439,452.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Annual Report for the year ended December 31, 1999,
are incorporated by reference in Part II of this Form 10-K.
Parts of the Registrant's Proxy Statement to be dated March 28, 2000, are
incorporated by reference in Part III of this Form 10-K.
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Part I
Item 1. Business.
ReliaStar Financial Corp. ("Registrant" or "ReliaStar") is a holding company
whose subsidiaries specialize in providing life insurance and related financial
services products. Through ReliaStar Life Insurance Company ("ReliaStar Life"),
Minneapolis, Minnesota, and other subsidiaries, the Registrant provides and
distributes individual life insurance and annuities, employee benefits products
and services, retirement plans, life and health reinsurance, mutual funds and
bank products.
ReliaStar's strategy is to offer, principally through education-based marketing,
a wide variety of products and services designed to address customers' needs for
financial security. Through various distribution channels, ReliaStar is focused
on gathering consumer assets. During 1999, ReliaStar operated in four reportable
segments: Personal Financial Services, Worksite Financial Services,
Tax-Sheltered and Fixed Annuities, and Reinsurance.
ReliaStar has four life insurance company subsidiaries, each of which is owned
directly or indirectly by ReliaStar Life. These include ReliaStar Life, Northern
Life Insurance Company ("Northern"), Seattle, Washington; Security-Connecticut
Life Insurance Company ("Security- Connecticut"), Avon, Connecticut; and
ReliaStar Life Insurance Company of New York ("RLNY"), Woodbury, New York. These
subsidiaries are sometimes collectively referred to as the "Insurers". RLNY
serves as the New York outlet for certain insurance products of the other
Insurers and sells individual life insurance and annuity products in the State
of New York, where none of the other Insurers are licensed, and throughout the
United States.
Additional subsidiaries include Pilgrim Holdings Corporation and its
subsidiaries, Phoenix, Arizona, ReliaStar's mutual fund/asset management group;
Washington Square Securities, Inc., Minneapolis, Minnesota, a broker/dealer;
PrimeVest Financial Services, Inc., St. Cloud, Minnesota, a broker/dealer which
targets the sale of financial products and services through unaffiliated banks;
Successful Money Management Seminars, Inc., Portland, Oregon, a producer of
financial-education seminar systems; and ReliaStar Bank, St. Cloud, Minnesota, a
federal savings bank, which offers consumer credit and deposit products.
Financial information by business segment may be found in "Note Fifteen" on
pages 48 and 49 of the Registrant's Annual Report for the year ended December
31, 1999, attached hereto as Exhibit 13 and which is incorporated herein by
reference.
Additional information concerning the Registrant may be found in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" from
the Registrant's Annual Report for the year ended December 31, 1999, attached
hereto as Exhibit 13 and which is incorporated herein by reference.
Personal Financial Services
The Registrant's individual life insurance and annuity operations are conducted
by the Personal Financial Services (PFS) segment through the Insurers. The PFS
segment serves individual customers who prefer to purchase insurance and
investment products from a personal financial adviser. This segment principally
targets middle and upper-income families and niche markets including U.S.
military personnel and small-business owners. The PFS segment offers a wide
range of products, including term, universal life, second-to-die universal life,
variable universal life, as well as variable annuities through a nationwide
network of independent agents and financial professionals. Washington Square
Securities, Inc. provides broker/dealer services to PFS product distributors.
Unaffiliated broker/dealers also provide additional distribution for PFS
products. ReliaStar seeks to encourage the sale of products of each Insurer by
the distribution forces of the other Insurers. ReliaStar provides oversight to
these operations and seeks to
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achieve efficiencies through shared access to actuarial data, product design,
investment origination and portfolio management, capital allocation, systems and
administrative support and seeks further opportunities for synergistic benefits.
The PFS segment maintains relationships with its independent agents through a
network of regional managers who recruit, train and support the distributors in
their region; and Brokerage General Agents (BGAs). Compensation of these agents
and the regional managers and BGAs is on a variable basis, dependent upon their
sales performance, which is designed to minimize the PFS segment's fixed
distribution costs. The PFS segment attempts to maintain relationships with its
sales force by striving to provide high quality service to its independent
agents. The ability of the Insurers to retain their agents is affected by the
competitive position of the Insurers' products, the commission structure and the
support services provided.
During 2000, the PFS segment will introduce several Internet strategies designed
to supplement existing distribution channels by generating leads, and providing
agents with access to educational materials and retirement planning tools.
Variable universal life and fixed universal life insurance represents a
significant portion of the statutory individual life insurance premium volume of
the PFS segment. Variable universal life insurance policies contain alternative
investment options (generally mutual funds) and policy values which will vary
based upon the investment returns of the fund(s) selected by the policyholder.
Fixed universal life policies provide for guaranteed levels of insurance
protection and minimum interest rate guarantees. Interest sensitive products
provide for interest crediting rates which may be adjusted periodically. The PFS
segment adjusts the crediting rates on interest sensitive products based upon
investment performance, market interest rates and competitive factors. Profits
recognized on interest-sensitive products are affected by mortality experience,
the margin between interest rates earned on investments and interest credited to
policyholders, as well as capital gains and losses on investments, persistency
and expenses. The variable annuity products offered by the PFS segment contain
alternative investment options (generally mutual funds) and policy values which
will vary based upon the investment returns of the fund(s) selected by the
policyholder.
The PFS segment discourages premature surrenders of interest-sensitive products
through contractual surrender charges and the adjustment of interest crediting
rates. The policies and annuities sold by the PFS segment contain provisions
which allow the contractholder to withdraw or surrender their contracts under
defined circumstances. These contracts generally contain provisions which apply
penalties or otherwise limit the ability of contractholders to make such
withdrawals or surrenders. The interest rates that the Insurers might be
required to credit under their interest-sensitive insurance products to
forestall surrenders, particularly in a time of rapidly rising market interest
rates, could have an adverse effect on operating income.
Individual life insurance business is subject to risks in the event that the
Insurers' mortality experience deviates from the assumptions used in
establishing its premium rates.
The Registrant, which was incorporated in Delaware in 1988, became the parent of
ReliaStar Life and its subsidiaries pursuant to a Plan of Conversion and
Reorganization (the "Plan") which became effective on January 3, 1989. Pursuant
to the Plan, ReliaStar Life was converted from a combined stock and mutual life
insurance company to a stock life insurance company. Participating whole life
and term insurance policies and annuities issued by ReliaStar Life prior to the
effective date of the Plan are segregated as a closed book of business in a
Participation Fund Account ("PFA"). The PFA was established to provide for the
continued maintenance of ReliaStar Life's policyholder dividend practices
relative to these lines of business. Earnings derived from the operation of the
PFA will inure solely to the benefit of the policyholders covered by the PFA,
and no benefit will inure to ReliaStar Life. ReliaStar Life is not obligated to
support or maintain a minimum level of dividends on the policies in the PFA.
However, in
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the event the assets ($310.9 million as of December 31, 1999) of the
PFA are insufficient to provide the contractual benefits guaranteed by the
affected policies, ReliaStar Life must provide the contractual benefits from the
general assets of ReliaStar Life.
Worksite Financial Services
The Worksite Financial Services (WFS) segment targets, principally through
ReliaStar Life and RLNY, the sale of employee benefits and financial services to
medium and large corporate employers and affinity groups. In the future, WFS
will seek to expand its market to smaller employers. Building on these
relationships, the WFS segment also sells individual and payroll-deduction
products to employees of its corporate clients. Principal products include group
and individual life insurance, non-medical group insurance products and 401(k)
retirement plans.
The WFS segment offers group life and disability insurance and employee benefit
related services. Employee benefits products are marketed through major
brokerage operations and through direct sales to employers by marketing
professionals employed full-time by ReliaStar Life and located in regional
offices throughout the United States.
The WFS segment markets group term life insurance to employer groups in its
target market. Premiums for these policies are based largely upon the experience
of the WFS segment and, in some instances, on the experience of the particular
group policyholder. The primary risks related to this line of business include
deviations from expected mortality, expenses and investment income. The WFS
segment seeks to control the mortality risk through reinsurance treaties that
protect the WFS segment from catastrophic losses.
The WFS segment also markets group disability income insurance. This coverage
compensates employees for loss of income due to sickness or injury. The
profitability of this business is affected by morbidity experience and the
investment return on assets supporting the policy reserves.
The WFS segment markets individual life insurance policies to employees at the
worksite and to members of affinity groups. The products delivered to these
markets include universal life insurance policies and individual term life
policies.
The WFS segment markets a package of products and services for the employee
retirement needs of small and mid-sized companies through the 401(k) Retirement
Plan division of ReliaStar Life. The division was organized in 1991 and had
sales (estimated first year deposits on new contracts) of $600.4 million during
1999. The division seeks to achieve a competitive advantage through simplicity
of product design, flexibility and quality service provided at a very
competitive cost. The division also operates a plan administrator located in
Dallas, Texas that provides a full range of administrative services, including
Internet-based applications.
The WFS segment manages a closed block of ReliaStar Life participating pension
contracts with total contract liabilities of $239.2 million at December 31,
1999. Few contracts of this type have been issued since 1982, and currently,
ReliaStar Life does not market this product line. ReliaStar Life does, however,
receive additional deposits under some outstanding contracts. ReliaStar Life has
issued certain participating group annuity contracts jointly with another
insurance company. ReliaStar Life has entered into an arrangement with this
issuer whereby ReliaStar Life will gradually transfer these liabilities
(approximately $143.8 million at December 31, 1999) to the other insurer over a
ten-year period which commenced in 1993. The terms of the arrangement specify
the interest rate on the liabilities and provide for a transfer of assets and
liabilities scheduled in a manner consistent with the expected cash flows of the
assets allocated to support the attendant liabilities. Management does not
expect this arrangement to have a material effect on the earnings of the
Company.
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During 1999, pursuant to an agreement entered into during 1998, the WFS segment
completed the transfer of its group medical insurance and administrative
services business to a third-party insurer.
Tax-Sheltered and Fixed Annuities
The Tax-Sheltered and Fixed Annuities (TSA/FA) segment, primarily through
Northern, focuses on the retirement security needs of K-12 public and private
school teachers. Northern's sales force specialize in the sale of tax-sheltered
403(b) annuities (TSA), providing both fixed and variable annuities. Northern
distributes these products through a specialty field force of independent
agents, including former teachers, that focuses exclusively on TSA sales.
Northern sells TSA's to teachers after securing the approval of a school
district. The school district generally provides a payroll deduction facility
for premium payments and facilitates access to the individual teachers.
Northern's agents meet with prospective customers on a face-to-face basis.
Northern's compensation structure of level commission payments and an asset
based bonus, rewards agents for persistency in the long-term retention of these
contracts. Nonqualified fixed and variable annuities are sold through
independent agents and banks.
The TSA/FA segment distributes interest sensitive products which provide for
interest crediting rates which may be adjusted periodically. The TSA/FA segment
adjusts the crediting rates on interest sensitive products based upon investment
performance, market interest rates and competitive factors. Profits recognized
on interest-sensitive products are affected by the margin between interest rates
earned on investments and interest credited to policyholders, as well as capital
gains and losses on investments, persistency and expenses. The variable annuity
products contain alternative investment options (generally mutual funds) and
policy values which will vary based upon the investment returns of the fund(s)
selected by the policyholder.
The TSA products provide for significant penalties for early withdrawal which,
when coupled with the provisions of the tax code, act to minimize the risk of
early surrender. The surrender fees gradually reduce and generally expire five
to 14 years following issuance.
On November 8, 1999, the TSA/FA segment began serving policyholders and
distributors from a new service center in Minot, North Dakota.
Reinsurance
The Reinsurance segment operations are primarily conducted through ReliaStar
Life which provides specialized life and health reinsurance, including group and
special-risk reinsurance products, in the United States and internationally.
Target customers of the Reinsurance segment are medium and large life insurance
and selected non-life insurance companies such as worker's compensation insurers
and managed care and healthcare provider organizations. The Reinsurance segment
also offers specialty group insurance products on a direct basis and value-added
services, like catastrophic medical case management.
Earnings in the reinsurance business can fluctuate based upon a number of
factors, including pricing, market capacity, the availability and pricing of
retrocessional programs, loss experience and the risk profile of the book of
business.
ReliaStar Life has a strategy of maintaining a significant capacity to assume
reinsurance risks from its customers. ReliaStar Life maintains the capacity to
assume comparatively large risk positions from its reinsurance customers through
its retrocession program. ReliaStar Life's retrocession program consists of a
series of reinsurance contracts and treaties under which portions of reinsurance
risks assumed by ReliaStar Life are automatically retroceded to other
reinsurers. These secondary reinsurers (retrocessionaires) are selected by
ReliaStar Life based upon their financial capacity and stability. In addition to
this retrocession program, ReliaStar Life maintains reinsurance to provide
protection from catastrophic events. ReliaStar Life also maintains a diversified
portfolio of risks in an attempt to avoid
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concentrations in any business line.
ReliaStar Life markets both treaty (covering portfolios of policies as
underwritten by ceding insurers) and facultative (covering a specific
pre-identified risk) reinsurance. Special risk coverage involves underwriting
unusual accident or accidental death coverages in niche markets less affected by
cyclical competitive pressures. These products are marketed through reinsurance
brokers and through direct sales by employees of ReliaStar Life.
ReliaStar Life reinsures excess of loss major medical risks of insurers and
health maintenance organizations and maintains expertise in the management of
individual claims involving very large medical expenses. The Company believes
that through active intervention in a medical claim it may minimize large losses
and maintain strong relationships with its customers.
ReliaStar Life also participates in the international reinsurance market place.
The segment has branch offices in Toronto, Copenhagen, Mexico City and
Amsterdam. ReliaStar Life also has a subsidiary located in London to provide an
additional presence in the international reinsurance market place. ReliaStar
Life writes business in over 40 countries worldwide and is expanding
relationships in Europe and in other non-U.S. markets.
Other Business Units
Other Business Units include ReliaStar's mutual fund/asset management operation,
broker/dealer operations, personal finance seminar company, and banking and
trust operations.
In October 1999, ReliaStar completed the acquisition of Pilgrim Capital
Corporation. ReliaStar's existing mutual fund business was integrated into
Pilgrim's operation based in Phoenix. The combined organization has a family of
32 mutual funds.
Regulation
Insurance companies are subject to regulation and supervision by the
jurisdictions in which they are domiciled and transact business. The Insurers
are domiciled in Minnesota, Washington, Connecticut and New York. The laws of
the various states establish supervisory agencies with broad administrative and
supervisory powers relative to granting and revoking licenses to transact
business, regulating trade practices, licensing agents, approving policy forms,
filing certain premium rates, setting insurance liability and investment reserve
requirements, determining the form and content of required financial statements,
determining the reasonableness and adequacy of capital and surplus and
prescribing the types, amounts and concentrations of investments permitted.
Insurance companies are subject to periodic examinations by the regulatory
agencies, including market conduct examinations of sales practices. A number of
states require insurance companies to participate in assigned risk or other
pools providing insurance for people who cannot qualify in the regular markets.
The state of domicile of each of the Insurers imposes National Association of
Insurance Commissioners (NAIC) developed minimum risk-based capital requirements
on insurance enterprises. The formulas for determining the amount of risk-based
capital specify various weighting factors that are applied to financial balances
and various levels of activity, based upon the nature and perceived degree of
risk associated with such balances and levels of activity. Regulatory compliance
is measured by a company's risk-based capital ratio, which is calculated as a
company's regulatory total adjusted capital, as defined, divided by its
authorized control level risk-based capital, as defined. Companies with ratios
below specific trigger points are classified within certain regulatory action
levels, each of which requires specified corrective action. The risk-based
capital ratio of each of the Insurers significantly exceeds the ratio at which
regulatory corrective action would be required.
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Several states have adopted the NAIC Valuation of Life Insurance Policies Model
Regulation (known as "Revised Triple X"). This model regulation established new
minimum statutory reserve requirements for certain individual life insurance
products written after December 31, 1999. Compliance with these new requirements
has had an effect on the pricing of some insurance products and the competitive
position of insurance companies.
The Registrant is primarily a holding company owning, directly or indirectly,
the capital stock of its subsidiaries. Although the Registrant is not regulated
as an insurance company, it is subject to state insurance holding company
statutes as well as certain other laws. All holding company statutes require
disclosing or in certain cases, prior approval of material transactions between
an insurance company and an affiliate. There are legal limitations on the extent
to which ReliaStar Life and the Registrant's other insurance company
subsidiaries may pay dividends, lend or otherwise supply funds to the Registrant
or ReliaStar Life. State insurance regulatory laws also require advance approval
by state agencies of any change in control of an insurance company domiciled in
that state. "Control" is generally presumed to exist through the ownership of
10% or more of the voting securities of an insurance company or of any company
that controls an insurance company.
From time to time, the United States Congress considers legislation which, if
enacted, could have an adverse impact on the life insurance industry. The
Clinton administration's 2000 budget proposals contain recommendations that if
enacted could increase taxes on some life insurance companies. The Registrant
cannot predict whether these, or any other changes, may be enacted.
In addition to state insurance laws, the Registrant is also subject to general
business and corporation laws, federal and state securities laws, the Employee
Retirement Income Security Act of 1974, as amended, the Internal Revenue Code of
1986, as amended, consumer protection laws, fair credit reporting acts and other
laws.
Some of the Registrant's subsidiaries are registered broker-dealers and/or
investment advisors and are therefore subject to unique federal and/or state
regulation or self-regulatory agencies such as the National Association of
Securities Dealers, Inc. Some annuities and insurance policies issued by the
Insurers are funded by separate accounts, the interests in which are registered
under the Securities Act of 1933, as amended, and subject to review by the
Securities and Exchange Commission. The mutual funds managed by Pilgrim are also
subject to extensive regulation under the Investment Company Act of 1940, as
amended, and the Securities and Exchange Commission. These laws and regulations
are primarily intended to protect investors in the securities markets and
generally grant supervisory agencies broad administrative power, including the
power to limit or restrict the conduct of business for failure to comply with
such laws and regulations.
Through the ownership of ReliaStar Bank, the Registrant is also a thrift holding
company subject to regulation by the Office of Thrift Supervision (OTS).
ReliaStar Bank is subject to extensive regulations concerning its lending and
deposit taking activity, management, and capital structure by the OTS, the
Federal Deposit Insurance Corporation and various federal and state banking
laws.
Other
Competition
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The businesses in which the Insurers engage are each highly competitive. The PFS
and TSA/FA segments compete in marketplaces characterized by a large number of
competitors with similar products. Competition is based largely upon the
crediting rates under the policies, the credit and claims paying ratings of
competing insurers, name recognition, the commission structures of competing
insurers and the levels of service afforded distributors. Competing investment
opportunities are also made available by mutual funds, banks and other financial
intermediaries, many of which have greater resources than the
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Registrant. The products which the Insurers offer are not generally eligible for
legal protection from being copied by others, and capital is the most
significant barrier to entry by new competitors. The Insurers have obtained
claims paying ratings from public rating agencies. The Standard & Poor's claims
paying rating for all of the Insurers is AA; and the Duff & Phelps claims paying
rating for all of the Insurers is AA. The Moody's claims paying rating for all
of the Insurers is A1. The A.M. Best claims paying rating for ReliaStar Life,
Northern and RLNY is A+, while Security-Connecticut is A. Reductions in the
claims paying ratings of an Insurer could adversely affect its operations or
liquidity position.
The markets served by the WFS segment are all highly competitive. Group life
insurance is a homogeneous product sold in a highly competitive market.
ReliaStar Life's competitors include all of the largest insurers doing business
in the United States.
The life and health reinsurance business is also highly competitive, and is
affected by cyclical pressures as supply and demand for reinsurance changes from
year to year.
The enactment of the Gramm Leach Bliley Act of 1999 will implement substantial
changes in the regulation of the financial services industry in the United
States. This act has removed historical limitations on the ability of banks to
engage in securities related businesses and affiliate with insurance companies.
As a result of the passage of this act, bank holding companies, many with
greater resources may directly compete with the Insurers.
Reinsurance
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The Insurers are members of reinsurance associations established for the purpose
of ceding the excess of life insurance over retention limits. ReliaStar Life's
retention limit is $1,000,000 per insurable life for individual coverage, with
lower retention limits at Security-Connecticut and RLNY. For group coverage and
reinsurance assumed, the retention is $500,000 per life with per occurrence
limitations, subject to certain maximums. As of December 31, 1999, $47.9 billion
of life insurance in force was ceded to other companies. Additionally, the
Insurer's maintain catastrophe reinsurance which provides reinsurance protection
(in addition to the individual life coverages) in the event of a catastrophe
resulting in multiple deaths. While these reinsurers are selected based upon
their capacity and financial stability, a contingent liability exists with
respect to the amount of such reinsurance in the event reinsuring companies are
unable to meet their obligations.
Acquired Immune Deficiency Syndrome (AIDS)
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The Insurers may be affected by morbidity and mortality related to AIDS. While
the Insurers' pricing assumptions and underwriting criteria take into
consideration expected morbidity and mortality attributable to AIDS, experience
beyond that anticipated could adversely affect earnings.
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Geographic Distribution
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The Registrant, through the Insurers, conducts business in all 50 states. The
distribution of the Insurers' premium volume, by state, for the year ended
December 31, 1999 for life insurance, individual annuities and accident and
health insurance, on a statutory accounting basis, was as follows:
California 11% Connecticut 3%
New York 7 Georgia 3
Ohio 6 Massachusetts 3
Florida 5 Michigan 3
Minnesota 5 North Carolina 3
Texas 5 Virginia 3
Illinois 4 Washington 3
Pennsylvania 4 All Other (1) 32
(1) States with 2% or less of total premium volume
Employees
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At December 31, 1999, the Registrant and its subsidiaries employed approximately
3,800 persons. None of the Registrant's employees are covered by collective
bargaining agreements.
Other
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Additional information concerning the Registrant may be found in "Known Trends
and Uncertainties" from the Registrant's Annual Report for the year ended
December 31, 1999, attached hereto as Exhibit 13 and which is incorporated
herein by reference.
Item 2. Properties.
The Registrant owns three office buildings in downtown Minneapolis, Minnesota,
which serve as its home offices and a building housing its service center
operation in Minot, North Dakota. Space in the home office buildings not used by
the Registrant and its subsidiaries is rented to other tenants. Additional
office space is leased in Seattle, Washington; Arlington, Virginia; Avon,
Connecticut; and Woodbury, New York, to conduct the operations of the Insurers.
In addition, the Registrant owns the headquarters of ReliaStar Bank in St.
Cloud, Minnesota and leases space in Phoenix, Arizona; Dallas, Texas; New York,
New York; Brentwood, Tennessee; Portland, Oregon; St. Cloud, Minnesota and other
cities in the United States and Europe for regional group, reinsurance, pension
and claims offices and other business operations.
Item 3. Legal Proceedings.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
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Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information entitled "Common Stockholder Information" from page 53 of the
Registrant's Annual Report for the year ended December 31, 1999, is attached as
Exhibit 13 hereto and is incorporated herein by reference.
Item 6. Selected Financial Data.
The information entitled "Revenues and Earnings" and "Financial Position" from
page 13 of the Registrant's Annual Report for the year ended December 31, 1999,
is attached as Exhibit 13 hereto and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" from pages 14 through 27 of the
Registrant's Annual Report for the year ended December 31, 1999, is attached as
Exhibit 13 hereto and is incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
The information entitled "Market-Sensitive Instruments and Risk Management" from
pages 23 through 25 of the Registrant's Annual Report for the year ended
December 31, 1999 is attached as Exhibit 13 hereto and is incorporated by
reference.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data from pages 28
through 51, but not including the Report of Management from page 51 included in
the Registrant's Annual Report for the year ended December 31, 1999, is attached
as Exhibit 13 hereto and are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
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Part III
Item 10. Directors and Executive Officers of the Registrant.
Except for the information set forth below, the information entitled "Board of
Directors" from pages 6 and 7 and the information entitled "Compliance with
Section 16(a) Reporting" from page 25 of the Registrant's 2000 Proxy Statement
is incorporated herein by reference in response to this item.
Executive Officers of the Registrant are as follows:
First
Elected
As
Name Position with Company Age Officer
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John G. Turner Chairman and Chief Executive Officer 60 1972
Robert C. Salipante President and Chief Operating Officer 43 1992
Wayne R. Huneke Senior Executive Vice President 48 1986
Michael J. Dubes Executive Vice President 57 1984
Kenneth U. Kuk Executive Vice President 53 1990
Richard R. Crowl Senior Vice President, General Counsel
and Secretary 52 1982
James R. Miller Senior Vice President, Chief Financial
Officer and Treasurer 52 1985
Dewette Ingham Senior Vice President, Human Resources 50 1998
Chris D. Schreier Vice President and Controller 43 1994
Mr. Huneke has been Senior Executive Vice President of the Registrant since
1999, and since November 1997 has been responsible for the Financial Markets
business of the Registrant. From 1997 to 1999, Mr. Huneke was Senior Vice
President of the Registrant and from 1994 to 1997, Mr. Huneke was Senior Vice
President, Chief Financial Officer and Treasurer of the Registrant. From 1990 to
1994, Mr. Huneke was Vice President, Treasurer and Chief Accounting Officer of
the Registrant. Mr. Huneke has been associated with the Registrant since 1986.
Mr. Dubes has been Executive Vice President of the Registrant since 1999 and
President and Chief Executive Officer of Northern since 1994. From 1996 to 1999
Mr. Dubes was a Senior Vice President of the Registrant. From 1987 to 1994, Mr.
Dubes was Senior Vice President of Individual Insurance Operations of ReliaStar
Life. Mr. Dubes has been associated with Registrant since 1984.
Mr. Kuk has been a Executive Vice President of the Registrant since 1999. In
1998, Mr. Kuk assumed responsibility of the Registrant's Worksite Financial
Services. From 1996 to 1997, Mr. Kuk was responsible for strategic marketing.
From 1996 to 1999, Mr. Kuk was a Senior Vice President of the Registrant. From
1991 to 1996, Mr. Kuk was Vice President, Investments of the Registrant. Mr. Kuk
has been associated with the Registrant since 1985.
Mr. Crowl has been Senior Vice President, General Counsel and Secretary of the
Registrant since 1996. Mr. Crowl was Vice President and Associate General
Counsel of the Registrant from 1989 to 1996. Mr. Crowl has been associated with
the Registrant since 1974.
Mr. Miller has been Senior Vice President, Chief Financial Officer and Treasurer
of the Registrant since 1997. From 1992 to 1997, Mr. Miller was Executive Vice
President and Chief Operating Officer of Northern. Mr. Miller has been
associated with the Registrant since 1985.
Mr. Ingham has been Senior Vice President, Human Resources of the Registrant
since 1998. Mr. Ingham has been associated with the Registrant since 1998. Prior
to being associated with the Registrant, Mr. Ingham was Corporate Vice
President, Compensation and Benefits with RR Donnelly and Sons Company.
11
<PAGE>
Mr. Schreier has been Vice President of the Registrant since 1999 and the
Principal Accounting Officer and Controller since 1996. Mr. Schreier was a
Second Vice President of the Registrant from 1996 to 1999, and an Assistant Vice
President and Assistant Controller from 1994 to 1996. Mr. Schreier has been
associated with the Registrant since 1990.
Officers are elected annually by the Board of Directors for one-year terms,
subject to removal by the Board.
Item 11. Executive Compensation.
The information entitled "Board Compensation" from pages 8 and 9 and the
information from the section entitled "Executive Compensation" from pages 18
through 25, of the Registrant's 2000 Proxy Statement, is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information entitled "Beneficial Ownership" from pages 12 through 13 of the
Registrant's 2000 Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information from page 9 of the Registrant's 2000 Proxy Statement is
incorporated herein by reference.
12
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(A) 1. Financial Statements:
The following financial statements, included from the Annual Report for
the year ended December 31, 1999, are incorporated by reference in Item
8.
a. Consolidated Balance Sheets as of December 31, 1999 and 1998
b. Consolidated Statements of Income for the years ended December
31, 1999, 1998 and 1997
c. Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the years ended December 31, 1999, 1998 and 1997
d. Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
e. Notes to Consolidated Financial Statements
f. Independent Auditors' Report
2. Financial Statement Schedules:
The following financial statement schedules are filed as part of this
Form 10-K:
Independent Auditors' Report
Schedule I - Summary of Investments - Other than Investments in
Related Parties
Schedule II - Condensed Financial Information of Registrant
Schedule III - Supplementary Insurance Information
Schedule IV - Reinsurance
Schedule V - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements
or notes thereto.
3. Exhibits:
3(a) - Certificate of Incorporation, as amended, of the Registrant
(incorporated by reference to Exhibit 4(a) to the
Registrant's Registration Statement on Form S-8,
Registration No. 333-42125).
3(b) - By-Laws, as amended, of the Registrant (incorporated by
reference to Exhibit 3 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999, File No.
1-10640).
4(a) - Certificate of Incorporation, as amended, of the Registrant
(incorporated by reference to Exhibit 4(a) to the
Registrant's Registration Statement on Form S-8,
Registration No. 333-42125).
4(b) - By-Laws, as amended, of the Registrant (incorporated by
reference to Exhibit 3 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1990, File No.
1-10640).
13
<PAGE>
4(c) - Surplus Note (incorporated by reference to Exhibit 4(e) to
the Registrant's Registration Statement on Form S-3,
Registration No. 33-87588).
4(d) - Amendment to Rights Agreement dated as of February 11, 1999
(incorporated by reference to Exhibit 1 to the Registrant's
Amendment on Form 8-A/A dated February 26, 1999, to
Registration Statement on Form 8-A dated October 4, 1989,
File No. 0-17441).
10 - Material contracts:
Credit Agreement, dated as of June 30, 1999, by and
between the Registrant, the Lenders which are
signatories thereto, and U.S. Bank National
Association, as Agent (incorporated by reference to
Exhibit 10(a) to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30,
1999, File No. 1-10640).
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to
Form 10-K for Fiscal Year Ended December 31, 1999:
o Form of Three Year Management Employment Agreement
o ReliaStar Annual Incentive Bonus Plan for Designated
Executive Officers effective as of January 1, 1999
(incorporated by reference to Exhibit 10(a) for the
quarter ended June 30, 1999, File No. 1-10640)
o The ReliaStar Stock Ownership Plan for NonEmployee
Directors, as amended and restated effective May
13,1999, (incorporated by reference to Exhibit 10(b)
to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999, File No.
1-10640)
o ReliaStar Deferred Compensation Plan for NonEmployee
Directors, as amended and restated effective May 13,
1999, (incorporated by reference to Exhibit 10(a) to
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, File No.
1-10640)
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to
Form 10-K for Fiscal Year Ended December 31, 1998:
o Amendment No. 1 to ReliaStar 1993 Stock Incentive Plan
(effective as of November 12, 1998)
o Form of Restricted Stock Agreement
o Consulting Agreement effective January 1, 1999 between
Northern Life Insurance Company and Randy James
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1997:
o Amendment No. 1 ReliaStar Stock Ownership Plan for
Nonemployee Directors
o ReliaStar 1993 Stock Incentive Plan (as amended and
restated effective as of February 11, 1998)
o Form of Management Employment Agreement
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1996:
o ReliaStar Stock Ownership Plan for Nonemployee Directors
(as amended and restated effective May 9, 1996)
o ReliaStar Financial Corp. Retirement Plan for Nonemployee
Directors (as amended on February 9, 1995)
o ReliaStar Deferred Compensation Plan for Nonemployee
Directors (as amended effective as of August 16, 1996)
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1995:
o ReliaStar Financial Corp. Supplemental Executive
Retirement Plan
o ReliaStar Executives' Long-term Incentive Compensation
Program (as amended and restated effective January 1,
1996)
o Form of Deposit Share Agreement issued under the ReliaStar
1993 Stock
14
<PAGE>
Incentive Plan
o Form of Nonqualified Stock Option Agreement issued under
the ReliaStar Stock Ownership Plan for Nonemployee
Directors
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to
Form 10-K for Fiscal Year Ended December 31, 1994:
o ReliaStar Executives' Annual Incentive Compensation
Program
o ReliaStar Annual Incentive Bonus Plan For Designated
Executive Officers
o ReliaStar Supplemental 401(k) Plan
o ReliaStar Supplemental Profit Sharing Plan
o First Amendment to Compensation Trust Agreement
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1993:
o Form of Incentive Stock Option Agreement issued under
The NWNL Companies 1993 Stock Incentive Plan
o Form of Nonqualified Stock Option Agreement issued under
The NWNL Companies 1993 Stock Incentive Plan
o Form of Nonqualified Stock Option Agreement (Replacement
Stock Option Grant) issued under The NWNL Companies
1993 Stock Incentive Plan
o Form of Incentive Stock Option Agreement (Replacement
Stock Option Grant) issued under The NWNL Companies 1993
Stock Incentive Plan
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to
Form 10-K for Fiscal Year Ended December 31, 1992:
o Nonqualified Stock Option Agreement issued under The NWNL
Companies Stock Incentive Plan
o Incentive Stock Option Agreement issued under The NWNL
Companies Stock Incentive Plan
o Deferred Compensation Agreement (for Supplemental
Retirement Benefits)
o Form of Split Dollar Agreement
o Confidential Cash Payment and Deferred Compensation
Agreement between NWNL and Executive Officer, as amended
o Confidential Deferred Compensation Agreement between NWNL
and Executive Officer, as amended
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to
previous Form 10-K as noted:
o The NWNL Companies Stock Incentive Plan - filed as
exhibit to Form 10-K for Fiscal Year Ended December
31, 1991
o The NWNL Companies, Inc., Restricted Stock Plan for
Nonemployee Directors - filed as exhibit to Form 10-K
for Fiscal Year Ended December 31, 1991
o The NWNL Companies Deferred Compensation Plan for
Nonemployee Directors (as amended effective May 10,
1991) - filed as exhibit to Form 10-K for Fiscal
Year Ended December 31, 1991
o The NWNL Companies Stock Incentive Plan Restricted Stock
Agreement - filed as exhibit to Form 10-K for Fiscal
Year Ended December 31, 1991
o The NWNL Companies Supplemental Profit Sharing Plan
as amended on December 14, 1989 - filed as exhibit
to Form 10-K for Fiscal Year Ended December 31, 1989
o Compensation Trust Agreement - filed as exhibit to
Form 10-K for Fiscal Year Ended December 31, 1988
13 - Registrant's Annual Report for the year ended December
31, 1999, is filed as an exhibit to the extent
incorporated by reference herein
21 - Subsidiaries
23 - Consent
24 - Powers of attorney
15
<PAGE>
27 - Supplemental Data Schedule
(B) Reports on Form 8-K:
Current Report on Form 8-K dated October 25, 1999, disclosing the Registrant's
earnings for the three months and nine months ending September 30, 1999.
Current Report on Form 8-K dated October 29, 1999, with respect to the
consummation of the acquisition of Pilgrim Capital Corporation.
16
<PAGE>
Independent Auditors' Report
Board of Directors and Shareholders
ReliaStar Financial Corp. and Subsidiaries
Minneapolis, Minnesota
We have audited the consolidated financial statements of ReliaStar Financial
Corp. and Subsidiaries (the Company) as of December 31, 1999 and 1998, and for
each of the three years in the period ended December 31, 1999, and have issued
our report thereon dated February 1, 2000, such consolidated financial
statements and report are included in the Company's 1999 Annual Report to
Shareholders and are incorporated herein by reference. Our audits also included
the consolidated financial statement schedules of ReliaStar Financial Corp. and
Subsidiaries, listed in Item 14(A)2 of this Report on Form 10-K. These
consolidated financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 1, 2000
17
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE I - CONSOLIDATED SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1999
(In Millions)
<TABLE>
<CAPTION>
Column A Column B Column C Column D
------------------ ---------------- ----------------- -------------
Amount at which
shown in the
Type of Investment Cost Value balance sheet
------------------ ---------------- ----------------- -------------
<S> <C> <C> <C>
Fixed Maturities
Bonds
United States Government and
Government Agencies and
Authorities $ 535.3 $ 544.3 $ 544.3
States, Municipalities and
Political Subdivisions 30.8 30.6 30.6
Foreign Governments 69.2 68.7 68.7
Public Utilities 599.6 603.2 603.2
All Other Corporate Bonds 10,016.4 9,771.9 9,771.9
Redeemable Preferred Stocks 25.0 23.1 23.1
----------- ---------- -----------
Total Fixed Maturities 11,276.3 11,041.8 11,041.8
----------- ---------- -----------
Equity Securities
Industrial, Miscellaneous and
all Other Common Stocks 16.3 19.0 19.0
Nonredeemable Preferred Stocks 38.1 35.9 35.9
----------- ---------- -----------
Total Equity Securities 54.4 54.9 54.9
----------- ---------- -----------
Mortgage Loans on Real Estate 1 2,319.5 2,309.7
Real Estate 1 18.0 17.3
Real Estate Acquired in
Satisfaction of Debt 1 7.3 3.3
Policy Loans 739.9 739.9
Other Long-Term Investments 1 147.1 138.6
Short-Term Investments 157.7 157.7
----------- -----------
Total Investments $ 14,720.2 $ 14,463.2
=========== ===========
</TABLE>
1 Amounts in Column D differ from amounts shown in Column B because they are
net of allowances and write-downs for losses.
18
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(In Millions)
ASSETS 1999 1998
---------- ----------
Investments
Investment in and Advances to
Subsidiaries $ 2,907.3 $ 2,812.0
Other Invested Assets 67.8 50.7
Short-Term Investments 4.7 23.5
---------- ----------
Total Investments 2,979.8 2,886.2
Accounts and Notes Receivable 15.6 9.3
Other Assets 12.0 8.3
---------- ----------
TOTAL ASSETS $ 3,007.4 $ 2,903.8
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other Liabilities $ 37.2 $ 44.0
Notes Payable 1,045.9 751.2
Income Taxes Payable (21.4) (11.6)
---------- ----------
TOTAL LIABILITIES 1,061.7 783.6
---------- ----------
SHAREHOLDERS' EQUITY
Common Stock .9 .9
Additional Paid-in Capital 1,008.1 1,003.0
Retained Earnings 1,321.6 1,137.6
Accumulated Other Comprehensive Income (107.5) 257.2
Note Receivable from ESOP (17.6) (19.8)
Unamortized Restricted Stock Awards (.6) (.7)
Less Treasury Common Stock, at Cost (259.2) (258.0)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 1,945.7 2,120.2
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 3,007.4 $ 2,903.8
========== ==========
See Notes to Condensed Financial Information of Registrant.
19
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In Millions, except Per Share Data)
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ------
<S> <C> <C> <C>
REVENUES
Net Investment Income $ 16.4 $ 10.3 $ 11.6
Realized Investment Gains 6.5 .3 -
Other Income 3.1 2.8 2.9
------- -------- --------
TOTAL 26.0 13.4 14.5
------- -------- --------
BENEFITS AND EXPENSES
Sales and Operating Expenses (5.5) (6.8) (2.4)
Interest Expense 66.3 48.1 38.0
------- -------- --------
TOTAL 60.8 41.3 35.6
------- -------- --------
Loss from Continuing Operations
Before Income Taxes (34.8) (27.9) (21.1)
Income Tax - - -
------- -------- --------
Loss of Parent Only (34.8) (27.9) (21.1)
Equity in Net Income from Continuing
Subsidiaries Operations 288.4 272.8 239.9
------- -------- --------
Income from Continuing Operations 253.6 244.9 218.8
Equity in Net Income (Loss) from Discontinued Operations - (7.2) 3.2
------- --------- --------
NET INCOME $ 253.6 $ 237.7 $ 222.0
======= ======== ========
PER COMMON SHARE
Basic
Income from Continuing Operations $ 2.89 $ 2.69 $ 2.55
Income (Loss) from Discontinued Operations - (.08) .04
------- --------- --------
Net Income $ 2.89 $ 2.61 $ 2.59
======= ========= ========
Diluted
Income from Continuing Operations $ 2.85 $ 2.64 $ 2.51
Income (Loss) from Discontinued Operations - (.08) .04
------- --------- --------
Net Income $ 2.85 $ 2.56 $ 2.55
======= ========= ========
</TABLE>
See Notes to Condensed Financial Information of Registrant.
20
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In Millions)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Cash Used in Operating Activities $ (50.0) $ (20.6) $ (3.5)
-------- -------- -------
INVESTING ACTIVITIES
Sales (Purchases) of Investments, Net 6.5 (68.9) (5.9)
Dividends Received from Subsidiaries 88.6 92.7 68.5
Repayments from (Investments in or Advances to) Subsidiaries (55.5) 29.7 (40.7)
Cash (Paid for) Acquired with Acquisitions (82.3) - 7.7
-------- -------- -------
Net Cash Provided by (Used in) Investing Activities (42.7) 53.5 29.6
-------- -------- -------
FINANCING ACTIVITIES
Increase in Notes and Mortgages Payable 293.9 197.4 174.9
Repayment of Notes and Mortgages Payable - (37.0) (19.9)
Payments Received on Note Receivable from ESOP - - .1
Issuance of Common Stock under Stock Option
and Other Plans 23.6 35.4 21.8
Dividends on Common Stock (70.1) (64.8) (52.0)
Acquisition of Treasury Common Stock (154.7) (163.9) (151.0)
-------- -------- -------
Net Cash Provided by (Used in) Financing Activities 92.7 (32.9) (26.1)
-------- -------- -------
Net Change in Cash - - -
Cash at Beginning of Year - - -
-------- -------- -------
Cash at End of Year $ - $ - $ -
======== ======== =======
</TABLE>
See Notes to Condensed Financial Information of Registrant.
21
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
1. Accounting Policies
The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes included in the ReliaStar
Financial Corp. 1999 Annual Report to Shareholders.
2. Dividends from Subsidiaries
The cash dividends paid to ReliaStar during the years ended December 31, 1999,
1998 and 1997, by its subsidiaries were $88.6 million, $92.7 million and $68.5
million, respectively.
22
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(In Millions)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Deferred Pending Policy
Policy Future Policy Claims and Other
Acquisition and Contract Policyholder
Segment Costs Benefits Funds Premiums
- ------- ------------- -------------- ------------------ --------
<S> <C> <C> <C> <C>
1999
- ----
Personal Financial Services $ 724.2 $ 4,742.0 $ 188.4 $ 128.3
Worksite Financial Services 124.1 1,259.7 221.3 586.4
Tax-Sheltered and Fixed Annuities 616.7 7,415.1 17.8 14.9
Reinsurance 11.0 268.9 512.6 463.2
Other Business Units - - - -
Corporate 1.5 (14.3) (.1) -
----------- ---------- --------- ----------
Total $ 1,477.5 $ 13,671.4 $ 940.0 $ 1,192.8
=========== ========== ========= ==========
1998
- ----
Personal Financial Services $ 632.0 $ 4,802.7 $ 179.5 $ 146.0
Worksite Financial Services 98.1 1,307.0 215.6 533.3
Tax-Sheltered and Fixed Annuities 476.9 7,238.1 14.5 14.5
Reinsurance 4.4 182.6 328.5 320.3
Other Business Units - - - -
Corporate 3.5 (10.6) - -
----------- ---------- --------- ----------
Total $ 1,214.9 $ 13,519.8 $ 738.1 $ 1,014.1
=========== ========== ========= ==========
1997
- ----
Personal Financial Services $ 562.6 $ 4,877.2 $ 204.4 $ 127.6
Worksite Financial Services 77.4 1,328.5 205.9 524.4
Tax-Sheltered and Fixed Annuities 441.0 6,982.2 12.1 14.0
Reinsurance 6.0 144.0 204.6 221.9
Other Business Units - - - -
Corporate 4.9 (2.5) - -
----------- ---------- --------- ----------
Total $ 1,091.9 $ 13,329.4 $ 627.0 $ 887.9
=========== ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Column A Column F Column G Column H Column I
- -------- -------- -------- -------- --------
Amortization of Sales
Net Benefits Deferred Policy and
Investment to Acquisition Operating
Segment Income Policyholders Costs Expenses
- ------- ------------ ------------- ----------------- --------
<S> <C> <C> <C> <C>
1999
- ----
Personal Financial Services $ 364.7 $ 433.6 $ 88.4 $ 132.7
Worksite Financial Services 134.6 553.5 8.2 136.8
Tax-Sheltered and Fixed Annuities 563.7 370.5 30.3 72.4
Reinsurance 24.7 358.1 - 103.4
Other Business Units .8 - - 219.9
Corporate 27.4 (.5) .8 (5.8)
--------- ----------- -------- ---------
Total $ 1,115.9 $ 1,715.2 $ 127.7 $ 659.4
========= =========== ======== =========
1998
- ----
Personal Financial Services $ 386.4 $ 460.6 $ 86.1 $ 171.5
Worksite Financial Services 141.9 507.9 3.6 173.4
Tax-Sheltered and Fixed Annuities 551.3 389.4 26.8 59.1
Reinsurance 21.1 194.8 2.3 76.3
Other Business Units .4 - - 172.0
Corporate 15.8 (.7) .9 (7.1)
--------- ----------- -------- ---------
Total $ 1,116.9 $ 1,552.0 $ 119.7 $ 645.2
========= =========== ======== =========
1997
- ----
Personal Financial Services $ 340.3 $ 397.4 $ 80.0 $ 120.0
Worksite Financial Services 135.3 504.1 2.6 178.6
Tax-Sheltered and Fixed Annuities 502.2 354.7 5.0 52.7
Reinsurance 18.0 121.8 .5 51.3
Other Business Units .1 - - 142.5
Corporate 10.4 (.7) .8 7.1
--------- ----------- -------- ---------
Total $ 1,006.3 $ 1,377.3 $ 88.9 $ 552.2
========= =========== ======== =========
</TABLE>
23
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE IV - REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In Millions, Except Percentages)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------- -------- -------- -------- -------- --------
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed to
Amount Companies Companies Amount Net
------------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1999
- ----
Life Insurance In Force $ 272,022.9 $ 47,889.7 $ 55,725.4 $ 279,858.6 19.9%
============= =========== ========== =============
Premiums
Life Insurance $ 630.2 $ 191.3 $ 405.1 $ 844.0 48.0
Accident and Health Insurance 207.8 204.2 345.2 348.8 99.0
------------- ----------- ---------- -------------
Total Premiums $ 838.0 $ 395.5 $ 750.3 $ 1,192.8 62.9%
============= =========== ========== =============
1998
- ----
Life Insurance In Force $ 248,361.8 $ 44,037.8 $ 48,164.3 $ 252,488.3 19.1%
============= =========== ========== =============
Premiums
Life Insurance $ 587.1 $ 145.6 $ 285.4 $ 726.9 39.3
Accident and Health Insurance 192.9 125.3 219.6 287.2 76.5
------------- ----------- ---------- -------------
Total Premiums $ 780.0 $ 270.9 $ 505.0 $ 1,014.1 49.8%
============= =========== ========== =============
1997
- ----
Life Insurance In Force $ 223,972.0 $ 34,305.4 $ 43,052.9 $ 232,719.5 18.5%
============= =========== ========== =============
Premiums
Life Insurance $ 486.1 $ 78.6 $ 235.7 $ 643.2 36.6
Accident and Health Insurance 189.5 95.3 150.5 244.7 61.5
------------- ----------- ---------- -------------
Total Premiums $ 675.6 $ 173.9 $ 386.2 $ 887.9 43.5%
============= =========== ========== =============
</TABLE>
24
<PAGE>
RELIASTAR FINANCIAL CORP.
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
AS OF DECEMBER 31, 1999, 1998 AND 1997
(In Millions)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
Additions
------------------------
Balance at Charged to Balance
Beginning Costs and Charged to at End of
Description of Period Expenses Other Accounts Deductions1 Period
- ----------- ---------------- --------- -------------- ----------- -------
<S> <C> <C> <C> <C> <C>
1999
- ----
Commercial Mortgage Loans $9.4 - - $(.7) $8.7
Residential Mortgage Loans 1.1 - - - 1.1
Foreclosed Real Estate 6.8 $ .9 - (3.7) 4.0
Real Estate 2.2 - - (1.5) .7
Other Invested Assets 6.0 8.4 - (5.9) 8.5
Accounts and Notes Receivable 2.5 6.7 - (4.8) 4.4
1998
- ----
Commercial Mortgage Loans $9.4 - - - $9.4
Residential Mortgage Loans 1.1 - - - 1.1
Foreclosed Real Estate 9.1 $ 1.9 - $(4.2) 6.8
Real Estate 2.8 .2 - (.8) 2.2
Other Invested Assets 2.7 3.3 - - 6.0
Accounts and Notes Receivable
and Other Assets 2.1 1.0 - (.6) 2.5
1997
- ----
Commercial Mortgage Loans $11.0 $ 2.0 - $(3.6) $9.4
Residential Mortgage Loans .7 .4 - - 1.1
Foreclosed Real Estate 11.2 1.6 - (3.7) 9.1
Real Estate 2.1 .7 - - 2.8
Other Invested Assets 2.6 .1 - - 2.7
Accounts and Notes Receivable 2.2 .1 - (.2) 2.1
</TABLE>
1 The deductions are for reserves released upon disposal of the related
asset or upon foreclosure of the property underlying the loan at which
time the foreclosed property is recorded at fair value.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis
and the State of Minnesota, on the 17th day of March 2000.
RELIASTAR FINANCIAL CORP.
By JOHN G. TURNER*
------------------------------------
John G. Turner, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on the 17th day of March 2000 by the following persons on behalf
of the Registrant and in the capacities indicated.
JOHN G. TURNER* Chairman and Chief Executive Officer
- ------------------------------- (Principal Executive Officer)
John G. Turner
JAMES R. MILLER* Senior Vice President, Chief Financial
- ------------------------------- Officer and Treasurer (Principal
James R. Miller Financial Officer)
CHRIS D. SCHREIER* Vice President and Controller
- ------------------------------- (Principal Accounting Officer)
Chris D. Schreier
CAROLYN H. BALDWIN
DAVID C. COX
RICHARD U. DE SCHUTTER
JOHN H. FLITTIE
LUELLA GROSS GOLDBERG A majority of the
WILLIAM A. HODDER Board of Directors*
JAMES J. HOWARD, III
RANDY C. JAMES
RICHARD L. KNOWLTON
DAVID A. KOCH
JAMES J. RENIER
ROBERT C. SALIPANTE
JOHN G. TURNER
* Richard R. Crowl, by signing his name hereto, does hereby sign this document
on behalf of the above named directors and officers of the Registrant
pursuant to powers of attorney duly executed by such persons.
/s/ Richard R. Crowl
----------------------------------
Richard R. Crowl, Attorney-in-Fact
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ReliaStar Financial Corp.
Exhibit Index
Exhibit No. Description Page
- ---------- ---------- ----
10 Material Contracts:
Form of Three Year Management Employee Agreement 27
13 Registrant's Annual Report for the year ended
December 31, 1999, is filed as an exhibit to the
extent incorporated by reference herein 41
21 Subsidiaries 81
23 Consent 83
24 Powers of Attorney 84
27 Financial Data Schedule 100
<PAGE>
EXHIBIT 10
MANAGEMENT EMPLOYMENT AGREEMENT
AGREEMENT entered into by and between ReliaStar Financial Corp., a Delaware
corporation ("the Company"), and ___________________ (the "Executive"). This
Agreement is effective on the date executed by the Executive ("Effective Date").
WITNESSETH:
WHEREAS, the Executive is a key member of the management of the Company
and/or its subsidiaries and is expected to devote substantial skill and effort
to the affairs of the Company and its subsidiaries, and the Board of Directors
of the Company desires to recognize the significant personal contribution that
the Executive will make to further the best interests of the Company and its
stockholders; and
WHEREAS, it is desirable and in the best interests of the Company and its
stockholders to obtain the benefits of the Executive's services and attention to
the affairs of the Company and its subsidiaries; and
WHEREAS, it is desirable and in the best interests of the Company and its
stockholders to provide inducement for the Executive (A) to remain in the
service of the Company and/or its subsidiaries in the event of any proposed or
anticipated change in control of the Company and (B) to remain in the service of
the Company and/or its subsidiaries in order to facilitate an orderly transition
in the event of a change in control of the Company; and
WHEREAS, it is desirable and in the best interests of the Company and its
stockholders that the Executive be in a position to make judgments and advise
the Company with respect to proposed changes in control of the Company without
regard to the possibility that Executive's employment may be terminated without
compensation in the event of certain changes in control of the Company; and
WHEREAS, the Executive desires to be protected in the event of certain
changes in control of the Company; and
WHEREAS, on ___________, the Executive entered into a Management Employment
Agreement with ReliaStar Financial Corp. intended to protect the Executive in
the Event of a change of control of the Company, hereinunder the "Earlier
Agreement"; and
<PAGE>
WHEREAS, the parties hereto have agreed to replace the Earlier Agreement
with this Agreement, thereby canceling the Earlier Agreement as of the Effective
Date of this Agreement and rendering the Earlier Agreement null and void; and
WHEREAS, for the reasons set forth above, the Company and the Executive
desire to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, the Company and the Executive agree as follows:
Section 1. Employment. The Executive shall remain in the employ of the
Company and/or its subsidiaries for the term of this Agreement as defined in
Section 12 (the "Term"), and during the Term the Executive shall have such
title, duties, responsibilities and authority, and receive such remuneration and
fringe benefits, as the Board of Directors of the Company shall from time to
time provide for the Executive; provided, however, that either the Executive or
the Company (including its subsidiaries) may terminate the employment of the
Executive at any time prior to the expiration of the Term, with or without Cause
and for any reason whatever, upon at least ten working days' prior written
notice to the other party, subject to the right of the Executive to receive any
payment and other benefits that may be due pursuant to the terms and conditions
of Sections 3 and 5 of this Agreement.
Section 2. Change in Control "Event". For purposes of this Agreement, a
change in control event ("Event") shall mean the occurrence of any of the
following:
(a) An acquisition (other than directly from the Company) of any voting
securities of the Company (the "Voting Securities") by any "Person"
(as the term person is used for purposes of Section 13(d) or 14(d) of
the Securities Exchange Act of 1934, as amended (the "1934 Act"))
immediately after which such Person is the "Beneficial Owner" (within
the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty
percent (20%) or more of the combined voting power of the then
outstanding Voting Securities; provided, however, in determining
whether an Event has occurred, Voting Securities which are acquired in
a "Non-Control Acquisition" shall not constitute an acquisition which
would cause an Event. A "Non-Control Acquisition" shall mean (1) an
acquisition by an employee benefit plan (or a trust forming a part
thereof) maintained by the Company or any corporation or other Person
of which a majority of its voting power or its equity securities or
equity interest is owned directly or indirectly by the Company (an
"Affiliated Entity"), (2) an
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acquisition by the Company or any Affiliated Entity, (3) a
transaction in which any Person became the Beneficial Owner of more
than twenty percent (20%) of the outstanding Voting Securities as a
result of an acquisition of Voting Securities by the Company which, by
reducing the number of Voting Securities outstanding, increased the
percentage of the outstanding Voting Securities Beneficially Owned by
such Person, provided that if an Event would occur (but for the
operation of this sentence) and after such share acquisition by the
Company, such Person becomes the Beneficial Owner of any additional
Voting Securities which increases the percentage of the then
outstanding Voting Securities Beneficially Owned by such Person then
an Event shall occur, or (4) an acquisition by any Person in
connection with a "Non-Control Transaction" (as defined in subsection
(c) of Section 2 hereof).
(b) The individuals who, as of the date this Agreement was approved by the
Board, were members of the Board (the "Incumbent Board"), cease for
any reason to constitute at least two-thirds of the Board; provided,
however, that if the election, or nomination for election by the
Company's stockholders, of any new director was approved by a vote of
at least a two-thirds majority of the Incumbent Board, such new
director shall, for purposes of this Agreement, be considered as a
member of the Incumbent Board; provided further, however, that no
individual shall be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-11 promulgated
under the 1934 Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board
(a "Proxy Contest") including by reason of any agreement intended to
avoid or settle any Election Contest or Proxy Contest; or
(c) Approval by stockholders of the Company of:
(1) A merger, consolidation or reorganization involving the Company,
unless such merger, consolidation or reorganization is a
"Non-Control Transaction" which is defined as a transaction in
which:
(A) the stockholders of the Company, immediately before such
merger, consolidation or reorganization, own, directly or
indirectly immediately following such merger, consolidation
or reorganization, at least fifty-one percent (51%) of the
combined voting power of the outstanding voting securities
of the corporation
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resulting from such merger or consolidation or
reorganization (the "Surviving Corporation") in
substantially the same proportion as their ownership of the
Voting Securities immediately before such merger,
consolidation or reorganization,
(B) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement
providing for such merger, consolidation or reorganization
constitute at least two-thirds of the members of the board
of directors of the Surviving Corporation, and
(C) no person (other than the Company or any Affiliated Entity,
any employee benefit plan (or any trust forming a part
thereof) maintained by the Company, the Surviving
Corporation or any Affiliated Entity, or any Person who,
immediately prior to such merger, consolidation or
reorganization had Beneficial Ownership of twenty percent
(20%) or more of the then outstanding Voting Securities) has
Beneficial Ownership of twenty percent (20%) or more of the
combined voting power of the Surviving Corporation's then
outstanding voting securities.
(2) A complete liquidation or dissolution of the Company; or
(3) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person
(other than a transfer to an Affiliated Entity).
(d) The Company enters into an agreement in principle or a definitive
agreement relating to an Event described in subsection (a), (b) or (c)
of this Section 2 which ultimately results in such Event occurring or
a tender or exchange offer or proxy contest is commenced which
ultimately results in an Event described in subsection (a), (b) or (c)
of Section 2 hereof occurring.
Section 3. Rights to Payment Following Change in Control "Event".
(a) If any Event shall occur during the Term of this Agreement (the first
such Event being the "First Event"), and if at any time after the
occurrence of the First Event and prior to the end of the Transition
Period (as hereinafter defined in Section 7), the employment of the
Executive with the Company and/or its subsidiaries is terminated
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for any reason (unless such termination is a voluntary termination by
the Executive other than a Constructive Involuntary Termination, as
defined in Section 4, or is on account of the death, Disability or
Retirement of the Executive or is a termination by the Company and/or
its subsidiaries for Cause), and if Executive is less than 65 years of
age on the date of such termination, the Executive (or the Executive's
legal representative), subject to the limitations set forth in Section
3(c), shall be entitled
(1) to receive from the Company or its successor, upon such
termination of employment, a cash payment in an amount equal to
(A) the lesser of three (3) ("Severance Multiple") or, if
Executive has attained the age of 62, a percentage of the
Severance Multiple equal to the percentage which the number of
months from the date of the Executive's termination to the date
of such Executive's attainment of age 65, is of thirty-six months
times (B) the sum of (i) the base annual salary payable to the
Executive at the time of the Executive's termination of
employment or at the time of the First Event, whichever is
greater, plus (ii) the average annual bonus payable by the
Company to the Executive under the ReliaStar Executives' Annual
Incentive Compensation Program, the calculation of which is based
on either the bonuses paid to the Executive during the most
recent three (3) years or the bonuses paid to the Executive
during the period the Executive was employed by the Company
and/or its subsidiaries, whichever is shorter, such payment to be
made to the Executive by the Company or its successor in a lump
sum at the time of such termination of employment;
(2) to receive from the Company or its successor, upon such
termination of employment, a cash payment equal to the excess, if
any, of (A) the present value of the sum of the retirement plan
benefits under the qualified and nonqualified supplemental
defined benefit retirement plans of the Company and its
subsidiaries covering the Executive at the time of his/her
termination of employment to which the Executive would have been
entitled had his/her period of service for purposes of computing
such benefits included service until the earlier of the last day
of the Transition Period or such Executive's sixty-fifth
birthday, over (B) the present value of the sum of the actual
retirement plan benefits to which the Executive is entitled under
such retirement plans as of his/her termination of employment;
provided, that for purposes of this subsection 3(a)(2),
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present value shall be determined using the UP 1984 Mortality
Table with a two-year set back or any successor table thereto,
and the interest rate assumptions which are used by the Pension
Benefit Guaranty Corporation deferred annuity factor as in effect
on the first day of the Plan Year in which the termination of
employment occurred; and
(3) to participate in any health, disability and life insurance plan
or program in which the Executive was entitled to participate
immediately prior to the First Event as if he were an Executive
of the Company and/or its subsidiaries until the earlier of the
Executive's sixty-fifth birthday or the third anniversary date of
such termination (except, with respect to health insurance
coverage, for those portions remaining after such termination
that duplicate health insurance coverage that is in place for the
Executive under any other policy provided at the expense of the
Company or another employer); provided, however, that in the
event that the Executive's participation in any such health,
disability or life insurance plan or program is barred, the
Company, at its sole cost and expense, shall arrange to provide
the Executive with benefits substantially similar to those which
the Executive is entitled to receive under such plan or program.
(b) Notwithstanding anything contained in this Agreement to the contrary,
if the Executive's employment is terminated during the Term and the
Executive reasonably demonstrates that such termination (1) was at the
request of a third party who has indicated an intention or taken steps
reasonably calculated to effect an Event and who effectuates an Event
(a "Third Party") or (2) otherwise occurred in connection with, or in
anticipation of, an Event which actually occurs, then for all purposes
of this Agreement, the date of the Event with respect to the Executive
shall mean the date immediately prior to the date of such termination
of the Executive's employment.
(c) The payments provided for in Section 3(a)(1) shall be in addition to
any salary or other remuneration otherwise payable to the Executive on
account of employment by the Company or one or more of its
subsidiaries or its successor (including any amounts received prior to
such termination of employment for personal services rendered after
the occurrence of the First Event) but shall be reduced (but not to
less than zero) by any severance pay which the Executive receives from
the Company, or its subsidiaries or its
6
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successor under any other policy or agreement of the Company or its
subsidiaries or its successors in the event of involuntary termination
of Executive's employment; provided, however, that payment of amounts
previously credited to deferred compensation accounts on behalf of the
Executive or the value of any accelerated vesting of benefits shall
not be considered severance pay for purposes of this subsection (c) of
Section 3.
(d) The Company shall also pay to the Executive all legal fees and
expenses incurred by the Executive as a result of such termination,
including, but not limited to, all such fees and expenses, if any,
incurred in contesting or disputing any such termination or in seeking
to obtain or enforce any right or benefit provided by this Agreement.
Section 4. Constructive Involuntary Termination of Employment. In the event
that at any time from the date of the First Event until the end of the
Transition Period, any one of the conditions described in subsections (a), (b),
(c) or (d) of this Section 4 occurs, a termination of employment by the
Executive thereafter shall constitute a Constructive Involuntary Termination;
provided, however, that termination of employment shall not constitute a
Constructive Involuntary Termination if (A) the Executive is immediately
thereafter an Executive of the Company, a subsidiary of the Company or a
successor company with substantially equivalent or greater title, duties,
responsibilities and authority or substantially equivalent or greater salary and
other remuneration and fringe benefits (including paid vacation), (B) the new
employer enters into a management employment agreement offering benefits at
least comparable to this Agreement, and (C) the events described in subsections
(c) or (d) of this Section 4 would not effectively occur by reason of such new
employment. The conditions are
(a) the Executive shall not be given substantially equivalent or greater
title, duties, responsibilities and authority or substantially
equivalent or greater salary and other remuneration and fringe
benefits (including paid vacation), in each case as compared with the
Executive's status immediately prior to the First Event, other than
for Cause or on account of disability, death or retirement of the
Executive
(b) the Company shall have failed to obtain assumption of this Agreement
by any successor as contemplated by Section 8(b) hereof,
(c) the Company shall require the Executive to relocate to any place other
than a location within twenty-five miles of the location at
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which the Executive performed the Executive's duties immediately prior
to the First Event or, if the Executive performed such duties at the
Company's principal executive offices, the Company shall relocate its
principal executive offices to any location other than a location
within twenty-five miles of the location of the principal executive
offices immediately prior to the First Event, or
(d) the Company shall require that the Executive travel on Company
business to a substantially greater extent than required immediately
prior to the First Event.
Section 5. Taxes, Additional Payments or Reduced Payments.
(a) In the event it shall be determined that any payment or distribution
by the Company, any subsidiary or successor in the nature of
compensation to or for the benefit of the Executive (whether paid or
payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise, but determined without regard to any
additional payments required under this Section 5 (a "Payment")) would
be subject to an excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986 ("Code") or any successor provision thereto (such
excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then,
except to the extent limited by subsections (1), (2) and (3) of this
Section 5(a), the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by
the Executive of all taxes (including any interest or penalties
imposed with respect to such taxes), including, without limitation,
any income taxes and Excise Tax imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Payments, provided, however, that
(1) if the benefit to the Executive of the Payments does not exceed
110% of the maximum value that the Executive could receive
without the Payments being subject to the Excise Tax (this value
being hereinafter referred to as the "Tax Limit"), then
(2) no Gross-Up Payment will be made, and
(3) the Payments shall be reduced (but not below zero) to the Tax
Limit (provided, that the Payments shall not be so reduced if the
benefit to the Executive, net of Excise Taxes imposed by Section
4999, (without reduction of the
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Payments) exceeds the Tax Limit). If any reduction is required
pursuant to this subsection (3) of this Section 5(a), the
Payments shall be reduced in a manner, as directed by the
Executive, to maximize the value of all Payments actually made to
the Executive.
(b) All determinations required to be made under Section 5(a), including
whether and when a Gross-Up Payment or reduction in Payments is
required, the amount, if any, of the Gross-Up Payment, the actual
amount of the Tax Limit, the value of the Payments to the Participant
for purposes of Section 280G of the Code and the assumptions to be
utilized in arriving at such determinations, shall be made by Deloitte
& Touche LLP or such other certified public accounting firm as the
Executive and Company may mutually designate (the "Accounting Firm")
which shall provide detailed supporting calculations both to the
Company and the Executive within 15 business days after the receipt of
notice from the Executive that the Executive has been terminated, or
such earlier time as is requested by the Company. In the event that
the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting the Event, the Company and
Executive shall jointly appoint another nationally recognized
accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm
hereunder). All fees and expenses of the Accounting Firm shall be
borne solely by the Company. Any Gross-Up Payment, as determined
pursuant to subsection (a) of this Section 5, shall be paid by the
Company to the Executive within five days after the receipt of the
Accounting Firm's determination. Any determination by the Accounting
Firm shall be binding upon the Company and the Executive.
(c) As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by the Accounting
Firm hereunder, it is possible that additional amounts which will not
have been made by the Company should have been made ("Underpayment").
In the event that it is determined that an Underpayment has occurred,
any such Underpayment shall be promptly paid by the Company to or for
the benefit of the Executive.
(d) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten business
days after the Executive is informed in writing of such claim
(provided that any delay in so informing the Company within such
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ten business day period shall not affect the obligations of the
Company under this Section 5 except to the extent that such delay
materially and adversely affects the Company) and shall apprise the
Company of the nature of such claim and the date on which such claim
is requested to be paid. The Executive shall not pay such claim prior
to the expiration of the 30-day period following the date on which it
gives such notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is due). If
the Company notifies the Executive in writing prior to the expiration
of such period that it desires to contest such claim, the Executive
shall:
(1) give the Company any information reasonably requested by the
Company relating to such claim,
(2) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected by
the Company,
(3) cooperate with the Company in good faith in order to effectively
contest such claim, and
(4) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect thereto)
imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this
Section 5(d), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or
forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and
may, at its sole option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible
manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the
Company shall
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advance the amount of such payment to the Executive, on an
interest-free basis, and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the
taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
(e) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 5(d), the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall
(subject to the Company's complying with the requirements of Section
5(d)) promptly pay to the Company the amount of such refund (together
with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by the Executive of an amount advanced
by the Company pursuant to Section 5(d), a determination is made that
the Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in writing of its
intent to contest such denial of refund prior to the expiration of 30
days after such determination, then such advance shall be forgiven and
shall not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of Gross-Up Payment
required to be paid.
Section 6. Miscellaneous.
(a) The Executive shall not be required to mitigate the amount of any
payment or other benefit provided for in this Agreement by seeking
other employment or otherwise, nor shall the amount of any payment or
other benefit provided for in this Agreement be reduced by any
compensation earned by the Executive as the result of employment by
another employer after termination, or otherwise.
(b) The obligations of the Company under Sections 3, 4 and 5 of this
Agreement shall survive the termination of this Agreement.
Section 7. Definition of Certain Terms. As used in this Agreement the
following terms shall have the meanings set forth in this Section.
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(a) "Person" shall mean an individual, partnership, corporation, estate,
trust or other entity.
(b) "Cause" shall mean, and be limited to, (1) willful and gross neglect
of duties by the Executive or (2) an act or acts committed by the
Executive constituting a felony and substantially detrimental to the
Company, subsidiaries or successors or their reputations.
(c) "Retirement" shall mean mandatory termination of employment in
accordance with the Company's retirement policy generally applicable
to its salaried Executives.
(d) "Disability" shall mean the Executive's absence from his duties on a
full time basis for 160 consecutive business days, as a result of the
Executive's incapacity due to physical or mental illness, unless
within 30 days after written notice pursuant to Section 1 hereof is
given following such absence, the Executive shall have returned to the
full time performance of his duties.
(e) "Transition Period" shall mean the three-year period commencing on the
date of the First Event as described in clause (a), (b) or (c) of
Section 2 hereof and ending on the third anniversary of the First
Event
Section 8. Successors and Assigns.
(a) This Agreement shall be binding upon and inure to the benefit of the
successors, legal representatives and assigns of the parties hereto;
provided, however, that the Executive shall not have any right to
assign, pledge or otherwise dispose of or transfer any interest in
this Agreement or any payments hereunder, whether directly or
indirectly or in whole or in part, without the written consent of the
Company or its successor.
(b) On or after the First Event, the Company will require any successor
(whether direct or indirect, by purchase of a majority of the
outstanding voting stock of the Company or all or substantially all of
the assets of the Company, or by merger, consolidation or otherwise),
by agreement in form and substance satisfactory to the Executive, to
assume expressly and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any
such succession on or after the
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Commencement Date (other than in the case of a merger or
consolidation) shall be a breach of this Agreement and shall entitle
the Executive to compensation from the Company in the same amount and
on the same terms as the Executive would be entitled hereunder if the
Executive terminated his employment on account of a Constructive
Involuntary Termination, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective
shall be deemed the date of termination. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which is required
to execute and deliver the agreement provided for in this Section 8(b)
or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law.
Section 9. Governing Law. This Agreement shall be construed in accordance
with the laws of the State of Minnesota.
Section 10. Notices. All notices, requests and demands given to or made
pursuant hereto shall be in writing and shall be delivered or mailed to any such
party at its address which:
(a) In the case of the Company shall be:
ReliaStar Financial Corp.
20 Washington Avenue South
Minneapolis, MN 55401
Attention: Secretary
(b) In the case of the Executive shall be his or her residence
address as maintained in the Executive's employment records,
or following termination of employment, as provided in writing
by the Executive to the Company.
Either party may, by notice hereunder, designate a changed address. Any notice,
if mailed properly addressed, postage prepaid, registered or certified mail,
shall be deemed to have been given on the registered date or that date stamped
on the certified mail receipt.
Section 11. Severability; Severance. In the event that any portion of
this Agreement is held to be invalid or unenforceable for any reason, it is
hereby agreed that such invalidity or unenforceability shall not affect the
other portions of this Agreement and that the remaining covenants, terms and
conditions or portions hereof shall remain in full force and effect, and any
court of competent jurisdiction may so modify the objectionable provision as to
make it valid,
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reasonable and enforceable. In the event that any benefits to the Executive
provided in this Agreement are held to be unavailable to the Executive as a
matter of law, the Executive shall be entitled to severance benefits from the
Company, in the event of an involuntary termination or Constructive Involuntary
Termination of employment of the Executive (other than a termination on account
of the death, Disability or Retirement of the Executive or a termination for
Cause) during the term of this Agreement following the occurrence of an Event,
at least as favorable to the Executive (when taken together with the benefits
under this Agreement that are actually received by the Executive) as the most
advantageous benefits made available by the Company to Executives of comparable
position and seniority to the Executive during the five-year period prior to the
First Event.
Section 12. Term. This Agreement shall commence on the Effective Date and
shall continue in effect until the later of the date it is effectively amended
or terminated in accordance with this Section 12 or, if a First Event occurs
prior to such effective date of amendment or termination, the third anniversary
of the First Event. No amendment or termination of this Agreement shall become
effective until the earlier of (A) the date which is two years following the
date the Company has provided the Executive written notice of such amendment or
termination, or (B) the date the Executive consents in writing to such amendment
or termination.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year written below.
RELIASTAR FINANCIAL CORP.
Dated:_____________________
__________________________ By
(EXECUTIVE) --------------------------------------
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EXHIBIT 13
ReliaStar Financial Corp. and Subsidiaries
Five-Year Consolidated Financial Highlights
<TABLE>
<CAPTION>
(in millions, except per share data) 1999 1998 1997 1996 1995
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Revenues and Earnings
Premiums $ 1,192.8 $ 1,014.1 $ 887.9 $ 836.9 $ 851.5
Net Investment Income 1,115.9 1,116.9 1,006.3 929.6 884.3
Realized Investment Gains (Losses) (1.3) 17.6 11.7 11.2 4.9
Policy and Contract Charges 454.5 427.6 332.9 245.9 218.5
Other Income 275.4 272.0 238.8 143.4 114.4
- ------------------------------------------------------------------------------------------------------------------------------
Total Revenues 3,037.3 2,848.2 2,477.6 2,167.0 2,073.6
Benefits and Expenses 2,634.2 2,447.1 2,122.7 1,866.1 1,816.7
Income Tax Expense 136.3 143.0 125.7 105.0 89.7
Dividends on Preferred Securities of Subsidiaries,
Net of Tax 13.2 13.2 10.4 5.0 --
- ------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 253.6 244.9 218.8 190.9 167.2
Income (Loss) from Discontinued Operations,
Net of Tax -- (7.2) 3.2 2.1 (3.5)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 253.6 $ 237.7 $ 222.0 $ 193.0 $ 163.7
==============================================================================================================================
Net Income Available to Common Shareholders $ 253.6 $ 237.7 $ 222.0 $ 187.8 $ 155.4
==============================================================================================================================
PER COMMON SHARE
Income from Continuing Operations (Diluted) $ 2.85 $ 2.64 $ 2.51 $ 2.35 $ 2.04
Net Income (Diluted) 2.85 2.56 2.55 2.37 1.99
Dividends Paid .800 .710 .605 .545 .488
Financial Position
Assets $ 24,926.9 $ 22,608.7 $ 21,000.8 $ 16,707.0 $ 15,519.2
Notes and Mortgages Payable 803.6 509.4 593.5 407.5 422.3
Trust-Originated Preferred Securities 242.6 242.3 241.9 120.9 --
Other Liabilities 21,935.0 19,736.8 18,154.4 14,760.9 13,676.8
Common Shareholders' Equity 1,945.7 2,120.2 2,011.0 1,417.7 1,351.4
Preferred Shareholders' Equity -- -- -- -- 68.7
Other Data
Operating Income/1/ $ 253.1 $ 235.2 $ 212.8 $ 185.5 $ 164.7
Operating Income Before Special Items/1,2/ 255.0 269.5 226.8 185.5 164.7
Operating Income Per Diluted Common Share/1/ 2.84 2.54 2.44 2.28 2.00
Operating Income Before Special Items
Per Diluted Common Share/1,2/ 2.86 2.91 2.60 2.28 2.00
Statutory Premiums and Deposits and Fee Revenues/3/ $ 4,195.7 $ 3,543.2 $ 3,211.1 $ 2,726.7 $ 2,560.2
Return on Equity - Operating Income/1,4/ 14.1% 13.3% 14.7% 16.4% 16.0%
Return on Equity - Operating Income
Before Special Items/1,2,4/ 14.2% 15.2% 15.7% 16.4% 16.0%
Year-End Market Price Per Common Share $ 39/3/16/ $ 46/1/8/ $ 41/3/16/ $ 28/7/8/ $ 22/3/16/
Book Value Per Common Share/4/ 23.10 20.96 19.74 15.95 14.27
Assets Under Management /5/ 35,456.6 22,711.9 20,336.9 18,141.0 15,826.5
Common Shareholders' Equity, Excluding
Accumulated Other Comprehensive Income 2,053.2 1,863.0 1,784.8 1,276.9 1,104.6
Insurance Product Sales/6/
Individual Life $ 146.2 $ 127.3 $ 89.3 $ 68.9 $ 65.6
Individual Annuity 873.0 840.7 762.3 643.3 669.6
Group Life 78.5 66.0 64.7 43.5 23.0
Group Health 28.4 16.9 16.7 32.1 49.1
Retirement Plan Sales 600.4 453.1 405.8 315.7 255.2
Life and Health Reinsurance 275.4 205.6 98.1 70.2 46.5
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 2,001.9 $ 1,709.6 $ 1,436.9 $ 1,173.7 $ 1,109.0
==============================================================================================================================
Life Insurance in Force
Individual $129,760.1 $123,947.9 $118,485.2 $ 67,653.1 $ 66,399.5
Group 193,225.9 166,979.7 141,311.4 117,342.1 106,873.7
Reinsurance 4,762.3 5,598.5 7,228.3 5,220.0 4,715.4
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $327,748.3 $296,526.1 $267,024.9 $190,215.2 $177,988.6
==============================================================================================================================
</TABLE>
NOTE: Pilgrim Capital Corporation and Security-Connecticut Corporation were
acquired effective October 29, 1999 and July 1, 1997, respectively. The
financial data includes the contributions of the acquired entities subsequent to
their respective acquisition dates.
/1/Operating Income excludes realized investment gains and losses and their
impact on deferred policy acquisition costs and present value of future
profits.
/2/Excludes special items of $1.9 million, $34.3 million and $14.0 million
(after-tax) recorded in 1999, 1998 and 1997, respectively. (See Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
/3/Premiums and deposits of life insurance subsidiaries are presented on a
statutory insurance accounting basis. Fee revenues are presented in
accordance with generally accepted accounting principles.
/4/Amounts exclude the accumulated other comprehensive income component of
shareholders' equity.
/5/Amounts exclude unrealized investment gains and losses on invested assets
recorded in accordance with SFAS No. 115.
/6/Represents annualized amounts of new premiums and deposits. Beginning in
1999, individual life lump-sum deposits are reported on a weighted basis.
Previously reported amounts have been restated accordingly.
13
<PAGE>
ReliaStar Financial Corp. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Results of operations by operating segment are summarized below:
<TABLE>
<CAPTION>
Year ended December 31 (in millions) 1999 1998 1997
==================================================================================
Operating Income (Loss) Before Special Items/1/
<S> <C> <C> <C>
Reportable Segments
Personal Financial Services $109.9 $100.3 $ 77.9
Worksite Financial Services 64.5 60.5 51.4
Tax-Sheltered and Fixed Annuities 77.3 74.0 67.6
Reinsurance 16.1 42.4 37.2
Other Business Units 12.3 11.4 9.4
Corporate (25.1) (19.1) (16.7)
- ----------------------------------------------------------------------------------
255.0 269.5 226.8
Special Items (1.9) (34.3) (14.0)
- ----------------------------------------------------------------------------------
Operating Income 253.1 235.2 212.8
Net Realized Investment Gains, Net of Tax .5 9.7 6.0
- ----------------------------------------------------------------------------------
Income From Continuing Operations 253.6 244.9 218.8
Income (Loss) From Discontinued Operations, Net of Tax -- (7.2) 3.2
- ----------------------------------------------------------------------------------
NET INCOME $253.6 $237.7 $222.0
==================================================================================
</TABLE>
/1/Operating income is after-tax and excludes realized investment gains and
losses and their impact on the amortization of deferred policy acquisition costs
(DAC) and present value of future profits (PVFP). Special items are presented
separately to be consistent with the presentation of operating segment results
used for internal management purposes.
ReliaStar Financial Corp. (the Company or ReliaStar) is principally engaged in
the business of providing life insurance and related financial services
products. Through its subsidiaries, the Company provides and distributes
individual life insurance and annuities; employee benefit products and services;
retirement plans; life and health reinsurance; mutual funds and bank products.
The Company conducts its life insurance operations through its 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.
The Company reports its operating results in four reportable operating
segments: Personal Financial Services (PFS), Worksite Financial Services (WFS),
Tax-Sheltered and Fixed Annuities (TSA/FA), and Reinsurance. The Personal
Financial Services segment sells life insurance and annuity products to
individuals. The Worksite Financial Services segment sells group and individual
life insurance products, retirement plans and financial services to employers
and their employees at the worksite. The Tax-Sheltered and Fixed Annuities
segment sells 403(b) annuities and other retirement products, primarily to the
K-12 schoolteacher market. The Reinsurance segment sells group life, health, and
specialty risk reinsurance and specialty insurance products in the United States
and internationally. Other Business Units include the Company's mutual fund
operation, broker/dealer operations and banking operations. 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 was 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.
ReliaStar completed the acquisitions of Pilgrim Capital Corporation (Pilgrim)
and Security-Connecticut Corporation (SCC) on October 29, 1999, and July 1,
1997, respectively. The acquisitions were accounted for using the purchase
method of accounting and, accordingly, the results of operations do not include
the results of the acquired entities prior to the respective acquisition dates.
During the fourth quarter of 1999, the Company recorded two separate special
items totaling $1.9 million (after-tax). The first special item was an $8.9
million (after-tax) special charge consisting of severance, facilities, and
other merger-related costs associated with the integration of the Company's
existing mutual fund operation with Pilgrim. The second special item was a $7.0
million tax benefit, recorded in Corporate, that resulted from a change in tax
law that permits the Company to use certain net operating loss carryforwards of
previously acquired entities.
During the fourth quarter of 1998, the Company recorded $34.3 million (after-
tax) of special items related to updating certain assumptions affecting deferred
acquisition costs for interest sensitive products (primarily lapse
14
<PAGE>
ReliaStar Financial Corp. and Subsidiaries M D & A
assumptions for fixed annuities), an accrual for life insurance litigation
settlement costs and certain costs associated with restructuring activities. The
restructuring charges related to the Company's decision to consolidate certain
activities, primarily customer service functions. Accrued costs associated with
these restructuring activities are primarily employee related termination costs
and non-cancelable lease contract costs associated with vacated facilities.
During the fourth quarter of 1997, the Company recorded $14.0 million (after-
tax) of special items related to updating certain assumptions affecting deferred
acquisition costs for interest sensitive products and for costs related to
restructuring and other activities. The costs related to restructuring and other
activities were primarily related to the Company's decision to consolidate
certain financial, underwriting and claims activities. Costs associated with
these restructuring activities were primarily employee related termination costs
and non-cancelable lease contract costs associated with vacated facilities.
Special items are presented separately in the "Results of Operations" table
to be consistent with the presentation of operating segment results used for
internal management purposes.
The discussion of segment operating results that follows refers to the
"Results of Operations" table and, in each instance, amounts are after-tax and
before special items unless otherwise indicated.
1999 compared with 1998
Personal Financial Services - Operating income before special items of the PFS
segment for 1999 increased $9.6 million, or 10%, compared with 1998. The
increase in operating income before special items was primarily due to favorable
mortality experience and growth in assets under management, partially offset by
slightly lower interest spreads.
The interest spread for the PFS segment was 237 basis points in 1999 compared
to 239 basis points in 1998. This decrease in spreads reflects a 21 basis point
decrease in the portfolio yield and a 19 basis point reduction in the average
crediting rate. For most of the business included in the PFS segment, crediting
rates can be changed on the policy anniversary or some other date. The balance
of the business has crediting rates that are reset annually at the beginning of
the calendar year and are guaranteed for one year. Crediting rates offered on
new business can be changed at any time in response to competition and market
interest rates.
Total assets under management increased to $7.5 billion as of December 31,
1999, from $6.9 billion as of December 31, 1998. Separate account assets under
management increased to $2.9 billion as of December 31, 1999, from $2.1 billion
as of December 31, 1998.
Total sales (annualized new premiums and deposits) for 1999 were $341.2
million compared to $352.3 million in 1998. The decrease in sales reflects a 10%
decrease in annuity sales, partially offset by a 12% increase in individual life
insurance sales.
Worksite Financial Services - Operating income before special items of the WFS
segment for 1999 increased $4.0 million, or 7%, compared with 1998. The increase
in operating income before special items was primarily due to higher sales and
lower levels of expenses in the voluntary payroll deduction unit and growth in
assets under management in the retirement plans unit, partially offset by lower
earnings from the closed block of pension business.
Total sales for 1999 were $728.1 million compared with $551.5 million in
1998. The increase in sales reflects a 33% increase in retirement plan sales, a
68% increase in group health sales, a 19% increase in group life sales and a 34%
increase in individual life sales.
Tax-Sheltered and Fixed Annuities - Operating income before special items of the
TSA/FA segment for 1999 increased $3.3 million, or 4%, compared with 1998. The
increase in operating income before special items was primarily due to increased
interest spreads and growth in assets under management, partially offset by
higher expense levels, including expenses associated with the consolidation of
customer service functions.
The interest spread for the TSA/FA segment was 279 basis points in 1999
compared to 254 basis points in 1998. This increase in spreads reflects a 40
basis point reduction in the average crediting rate and a 15 basis point
decrease in the portfolio yield. For most of the business included in the TSA/FA
segment, crediting rates on in force business are reset annually at the
beginning of the calendar year and are guaranteed for one year. The balance of
the business has crediting rates that can be changed on the policy anniversary
or some other date. Crediting rates offered on new business can be changed at
any time in response to competition and market interest rates and are guaranteed
on most new deposits received to the end of the calendar year.
Total assets under management increased to $8.2 billion as of December 31,
1999, from $7.6 billion as of December 31, 1998. Separate account assets under
management increased to $779 million at December 31, 1999, from $378 million at
December 31, 1998.
Total sales for 1999 were $657.2 million compared with $600.2 million in
1998. The increase in sales reflects a 32% increase in sales of variable
annuities, partially offset by a 1% decrease in fixed annuity sales.
Reinsurance - Operating income before special items of the Reinsurance segment
for 1999 decreased $26.3 million, or 62%, compared with 1998. The decrease in
operating income before special items was primarily due to losses from medical
reinsurance business written by two independent managing underwriters with whom
the Company has terminated its relationships.
15
<PAGE>
ReliaStar Financial Corp. and Subsidiaries M D & A
Because of increased claims in the third quarter, the Company conducted an
extensive review of its medical business and determined that claims experience
for certain business written by two managing underwriters was developing much
worse than was assumed for pricing. The review concluded that the business was
not profitable and, as a result, a pretax accrual of $25 million ($16.2 million,
after-tax) was recorded for all incurred and prospective losses on all premiums
written by these two managing underwriters. Concurrent with the review of the
medical reinsurance business, the Company undertook a broader review of its
reinsurance businesses. As a result, deficiencies were discovered in the claims
reporting processes in the international reinsurance line. This required
reserves to be strengthened by $8 million, pretax ($5.1 million, after-tax).
Excluding the earned premium from the two terminated managing underwriters,
earned premium for the Reinsurance segment increased 39% to $358.2 million in
1999 compared with 1998. The increase in earned premium revenue was offset by a
higher overall loss ratio that increased to 68% in 1999 compared with 58% in
1998.
Claims experience and overall profitability of workers compensation carve-out
reinsurance in 1999 were consistent with 1998 and in line with the Company's
expectations.
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 1999 were $275.4 million compared with $205.6 million in 1998,
an increase of 34%, primarily due to strong sales of group long-term disability
and group medical reinsurance.
Other Business Units - Operating income before special items of the Other
Business Units for 1999 increased $.9 million compared with 1998. The increase
in operating income before special items was primarily due to the addition of
Pilgrim mutual funds in the fourth quarter of 1999 and growth in assets under
management of ReliaStar's existing mutual fund operation.
During the fourth quarter of 1999, an $8.9 million (after-tax) special charge
was recorded for severance, facilities and other merger-related costs associated
with the integration of the Company's existing mutual fund operation with
Pilgrim.
Corporate - Operating losses before special items of Corporate for 1999
increased $6.0 million compared with 1998. The increase in operating losses
before special items was primarily due to increased financing costs and goodwill
amortization related to purchase acquisitions and the financing costs associated
with common stock buybacks completed in 1999 and 1998.
During the fourth quarter of 1999, a special income item related to a tax
benefit of $7.0 million was recorded. The tax benefit resulted from a change in
tax law that permits the Company to use certain net operating loss carryforwards
of previously acquired entities.
1998 compared with 1997
Personal Financial Services - Operating income before special items of the PFS
segment for 1998 increased $22.4 million, or 29%, compared with 1997. Of the
total increase, $16.2 million was due to including twelve months of 1998
earnings from the SCC life insurance subsidiaries compared with including six
months of 1997 earnings from the SCC life insurance subsidiaries. The remaining
$6.2 million increase in operating income before special items was primarily due
to an increase in interest spreads, growth in assets under management and lower
expense levels, partially offset by less favorable mortality experience.
The interest spread for the PFS segment, excluding the former SCC life
insurance subsidiaries, was 259 basis points in 1998 compared to 237 basis
points in 1997. This increase in spreads reflects a 14 basis point increase in
the portfolio yield and an 8 basis point reduction in the average crediting
rate.
Total assets under management increased to $6.9 billion as of December 31,
1998, from $6.4 billion as of December 31, 1997. Separate account assets under
management increased to $2.1 billion as of December 31, 1998, from $1.6 billion
as of December 31, 1997.
Total sales for 1998 were $352.3 million compared to $298.5 million in 1997.
The increase in sales reflects a 51% increase in individual life insurance sales
and a 15% increase in variable annuity sales. Fixed annuity sales decreased 57%
in 1998 compared to 1997. Included in the sales results are $20.2 million of
sales from the SCC life insurance subsidiaries in the first six months of 1998
for which there are no comparable sales in the first six months of 1997, as SCC
was acquired on July 1, 1997.
During the fourth quarter of 1998, special items totaling $25.2 million were
recorded by the PFS segment related to updating certain assumptions (primarily
lapse assumptions for fixed annuities) affecting deferred acquisition costs for
interest sensitive products ($3.2 million), an accrual for life insurance
litigation settlement costs ($10.0 million) and certain costs associated with
restructuring activities ($12.0 million).
Worksite Financial Services - Operating income before special items of the WFS
segment for 1998 increased $9.1 million, or 18%, compared with 1997. The
increase in operating income before special items was primarily due to increased
investment income and lower expenses in the employee benefits unit; higher fee
income in the retirement plans unit, reflecting growth in assets under
management; favorable mortality experience and lower expenses in the
16
<PAGE>
ReliaStar Financial Corp. and Subsidiaries M D & A
pension lines of business; partially offset by increased start-up costs in the
Worksite Advisory Services unit.
Total sales for 1998 were $551.5 million compared with $502.7 million in 1997.
The increase in sales was primarily due to higher retirement plan sales.
During the fourth quarter of 1998, special items totaling $1.3 million were
recorded by the WFS segment related to certain costs associated with
restructuring activities.
During September 1998, the Company entered into a strategic alliance with
Trustmark Insurance Co. (Trustmark) related to its insured group medical and
Administrative Services Only (ASO) product lines. Under the alliance, ReliaStar
transferred to Trustmark the claims processing and administration for its
insured group medical, ASO and split risk product lines. The group medical
contracts were underwritten by ReliaStar Life until a future renewal date, at
which time Trustmark began providing products and services to these customers,
in addition to handling claims processing and administration. As a result of the
alliance, approximately 380 ReliaStar employees were terminated and most were
hired by Trustmark. The termination and other costs incurred were offset by
payments to ReliaStar as part of this alliance. The alliance did not materially
impact 1998 operating earnings of this segment.
Tax-Sheltered and Fixed Annuities - Operating income before special items of the
TSA/FA segment for 1998 increased $6.4 million, or 9%, compared with 1997. The
increase in operating income before special items was primarily due to increased
interest spreads and growth in assets under management.
The interest spread for the TSA/FA segment, excluding the former SCC life
insurance subsidiaries, was 255 basis points in 1998 compared to 250 basis
points in 1997. This increase in spreads reflects a 14 basis point reduction in
the average crediting rate and a 9 basis point decrease in the portfolio yield.
Total assets under management increased to $7.6 billion as of December 31,
1998, from $7.1 billion as of December 31, 1997. Separate account assets under
management increased to $378 million at December 31, 1998, from $142 million at
December 31, 1997.
Total sales for 1998 were $600.2 million compared with $537.6 million in 1997.
The increase in sales reflects a 74% increase in sales of variable annuities,
partially offset by a 5% decrease in fixed annuity sales.
During the fourth quarter of 1998, special items totaling $7.8 million were
recorded by the TSA/FA segment related to updating certain assumptions
(primarily lapse assumptions for fixed annuities) affecting deferred acquisition
costs and present value of future profits (PVFP) for interest sensitive products
($5.0 million) and certain costs associated with restructuring activities ($2.8
million).
Reinsurance - Operating income before special items of the Reinsurance segment
for 1998 increased $5.2 million, or 14%, compared with 1997. The increase in
operating income before special items was primarily due to a 44% increase in net
earned premiums, partially offset by higher commission expenses and a higher
overall loss ratio.
Total sales for 1998 were $205.6 million compared with $98.1 million in 1997,
an increase of 110%, primarily due to strong sales of group life and managed
care reinsurance.
Other Business Units - Operating income before special items of the Other
Business Units for 1998 increased $2.0 million compared with 1997. The increase
in operating income before special items was primarily due to higher revenues
from increased broker/dealer volume.
Corporate - Operating losses before special items of Corporate for 1998
increased $2.4 million compared with 1997. The increase was primarily due to
increased financing costs and goodwill amortization related to purchase
acquisitions and the financing costs associated with common stock buybacks
completed in 1998.
Realized Investment Gains and Losses
The sources of net realized investment gains (losses) were as follows:
<TABLE>
<CAPTION>
Year ended December 31 (in millions) 1999 1998 1997
================================================================================
Net Gains (Losses) on
<S> <C> <C> <C>
Sales of Investments
Fixed Maturity Securities
Gross Gains $ 17.8 $ 26.3 $10.3
Gross Losses (15.2) (13.2) (6.4)
Equity Securities
Gross Gains 7.2 2.2 5.1
Gross Losses (.5) (2.5) --
Mortgage Loans on Real Estate .4 (.2) --
Real Estate and Leases 8.2 4.9 .7
Other 7.9 15.3 9.8
- --------------------------------------------------------------------------------
Provisions for Losses on Investments
Fixed Maturity Securities (13.6) (8.4) (3.0)
Equity Securities -- -- (.1)
Mortgage Loans on Real Estate (.1) -- (2.4)
Real Estate and Leases (.9) (2.4) (2.3)
Other (12.5) (4.4) --
- --------------------------------------------------------------------------------
Pretax Realized Investment
Gains (Losses) (1.3) 17.6 11.7
DAC/PVFP Amortization/1/ 2.2 (2.7) (2.5)
Income Taxes (.4) (5.2) (3.2)
- --------------------------------------------------------------------------------
NET REALIZED INVESTMENT GAINS,
NET OF TAX $ .5 $ 9.7 $ 6.0
================================================================================
/1/Due to pretax realized investment gains and losses.
</TABLE>
The Company establishes allowances and writes down the value of specific assets
based upon its 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
17
<PAGE>
ReliaStar Financial Corp. and Subsidiaries M D & A
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.
Discontinued Operations
During 1998, the Company sold its mortgage banking subsidiary. The results of
the former mortgage banking subsidiary are presented as discontinued operations
in the Consolidated Statements of Income.
Income Taxes
The Company's effective tax rate was 33.8% for 1999, 35.7% for 1998 and 35.4%
for 1997, compared to the statutory federal tax rate of 35.0%. The Company's
effective tax rate for 1999 is lower than the statutory federal tax rate
primarily due to a $7.0 million tax benefit recorded in the fourth quarter of
1999, partially offset by non-deductible goodwill amortization. The effective
tax rates for 1998 and 1997 were higher than the statutory federal tax rate
primarily due to non-deductible goodwill amortization.
FINANCIAL CONDITION
Liquidity and Capital Resources - ReliaStar Financial Corp.
ReliaStar, as parent, is dependent upon payments received from its subsidiaries
for dividends, interest, and other charges to be able to pay dividends to
shareholders, service its debt and pay other obligations. The payment of
dividends, interest or other charges is subject to restrictions imposed by
applicable laws and regulations.
The payment of future dividends by ReliaStar to its shareholders will be
largely dependent upon the ability of ReliaStar Life to pay dividends to the
Company. Under Minnesota insurance law regulating the payment of dividends by
ReliaStar Life, any such payment must be in an amount deemed prudent by
ReliaStar Life's Board of Directors and, unless otherwise approved by the
Commissioner of the Minnesota Department of Commerce (the Commissioner), must be
paid solely from the adjusted earned surplus of ReliaStar Life. Adjusted earned
surplus means the earned surplus as determined in accordance with statutory
accounting practices (unassigned funds) less 25% of the amount of such earned
surplus which is attributable to net unrealized capital gains. Further, without
approval of the Commissioner, ReliaStar Life may not pay in any calendar year
any dividend which, when combined with other dividends paid within the preceding
12 months, exceeds the greater of (i) 10% of ReliaStar Life's statutory surplus
at the prior year-end or (ii) 100% of ReliaStar Life's statutory net gain from
operations (not including realized capital gains) for the prior calendar year.
For 2000, the amount of dividends which can be paid by ReliaStar Life without
Commissioner approval is $208.4 million.
ReliaStar has loaned $100.0 million to ReliaStar Life under a surplus note
with a stated interest rate of 6.625%. The surplus note provides that there may
be no payment of interest or principal without the express approval of the
Minnesota Department of Commerce.
The Company maintains a Dividend Reinvestment and Optional Cash Payment Plan.
The plan provides shareholders with an opportunity to reinvest the dividends on
their shares of the common stock of the Company and to make additional purchases
of shares at a discount from the market based price. The amount of the discount
may be changed or eliminated from time to time at the option of the Company.
Pursuant to this program, the Company has issued 200,270, 207,527 and 258,637
shares for an aggregate purchase price of $8.1 million, $8.9 million and $8.3
million during the years ended December 31, 1999, 1998 and 1997, respectively.
The Company has on file with the Securities and Exchange Commission (SEC) a
shelf registration statement for the issuance of up to $500 million of debt and
equity securities. As of December 31, 1999, $300 million of debt and equity
securities were available for issuance under this shelf registration.
The Company has unsecured revolving credit facilities with banks totaling
$350.0 million for general corporate purposes. As of December 31, 1999, $254.0
million remained available for borrowing under these facilities.
On October 29, 1999, the Company completed the acquisition of Pilgrim Capital
Corporation (Pilgrim). ReliaStar issued approximately 2.6 million shares of
common stock from treasury and paid approximately $63.9 million in cash. The
Company also assumed approximately $28 million of debt.
During October 1999, the Company completed the issuance of $200 million of 8%
notes payable which are due October 30, 2006. The proceeds from this offering
were used to reduce outstanding short-term borrowings and finance the
acquisition of Pilgrim.
During the second quarter of 1999, the Company terminated a systematic program
to repurchase shares of its common stock in open market transactions. During
1999, the Company repurchased 1,095,000 shares under this program at an average
price of $43.39 per share. 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.
18
<PAGE>
ReliaStar Financial Corp. and Subsidiaries M D & A
On November 18, 1998, the Company completed the issuance of $200 million of
6.5% notes payable which are due November 15, 2008. The Company used the
proceeds from this offering to repurchase 2,889,400 of its common shares in a
$125 million common stock buyback program that was completed during the fourth
quarter of 1998, to repay short-term bank debt and for general corporate
purposes.
During the first quarter of 1998, the Company repurchased 560,000 of its
common shares at an average price of $46.58 per share in a common stock buyback
program completed in conjunction with the acquisitions of ReliaStar Managing
Underwriters, Inc. and ReliaStar Bancshares, Inc.
During December 1997, the Company repurchased 466,000 of its common shares at
an average price of $39.21 per share in a common stock buyback program completed
in conjunction with the acquisition of the common stock held by the minority
shareholders of the Company's mutual fund company.
On June 3, 1997, the Company completed the issuance of $125.0 million of 8.1%
Trust-Originated Preferred Securities due June 3, 2027. The Company used the
proceeds from this offering to repurchase 3,252,200 of its common shares in a
$125.0 million common stock buyback program that was completed during the third
quarter of 1997 in conjunction with the acquisition of SCC.
Also in conjunction with the acquisition of SCC, the Company assumed $75.0
million of 7.125% notes, which are due March 1, 2003.
Liquidity and Capital Resources - Insurers
Liquidity for life insurance companies is measured by their ability to pay
scheduled contractual benefits, pay operating expenses and fund investment
commitments. Sources of liquidity include scheduled and unscheduled principal
and interest payments on investments, premium payments and deposits and the sale
of liquid investments. These sources of liquidity for the Insurers significantly
exceed scheduled uses.
Liquidity is also affected by unscheduled benefit payments, including death
benefits, benefits under insured accident and health policies and contract
withdrawals and surrenders. The amount of withdrawals and surrenders is affected
by a variety of factors such as credited interest rates for competing products,
general economic conditions, the Insurers' claims paying ratings and events in
the industry which affect policyholders' confidence.
The Insurers' investment portfolios represent a significant source of liquid
assets. As of December 31, 1999, the Insurers' investment portfolios included
$7.6 billion (30.4% of consolidated assets) of short-term investments and
investment grade marketable bonds. The December 31, 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 contract holders to withdraw or surrender their contracts under
defined circumstances. These policies and annuities generally contain provisions
which apply penalties or otherwise restrict the ability of contract holders to
make such withdrawals or surrenders. The Insurers monitor the surrender and
policy loan activity of their insurance products and manage the composition of
their investment portfolios, including liquidity, in light of such activity. The
current level of withdrawal and 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 growth goals contemplate continued growth in its
insurance businesses. To achieve these growth goals, the Insurers will need to
increase their statutory surplus. Statutory surplus is computed according to
rules prescribed by the National Association of Insurance Commissioners (NAIC),
as modified by each Insurer's state of domicile. Statutory accounting rules are
different from generally accepted accounting principles (GAAP) and are intended
to reflect a more conservative perspective by, for example, requiring immediate
recognition of selling expenses. Additional statutory surplus may be secured
through various sources such as internally generated statutory earnings or
equity infusions by ReliaStar with funds generated through debt or equity
offerings.
The state of domicile of each of the Insurers imposes NAIC-developed minimum
risk-based capital requirements on insurance enterprises. The formulas for
determining the amount of risk-based capital specify various weighting factors
that are applied to financial balances and various levels of activity, based
upon the nature and perceived degree of risk associated with such balances and
levels of activity. Regulatory compliance is measured by a company's risk-based
capital ratio, which is calculated as a company's regulatory total adjusted
capital, as defined, divided by its authorized control level risk-based capital,
as defined. Companies with ratios below specific trigger points are classified
within certain regulatory action levels, each of which requires specified
corrective action. The risk-based capital ratio of each of the Insurers
significantly exceeds the ratio at which regulatory corrective action would be
required.
19
<PAGE>
ReliaStar Financial Corp. and Subsidiaries M D & A
Consolidated Cash Flows
The Company's cash balance at December 31, 1999, was $47.9 million. During 1999,
net cash provided by financing activities was $387.4 million, which was
partially offset by net cash used in operating and investing activities of $18.6
million and $342.4 million, respectively.
The $18.6 million of net cash used by operating activities was primarily due
to the result of cash outflows for insurance benefits and sales and operating
expenses exceeding positive cash flow from premiums and investment income. Net
cash provided by financing activities of $387.4 million was primarily the result
of net cash inflows from insurance contracts and the issuance of notes payable,
partially offset by the repurchase 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 for 2000 to
the acquisition of investment grade bonds and commercial mortgages. Investment
grade marketable bonds include both corporate issues and structured finance
securities such as asset-backed securities, 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 that are compatible with
the liabilities they support. All of the investments in the Insurers' portfolios
are subject to diversification, quality and reserving requirements of state laws
regulating the Insurers.
The following table provides information regarding the composition of the
Company's invested assets:
<TABLE>
<CAPTION>
December 31 (in millions) 1999 1998
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Grade Bonds
Marketables $ 7,415.0 51.3% $ 7,823.4 52.5%
Private Placements 2,705.0 18.7 2,881.6 19.3
Below Investment Grade Bonds
Marketables 489.4 3.4 391.3 2.6
Private Placements 409.3 2.8 510.4 3.4
Redeemable Preferred Stock 23.1 .1 18.4 .1
- --------------------------------------------------------------------
Fixed Maturity Securities 11,041.8 76.3 11,625.1 77.9
Equity Securities 54.9 .4 60.3 .4
Commercial Mortgages 1,868.5 12.9 1,726.8 11.6
Residential and Other
Mortgages 441.2 3.0 428.0 2.9
Real Estate 20.6 .2 53.3 .3
Policy Loans 739.9 5.1 702.3 4.7
Short-Term Investments 157.7 1.1 168.7 1.2
Other 138.6 1.0 144.6 1.0
- --------------------------------------------------------------------
TOTAL INVESTED ASSETS $14,463.2 100.0% $14,909.1 100.0%
====================================================================
</TABLE>
Fixed Maturity Securities
The amounts invested in fixed maturity securities as of December 31, 1999 and
1998, were $11.0 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 through and
asset-backed securities) as of December 31, 1999, were $9.4 million and $7.9
million, respectively.
All of the Insurer's marketable and privately placed bonds are required to be
evaluated by the Securities Valuation Office (SVO) of the NAIC. The SVO
evaluates the investments of insurers for regulatory reporting purposes and
assigns securities to one of six investment categories. The NAIC's categories
closely follow the public rating agencies' categories for marketable bonds. NAIC
categories 1 and 2 include bonds considered investment grade (BBB or higher) by
the public rating agencies. Categories 3 through 6 are referred to as below
investment grade (BB or lower).
As of December 31, 1999, the weighted average book yields of the Company's
investment grade portfolio and below investment grade portfolio were 7.6% and
8.4%, respectively. The weighted average book yield is not necessarily
reflective of the net investment income ultimately realized by the Company.
Investments with greater credit risk have a greater risk of default than
investment grade securities, and accordingly, some of the incremental book yield
of the below investment grade portfolio may not be realized.
20
<PAGE>
ReliaStar Financial Corp. and Subsidiaries M D & A
The following tables identify the amortized cost and the fair value of the
Company's fixed maturity securities with respect to each NAIC credit rating
category.
<TABLE>
<CAPTION>
MARKETABLES PRIVATE PLACEMENTS
-------------------------------------- ----------------------------------------
AMORTIZED GROSS UNREALIZED FAIR AMORTIZED GROSS UNREALIZED FAIR
---------------- ----------------
December 31, 1999 (in millions) COST GAINS (LOSSES) VALUE COST GAINS (LOSSES) VALUE
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NAIC Rating
1 $5,097.0 $ 58.6 $(117.0) $5,038.6 $ 945.5 $ 8.8 $(25.3) $ 929.0
2 2,439.7 19.3 (82.6) 2,376.4 1,816.7 10.0 (50.7) 1,776.0
3 418.1 3.0 (20.6) 400.5 294.0 .9 (9.6) 285.3
4 94.5 1.5 (8.9) 87.1 104.4 1.5 (.4) 105.5
5 .1 -- -- .1 15.5 .1 (.4) 15.2
6 1.7 -- -- 1.7 3.6 -- (.3) 3.3
Redeemable Preferred Stock 11.0 .3 (1.5) 9.8 13.3 -- -- 13.3
- -------------------------------------------------------------------------------------------------------------------
TOTAL $8,062.1 $ 82.7 $(230.6) $7,914.2 $3,193.0 $ 21.3 $(86.7) $3,127.6
===================================================================================================================
MARKETABLES PRIVATE PLACEMENTS
-------------------------------------- ----------------------------------------
AMORTIZED GROSS UNREALIZED FAIR AMORTIZED GROSS UNREALIZED FAIR
---------------- ----------------
December 31, 1998 (in millions) COST GAINS (LOSSES) VALUE COST GAINS (LOSSES) VALUE
===================================================================================================================
NAIC Rating
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.
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR
December 31 (in millions) COST VALUE COST VALUE
================================================================================
<S> <C> <C> <C> <C>
Maturing In:
One Year or Less $ 417.1 $ 416.6 $ 459.5 $ 462.9
One to Five Years 3,467.1 3,455.5 3,555.5 3,710.1
Five to Ten Years 2,858.7 2,782.2 3,022.9 3,191.1
Ten Years or Later 1,195.4 1,154.0 1,296.1 1,375.8
Mortgage-Backed/Structured Finance 3,316.8 3,233.5 2,793.0 2,885.2
- --------------------------------------------------------------------------------
TOTAL $11,255.1 $11,041.8 $11,127.0 $11,625.1
================================================================================
</TABLE>
21
<PAGE>
ReliaStar Financial Corp. and Subsidiaries M D & A
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
------------- ------------------
December 31 1999 1998 1999 1998
==========================================================
<S> <C> <C> <C> <C>
Basic Materials 6.2% 6.5% 6.3% 7.0%
Consumer Non-Cyclical 5.0 5.8 15.4 14.6
Consumer Products/
Services 10.1 8.4 15.2 18.7
Energy 5.3 6.0 7.0 7.3
Financial Services 18.2 20.2 14.2 15.8
Government 2.2 2.8 .1 .2
Industrial 4.4 5.0 11.6 11.1
Mortgage-Backed/
Structured Finance 34.5 30.8 16.9 11.4
Real Estate 1.3 1.4 2.0 2.2
Retailing 1.6 1.9 4.0 4.7
Technology 2.1 2.0 1.7 2.1
Utilities 9.1 9.2 5.6 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 December 31, 1999.
The largest investment in below investment grade bonds of any one industry
grouping was approximately 1.5% of invested assets at December 31, 1999. The
portfolio of below investment grade bonds is regularly analyzed and managed in
an effort to avoid concentration risks.
Mortgage-Backed/Structured Finance Securities - The Company's investment policy
permits the acquisition of mortgage-backed securities and collateralized
mortgage obligations (collectively referred to as MBS securities) provided that
the Company's aggregate investment in MBS securities shall not exceed 50% of its
statutory assets and the Company shall not acquire any interests in residual,
interest only, principal only or inverse floater tranches of MBS securities. The
Company's investment strategy has been to invest primarily in actively traded
MBS securities which are structured to reduce prepayment risk as compared to
direct investments in the underlying mortgage collateral.
The amortized cost and estimated fair value of investments in MBS securities,
categorized by interest rates on the underlying collateral, were as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
December 31, 1999 (in millions) COST VALUE
======================================================
<S> <C> <C>
Adjustable Rate Pass Through
Below 6% $ 3.9 $ 3.9
6% - 7% 48.2 47.8
7% - 8% 30.0 29.8
Fixed Rate Pass Through
Below 9% 50.3 49.8
Above 9% 4.7 4.9
Planned Amortization Class
Below 7% 217.5 223.3
7% - 8% 201.4 203.5
8% - 9% 47.3 48.0
Above 9% 1.0 1.0
Other
Below 7% 264.4 258.3
7% - 8% 169.1 169.4
8% - 9% 29.7 29.8
Above 9% 1.1 1.2
- ------------------------------------------------------
TOTAL MBS SECURITIES $1,068.6 $1,070.7
======================================================
</TABLE>
The Company invests in public and private asset-backed securities in addition to
the MBS securities described above. As of December 31, 1999, the Insurers held
asset-backed securities with an amortized cost of $2,248.2 million and a fair
value of $2,162.8 million. These securities are collateralized by diversified
pools of manufactured housing loans, credit card receivables, automobile loans,
home equity loans, commercial mortgage loans, and high yield bank loans and
corporate bonds. The investment strategy has been to purchase primarily senior
structures and tranches that minimize prepayment and default risk. As of
December 31, 1999, approximately 97% of the Company's asset-backed securities
had investment grade ratings. Approximately 31% of these asset-backed securities
are collateralized by manufactured housing loans, 22% by commercial mortgage
loans, 21% by high yield bank loans and corporate bonds, and 17% by home equity
loans. The remaining 9% of asset-backed securities are backed by categories of
collateral types that are not material on an individual basis.
22
<PAGE>
ReliaStar Financial Corp. and Subsidiaries M D & A
Mortgage Loans
The Company's commercial mortgage loans generally range in size from $2 million
to $26 million, with the average commercial mortgage loan investment as of
December 31, 1999, being approximately $3.2 million.
The commercial mortgage loan portfolio diversification by property type and
geographic region of the United States was as follows:
<TABLE>
<CAPTION>
December 31 1999 1998
====================================================================
<S> <C> <C>
Property Type
Apartment 25.1% 24.5%
Special Purpose 22.8 19.1
Retail 20.6 19.6
Industrial 19.3 20.6
Office 10.4 14.1
Hotel/Motel 1.8 2.1
- --------------------------------------------------------------------
TOTAL 100.0% 100.0%
====================================================================
December 31 1999 1998
====================================================================
Geographic Region
Midwest 36.0% 37.4%
Pacific 24.0 24.2
Southeast 15.9 14.7
Northeast 11.5 10.1
Mountain 8.3 8.3
Southwest 4.3 5.3
- --------------------------------------------------------------------
TOTAL 100.0% 100.0%
====================================================================
</TABLE>
The weighted average yield and the weighted average maturity of the loans in the
commercial mortgage loan portfolio as of December 31, 1999, were 7.8% and 8.6
years, respectively.
The Company invests in individual and pools of individual residential mortgage
loans in addition to the structured finance securities backed by residential
mortgages. As of December 31, 1999 and 1998, the Insurers held $440.9 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 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.
The components of net unrealized investment gains and losses included in
accumulated other comprehensive income are shown below:
<TABLE>
<CAPTION>
December 31 (in millions) 1999 1998
=====================================================================
<S> <C> <C>
Unrealized Investment Gains (Losses) $(216.7) $ 526.2
DAC/PVFP 50.7 (128.6)
Deferred Income Taxes 58.5 (140.4)
- ---------------------------------------------------------------------
NET UNREALIZED INVESTMENT GAINS (LOSSES) $(107.5) $ 257.2
=====================================================================
</TABLE>
Market-Sensitive Instruments and Risk Management
The Company's market risk-sensitive instruments include those financial
instruments as defined by SFAS No. 107, "Disclosures about Financial
Instruments," and are all considered to be entered into for other than trading
purposes. The Company's primary market risk exposure associated with these
instruments is the risk associated with changes in market interest rates.
Changes in market interest rates impact the market value of fixed interest
rate securities. The change in market value of the Company's fixed maturity
securities caused by changes in market interest rates is not expected to have a
significant effect on results of operations or liquidity because: (i) the
Company has the present intent and practice to hold most of its available-for-
sale fixed maturity securities to maturity and (ii) the Company's
asset/liability management activity is designed to monitor and adjust for
the effects of changes in market interest rates.
The insurance liabilities of the Company are also sensitive to changes in
market interest rates. Changes in interest rates may affect the incidence of
policy surrenders and other withdrawals. In addition to the potential impact on
liquidity, unanticipated withdrawals in a changed interest rate environment
could adversely affect earnings if the Company were required to sell investments
at reduced values in order to meet liquidity demands.
The Company has established procedures for evaluating these liabilities and
attempts to structure investment asset portfolios with yield, cash flow and
interest rate sensitivities appropriate to support the insurance liabilities.
The Company also uses derivative instruments, such as interest rate swaps, to
adjust the duration of the asset and liability portfolios. In addition, the
Insurers monitor the surrender and policy loan activity of their insurance
products and manage
23
<PAGE>
ReliaStar Financial Corp. and Subsidiaries M D & A
the composition of their investment portfolios in light of such activity.
The Company manages the composition of its capital structure by considering
factors such as market conditions and the ratio of debt and trust-originated
preferred securities to total capital.
As an illustration of the impact interest rates have on the fair value of the
Company's financial instruments, a hypothetical 100 basis point increase in the
level of risk-free interest rates from their December 31, 1999 and 1998 levels
would result in an estimated net decline in fair value of the Company's
financial instruments of approximately $486.6 million and $478.3 million,
respectively.
In determining the estimated impact of this hypothetical change in market
interest rates, the Company used duration analysis and discounted cash flow
models. These analyses are significantly impacted by the assumptions and
estimates used and assume an immediate change in market interest rates without
any adjustment of other assumptions and without any other management of market-
sensitive instruments in reaction to such an assumed change in market interest
rates. Because the modeling approach only considers a change in one of the
assumptions affecting fair values, actual changes in the fair value of market-
sensitive instruments due to such a change in market interest rates may differ
significantly from the illustrated results.
The Company manages its interest rate risk by managing its assets within
target duration ranges, based on the Company's liability profile. The Company
uses duration analysis to estimate the amount of sensitivity to market interest
rate changes. The duration of a bond or a portfolio can be thought of as the
life, in years, of a notional zero-coupon bond whose fair value would change by
the same amount in response to any change in market interest rates. The
portfolio duration includes the duration impact of interest rate swaps and caps.
The target duration ranges are determined by the Company based upon the
subjective evaluation of a number of characteristics of the liabilities,
including such factors as the ability of the Company to modify interest
crediting rates, the presence and magnitude of surrender charges, historical and
projected lapse experience, the level of market interest rates and competition.
A goal of this risk control process is to optimize portfolio performance
relative to the product liability requirements.
The following table sets forth the asset duration, portfolio duration and
target duration for the investment portfolio of each business segment at
December 31, 1999:
<TABLE>
<CAPTION>
ASSET PORTFOLIO TARGET
(in years) DURATION DURATION DURATION
=======================================================================
<S> <C> <C> <C>
Personal Financial Services 4.4 4.5 3.5 - 5.0
Worksite Financial Services 3.5 3.7 3.0 - 6.0
Tax-Sheltered and Fixed Annuities 4.0 4.1 4.0 - 5.5
Reinsurance 5.0 5.0 3.5 - 8.0
=======================================================================
</TABLE>
The Company uses interest rate swaps as part of this asset/liability
management program. The Company has acquired a significant amount of certain
shorter duration investments, such as floating rate or adjustable rate
investments. Acquisition of these assets shortens the duration of an asset
portfolio. The Company uses interest rate swaps to extend the duration of these
portfolios as an alternative to purchasing longer duration investments.
At December 31, 1999, the Company had 51 interest rate swap contracts in
effect with a notional amount of $790.5 million. At December 31, 1998, the
Company had 60 interest rate swap contracts in effect with a notional amount of
$897.5 million. During the twelve months ended December 31, 1999, one interest
rate swap contract was entered into with a notional amount of $275.0 million,
and 10 interest rate swap contracts matured with a total notional amount of
$382.0 million. There were no terminations of interest rate swap contracts prior
to maturity during 1999. The Company had no deferred gains or losses as of
December 31, 1999, related to interest rate swap contracts terminated early. The
estimated fair value of the interest rate swap contracts in effect at December
31, 1999, was an unrealized loss of $2.4 million, which is reported with other
invested assets in the Consolidated Balance Sheets.
Most of the interest rate swap contracts are standard contracts whereby the
Company pays a floating rate of interest (generally based upon the LIBOR rate as
determined from time to time) and receives a fixed rate (generally a specified
contract rate). The following table details the characteristics of the Company's
interest rate swap contracts at December 31, 1999.
<TABLE>
<CAPTION>
NOTIONAL RANGE OF FIXED
(dollars in millions) AMOUNT RATES RECEIVED
=======================================================
<S> <C> <C>
Maturing in:
One Year or Less $275.5 5.3 - 6.7%
One to Three Years 315.0 5.5 - 8.2%
Three to Five Years 200.0 6.0 - 6.8%
- -------------------------------------------------------
TOTAL NOTIONAL AMOUNT $790.5
=======================================================
</TABLE>
24
<PAGE>
ReliaStar Financial Corp. and Subsidiaries M D & A
The Company monitors the effect of the swap position on reported income. The
Company's investment portfolio includes a substantial amount of floating rate
investments. Changes in market interest rates have an opposite (and
approximately offsetting) effect on the reported income from the swap portfolio.
Accordingly, the reported investment income (or loss) attributable to the
Company's swap position will be approximately offset by the changed investment
income of the Company's floating or adjustable rate investments in a changing
rate environment. At December 31, 1999, the Company held $913.3 million of
adjustable rate invested assets, short-term investments and cash.
The Company also uses interest rate caps as part of its overall interest rate
risk management strategy for certain annuity products primarily to hedge the
risk of investment losses due to product surrenders in an increasing interest
rate environment. The Company held eight interest rate caps with an aggregate
notional amount of $510.0 million and a fair value of approximately $.1 million
as of December 31, 1999.
The Company holds certain call options indexed to the performance of the S&P
500 Index as part of its asset/liability management strategy for its equity-
indexed annuity products. The Company held 50 call options with a notional
amount of $55.6 million and an estimated fair value of $19.6 million as of
December 31, 1999.
Problem Investments
The Company classifies invested assets of the Insurers as problem investments
where: (i) an asset is delinquent in a required payment of principal or
interest; (ii) an asset is the subject of a foreclosure action or the borrower
is in bankruptcy; (iii) a loan has been restructured; or (iv) a loan has been
foreclosed and the collateral is owned (Problem Investments). The Company
reports a mortgage loan as delinquent when a required payment of principal or
interest is 60 days past due. Fixed maturity securities are reported as
delinquent following the contractual grace period allowed for any required
payment of principal or interest. The Company generally considers a loan as
restructured when one or more of the following terms is changed for the benefit
of the borrower: (i) interest rate for a specified period of time or for the
life of the loan; (ii) maturity date; (iii) principal face amount or timing of
principal repayments on a contingent or absolute basis; or (iv) amount or timing
of payment of accrued interest.
The amortized cost of Problem Investments, net of related write-offs and
allowances and non-recourse debt, was $35.8 million and $64.6 million at
December 31, 1999 and 1998, respectively.
The amortized cost of Problem Investments 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 Company in the Consolidated
Balance Sheets were $32.2 million and $45.4 million at December 31, 1999 and
1998, respectively.
The Company also monitors its portfolios in an attempt to identify loans that
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
Company had Potential Problem private placement bond investments totaling $12.6
million at December 31, 1999.
INFLATION
The primary direct effect on the Company of inflation is the increase in
operating expenses. A large portion of the Company's operating expenses consists
of salaries that are subject to wage increases at least partly affected by the
rate of inflation. The Company attempts to minimize the impact of inflation on
operating expenses through programs to improve productivity.
The rate of inflation also has an indirect effect on the Company. To the
extent that the government's policies to control the level of inflation results
in changes in interest rates, the Company's new sales of insurance products and
investment income are affected. Changes in the level of interest rates also have
an effect on interest spreads, as investment earnings are reinvested.
KNOWN TRENDS AND UNCERTAINTIES
Competition
Aggressive competition in insurance premiums or other product fees and
commissions could adversely affect ReliaStar's sales, earnings and ability to
retain distributors. ReliaStar competes with the largest 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
distributors, and excellent customer service are required to successfully
compete in these markets.
25
<PAGE>
ReliaStar Financial Corp. and Subsidiaries M D & A
The enactment of the Gramm Leach Bliley Act of 1999 will implement substantial
changes in the regulation of the financial services industry in the United
States. This act has removed historical limitations on the ability of banks to
engage in securities related businesses and affiliate with insurance companies.
As a result of the passage of this act, bank holding companies, many with
greater resources, may directly compete with the Insurers.
Financial Markets Conditions
The products 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 low interest rate environments. ReliaStar seeks to control this risk
by maintaining a mix of products designed to be attractive in alternative
financial market conditions. Changes in market interest 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.
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
The Company is a defendant in a number of lawsuits arising out of the normal
course of its business. Some of the claims seek to be granted class action
status and many of the claims seek both compensatory and punitive damages. In
the opinion of management, the ultimate resolution of such litigation will not
have a material adverse impact to the financial position of the Company. It
should be noted, however, that a number of financial services companies have
been subjected to significant awards in connection with punitive damages claims
and the Company can make no assurances that it will not be subjected to such an
award. The defense of the putative class actions pending against the Company may
require the commitment of substantial internal resources and the retention of
legal counsel and expert advisors.
The Company is a defendant in litigation in New York State court regarding an
alleged reinsurance contract. The plaintiff alleges damages in excess of $100
million. The Company believes that no contract exists and the suit is without
merit. The Company filed a motion for summary judgement on February 18, 2000. If
the court does not grant the Company's motion, the case may go to trial later
this year.
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. ReliaStar converted, tested for Year 2000 compliance and put into
production all of its core business applications prior to December 31, 1999.
Through the end of February 2000, the Company has not experienced any Year 2000-
related business operation problems.
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 effort 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 is not compliant. The
Company does not have the ability to assure with any certainty the compliance
capacity of third parties.
Although the Company has developed contingency plans, it is not reasonably
possible to develop contingency plans for all possible scenarios or which would
comprehensively address widespread systems failures that may yet occur.
26
<PAGE>
ReliaStar Financial Corp. and Subsidiaries M D & A
Impact of Accounting Pronouncements
to be Adopted in the Future
Accounting for Derivative Instruments and Hedging Activities - In September
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. 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.
Certain Forward-Looking Information
This report contains forward-looking information, which discusses known trends
and uncertainties, including, but not limited to: claims experience, withdrawal
and surrender activity, direction of new investment cash flow, impacts of
changes in interest rates on the Insurers' investment portfolio and strategies
to mitigate such effects. The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for forward-looking information to encourage companies
to provide prospective information about themselves without fear of litigation
so long as such information is identified as forward-looking and is accompanied
by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those projected in the
information. Forward-looking information is indicated by the use of such words
as "anticipates," "expects," "believes," "should," "could," "intends,"
"estimates," and "may," or other comparable language. ReliaStar identifies the
following important factors that could cause ReliaStar's actual results to
differ materially from any results that might be projected by ReliaStar in
forward-looking information. All of these factors are difficult to predict,
many are beyond the control of the Company. Accordingly, although ReliaStar
believes that the assumptions underlying the forward-looking information are
reasonable, there can be no assurances that those assumptions will approximate
actual experience.
The important factors include the following:
. General economic conditions, including prevailing interest rates and the
performance of the stock market which may affect the Company's ability to
sell its products;
. The market value of the Company's investments;
. The lapse rate and profitability of the insurance policies issued by
ReliaStar;
. Mortality and morbidity factors in ReliaStar's insurance business (including
the effect of the Company's reinsurance and retrocession risk management
programs);
. Changes in federal tax laws, which could adversely affect the tax advantages
of certain of the Company's products;
. Legislative or regulatory changes affecting financial institutions,
including those affecting bank sales and underwriting of insurance products
and regulation of the sale, underwriting and pricing of insurance products;
. Industry consolidation and competition; and
. Retention of key employees.
You should also consider other risks and uncertainties discussed in documents
filed by ReliaStar with the Securities and Exchange Commission. ReliaStar has no
obligation to update forward-looking information.
27
<PAGE>
ReliaStar Financial Corp. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31 (in millions) 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Fixed Maturity Securities, at fair value
(Amortized Cost: 1999, $11,255.1; 1998, $11,127.0) $11,041.8 $11,625.1
Equity Securities, at fair value (Cost: 1999, $54.2; 1998, $57.6) 54.9 60.3
Mortgage Loans on Real Estate 2,309.7 2,154.8
Real Estate and Leases 20.6 53.3
Policy Loans 739.9 702.3
Other Invested Assets 138.6 144.6
Short-Term Investments 157.7 168.7
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 14,463.2 14,909.1
Cash 47.9 21.5
Accounts and Notes Receivable 334.6 287.7
Reinsurance Receivable 605.4 417.7
Deferred Policy Acquisition Costs 1,477.5 1,214.9
Present Value of Future Profits 434.6 422.5
Property and Equipment, Net 126.5 117.3
Accrued Investment Income 199.1 196.0
Other Assets 730.5 399.8
Participation Fund Account Assets 310.9 311.6
Assets Held in Separate Accounts 6,196.7 4,310.6
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $24,926.9 $22,608.7
- ----------------------------------------------------------------------------------------------------
Liabilities
Future Policy and Contract Benefits $13,671.4 $13,519.8
Pending Policy Claims 585.7 433.5
Other Policyholder Funds 354.3 304.6
Notes and Mortgages Payable 803.6 509.4
Income Taxes 58.1 199.0
Other Liabilities 763.4 663.2
Participation Fund Account Liabilities 310.9 311.6
Liabilities Related to Separate Accounts 6,191.2 4,305.1
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 22,738.6 20,246.2
- ----------------------------------------------------------------------------------------------------
Company-Obligated Mandatorily Redeemable Preferred
Securities Issued by Consolidated Subsidiaries 242.6 242.3
- ----------------------------------------------------------------------------------------------------
Shareholders' Equity
Common Stock (Shares Issued: 1999 and 1998, 98.1) .9 .9
Additional Paid-in Capital 1,008.1 1,003.0
Retained Earnings 1,321.6 1,137.6
Accumulated Other Comprehensive Income (107.5) 257.2
Note Receivable from ESOP (17.6) (19.8)
Unamortized Restricted Stock Awards (.6) (.7)
Less Treasury Common Stock, at Cost (Shares Held: 1999 and 1998, 9.2) (259.2) (258.0)
- ----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,945.7 2,120.2
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $24,926.9 $22,608.7
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE>
ReliaStar Financial Corp. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31 (in millions, except per share data) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Premiums $1,192.8 $1,014.1 $ 887.9
Net Investment Income 1,115.9 1,116.9 1,006.3
Realized Investment Gains (Losses), Net (1.3) 17.6 11.7
Policy and Contract Charges 454.5 427.6 332.9
Other Income 275.4 272.0 238.8
- -------------------------------------------------------------------------------------------------------------
TOTAL 3,037.3 2,848.2 2,477.6
- -------------------------------------------------------------------------------------------------------------
Benefits and Expenses
Benefits to Policyholders 1,715.2 1,552.0 1,377.3
Sales and Operating Expenses 659.4 645.2 552.2
Amortization of Deferred Policy Acquisition Costs
and Present Value of Future Profits 185.5 192.4 146.1
Interest Expense 46.0 28.1 22.3
Dividends and Experience Refunds to Policyholders 28.1 29.4 24.8
- -------------------------------------------------------------------------------------------------------------
TOTAL 2,634.2 2,447.1 2,122.7
- -------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Income Taxes and
Dividends on Preferred Securities of Subsidiaries 403.1 401.1 354.9
Income Tax Expense 136.3 143.0 125.7
Dividends on Preferred Securities of Subsidiaries, Net of Tax 13.2 13.2 10.4
- -------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 253.6 244.9 218.8
Income (Loss) from Discontinued Operations, Net of Tax -- (7.2) 3.2
- -------------------------------------------------------------------------------------------------------------
NET INCOME $ 253.6 $ 237.7 $ 222.0
- -------------------------------------------------------------------------------------------------------------
Per Common Share
Basic
Income from Continuing Operations $ 2.89 $ 2.69 $ 2.55
Income (Loss) from Discontinued Operations -- (.08) .04
- -------------------------------------------------------------------------------------------------------------
Net Income $ 2.89 $ 2.61 $ 2.59
- -------------------------------------------------------------------------------------------------------------
Diluted
Income from Continuing Operations $ 2.85 $ 2.64 $ 2.51
Income (Loss) from Discontinued Operations -- (.08) .04
- -------------------------------------------------------------------------------------------------------------
Net Income $ 2.85 $ 2.56 $ 2.55
- -------------------------------------------------------------------------------------------------------------
Weighted Average Common Shares
Basic 87.7 91.1 85.6
Diluted 89.0 92.7 87.1
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
ReliaStar Financial Corp. and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY COMPREHENSIVE INCOME
----------------------------------------- -------------------------------------
Year ended December 31 (in millions, except
per share data) 1999 1998 1997 1999 1998 1997
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Common Stock
Beginning of Year $ .9 $ .9 $ .4
Issued for Acquisition -- -- .1
Issued for Common Stock Split -- -- .4
- ----------------------------------------------------------------------------------------
End of Year .9 .9 .9
- ----------------------------------------------------------------------------------------
Additional Paid-In Capital
Beginning of Year 1,003.0 1,019.8 571.9
Issued for Acquisition -- -- 428.3
Issued for Benefit Plans -- -- 11.7
Loss on Treasury Shares Reissued
for Benefit Plans (21.3) (28.2) (8.1)
Gain (Loss) on Treasury Shares
Reissued for Acquisitions 18.6 (.9) 9.5
Tax Benefit on Stock Options Exercised 7.8 12.3 6.9
Other -- -- (.4)
- ----------------------------------------------------------------------------------------
End of Year 1,008.1 1,003.0 1,019.8
- ----------------------------------------------------------------------------------------
Retained Earnings
Beginning of Year 1,137.6 964.8 794.2
Net Income 253.6 237.7 222.0 $ 253.6 $237.7 $222.0
Dividends to Common Shareholders
(Per Share: 1999, $.80; 1998, $.71;
1997, $.605) (70.1) (64.8) (52.0)
Other, Net .5 (.1) .6
- ----------------------------------------------------------------------------------------
End of Year 1,321.6 1,137.6 964.8
- ----------------------------------------------------------------------------------------
Accumulated Other Comprehensive Income
Beginning of Year 257.2 226.2 140.8
Change for the Year (364.7) 31.0 85.4 (364.7) 31.0 85.4
- ----------------------------------------------------------------------------------------
End of Year (107.5) 257.2 226.2
- ----------------------------------------------------------------------------------------
Note Receivable From ESOP
Beginning of Year (19.8) (20.8) (21.6)
Repayments, Accrued or Paid 2.2 1.0 .8
- ----------------------------------------------------------------------------------------
End of Year (17.6) (19.8) (20.8)
- ----------------------------------------------------------------------------------------
Unamortized Restricted Stock Awards
Beginning of Year (.7) (1.0) (1.8)
(Awards) and Forfeitures, Net (.4) .1 (.1)
Amortization of Restricted Stock Awards .5 .2 .9
- ----------------------------------------------------------------------------------------
End of Year (.6) (.7) (1.0)
- ----------------------------------------------------------------------------------------
Treasury Common Stock
Beginning of Year (258.0) (178.9) (66.2)
Acquired (154.7) (163.9) (151.0)
Reissued for Acquisitions 108.6 21.2 17.6
Reissued, Other 44.9 63.6 20.7
- ----------------------------------------------------------------------------------------
End of Year (259.2) (258.0) (178.9)
- ---------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $(111.1) $268.7 $307.4
=================================================================================================================================
TOTAL SHAREHOLDERS' EQUITY $1,945.7 $2,120.2 $2,011.0
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE>
ReliaStar Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31 (in millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Income $ 253.6 $ 237.7 $ 222.0
Adjustments to Reconcile Net Income to Net
Cash Provided by (Used in) Operating Activities
Interest Credited to Insurance Contracts 564.1 586.8 548.9
Future Policy Benefits (699.0) (685.6) (396.9)
Capitalization of Policy Acquisition Costs (290.9) (258.7) (212.7)
Amortization of Deferred Policy Acquisition Costs and
Present Value of Future Profits 185.5 192.4 146.1
Deferred Income Taxes 32.1 13.8 7.7
Net Change in Receivables and Payables 31.8 19.9 7.0
Other Assets (68.6) 315.1 (91.5)
Realized Investment (Gains) Losses, Net 1.3 (17.6) (11.7)
Other (28.5) (25.8) 1.7
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities (18.6) 378.0 220.6
- -------------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from Sales of Fixed Maturity Securities 957.3 535.8 474.0
Proceeds from Maturities or Repayment of Fixed Maturity Securities 1,370.8 1,096.6 910.7
Cost of Fixed Maturity Securities Acquired (2,451.6) (2,083.5) (1,431.6)
Sales (Purchases) of Equity Securities, Net 10.6 (30.9) 14.8
Proceeds of Mortgage Loans Sold, Matured or Repaid 340.7 654.4 350.4
Cost of Mortgage Loans Acquired (497.5) (539.9) (649.4)
Sales of Real Estate and Leases, Net 41.4 23.7 14.1
Policy Loans Issued, Net (37.6) (39.0) (41.5)
Purchases of Other Invested Assets, Net (9.3) (16.8) (10.1)
Sales (Purchases) of Short-Term Investments, Net 11.0 (10.8) (37.8)
Cash (Paid for) from Acquisitions, Net (78.2) 1.3 18.5
- -------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (342.4) (409.1) (387.9)
- -------------------------------------------------------------------------------------------------------------------
Financing Activities
Deposits to Insurance Contracts 1,678.0 1,634.9 1,429.3
Maturities and Withdrawals from Insurance Contracts (1,383.1) (1,350.9) (1,299.5)
Net Proceeds from Issuance of Trust-Originated Preferred Securities -- -- 120.8
Increase in Notes and Mortgages Payable 293.9 261.3 132.2
Repayment of Notes and Mortgages Payable (.2) (345.8) (20.4)
Payments Received on Note Receivable from ESOP -- -- .1
Issuance of Common Stock Under Stock Option and Other Plans 23.6 35.4 21.8
Dividends on Common Stock (70.1) (64.8) (52.0)
Acquisition of Treasury Common Stock (154.7) (163.9) (151.0)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 387.4 6.2 181.3
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 26.4 (24.9) 14.0
Cash at Beginning of Year 21.5 46.4 32.4
- -------------------------------------------------------------------------------------------------------------------
Cash at End of Year $ 47.9 $ 21.5 $ 46.4
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE>
ReliaStar Financial Corp. and Subsidiaries
Notes To Consolidated Financial Statements
NOTE ONE: NATURE OF OPERATIONS
AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
ReliaStar Financial Corp. (the Company or ReliaStar) is principally engaged in
the business of providing life insurance and related financial services
products. Through its subsidiaries, the Company provides and distributes
individual life insurance and annuities; employee benefit products and services;
retirement plans; life and health reinsurance; mutual funds and bank products.
The Company operates primarily in the United States and, through its
subsidiaries, is authorized to conduct business in all 50 states.
The Company primarily operates in four reportable operating segments: Personal
Financial Services, Worksite Financial Services, Tax-Sheltered and Fixed
Annuities, and Reinsurance.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. References to the Company relate to ReliaStar and all
subsidiaries. These consolidated financial statements exclude the effects of all
material intercompany transactions.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investments
Fixed maturity securities (bonds and redeemable preferred stocks) are classified
as available-for-sale and are carried at fair value.
Equity securities (common stocks and nonredeemable preferred stocks) are
carried at fair value.
Mortgage loans on real estate are carried at amortized cost less an impairment
allowance for estimated uncollectible amounts.
Investment real estate owned directly by the Company is carried at cost less
accumulated depreciation and allowances for estimated losses. Investments in
real estate joint ventures are accounted for using the equity method. Real
estate acquired through foreclosure is carried at the lower of fair value less
estimated costs to sell or cost.
Short-term investments are carried at amortized cost, which approximates fair
value.
Unrealized investment gains and losses of equity securities and fixed maturity
securities, net of related deferred policy acquisition costs (DAC), present
value of future profits (PVFP) and tax effects, are accounted for as a direct
increase or decrease to the accumulated other comprehensive income components of
shareholders' equity.
Realized investment gains and losses enter into the determination of net
income. Realized investment gains and losses on sales of securities are
determined on the specific identification method. Write-offs of investments that
decline in value below cost on other than a temporary basis and the change in
the allowance for mortgage loans and wholly owned real estate are included with
realized investment gains and losses in the Consolidated Statements of Income.
The Company records write-offs or allowances for its investments based upon an
evaluation of specific problem investments. The Company periodically reviews all
invested assets (including marketable bonds, private placements, mortgage loans
and real estate investments) to identify investments where the Company has
credit concerns. Investments with credit concerns include those the Company has
identified as problem investments, which are issues delinquent in a required
payment of principal or interest, issues in bankruptcy or foreclosure and
restructured or foreclosed assets. The Company also identifies investments as
potential problem investments, which are investments where the Company has
serious doubts as to the ability of the borrowers to comply with the present
loan repayment terms.
Interest Rate Swap Agreements
Interest rate swap agreements are used as hedges for asset/liability management
of adjustable rate and short-term invested assets. The Company does not enter
into any interest rate swap agreements for trading purposes. The interest rate
swap transactions involve the exchange of fixed and floating rate interest
payments without the exchange of underlying principal amounts and do not contain
other optional provisions. The Company utilizes the settlement method of
accounting for its interest rate swap agreements whereby the difference between
amounts paid and amounts received or accrued on interest rate swap agreements is
reflected in net investment income.
The characteristics (notional amount, maturity and payment dates) of the
interest rate swap agreements are similar to the characteristics of the
designated hedged assets. Interest rate swaps are carried at fair value, and
changes in fair value are recorded as a direct increase or decrease in the
accumulated other comprehensive income component of shareholder's equity. In the
event an interest rate swap agreement would cease to qualify for hedge
accounting, changes in fair value of the affected swap would be recorded as
income or expense. There were no terminations of interest rate swap agreements
during 1999, 1998 and 1997.
32
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
Equity Index Call Options
Equity index call options are tied to the performance of the S&P 500 Index and
are used for asset/liability management of equity indexed annuity products. The
Company does not purchase options for trading purposes. The notional amounts and
other characteristics of the options correspond to the characteristics of
obligations to policyholders for deposits received on equity indexed annuities.
The change in the fair value of the call options approximates the change in the
corresponding equity indexed annuity account value. The call options are carried
at fair value, and changes in fair value are recorded as income or expense,
consistent with the equity indexed annuity products.
Policy Acquisition Costs
Those costs of acquiring new business, which vary with and are primarily related
to the production of new business, have been deferred to the extent that such
costs are deemed recoverable. Such costs include commissions, certain costs of
policy issuance and underwriting and certain variable agency expenses.
Costs deferred related to traditional life insurance products are amortized
over the premium paying period of the related policies, in proportion to the
ratio of annual premium revenues to total anticipated premium revenues. Such
anticipated premium revenues are estimated using the same assumptions used for
computing liabilities for future policy benefits.
Costs deferred related to universal life-type policies and investment
contracts are amortized over the lives of the policies, in relation to the
present value of estimated gross profits from mortality, investment, surrender
and expense margins.
Present Value of Future Profits
The present value of future profits reflects the estimated fair value of
acquired insurance business in force and represents the portion of the
acquisition cost that was allocated to the value of future cash flows from
insurance contracts existing at the date of acquisition. Such value is the
present value of the actuarially determined projected net cash flows from the
acquired insurance contracts.
PVFP is amortized over the lives of the acquired insurance business in force
in a manner consistent with amortization of policy acquisition costs. An
analysis of the PVFP asset account is presented below:
(in millions) 1999 1998 1997
- ----------------------------------------------------------------
Balance, Beginning of Year $422.5 $480.0 $220.2
Acquisition -- (7.3) 323.6
Imputed Interest 26.9 31.0 25.5
Amortization (77.5) (90.1) (66.0)
Impact of Net Unrealized
Investment Gains and Losses 62.7 8.9 (23.3)
- ----------------------------------------------------------------
BALANCE, END OF YEAR $434.6 $422.5 $480.0
- ----------------------------------------------------------------
Based on current conditions and assumptions as to future events on acquired
policies in force, the Company expects that the net amortization of the December
31, 1999, PVFP balance will be between 6% and 9% in each of the years 2000
through 2004. The interest rates used to determine the amount of imputed
interest on the unamortized PVFP balance ranged from 5% to 8%.
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation of
$112.6 million and $106.1 million at December 31, 1999 and 1998, respectively.
The Company provides for depreciation of property and equipment using straight-
line and accelerated methods over the estimated useful lives of the assets.
Buildings are generally depreciated over 35 to 50 years. Depreciation expense
for the years ending December 31, 1999, 1998 and 1997 totaled $6.7 million, $7.9
million and $7.1 million, respectively.
Goodwill
Goodwill is the excess of the amount paid to acquire a company over the fair
value of the net assets acquired and is amortized on straight-line basis over 15
to 40 years. The carrying value of goodwill is monitored for indicators of
impairment of value. No events or circumstances were identified which warrant
consideration of impairment or a revised estimate of useful lives.
Participation Fund Account
On January 3, 1989, the Commissioner of Commerce of the State of Minnesota
approved a Plan of Conversion and Reorganization (the Plan) which provided,
among other things, for the conversion of ReliaStar Life Insurance Company
(ReliaStar Life) from a combined stock and mutual life insurance company to a
stock life insurance company.
The Plan provided for the establishment of a Participation Fund Account (PFA)
for the benefit of certain participating individual life insurance policies and
annuities issued by ReliaStar Life prior to the effective date of the Plan.
Under the terms of the PFA, the insurance liabilities and assets with respect to
such policies are segregated in the accounting records of ReliaStar Life to
assure the continuation of policyholder dividend practices. Assets and
liabilities of the PFA are presented in accordance with statutory accounting
practices. Earnings derived from the operation of the PFA inure solely to the
benefit of the policies covered by the PFA and no benefit will inure to the
Company. Accordingly, results of operations for the PFA are excluded from the
Company's Consolidated Statements of Income. In the event that the assets of the
PFA are insufficient to provide the contractual benefits guaranteed by the
affected policies, ReliaStar Life must provide such contractual benefits from
its general assets.
Separate Accounts
The Company operates separate accounts. The assets and liabilities of the
separate accounts are primarily related to variable annuity, variable life and
401(k) contracts and represent policyholder-directed funds that are separately
administered. The assets (primarily investments) and liabilities (primarily to
contractholders) of each account are clearly identifiable and distinguishable
from other assets and liabilities of the Company. Assets are carried at fair
value. Revenues
33
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
from these separate account contracts consist primarily of charges for mortality
risk and expenses, cost of insurance, contract administration and surrender
charges. Revenue for these products is recognized when due.
Future Policy and Contract Benefits
Liabilities for future policy benefits for traditional life contracts are
calculated using the net level premium method and assumptions as to investment
yields, mortality, withdrawals and dividends. The assumptions are based on
projections of past experience and include provisions for possible unfavorable
deviation. These assumptions are made at the time the contract is issued or, for
purchased contracts, at the date of acquisition.
Liabilities for future policy and contract benefits on universal life-type and
investment contracts are based on the policy account balance.
The liabilities for future policy and contract benefits for group disabled
life reserves and long-term disability reserves are based upon interest rate
assumptions and morbidity and termination rates from published tables, modified
for Company experience.
Income Taxes
The provision for income taxes includes amounts currently payable and deferred
income taxes resulting from the cumulative temporary differences in the assets
and liabilities determined on a tax return and financial statement basis.
Premium Revenue and Benefits to Policyholders
Recognition of Traditional Life, Group and Annuity Premium Revenue and Benefits
to Policyholders - Traditional life insurance products include those products
with fixed and guaranteed premiums and benefits and consist principally of term
and whole life insurance policies and certain annuities with life contingencies
(immediate annuities). Life insurance premiums and immediate annuity premiums
are recognized as premium revenue when due. Group insurance premiums are
recognized as premium revenue over the time period to which the premiums relate.
Benefits and expenses are associated with earned premiums so as to result in
recognition of profits over the life of the contracts. This association is
accomplished by means of the provision for liabilities for future policy
benefits and the amortization of DAC and PVFP.
Recognition of Universal Life-Type Contract Revenue and Benefits to
Policyholders - Universal life-type policies are insurance contracts with terms
that are not fixed and guaranteed. The terms that may be changed could include
one or more of the amounts assessed the policyholder, premiums paid by the
policyholder or interest accrued to policyholder balances. Amounts received as
deposits to such contracts are not reported as premium revenues.
Revenues for universal life-type policies consist of charges assessed against
policy account values for deferred policy loading and the cost of insurance and
policy administration. Policy benefits and claims that are charged to expense
include interest credited to contracts and benefit claims incurred in the period
in excess of related policy account balances.
Recognition of Investment Contract Revenue and Benefits to Policyholders -
Contracts that do not subject the Company to risks arising from policyholder
mortality or morbidity are referred to as investment contracts. Retirement plan
contracts, Guaranteed Investment Contracts (GICs) and certain deferred annuities
are considered investment contracts. Amounts received as deposits to such
contracts are not reported as premium revenues.
Revenues for investment products consist of investment income and charges
assessed against contract account values for policy administration. Contract
benefits that are charged to expense include benefit claims incurred in the
period in excess of related contract balances, and interest credited to contract
balances.
Stock-Based Compensation
The Company recognizes compensation cost for its stock-based compensation plans
based on the intrinsic value of the equity instrument awarded in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees."
Changes in Accounting Principles
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities - Effective for transactions occurring on or after January 1,
1998, the Company adopted those provisions of Statement of Financial Accounting
Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," which were deferred by SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." Effective for transactions occurring on or after January 1, 1997, the
Company adopted those provisions of SFAS No. 125 which were not deferred by SFAS
No. 127. SFAS No. 125 requires a company to recognize the financial and
servicing assets it controls and the liabilities it has incurred and to
derecognize financial assets when control has been surrendered in accordance
with the criteria provided in SFAS No. 125. The adoption of this standard had no
effect on the financial results of the Company.
Reporting Comprehensive Income - Effective January 1, 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a company's full set of financial statements. Comprehensive income
encompasses all changes in shareholders' equity from transactions and other
events and circumstances from nonowner sources. Adoption of this standard had no
effect on the financial results of the Company.
Disclosures about Segments of an Enterprise and Related Information - Effective
January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that a company reports information about operating segments in
financial statements using a "management approach" to aggregate operating
segments.
34
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
Adoption of this standard had no effect on the financial results of the Company.
Employers' Disclosures about Pensions and Other Postretirement Benefits -
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132
requires new disclosures relating to a company's pension and other
postretirement benefit plans. Adoption of this standard had no effect on the
financial results of the Company.
Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use - Effective January 1, 1998, the Company adopted Statement of Position (SOP)
No. 98-1, "Accounting for the Cost of Computer Software Developed or Obtained
for Internal Use." SOP No. 98-1 provides guidance on accounting for costs
associated with computer software developed or obtained for internal use.
Adoption of this standard did not have a significant effect on the financial
results of the Company.
Earnings per Share - During the fourth quarter of 1997, the Company adopted SFAS
No. 128, "Earnings per Share." SFAS No. 128 requires the computation and
disclosure of basic and diluted earnings per share (EPS). Basic EPS is computed
by dividing income available to common stockholders (the numerator) by the
weighted-average number of common shares outstanding (the denominator) during
the period. Shares issued during the period and shares reacquired during the
period are weighted for the portion of the period that they were outstanding.
Income available to common stockholders is computed by deducting both the
dividends declared in the period on preferred stock (whether or not paid) and
the dividends accumulated for the period on cumulative preferred stock (whether
or not earned) from income from continuing operations and also from net income.
The computation of diluted EPS is similar to the computation of basic EPS except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if all dilutive potential common shares
had been issued. In addition, in computing the dilutive effect of convertible
securities, the numerator is adjusted to add back any convertible preferred
dividends and any other changes in income or loss that would result from the
assumed conversion of those potential common shares. All EPS amounts for all
periods presented have been computed in accordance with the provisions of SFAS
No. 128.
NOTE TWO: ACQUISITIONS
On October 29, 1999, the Company completed the acquisition of Pilgrim Capital
Corporation (Pilgrim), a Phoenix-based asset management and mutual fund company.
The acquisition was accounted for using the purchase method of accounting.
Therefore, the consolidated financial statements include the accounts of Pilgrim
since the date of acquisition. The acquisition was effected through a stock-and-
cash transaction and includes the Company's assumption of approximately $28
million of debt. Pilgrim shareholders received approximately 2.6 million shares
of ReliaStar common stock plus approximately $63.9 million in cash. The total
purchase price of approximately $194 million included approximately $3 million
of other direct costs of acquisition. Goodwill of approximately $150 million was
recorded.
The following pro forma consolidated financial information was prepared,
assuming the acquisition of Pilgrim had taken place at the beginning of each
period presented:
Year ended December 31 (in millions) 1999 1998
- ------------------------------------------------------------------
Revenues $3,084.8 $2,896.6
Net Income 253.0 237.4
Net Income per Common Share (Diluted) 2.77 2.48
- ------------------------------------------------------------------
The pro forma consolidated financial information is not necessarily indicative
of either the results of operations that would have occurred if this acquisition
had been completed at the beginning of each year presented or of future
operations of the combined companies.
During July 1999, the Company completed the acquisition of the Financial
Northeastern Companies (FNC), located in Fairfield, New Jersey. FNC is engaged
in securities and certificates of deposit brokerage and insurance marketing. The
acquisition was accounted for using the purchase method of accounting. The cash
purchase price was approximately $15 million, and goodwill of approximately $13
million was recorded. The pro forma effect of this transaction on consolidated
results is not material.
In January 1998, the Company completed the acquisitions of ReliaStar
Bancshares, Inc., formerly known as Citizens Community Bancshares Co., and
ReliaStar Managing Underwriters, Inc., formerly known as LaMar & Phillips, Inc.
ReliaStar Bancshares, Inc. is a thrift holding company whose subsidiary,
ReliaStar Bank, is based in St. Cloud, Minnesota. ReliaStar Bank is a federally
chartered savings bank that provides consumer banking products. This acquisition
was accounted for using the purchase method of accounting and was effected
through a stock-for-stock exchange whereby the Company issued approximately
228,000 shares of ReliaStar common stock from treasury. Goodwill recorded as a
result of this transaction was approximately $3 million.
ReliaStar Managing Underwriters, Inc. is a managing general underwriter,
located in Brentwood, Tennessee, specializing in the HMO reinsurance and
provider excess business. This acquisition was accounted for using the purchase
method of accounting and was effected through a stock-for-stock exchange whereby
the Company issued approximately 330,000 shares of ReliaStar common stock from
treasury. Goodwill recorded as a result of this transaction was approximately
$14 million.
35
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
On July 1, 1997, the Company completed the acquisition of Security-Connecticut
Corporation (SCC). SCC was a holding company with two primary subsidiaries:
Security-Connecticut Life Insurance Company (Security-Connecticut) of Avon,
Connecticut, and Lincoln Security Life Insurance Company (Lincoln Security) of
Brewster, New York. Lincoln Security was subsequently merged with ReliaStar Life
Insurance Company of New York, ReliaStar's New York based life insurance
subsidiary.
The acquisition was accounted for using the purchase method of accounting.
Therefore, the consolidated financial statements include the accounts of SCC
since the date of acquisition. The acquisition was effected through a stock-for-
stock exchange whereby the Company issued approximately 12.7 million shares of
ReliaStar common stock. The purchase price was approximately $433 million and
included approximately $4 million of other direct costs of acquisition. Goodwill
of approximately $150 million was recorded.
During December 1997, the Company acquired the common stock of Northstar
Holding, Inc. (Northstar) held by minority shareholders. Prior to the
acquisition, the Company was the majority shareholder and held 80% of
Northstar's common stock. The acquisition was effected through a stock-for-stock
exchange whereby the Company re-issued approximately .5 million shares of
ReliaStar common stock from treasury. The acquisition was accounted for using
the purchase method of accounting. Goodwill recorded as a result of this
transaction was approximately $27 million.
NOTE THREE: INVESTMENTS
Fixed Maturity Securities
The amortized cost and fair value of investments in fixed maturity securities by
type of investment were as follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ------------------ Fair
December 31, 1999 (in millions) Cost Gains (Losses) Value
====================================================================================================================
<S> <C> <C> <C> <C>
United States Government and Government Agencies and Authorities $ 85.2 $ 1.6 $ (.4) $ 86.4
States, Municipalities and Political Subdivisions 30.8 1.0 (1.2) 30.6
Foreign Governments 69.2 .5 (1.0) 68.7
Public Utilities 599.6 12.1 (8.5) 603.2
Corporate Securities 7,129.2 65.9 (198.8) 6,996.3
Mortgage-Backed/Structured Finance 3,316.8 22.6 (105.9) 3,233.5
Redeemable Preferred Stock 24.3 .3 (1.5) 23.1
- --------------------------------------------------------------------------------------------------------------------
Total $11,255.1 $104.0 $(317.3) $11,041.8
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ------------------ Fair
December 31, 1998 (in millions) Cost Gains (Losses) Value
====================================================================================================================
<S> <C> <C> <C> <C>
United States Government and Government Agencies and Authorities $ 103.6 $ 11.5 -- $ 115.1
States, Municipalities and Political Subdivisions 49.9 4.1 -- 54.0
Foreign Governments 88.5 8.9 -- 97.4
Public Utilities 643.0 56.6 $ (.2) 699.4
Corporate Securities 7,425.0 378.5 (47.9) 7,755.6
Mortgage-Backed/Structured Finance 2,793.0 99.9 (7.7) 2,885.2
Redeemable Preferred Stock 24.0 .3 (5.9) 18.4
- --------------------------------------------------------------------------------------------------------------------
Total $11,127.0 $559.8 $ (61.7) $11,625.1
====================================================================================================================
</TABLE>
The amortized cost and fair value of fixed maturity securities by contractual
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
December 31, 1999 (in millions) Cost Value
==========================================================================
<S> <C> <C>
Maturing in:
One Year or Less $ 417.1 $ 416.6
One to Five Years 3,467.1 3,455.5
Five to Ten Years 2,858.7 2,782.2
Ten Years or Later 1,195.4 1,154.0
Mortgage-Backed/Structured Finance 3,316.8 3,233.5
- --------------------------------------------------------------------------
Total $11,255.1 $11,041.8
==========================================================================
</TABLE>
36
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
The fair values for the actively traded marketable bonds are determined based
upon the quoted market prices. The fair values for marketable bonds without an
active market are obtained through several commercial pricing services which
provide the estimated fair values. Fair values of privately placed bonds which
are not considered problems are determined using a matrix-based pricing model.
The model considers the current level of risk-free interest rates, current
corporate spreads, the credit quality of the issuer and cash flow
characteristics of the security. Using this data, the model generates estimated
market values which the Company considers reflective of the fair value of each
privately placed bond. Fair values for privately placed bonds which are
considered problems are determined through consideration of factors such as the
net worth of borrower, the value of collateral, the capital structure of the
borrower, the presence of guarantees and the Company's evaluation of the
borrower's ability to compete in their relevant market.
At December 31, 1999, the largest industry concentration in the private
placement portfolio was mortgage-backed/ structured finance, where 16.9% of the
portfolio was invested, and the largest industry concentration in the marketable
bond portfolio was mortgage-backed/structured finance, where 34.5% of the
portfolio was invested.
Equity Securities
The cost and fair value of investments in equity securities were as follows:
<TABLE>
<CAPTION>
December 31 (in millions) 1999 1998
==========================================================================
<S> <C> <C>
Cost $ 54.2 $ 57.6
Gross Unrealized Gains 3.5 3.9
Gross Unrealized Losses (2.8) (1.2)
- --------------------------------------------------------------------------
Fair Value $ 54.9 $ 60.3
==========================================================================
</TABLE>
Mortgage Loans on Real Estate
Investments in mortgage loans on real estate were as follows:
<TABLE>
<CAPTION>
December 31 (in millions) 1999 1998
=============================================================================
<S> <C> <C>
Mortgage Loans, Non-Impaired $2,305.8 $2,152.3
Mortgage Loans, Impaired 13.7 13.0
- -----------------------------------------------------------------------------
2,319.5 2,165.3
- -----------------------------------------------------------------------------
Allowance for Credit Losses,
Beginning of Year (10.5) (10.5)
Increases -- --
Decreases .7 --
- -----------------------------------------------------------------------------
Allowances for Credit Losses,
End of Year (9.8) (10.5)
- -----------------------------------------------------------------------------
Total $2,309.7 $2,154.8
=============================================================================
Average Investment in Impaired
Mortgage Loans on Real Estate $ 2.0 $ 1.6
=============================================================================
</TABLE>
The Company does not accrue interest income on impaired mortgage loans when the
likelihood of collection is doubtful, rather income is recognized for these
loans as payments are received. Interest income recognized on impaired mortgage
loans during the years ended December 31, 1999, 1998 and 1997, was $1.1 million,
$.9 million and $1.3 million, respectively.
At December 31, 1999, the largest geographic concentration of commercial
mortgage loans was in the Midwest region of the United States, where
approximately 36.0% of the commercial mortgage loan portfolio was invested.
Investment Income
Investment income summarized by type of investment was
as follows:
<TABLE>
<CAPTION>
Year ended December 31 (in millions) 1999 1998 1997
===============================================================================
<S> <C> <C> <C>
Fixed Maturity Securities $ 875.0 $ 866.7 $ 787.9
Equity Securities 3.6 2.1 2.2
Mortgage Loans on Real Estate 181.2 181.6 178.9
Real Estate and Leases 9.2 21.6 16.1
Policy Loans 42.5 41.8 34.3
Other Invested Assets 13.2 12.8 3.6
Short-Term Investments 14.4 14.6 9.3
- -------------------------------------------------------------------------------
Gross Investment Income 1,139.1 1,141.2 1,032.3
Investment Expenses 23.2 24.3 26.0
- -------------------------------------------------------------------------------
Net Investment Income $1,115.9 $1,116.9 $1,006.3
===============================================================================
</TABLE>
Realized Investment Gains and Losses
Net pretax realized investment gains (losses) were as follows:
<TABLE>
<CAPTION>
Year ended December 31 (in millions) 1999 1998 1997
===============================================================================
<S> <C> <C> <C>
Net Gains (Losses) on Sales
Fixed Maturity Securities
Gross Gains $ 17.8 $ 26.3 $ 10.3
Gross Losses (15.2) (13.2) (6.4)
Equity Securities
Gross Gains 7.2 2.2 5.1
Gross Losses (.5) (2.5) --
Mortgage Loans on Real Estate .4 (.2) --
Real Estate and Leases 8.2 4.9 .7
Other 7.9 15.3 9.8
- -------------------------------------------------------------------------------
25.8 32.8 19.5
- -------------------------------------------------------------------------------
Provisions for Losses
Fixed Maturity Securities (13.6) (8.4) (3.0)
Equity Securities -- -- (.1)
Mortgage Loans on Real Estate (.1) -- (2.4)
Real Estate and Leases (.9) (2.4) (2.3)
Other (12.5) (4.4) --
- -------------------------------------------------------------------------------
(27.1) (15.2) (7.8)
- -------------------------------------------------------------------------------
Pretax Realized Investment
Gains (Losses) $ (1.3) $ 17.6 $ 11.7
===============================================================================
</TABLE>
Other Investment Information
Invested assets which were nonincome producing (no income received for the 12
months preceding the balance sheet date) were as follows:
<TABLE>
<CAPTION>
December 31 (in millions) 1999 1998
===============================================================================
<S> <C> <C>
Fixed Maturity Securities $ 4.5 $ 3.9
Mortgage Loans on Real Estate .2 1.5
Real Estate and Leases 2.9 7.1
Other Invested Assets 29.1 11.8
- -------------------------------------------------------------------------------
Total $36.7 $24.3
===============================================================================
</TABLE>
37
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
Allowances for losses on investments are reflected on the Consolidated Balance
Sheets as a reduction of the related assets and were as follows:
<TABLE>
<CAPTION>
December 31 (in millions) 1999 1998
================================================
<S> <C> <C>
Mortgage Loans on Real Estate $9.8 $10.5
Real Estate and Leases 4.7 9.0
Other Invested Assets 8.5 6.0
================================================
</TABLE>
Real estate assets acquired through foreclosure during the years ended
December 31, 1999 and 1997, totaled $1.3 million and $11.3 million,
respectively.
The components of net unrealized investment gains (losses) included in the
accumulated other comprehensive income component of shareholders' equity are
shown below:
<TABLE>
<CAPTION>
December 31 (in millions) 1999 1998
===============================================================
<S> <C> <C>
Unrealized Investment Gains (Losses) $(216.7) $ 526.2
DAC/PVFP Adjustment 50.7 (128.6)
Deferred Income Taxes 58.5 (140.4)
- ---------------------------------------------------------------
TOTAL $(107.5) $ 257.2
===============================================================
</TABLE>
The change in net unrealized investment gains and losses included in the change
in accumulated other comprehensive income consisted of the following:
<TABLE>
<CAPTION>
Year ended December 31 (in millions) 1999 1998 1997
===============================================================
Unrealized Investment
<S> <C> <C> <C>
Gains (Losses) Arising
During The Period/1/ $(474.8) $32.7 $119.9
Reclassification Adjustments/2/ (6.0) (8.4) (5.8)
Change in DAC/PVFP Adjustment/3/ 116.1 6.7 (28.7)
- ----------------------------------------------------------------
TOTAL $(364.7) $31.0 $ 85.4
================================================================
</TABLE>
/1/ Net of income taxes totaling $(258.9) million, $17.2 million and $67.7
million for 1999, 1998 and 1997, respectively.
/2/ Net of income taxes totaling $(3.3) million, $(4.4) million and $(3.2)
million for 1999, 1998 and 1997, respectively.
/3/ Net of income taxes totaling $63.3 million, $3.5 million and $(16.3) million
for 1999, 1998 and 1997, respectively.
NOTE FOUR: NOTES AND MORTGAGES PAYABLE
A summary of notes and mortgages payable is as follows:
<TABLE>
<CAPTION>
December 31 (in millions) 1999 1998
======================================================================
<S> <C> <C>
Bank Borrowings $ 96.0 --
Other Indebtedness - Current Portion 5.8 $ .2
- ----------------------------------------------------------------------
Short-Term Debt 101.8 .2
- ----------------------------------------------------------------------
Notes Payable - 8.000%,
due 2006, issued at 99.6% 197.9 --
Notes Payable - 6.500%,
due 2008, issued at 99.4% 197.6 197.4
Notes Payable - 6.625%,
due 2003, issued at 99.8% 119.9 119.9
Notes Payable - 8.625%,
due 2005, issued at 99.3% 109.6 109.5
Notes Payable - 7.125%,
due 2003, assumed from SCC 74.6 74.4
Other Indebtedness -
Noncurrent Portion 2.2 8.0
- ----------------------------------------------------------------------
Long-Term Debt 701.8 509.2
- ----------------------------------------------------------------------
TOTAL $803.6 $509.4
======================================================================
</TABLE>
At December 31, 1999 and 1998, other indebtedness is primarily mortgage notes
assumed in connection with certain real estate investments with interest rates
ranging from 6.2% to 9.6%.
The Company has unsecured revolving credit facilities with banks totaling
$350.0 million for general corporate purposes. As of December 31, 1999, $254.0
million remained available for borrowing. The facilities require annual
commitment fees ranging from .13% to .18%.
Principal payments required in each of the next five years and thereafter are
as follows:
(in millions)
==============================================
2000 - $101.8 2003 - $195.1
2001 - $ 2.0 2004 - --
2002 - $ .1 2005 and thereafter - $510.0
==============================================
Interest paid on notes and mortgages payable was $41.0 million, $25.9 million
and $32.5 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
NOTE FIVE: INCOME TAXES
The income tax liability reported on the Consolidated Balance Sheets consisted
of the following:
<TABLE>
<CAPTION>
December 31 (in millions) 1999 1998
==========================================
<S> <C> <C>
Current Income Taxes $38.8 $ (1.9)
Deferred Income Taxes 19.3 200.9
- ------------------------------------------
TOTAL $58.1 $199.0
==========================================
</TABLE>
38
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
Deferred income taxes reflect the impact for financial statement reporting
purposes of "temporary differences" between the financial statement carrying
amounts and tax bases of assets and liabilities. The "temporary differences"
that give rise to the net deferred tax liability relate to the following:
December 31 (in millions) 1999 1998
- -------------------------------------------------------------------------------
Future Policy and Contract Benefits $(381.2) $(368.8)
Net Unrealized Investment Losses (77.6) --
Investment Write-Offs and Allowances (24.5) (34.4)
Pension and Postretirement Benefit Plans (8.1) (7.8)
Employee Benefits (12.4) (12.9)
Other (64.4) (41.1)
- -------------------------------------------------------------------------------
Gross Deferred Tax Asset (568.2) (465.0)
- -------------------------------------------------------------------------------
Deferred Policy Acquisition Costs 370.2 326.6
Present Value of Future Profits 141.2 157.3
Net Unrealized Investment Gains -- 119.3
Property and Equipment 25.4 24.4
Real Estate Joint Ventures 10.0 15.5
Other 40.7 22.8
- -------------------------------------------------------------------------------
Gross Deferred Tax Liability 587.5 665.9
- -------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $ 19.3 $ 200.9
- -------------------------------------------------------------------------------
The provision for income taxes reported on the Consolidated Statements of Income
consisted of the following:
Year ended December 31 (in millions) 1999 1998 1997
- ------------------------------------------------------------------------------
Currently Payable $104.2 $128.1 $117.9
Deferred 39.1 14.9 7.8
Benefit of Operating
Loss Carryforward (7.0) -- --
- ------------------------------------------------------------------------------
TOTAL $136.3 $143.0 $125.7
- ------------------------------------------------------------------------------
The difference between the U.S. federal income tax rate and the consolidated tax
provision rate is summarized as follows:
Year ended December 31 1999 1998 1997
- -----------------------------------------------------------------
Statutory Tax Rate 35.0% 35.0% 35.0%
Benefit of Operating
Loss Carryforward (1.7) -- --
Other .5 .7 .4
- -----------------------------------------------------------------
EFFECTIVE TAX RATE 33.8% 35.7% 35.4%
- -----------------------------------------------------------------
During 1999, the Company recognized a $7.0 million tax benefit related to net
operating loss carryforwards of previously acquired entities as a result of a
change in tax law.
Federal income tax regulations allowed certain special deductions for 1983 and
prior years which are accumulated in a memorandum tax account designated as
"policyholders' surplus." Generally, this policyholders' surplus account will
become subject to tax at the then current rates only if the accumulated balance
exceeds certain maximum limitations or if certain cash distributions are deemed
to be paid out of the account. At December 31, 1999, ReliaStar Life and its life
insurance subsidiaries have accumulated approximately $51.0 million in their
separate policyholders' surplus accounts. Deferred taxes have not been provided
on this temporary difference.
There have been no deferred taxes recorded for the unremitted equity in
subsidiaries as the earnings are considered to be permanently invested or will
be remitted only when tax effective to do so.
The Internal Revenue Service has completed its review of the Company's tax
returns for all years through 1995.
The Company had approximately $63.6 million of non-life net operating loss
carryforwards for tax purposes available as of December 31, 1999.
Cash paid for federal income taxes was $52.5 million, $122.1 million and $88.2
million during the years ended December 31, 1999, 1998 and 1997, respectively.
NOTE SIX: EMPLOYEE BENEFIT PLANS
Success Sharing Plan and ESOP
The Success Sharing Plan and ESOP (Success Sharing Plan) was designed to
increase employee ownership and reward employees when certain Company
performance objectives are met. Essentially all employees are eligible to
participate in the Success Sharing Plan. The Success Sharing Plan has both
qualified and nonqualified components. The nonqualified component is equal to
25% of the annual award and is paid in cash to employees. The qualified
component is equal to 75% of the annual award which is contributed to the ESOP
portion of the Success Sharing Plan.
In addition, the Success Sharing Plan has a 401(k) feature whereby
participants may elect to contribute a percentage of their eligible earnings to
the plan. Beginning in 1999, the Company matched participants' 401(k)
contributions up to 6% of eligible earnings.
In 1991, the Company issued to the ESOP 1.3 million shares of a new series of
preferred stock in exchange for a $30.0 million note. The preferred stock was
converted to common stock in 1996. The stock portion of the Company's Success
Sharing Plan contributions were met through an allocation of stock to
participants' accounts of 133,725, 146,016 and 139,594 shares in 1999, 1998 and
1997, respectively.
Costs charged to expense for the Success Sharing Plan were $2.2 million, $.9
million and $2.8 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
Pension and Other Postretirement Benefits
The Company has funded and unfunded noncontributory defined benefit retirement
plans which provide benefits to employees upon retirement (Pension Plans).
Effective December 31, 1998, the Company's qualified defined benefit retirement
plan was amended to suspend the accrual of additional benefits for future
services. Eligible employees retain all of their accrued benefits as of December
31, 1998, which will be paid monthly at retirement according to the provisions
of the plan. Employees meeting certain age and service requirements will receive
certain transition benefits until retirement. A curtailment gain was recorded in
1998 to reflect the impact of this plan amendment and the impact of employee
reductions resulting from the transfer of certain accident and health
administrative operations to a third party.
39
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
The Company provides certain health care and life insurance benefits to
retired employees and their eligible dependents (Other Plans). The
postretirement health care plan is contributory, with retiree contribution
levels adjusted annually; the postretirement life insurance plan provides a flat
amount of noncontributory coverage and optional contributory coverage.
Net periodic expense or benefit for the Company's pension and other plans
included the following components:
Year ended December 31 (in millions) 1999 1998 1997
- ---------------------------------------------------------------------------
Pension Plans
Service Cost $ .3 $ 3.2 $ 4.9
Interest Cost 16.6 16.7 15.2
Expected Return On Plan Assets (22.0) (20.9) (17.0)
Amortization of Prior Service Cost .3 .8 1.1
Amortization of Transition Asset -- (.1) (.3)
Curtailment (Gain) Loss -- (3.7) --
Settlement Loss .3 -- --
Actuarial Loss 1.5 1.6 1.8
- ---------------------------------------------------------------------------
NET EXPENSE (BENEFIT) $ (3.0) $ (2.4) $ 5.7
- ---------------------------------------------------------------------------
Year ended December 31 (in millions) 1999 1998 1997
- ---------------------------------------------------------------------------
Other Plans
Service Cost $ .6 $ .5 $ .4
Interest Cost .9 .7 .7
Amortization of Prior Service Cost (1.4) (1.5) (1.6)
Curtailment Gain -- (1.7) --
Actuarial Gain -- (.1) (.1)
- ---------------------------------------------------------------------------
NET EXPENSE (BENEFIT) $ .1 $ (2.1) $ (.6)
- ---------------------------------------------------------------------------
The funded status of the plans and net amounts recognized in the Consolidated
Balance Sheets were as follows:
<TABLE>
<CAPTION>
PENSION PLANS OTHER PLANS
------------------ -----------------
(in millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit Obligations at Beginning of Year $238.7 $237.1 $ 10.8 $ 10.9
Service Cost .3 3.2 .6 .5
Interest Cost 16.6 16.7 .9 .7
Actuarial (Gain) Loss (6.6) 14.9 1.8 (.2)
Benefits Paid (15.1) (15.4) (.8) (.4)
Plan Amendments .1 2.0 -- --
Transfers .7 -- -- --
Termination Cost -- 1.0 -- --
Settlement (2.2) -- -- --
Curtailment -- (20.8) -- (.7)
- ------------------------------------------------------------------------------------------------
Benefit Obligations at End of Year 232.5 238.7 13.3 10.8
- ------------------------------------------------------------------------------------------------
Fair Value of Plan Assets at Beginning of Year 251.7 229.1 -- --
Actual Return on Plan Assets 109.8 36.6 -- --
Employer Contributions 3.4 1.4 .8 .4
Participant Contributions -- -- .5 .5
Settlement (2.2) -- -- --
Benefits Paid (15.1) (15.4) (1.3) (.9)
- ------------------------------------------------------------------------------------------------
Fair Value of Plan Assets at End of Year 347.6 251.7 -- --
- ------------------------------------------------------------------------------------------------
Funded Status 115.1 13.0 (13.3) (10.8)
Unrecognized Net Gain (98.2) (2.2) -- (1.8)
Unrecognized Prior Service Cost 3.3 3.6 (3.3) (4.7)
- ------------------------------------------------------------------------------------------------
NET ASSET (LIABILITY) RECOGNIZED $ 20.2 $ 14.4 $(16.6) $(17.3)
- ------------------------------------------------------------------------------------------------
</TABLE>
The components of the amounts recognized in the Consolidated Balance Sheets were
as follows:
<TABLE>
<CAPTION>
PENSION PLANS OTHER PLANS
----------------- -----------------
December 31 (in millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid Benefit Cost $ 33.8 $ 28.2 -- --
Accrued Benefit Liability (20.1) (19.1) $(16.6) $(17.3)
Intangible Asset 6.5 5.3 -- --
- ------------------------------------------------------------------------------------------------
NET ASSET (LIABILITY) RECOGNIZED $ 20.2 $ 14.4 $(16.6) $(17.3)
- ------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
The aggregate projected benefit obligation and the aggregate accumulated benefit
obligation for the unfunded pension plans were $20.1 million and $20.1 million,
respectively, as of December 31, 1999; and $19.4 million and $19.1 million,
respectively, as of December 31, 1998. As of December 31, 1999 and 1998, pension
plan assets included 1,232,982 shares of Company common stock with a fair value
of $48.3 million and $56.9 million, respectively. The benefit obligations for
the pension and other postretirement plans were determined using assumed
discount rates of 7.5% and 7.0% as of January 1, 2000 and 1999, respectively. A
weighted-average long-term rate of compensation increase of 4.5% was used for
the pension benefit obligation. The assumed long-term rate of return on pension
plan assets was 10.5% in 1999 and 1998. The assumed health care cost trend rate
for 2000 and thereafter used in measuring the postretirement health care benefit
obligation was 5.0%. The assumed health care cost trend rate has an effect on
the amounts reported. For example, a one-percentage-point increase in the rate
would increase the 1999 total service and interest cost by $.1 million and the
postretirement health care benefit obligation by $.5 million. A one-percentage-
point decrease in the rate would decrease the 1999 total service and interest
cost by $.1 million and the postretirement health care benefit obligation by $.5
million.
Stock Incentive Plan
The ReliaStar 1993 Stock Incentive Plan (Stock Incentive Plan) provides for
awards of stock options and restricted and unrestricted shares of the Company's
common stock to officers and key employees in connection with the Company's
incentive compensation programs.
The Stock Incentive Plan authorizes the grant of Incentive Stock Options (ISO)
or nonqualified options with such vesting provisions as may be determined at the
time of grant. The exercise price for all options granted was the market price
of the common stock at the date of grant. The options must be exercised within
10 years of the date of grant.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans other than for restricted
stock and performance-based awards. Had compensation cost for the Company's
stock option plans been determined based upon the fair value at the grant date
for awards under these plans, consistent with the optional accounting
methodology prescribed under SFAS No. 123, the Company's net income would have
been reduced by approximately $11.1 million, $8.1 million, and $4.9 million for
the years ended December 31, 1999, 1998 and 1997, respectively or approximately
$.11, $.08 and $.05 per diluted common share for 1999, 1998 and 1997,
respectively. The weighted average fair value per option granted during 1999,
1998 and 1997 was $10.54, $11.74 and $9.17, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
annual dividend yield ranging from 1.6% to 1.8%, volatility factors ranging from
.1881 to .2693, risk-free interest rates ranging from 5.2% to 6.2% and an
expected life of 5.0 to 5.8 years.
Stock option transactions are shown in the table below:
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
- ---------------------------------------------------------------------
Balance, December 31, 1996 4,220,000 $16.32
Granted 2,662,745 26.98
Exercised (934,903) 14.42
Canceled (177,479) 29.92
- ---------------------------------------------------------------------
Balance, December 31, 1997 5,770,363 21.12
Granted 1,646,178 45.80
Exercised (1,373,731) 15.81
Canceled (390,313) 36.67
- ---------------------------------------------------------------------
Balance, December 31, 1998 5,652,497 28.50
Granted 2,951,775 29.96
Exercised (828,146) 14.67
Canceled (322,604) 40.30
- ---------------------------------------------------------------------
BALANCE DECEMBER 31, 1999 7,453,522 $30.09
- ---------------------------------------------------------------------
Options exercisable at:
December 31, 1997 3,032,472 $15.12
December 31, 1998 3,015,613 19.60
December 31, 1999 4,414,967 22.44
- ---------------------------------------------------------------------
41
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
The following table summarizes information concerning options outstanding and
options exercisable as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF REMAINING CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES NUMBER LIFE (IN YEARS) PRICE NUMBER PRICE
===========================================================================================================
<S> <C> <C> <C> <C> <C>
$ 4.60 - $11.00 1,154,811 3.9 $ 5.34 1,154,811 $ 5.34
$11.01 - $21.00 1,007,693 4.4 16.07 1,005,361 16.08
$21.01 - $31.00 1,361,373 8.0 25.09 1,092,453 24.84
$31.01 - $41.00 1,843,724 7.9 39.11 425,238 37.27
$41.01 - $51.19 2,085,921 8.3 45.93 737,104 45.78
===========================================================================================================
</TABLE>
During 1999, 1998 and 1997, respectively, the Company issued 10,695, 11,379 and
13,438 restricted shares of common stock to officers under the terms of the
Company's Deposit Share Program. This program, which is part of the Company's
incentive compensation arrangements, allows eligible officers to deposit certain
unrestricted shares of the Company's common stock with the Company and receive
up to one share of restricted stock for each share deposited. One-half of the
matching restricted shares vests in three years and the remainder vests five
years after the date of issue. The restricted shares may not be sold, exchanged,
transferred or otherwise disposed of prior to vesting. The value of restricted
shares at issuance has been recorded as unearned compensation and is reflected
as a reduction in equity as unamortized restricted stock awards. The unearned
compensation is amortized as a charge to income over the vesting periods.
Effective January 1, 1997, the Stock Incentive Plan provides for annual
increases in the number of shares available for award based on a percentage of
the Company's common shares outstanding. As of January 1, 2000, the cumulative
number of shares which could have been issued under the Stock Incentive Plan for
awards of stock options, restricted shares and unrestricted shares of the common
stock was 11,764,381. The number of shares remaining available for awards under
the Stock Incentive Plan was 3,579,941 at January 1, 2000.
Stock Ownership Plan for Nonemployee Directors
Under the ReliaStar Stock Ownership Plan for Nonemployee Directors, the Company
pays certain amounts of each non-employee director's retainer in the form of
nonqualified stock options. In 1999, 1998 and 1997, the Company granted 45,277,
38,500 and 27,500 nonqualified stock options, respectively, to its nonemployee
directors. The exercise price for all stock options granted was the market price
at the date of the grant and no compensation expense was recorded. The stock
options must be exercised within 10 years and vest at the rate of one-third of
the grant on each of the first three anniversaries of the grant. The total
number of shares which may be issued under the ReliaStar Stock Ownership Plan
for Nonemployee Directors for awards of stock options and restricted shares is
600,000. The number of shares remaining available for awards was 348,666 as of
December 31, 1999.
NOTE SEVEN: UNPAID ACCIDENT AND HEALTH CLAIMS
The change in the liability for unpaid accident and health claims and claim
adjustment expenses is summarized as follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
=======================================================
<S> <C> <C> <C>
Balance at January 1 $480.3 $387.0 $383.3
Less Reinsurance Recoverable 180.9 120.2 102.6
- -------------------------------------------------------
Net Balance at January 1 299.4 266.8 280.7
Incurred Related to:
Current Year 286.0 204.4 178.6
Prior Years 20.8 8.2 (3.0)
- -------------------------------------------------------
Total Incurred 306.8 212.6 175.6
Paid Related to:
Current Year 113.2 84.2 107.4
Prior Years 130.9 95.8 82.1
- -------------------------------------------------------
Total Paid 244.1 180.0 189.5
Net Balance at December 31 362.1 299.4 266.8
Plus Reinsurance Recoverables 293.4 180.9 120.2
- -------------------------------------------------------
BALANCE AT DECEMBER 31 $655.5 $480.3 $387.0
=======================================================
</TABLE>
The liability for unpaid accident and health claims and claim adjustment
expenses is included in Future Policy and Contract Benefits on the Consolidated
Balance Sheets.
NOTE EIGHT: COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES ISSUED
BY CONSOLIDATED SUBSIDIARIES
On June 3, 1997, ReliaStar Financing II (Subsidiary Trust II) issued $125.0
million (5 million shares) of 8.10% Trust-Originated Preferred Securities (the
8.10% Preferred Securities). In connection with Subsidiary Trust II's issuance
of the 8.10% Preferred Securities and the related purchase by ReliaStar of all
of Subsidiary Trust II's common securities (Common Securities II), ReliaStar
issued to Subsidiary Trust II $128.9 million principal amount of its 8.10%
Subordinated Deferrable Interest Notes, due June 3, 2027, (the Junior
Subordinated Debt Securities II). ReliaStar, at its option, may extend the
maturity date of the Junior Subordinated Debt Securities II to a date not later
than June 3, 2046. All issued shares remain outstanding.
42
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
On March 29, 1996, ReliaStar Financing I (Subsidiary Trust I), issued $125.0
million (5 million shares) of 8.20% Trust-Originated Preferred Securities (the
8.20% Preferred Securities). In connection with Subsidiary Trust I's issuance of
the 8.20% Preferred Securities and the related purchase by ReliaStar of all of
Subsidiary Trust I's common securities (Common Securities I), ReliaStar issued
to Subsidiary Trust I $128.9 million principal amount of its 8.20% Subordinated
Deferrable Interest Notes, due March 15, 2016 (Junior Subordinated Debt
Securities I). All issued shares remain outstanding.
Subsidiary Trust I and II (the Subsidiary Trusts) are wholly owned
subsidiaries of ReliaStar. The sole assets of the Subsidiary Trusts are and will
be the Junior Subordinated Debt Securities I & II (the Junior Subordinated Debt
Securities). The interest and other payment dates on the Junior Subordinated
Debt Securities correspond to the distribution and other payment dates on the
8.20% and 8.10% Preferred Securities (the Preferred Securities) and the Common
Securities I and II (the Common Securities). Under certain circumstances, the
Junior Subordinated Debt Securities may be distributed to holders of Preferred
Securities and holders of the Common Securities in liquidation of the Subsidiary
Trusts.
The Junior Subordinated Debt Securities I are redeemable at the option of
ReliaStar on or after March 29, 2001, at a redemption price of $25 per Junior
Subordinated Debt Securities I plus accrued and unpaid interest. The Junior
Subordinated Debt Securities II are redeemable at the option of ReliaStar on or
after June 3, 2002 at a redemption price of $25 per Junior Subordinated Debt
Securities II plus accrued and unpaid interest. The Preferred Securities and the
Common Securities will be redeemed on a pro rata basis to the same extent that
the Junior Subordinated Debt Securities are repaid, at $25 per Preferred
Security and Common Security plus accumulated and unpaid distributions.
ReliaStar's obligations under the Junior Subordinated Debt Securities and
related agreements, taken together, constitute a full and unconditional
guarantee by ReliaStar of payments due on the Preferred Securities.
NOTE NINE: SHAREHOLDERS' EQUITY
Share Data
The authorized capital stock of ReliaStar consists of 200,000,000 common shares
and 7,000,000 preferred shares, all with a par value of $.01 per share.
A summary of common share activity is as follows:
<TABLE>
<CAPTION>
ISSUED TREASURY STOCK
========================================================
<S> <C> <C>
Balance, December 31, 1996 84,786,276 (4,752,906)
Issued for Acquisitions 12,667,718 466,199
Issued for Benefit Plans 653,384 581,687
Treasury Stock Acquired -- (3,963,096)
- --------------------------------------------------------
Balance, December 31, 1997 98,107,378 (7,668,116)
Issued for Acquisitions -- 558,272
Issued for Benefit Plans -- 1,604,756
Treasury Stock Acquired -- (3,731,024)
- --------------------------------------------------------
Balance, December 31, 1998 98,107,378 (9,236,112)
Issued for Acquisition -- 2,555,159
Issued for Benefit Plans -- 1,056,349
Treasury Stock Acquired -- (3,607,640)
- --------------------------------------------------------
BALANCE DECEMBER 31, 1999 98,107,378 (9,232,244)
========================================================
</TABLE>
Note Receivable from ESOP
To finance the shares held by the ESOP, the ESOP borrowed $30.0 million from the
Company under a 20-year, 9.5% note due in 2011. The Company will pay dividends
on the shares held by the ESOP plus additional cash contributions in amounts
necessary to enable the ESOP to meet its obligations under the note.
Dividend Restrictions
The ability of ReliaStar to pay cash dividends to shareholders is primarily
dependent upon the amount of dividends received from ReliaStar Life. ReliaStar
Life's ability to pay cash dividends to ReliaStar is, in turn, restricted by law
or subject to approval of the insurance regulatory authorities of Minnesota.
These authorities recognize only statutory accounting practices for determining
the ability of an insurer to pay dividends to its shareholders.
Under Minnesota insurance law regulating the payment of dividends by ReliaStar
Life, any such payment must be an amount deemed prudent by ReliaStar Life's
Board of Directors and, unless otherwise approved by the Commissioner of the
Minnesota Department of Commerce (the Commissioner), must be paid solely from
the adjusted earned surplus of ReliaStar Life. Adjusted earned surplus means the
earned surplus as determined in accordance with statutory accounting practices
(unassigned funds) less 25% of the amount of such earned surplus which is
attributable to unrealized capital gains. Further, without approval of the
Commissioner, ReliaStar Life may not pay in any calendar year any dividend
which, when combined with other dividends paid within the preceding 12 months,
exceeds the greater of (i) 10% of ReliaStar Life's statutory surplus at the
prior
43
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
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 2000,
the amount of dividends that can be paid by ReliaStar Life without Commissioner
approval is $208.4 million.
Statutory Surplus and Net Income
Net income of the insurance subsidiaries, as determined in accordance with
statutory accounting practices, was $191.9 million, $153.3 million and $185.4
million for the years ended December 31, 1999, 1998 and 1997, respectively.
ReliaStar Life's statutory capital and surplus was $1,153.7 million and $1,063.4
million at December 31, 1999 and 1998, respectively.
Share Rights Plan
ReliaStar has a share rights plan that provides for one preferred share purchase
right for each outstanding share of common stock. Each right entitles the holder
to buy one-twentieth of a share of a new series of junior participating
preferred stock at an exercise price of $100, subject to adjustment.
The rights, which are attached to the common stock, will be detached and
become exercisable only after a person or group (Acquirer) acquires ownership of
20% or more of the common stock or announces a tender offer which, if
consummated, would give the offerer ownership of 20% or more of the common
stock. The rights will expire September 8, 2004, and ReliaStar may redeem the
rights under certain circumstances. The share rights plan also provides for the
right of shareholders, other than an Acquirer, to acquire additional common
shares of ReliaStar or an Acquirer in certain merger or similar transactions.
NOTE TEN: REINSURANCE
The Company is a member of reinsurance associations established for the purpose
of ceding the excess of life insurance over retention limits. The Reinsurance
segment assumes and cedes reinsurance on certain life and health risks as its
primary business.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The amount of the allowance for uncollectible reinsurance
receivables was immaterial at December 31, 1999 and 1998. The Company evaluates
the financial condition of its reinsurers and monitors concentrations of credit
risk to minimize its exposure to significant losses from reinsurer insolvencies.
ReliaStar Life's retention limit is $1,000,000 per insurable life for
individual coverage, with lower retention limits at ReliaStar Life's
subsidiaries. For group coverage and reinsurance assumed, the retention is
$500,000 per life with per occurrence limitations, subject to certain maximums.
As of December 31, 1999, $47.9 billion of life insurance in force was ceded to
other companies. The Company had assumed $55.7 billion of life insurance in
force as of December 31, 1999. Included in these amounts are $50.9 billion of
reinsurance assumed pertaining to Federal Employees' Group Life Insurance and
Servicemans' Group Life Insurance. Also included in the above amounts are $4.8
billion of reinsurance assumed and $.9 billion of reinsurance ceded by the
Reinsurance segment.
Premium amounts received for prospective reinsurance that meet conditions for
reinsurance accounting are recorded as unearned premium revenue and amortized
into earned premium ratably over the remaining reinsurance contract period.
The effect of reinsurance on premiums and recoveries was as follows:
Year Ended December 31 (in millions) 1999 1998 1997
- ------------------------------------------------------------------------------
Direct Premiums $ 838.0 $ 780.0 $ 675.6
Reinsurance Assumed 750.3 505.0 386.2
Reinsurance Ceded (395.5) (270.9) (173.9)
- ------------------------------------------------------------------------------
NET PREMIUMS $1,192.8 $1,014.1 $ 887.9
- ------------------------------------------------------------------------------
REINSURANCE RECOVERIES $ 355.2 $ 218.7 $ 114.4
- ------------------------------------------------------------------------------
NOTE ELEVEN: DISCONTINUED OPERATIONS
AND OTHER
In December 1998, the Company completed the sale of its
former mortgage banking subsidiary, ReliaStar Mortgage Corporation (RMC) for
approximately $19 million in cash. The results of RMC are presented as
discontinued operations in the Consolidated Statements of Income.
Revenues, income from operations and loss on disposal related to the former
mortgage banking subsidiary were as follows:
Year ended December 31 (in millions) 1999 1998 1997
- ------------------------------------------------------------------------
Revenues -- $18.9 $32.7
Income From Operations/1/ -- 0.1 3.2
Loss on Disposal/2/ -- (7.3) --
- ------------------------------------------------------------------------
/1/Net of tax expense of $1.8 million in 1997.
/2/Includes a $2.8 million pretax loss from operations during the phase-out
period and is net of a tax benefit of $4.3 million.
During 1999, the Company combined its mutual fund operations into one location.
This consolidation was substantially completed by the end of 1999 and resulted
in the termination of approximately 50 associates. Estimated costs recorded were
primarily for employee-related termination costs and non-cancelable lease
contracts associated with vacated facilities.
During 1998, the Company approved a plan to consolidate its five individual
life insurance and annuity service center operations into one new center. This
consolidation is expected to be substantially complete by the end of the year
2000 and affects approximately 700 positions at five separate service center
operations. Estimated costs recorded were primarily for employee-related
termination and non-cancelable lease contracts costs associated with vacated
facilities. The 1999 transition of annuity operations to the new center was
completed as originally scheduled.
44
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
During 1997, the Company approved a plan to eliminate redundancies and create
operational efficiencies in its Personal Financial Services segment operations
through consolidation of certain financial, underwriting and claims functions.
The plan was substantially completed by December 31, 1998.
The following table summarizes the liabilities recorded for these actions:
EMPLOYEE FACILITY AND
(in millions) RELATED OTHER RELATED TOTAL
- -----------------------------------------------------------------------
Balance at December 31, 1996 -- -- --
Actions Announced $ 4.4 $ 3.8 $ 8.2
- -----------------------------------------------------------------------
Balance at December 31, 1997 4.4 3.8 8.2
Actions Announced 13.0 11.8 24.8
Payments (2.6) (1.5) (4.1)
Adjustments to Liability -- (.5) (.5)
- -----------------------------------------------------------------------
Balance at December 31, 1998 14.8 13.6 28.4
Actions Announced 11.4 3.1 14.5
Payments (4.0) (1.8) (5.8)
Adjustments to Liability -- (.4) (.4)
- -----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $22.2 $14.5 $36.7
- -----------------------------------------------------------------------
NOTE TWELVE: COMMITMENTS
AND CONTINGENCIES
Litigation
The Company is a defendant in a number of lawsuits arising out of the normal
course of its business. Some of the claims seek to be granted class action
status and many of the claims seek both compensatory and punitive damages. In
the opinion of management, the ultimate resolution of such litigation will not
have a material adverse impact to the financial position of the Company. It
should be noted, however, that a number of financial services companies have
been subjected to significant awards in connection with punitive damages claims
and the Company can make no assurances that it will not be subjected to such an
award.
The Company is a defendant in litigation in New York State court regarding an
alleged reinsurance contract. The plaintiff alleges damages in excess of $100
million. The Company believes that no contract exists and the suit is without
merit.
Joint Group Life and Annuity Contracts
ReliaStar Life has issued certain participating group annuity and group life
insurance contracts jointly with another insurance company. ReliaStar Life has
entered into an arrangement with this insurer whereby ReliaStar Life will
gradually transfer its liabilities (approximately $144 million at December 31,
1999) to the other insurer over a ten year period which commenced in 1993. The
terms of the arrangement specify the interest rate on the liabilities and
provide for a transfer of assets and liabilities scheduled in a manner
consistent with the expected cash flows of the assets allocated to support the
liabilities. A contingent liability exists with respect to the joint obligor's
portion of the contractual liabilities attributable to contributions received
prior to July 1, 1993, (approximately $653 million at December 31, 1999) in the
event the joint obligor is unable to meet its obligations.
Financial Instruments
The Company is a party to financial instruments with on and off-balance-sheet
risk in the normal course of business to reduce its exposure to fluctuations in
interest rates and equity prices. These financial instruments include
commitments to extend credit, financial guarantees, futures contracts, interest
rate swaps and interest rate caps and equity indexed call options. Those
instruments involve, to varying degrees, elements of credit, interest rate,
equity price, or liquidity risk in excess of the amount recognized in the
Consolidated Balance Sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
financial guarantees written is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. For
interest rate swap and interest rate cap transactions, the contract or notional
amounts do not represent exposure to credit loss. For swaps, caps and equity
indexed call options, the Company's exposure to credit loss is limited to those
financial instruments where the Company has an unrealized gain.
Unless otherwise noted, the Company does not require collateral or other
security to support financial instruments with credit risk.
December 31 (in millions) 1999 1998
- ---------------------------------------------------------------
Contract or Notional Amount
Financial Instruments Whose Contract
Amounts Represent Credit Risk
Commitments to Extend Credit $ 42.6 $101.0
Financial Guarantees 28.5 28.8
Financial Instruments Whose Notional
or Contract Amounts Exceed the
Amount of Credit Risk
Interest Rate Swap Agreements 790.5 897.5
Interest Rate Cap Agreements 510.0 510.0
Equity-Indexed Call Options 55.6 28.7
- ---------------------------------------------------------------
Commitments to Extend Credit - Commitments to extend credit are legally binding
agreements to lend to a customer. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. They
generally may be terminated by the Company in the event of deterioration in the
financial condition of the borrower. Since some of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future liquidity requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis.
Financial Guarantees - Financial guarantees are conditional commitments issued
by the Company guaranteeing the performance of the borrower to a third party.
Those guarantees are primarily issued to support public and pri-
45
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
vate commercial mortgage borrowing arrangements. The credit risk involved is
essentially the same as that involved in issuing commercial mortgage loans.
ReliaStar Life is a partner in six real estate joint ventures where it has
guaranteed the repayment of loans of the partnership. As of December 31, 1999,
ReliaStar Life had guaranteed repayment of $28.5 million ($28.8 million at
December 31, 1998) of such loans including the portion allocable to the PFA. If
any payment were made under these guarantees, ReliaStar Life would be allowed to
make a claim for repayment from the joint venture, foreclose on the assets of
the joint venture, including its real estate investment and, in certain
instances, make a claim against the joint venture's general partner.
For certain of these partnerships, ReliaStar Life has made capital
contributions from time to time to provide the partnerships with sufficient cash
to meet its obligations, including operating expenses, tenant improvements and
debt service. Capital contributions during 1999 and 1998 were insignificant.
Further capital contributions may be required in future periods for certain of
the joint ventures. The Company cannot predict the amount of such future
contributions.
Interest Rate Swap Agreements - The Company enters into interest rate swap
agreements to manage interest rate exposure. The primary reason for the interest
rate swap agreements is to extend the duration of adjustable rate investments.
Interest rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amounts. Changes in market interest rates impact income
from adjustable rate investments and have an opposite (and approximately
offsetting) effect on the reported income from the swap portfolio. The risks
under interest rate swap agreements are generally similar to those of futures
contracts. Notional principal amounts are often used to express the volume of
these transactions but do not represent the much smaller amounts potentially
subject to credit risk. The amount subject to credit risk is approximately equal
to any unrealized gain on the agreements. At December 31, 1999, there was no
unrealized gain on the agreements.
Interest Rate Cap Agreements - The Company has entered into interest rate cap
agreements as a hedge against the effects of rising interest rates on the
invested assets supporting a portfolio of single premium deferred annuity
contracts. Notional principal amounts are often used to express the volume of
these transactions but do not represent the much smaller amounts potentially
subject to credit risk. The amount subject to credit risk is approximately equal
to the unrealized gain on the agreements which was approximately $.1 million at
December 31, 1999.
Equity Indexed Call Options - The Company holds certain call options indexed to
the performance of the S&P 500 Index as part of its asset/liability management
strategy for its equity indexed annuity products. The Company held 50 call
options with a notional amount of $55.6 million and an estimated fair value of
$19.6 million as of December 31, 1999.
Futures Contracts - Futures contracts are contracts for delayed delivery of
securities or money market instruments in which the seller agrees to make
delivery at a specified future date of a specified instrument, at a specified
price or yield. These contracts were entered into to manage interest rate risk
as part of the Company's asset and liability management. Risks arise from the
movements in securities values and interest rates.
During 1997, the Company closed out all of its futures contracts and
immediately entered into zero coupon interest rate swaps. The Company has not
entered into any new futures contracts since 1997. As of December 31, 1999, the
remaining deferred gain on the closed futures contracts was approximately $17
million, which is being amortized into income over the life of the liabilities
whose cash flows they supported.
Leases
The Company has operating leases for office space and certain computer
processing and other equipment. Rental expense for these items was $20.1
million, $15.9 million and $17.0 million for the years ended December 31, 1999,
1998 and 1997, respectively.
Future minimum aggregate rental commitments at December 31, 1999 for operating
leases were as follows:
(in millions)
- -----------------------------------------------------
2000 - $14.5 2003 - $ 9.8
2001 - $13.9 2004 - $ 9.7
2002 - $11.3 2005 and thereafter - $31.1
- -----------------------------------------------------
NOTE THIRTEEN: FAIR VALUE OF
FINANCIAL INSTRUMENTS
The following disclosures are made in accordance with the requirements of SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS No. 107
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates, in many cases, could not be realized in immediate
settlement of the instrument.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The fair value estimates presented herein are based on pertinent information
available to Management as of December 31, 1999 and 1998, respectively. Although
Management is not aware of any factors that would significantly
46
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since those
dates; therefore, current estimates of fair value may differ significantly from
the amounts presented herein.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Fixed Maturity Securities
The estimated fair value disclosures for fixed maturity securities satisfy the
fair value disclosure requirements of SFAS No. 107. (See Note 3.)
Equity Securities
Fair value equals carrying value as these securities are carried at quoted
market value.
Mortgage Loans on Real Estate
The fair values for mortgage loans on real estate are estimated using discounted
cash flow analyses and interest rates currently being offered in the marketplace
for similar loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Cash, Short-Term Investments and Policy Loans
The carrying amounts for these assets approximate the assets' fair values.
Other Financial Instruments Reported as Assets
The carrying amounts for these financial instruments (primarily premiums and
other accounts receivable and accrued investment income) approximate those
assets' fair values.
Investment Contract Liabilities
The fair value for deferred annuities was estimated to be the amount payable on
demand at the reporting date, as those investment contracts have no defined
maturity and are similar to a deposit liability. The amount payable at the
reporting date was calculated as the account balance less applicable surrender
charges.
The fair value for GICs was estimated using discounted cash flow analyses. The
discount rate used was based upon current industry offering rates on GICs of
similar durations.
The fair values for supplementary contracts without life contingencies and
immediate annuities were estimated using discounted cash flow analyses. The
discount rate was based upon treasury rates plus a pricing margin.
The carrying amounts reported for other investment contracts, which includes
participating pension contracts and retirement plan deposits, approximate those
liabilities' fair value.
Claim and Other Deposit Funds
The carrying amounts for claim and other deposit funds approximate the
liabilities' fair value.
Notes and Mortgages Payable
The fair value for publicly traded debt was based upon quoted market prices. For
other debt obligations, discounted cash flow analyses were used. The discount
rate was based upon the Company's estimated current incremental borrowing rates.
Trust-Originated Preferred Securities
The fair value was based upon quoted market prices.
Other Financial Instruments Reported as Liabilities
The carrying amounts for other financial instruments (primarily normal payables
of a short-term nature) approximate those liabilities' fair values.
Financial Guarantees
The fair values of financial guarantees were estimated using discounted cash
flow analyses based upon the expected future net amounts to be expended. The
estimated net amounts to be expended were determined based on projected cash
flows and a valuation of the underlying collateral.
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
December 31 (in millions) AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Instruments Recorded as Assets
Fixed Maturity Securities $11,041.8 $11,041.8 $11,625.1 $11,625.1
Equity Securities 54.9 54.9 60.3 60.3
Mortgage Loans on Real Estate
Commercial 1,868.5 1,854.7 1,726.8 1,841.8
Residential and Other 441.2 439.7 428.0 436.7
Policy Loans 739.9 739.9 702.3 702.3
Cash and Short-Term Investments 205.6 205.6 190.2 190.2
Other Financial Instruments Recorded as Assets 722.8 722.8 630.9 630.9
Financial Instruments Recorded as Liabilities
Investments Contracts
Deferred Annuities (7,849.0) (7,460.8) (7,784.5) (7,366.3)
GICs (79.1) (96.8) (70.3) (98.2)
Supplementary Contracts and Immediate Annuities (395.9) (394.3) (414.8) (416.5)
Other Investment Contracts (311.6) (311.6) (396.4) (396.4)
Claim and Other Deposit Funds (127.1) (127.1) (154.4) (154.4)
Notes and Mortgages Payable (803.6) (792.2) (508.4) (534.3)
Trust-Originated Preferred Securities (242.6) (212.2) (242.3) (257.5)
Other Financial Instruments Recorded as Liabilities (622.3) (622.3) (545.2) (545.2)
Off-Balance Sheet Financial Instruments
Financial Guarantees -- (2.1) -- (2.1)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgements regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgement and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
NOTE FOURTEEN: EARNINGS PER COMMON SHARE
The following table provides a reconciliation of the numerator and denominator
for the basic and diluted earnings per common share computation:
Year ended December 31 (in millions) 1999 1998 1997
- -----------------------------------------------------------------------
Numerator - Basic and Diluted
Income from Continuing
Operations $253.6 $244.9 $218.8
- -----------------------------------------------------------------------
Denominator
Weighted Average Common Shares
During the Period (Basic) 87.7 91.1 85.6
Dilutive Effect of:
Stock Options 1.2 1.5 1.4
Other .1 .1 .1
- -----------------------------------------------------------------------
Weighted Average Common Shares
During the Period (Diluted) 89.0 92.7 87.1
- -----------------------------------------------------------------------
NOTE FIFTEEN: SEGMENT INFORMATION
The Company operates in four reportable segments that 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 risk reinsurance and specialty
insurance products in the U.S. and internationally.
Operations not included in the four reportable segments are classified as
Other Business Units and include the Company's mutual fund operation,
broker/dealer operations and banking operations. Financing costs, goodwill
amortization, other unallocated costs and consolidating/eliminating adjustments
are reported in Corporate. Intersegment transactions are accounted for on a
third-party basis.
During 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 was 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.
48
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
Selected financial information by reportable segment is
as follows:
<TABLE>
<CAPTION>
Year ended December 31 (in millions) 1999 1998 1997
=========================================================================
<S> <C> <C> <C>
Operating Income Before Special Items
Personal Financial Services $ 109.9 $ 100.3 $ 77.9
Worksite Financial Services 64.5 60.5 51.4
Tax-Sheltered and Fixed Annuities 77.3 74.0 67.6
Reinsurance 16.1 42.4 37.2
- -------------------------------------------------------------------------
Total Reportable Segments 267.8 277.2 234.1
Other Business Units 12.3 11.4 9.4
Corporate (25.1) (19.1) (16.7)
- -------------------------------------------------------------------------
Operating Income Before
Special Items 255.0 269.5 226.8
Net Realized Investment Gains/1/ .5 9.7 6.0
Special Items/2/ (1.9) (34.3) (14.0)
- -------------------------------------------------------------------------
Consolidated Income from
Continuing Operations $ 253.6 $ 244.9 $ 218.8
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31 (in millions) 1999 1998 1997
=========================================================================
<S> <C> <C> <C>
Operating Revenues
Personal Financial Services $ 875.0 $ 890.3 $ 744.9
Worksite Financial Services 815.2 795.2 772.0
Tax-Sheltered and Fixed Annuities 604.8 592.6 534.2
Reinsurance 491.5 346.4 240.4
- -------------------------------------------------------------------------
Total Reportable Segments 2,786.5 2,624.5 2,291.5
Other Business Units 226.7 190.6 154.5
Corporate 25.4 15.5 19.9
- -------------------------------------------------------------------------
Operating Revenues 3,038.6 2,830.6 2,465.9
Net Realized Investment
Gains (Losses) (1.3) 17.6 11.7
- -------------------------------------------------------------------------
Consolidated Revenues $3,037.3 $2,848.2 $ 2,477.6
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31 (in millions) 1999 1998 1997
=========================================================================
<S> <C> <C> <C>
Net Investment Income
Personal Financial Services $ 364.7 $ 386.4 $ 340.3
Worksite Financial Services 134.6 141.9 135.3
Tax-Sheltered and Fixed Annuities 563.7 551.3 502.2
Reinsurance 24.7 21.1 18.0
- -------------------------------------------------------------------------
Total Reportable Segments 1,087.7 1,100.7 995.8
Other Business Units .8 .4 .1
Corporate 27.4 15.8 10.4
- -------------------------------------------------------------------------
Consolidated Net
Investment Income $1,115.9 $1,116.9 $ 1,006.3
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31 (in millions) 1999 1998 1997
=========================================================================
<S> <C> <C> <C>
Operating Income Tax Expense (Benefit)
Personal Financial Services $ 57.6 $ 53.4 $ 42.2
Worksite Financial Services 34.9 32.6 27.3
Tax-Sheltered and Fixed Annuities 41.9 39.8 36.3
Reinsurance 8.3 22.9 20.3
- -------------------------------------------------------------------------
Total Reportable Segments 142.7 148.7 126.1
Other Business Units 6.9 5.8 1.0
Corporate (2.0) 1.7 3.0
- -------------------------------------------------------------------------
Operating Income Tax Expense 147.6 156.2 130.1
Net Realized Investment Gains/1/ .4 5.2 3.2
Special Items/2/ (11.7) (18.4) (7.6)
- -------------------------------------------------------------------------
Consolidated Income Tax Expense $ 136.3 $ 143.0 $ 125.7
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31 (in millions) 1999 1998 1997
=========================================================================
<S> <C> <C> <C>
Amortization of DAC and PVFP
Personal Financial Services $ 132.6 $ 129.3 $ 107.6
Worksite Financial Services 11.6 10.1 7.8
Tax-Sheltered and Fixed Annotates 42.7 34.5 25.1
Reinsurance -- 2.3 .5
- -------------------------------------------------------------------------
Total Reportable Segments 186.9 176.2 141.0
Corporate .8 .9 .7
- -------------------------------------------------------------------------
187.7 177.1 141.7
Special Items/2/ -- 12.6 1.9
Net Realized Investments
Gains (Losses) (2.2) 2.7 2.5
- -------------------------------------------------------------------------
Consolidated Total $ 185.5 $ 192.4 $ 146.1
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31 (in millions) 1999 1998
=========================================================================
<S> <C> <C>
Assets Under Management
Personal Financial Services $ 7,544.0 $ 6,887.0
Worksite Financial Services 4,243.5 3,512.1
Tax-Sheltered and Fixed Annuities 8,189.9 7,594.7
Reinsurance 408.9 309.9
- -------------------------------------------------------------------------
Total Reportable Segments 20,386.3 18,303.7
Other Business Units 14,611.2 4,018.4
Corporate 459.1 389.8
- -------------------------------------------------------------------------
Assets Under Management 35,456.6 22,711.9
Net Unrealized Investment
Gains (Losses) (206.6) 526.2
Other Balance Sheet Assets 4,267.0 3,389.0
Off-Balance Sheet Mutual Fund
Client Assets (14,590.1) (4,018.4)
- -------------------------------------------------------------------------
Consolidated Assets $ 24,926.9 $22,608.7
=========================================================================
</TABLE>
/1/Amounts are after-tax and include the impact of net realized investment gains
on the amortization of deferred policy acquisition costs and present value of
future profits.
/2/The Company recorded $1.9 million, $34.3 million and $14.0 million of special
items (after-tax) in 1999, 1998 and 1997, respectively. These special items
are excluded from operating segment results for internal management purposes
and therefore, are presented separately.
49
<PAGE>
ReliaStar Financial Corp. and Subsidiaries NOTES
NOTE SIXTEEN: QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations:
<TABLE>
<CAPTION>
1999
----------------------------------
FIRST SECOND THIRD FOURTH
(in millions, except per share data) QUARTER QUARTER QUARTER QUARTER
==========================================================================
<S> <C> <C> <C> <C>
Revenues $727.1 $741.9 $743.8 $824.5
Income Taxes 37.9 42.2 25.9 30.3
Net Income $ 64.4 $ 71.7 $ 46.1 $ 71.4
==========================================================================
Net Income Per Common Share
Basic $ .73 $ .82 $ .54 $ .81
Diluted $ .71 $ .81 $ .53 $ .80
==========================================================================
Weighted Average Common Shares
Basic 88.8 87.9 86.1 88.0
Diluted 90.1 89.0 87.3 89.5
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------
FIRST SECOND THIRD FOURTH
(in millions, except per share data) QUARTER QUARTER QUARTER QUARTER
=================================================================================
<S> <C> <C> <C> <C>
Revenues $689.6 $721.8 $708.9 $727.9
Income Taxes 38.0 41.5 40.0 23.5
Income From Continuing Operations $ 64.5 $ 72.9 $ 68.6 $ 38.9
Income (Loss) From Discontinued Operations .1 (3.5) -- (3.8)
- ---------------------------------------------------------------------------------
Net Income $ 64.6 $ 69.4 $ 68.6 $ 35.1
=================================================================================
Per Common Share - Basic
Income From Continuing Operations $ .71 $ .80 $ .75 $ .43
Loss From Discontinued Operations -- (.04) -- (.04)
- ---------------------------------------------------------------------------------
Net Income $ .71 $ .76 $ .75 $ .39
=================================================================================
Per Common Share - Diluted
Income From Continuing Operations $ .70 $ .79 $ .74 $ .42
Loss From Discontinued Operations -- (.04) -- (.04)
- ---------------------------------------------------------------------------------
Net Income $ .70 $ .75 $ .74 $ .38
=================================================================================
Weighted Average Common Shares
Basic 91.0 91.2 91.5 90.6
Diluted 92.8 92.9 93.1 92.0
=================================================================================
</TABLE>
50
<PAGE>
ReliaStar Financial Corp. and Subsidiaries
Report of Management
Management of the Company is responsible for the financial information and
representations contained in the consolidated financial statements and other
sections of the Annual Report. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles to reflect
in all material respects the substance of transactions that should be included,
and the other information in the Annual Report is consistent with those
statements. In preparing the consolidated financial statements, management makes
informed estimates and judgments based on currently available information of the
effects of certain events and transactions.
The Company maintains accounting and other control systems which management
believes provide reasonable assurance that transactions are properly recorded in
the books and records and that the assets are properly safeguarded. The systems
of internal control include the careful selection and training of qualified
personnel, appropriate segregation of responsibilities, communication of written
policies and procedures and a broad program of internal audits. The costs of the
control systems are balanced against the expected benefits. During 1999, the
Audit Committee of the Board of Directors, composed solely of outside directors,
met three times with management, the Company's internal auditors and the
independent auditors to review the scope of the audits, discuss the evaluation
of internal accounting controls and discuss financial reporting matters. The
independent auditors and internal auditors have free access to the Audit
Committee and meet with it, without management present, to discuss any
appropriate matters.
The independent auditors are responsible for expressing an informed judgment
as to whether the consolidated financial statements present fairly, in
accordance with generally accepted accounting principles, the financial
position, results of operations and cash flows of the Company. They obtain an
understanding of the Company's internal accounting controls and conduct such
tests and related procedures as they deem necessary to provide reasonable
assurance, giving due consideration to materiality, that the consolidated
financial statements contain neither misleading nor erroneous data.
/s/ John G. Turner
- -----------------------------------------
John G. Turner, FSA
Chairman and Chief Executive Officer
Independent Auditors' Report
Board of Directors and Shareholders
ReliaStar Financial Corp. and Subsidiaries
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of ReliaStar
Financial Corp. and Subsidiaries as of December 31, 1999 and 1998, and the
related statements of income, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ReliaStar
Financial Corp. and Subsidiaries as of December 31, 1999 and 1998 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche, LLP
- -----------------------------------------
Minneapolis, Minnesota
February 1, 2000
51
<PAGE>
Common Stockholder Information
Market for the Company's Common Equity and
Related Stockholder Matters
The common stock of ReliaStar Financial Corp. is traded on the New York Stock
Exchange under the symbol RLR. The following table sets forth the amounts of
cash dividends per common share and the high and low prices of ReliaStar
Financial Corp. common stock for each quarter of 1999 and 1998.
<TABLE>
<CAPTION>
MARKET PRICE DIVIDENDS
PER SHARE PER SHARE
QUARTER ------------------------- ---------
1999 HIGH LOW
- ----------------------------------------------------------------
<S> <C> <C> <C>
1st $ 48 7/16 $ 39 9/16 $.185
2nd 43 15/16 34 7/8 .205
3rd 49 13/16 32 1/16 .205
4th 49 1/2 31 11/16 .205
Year .800
- ----------------------------------------------------------------
MARKET PRICE DIVIDENDS
PER SHARE PER SHARE
QUARTER ------------------------- ---------
1998 HIGH LOW
- ----------------------------------------------------------------
<S> <C> <C> <C>
1st $ 48 3/4 $ 39 3/4 $.155
2nd 49 15/16 41 3/4 .185
3rd 52 7/16 36 7/16 .185
4th 48 7/16 29 .185
Year .710
- ----------------------------------------------------------------
</TABLE>
For restrictions on dividends, see Note Nine of Notes to Consolidated Financial
Statements.
Shareholders
There were 21,711 common stockholders of record as of February 22, 2000.
Corporate Information
Employees and Agents
At year-end 1999, ReliaStar Financial Corp. had 3,800 employees and 31,700
agents under contract.
Auditors
Deloitte & Touche llp
Stock Transfer Agent
Norwest Bank Minnesota, N.A., P.O. Box 64854, St. Paul, Minnesota 55164-0854,
(651) 450-4064 or (800) 468-9716. Communications regarding stock transfer
requirements, lost certificates, dividend payments and change of address should
be directed to the transfer agent or to the Office of the Corporate Secretary,
ReliaStar Financial Corp., 20 Washington Avenue South, Minneapolis, Minnesota
55401.
Trading Market
New York Stock Exchange
Common Stock Trading Symbol
RLR
Trust-Originated Preferred Securities Trading Symbols
RLR PrA, RLR PrB
Annual Meeting
Thursday, May 11, 2000, 10 a.m., Central Time, ReliaStar Financial Corp. Home
Office, 20 Washington Avenue South, Minneapolis, Minnesota.
Investor Relations
Security analysts, investment professionals and shareholders should direct their
inquiries about financial performance to Karin E. Glasgow, Assistant Vice
President, Investor Relations at (612) 342-3979.
Media Relations and General Information
Members of the news media should direct their inquires to Ruth A. Weber Kelley,
Second Vice President, Corporate Communications, at (612) 372-5628. For general
information, call the Company's main switchboard at (612) 372-5432.
ReliaStar Line
Consumers who have questions about ReliaStar products or about financial needs
in general should call the ReliaStar Line toll-free at (888) 757-5757.
Form 10-K Report
Shareholders may obtain a copy of the current Form 10-K report without charge
upon written request to James R. Miller, Senior Vice President, Chief Financial
Officer and Treasurer, ReliaStar Financial Corp., 20 Washington Avenue South,
Minneapolis, Minnesota 55401.
53
<PAGE>
Exhibit 21
SUBSIDIARIES OF RELIASTAR FINANCIAL CORP.
AS OF MARCH 1, 2000
STATE OF
SUBSIDIARIES INCORPORATION
- ------------- -------------
ReliaStar Life Insurance Company Minnesota
Northern Life Insurance Company Washington
Norlic, Inc. Washington
NWNL Benefits Corporation Minnesota
Security-Connecticut Life Insurance Company Connecticut
ReliaStar Life Insurance Company of New York New York
ReliaStar Reinsurance Group (UK), Ltd. United Kingdom
ReliaStar Investment Research, Inc. Minnesota
Washington Square Securities, Inc. Minnesota
Washington Square Insurance Agency, Inc. (Puerto Rico) Puerto Rico
Pilgrim Capital Corporation Delaware
Pilgrim Advisors, Inc. Delaware
Pilgrim Group, Inc. Delaware
Pilgrim Securities, Inc. Delaware
Pilgrim Funding, Inc. Delaware
Pilgrim Investments, Inc. Delaware
Pilgrim Financial, Inc. Delaware
Express American T.C. Corp. Delaware
EAMC Liquidation Corp. Michigan
IB Holdings, Inc. Virginia
The New Providence Insurance Company, Limited Cayman Islands
Northeastern Corporation Connecticut
Successful Money Management Seminars, Inc. Oregon
PrimeVest Financial Services, Inc. Minnesota
PrimeVest Insurance Agency Alabama, Inc. Alabama
PrimeVest Insurance Agency of New Mexico, Inc. New Mexico
PrimeVest Insurance Agency of Ohio, Inc. Ohio
Branson Insurance Agency, Inc. Massachusetts
Granite Investment Services, Inc. Minnesota
Split Rock Financial, Inc. California
Bancwest Investment Services, Inc. Delaware
<PAGE>
STATE OF
SUBSIDIARIES INCORPORATION
- ------------- -------------
Financial Northeastern Corp. New Jersey
Financial Northeastern Securities, Inc. New Jersey
FNC Insurance Services, Inc. New Jersey
Arrowhead, Ltd. Bermuda
ReliaStar Bancshares, Inc. Minnesota
ReliaStar Bank Federal
ReliaStar Investment Services, Inc. Minnesota
ReliaStar Managing General Underwriters, Inc. Tennessee
ReliaStar Payroll Agent, Inc. Minnesota
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-26416, 33-30348, 33-63258, 33-88498, 333-12825, 333-12833, 333-32069,
333-42125 and 333-90389 of ReliaStar Financial Corp. on Form S-8 and 333-26881,
333-41575 and 333-73245 of ReliaStar Financial Corp. on Form S-3 of our reports
dated February 1, 2000 appearing in, and incorporated by reference in, the
Annual Report on Form 10-K of ReliaStar Financial Corp. for the year ended
December 31, 1999.
/s/ Deloitte and Touche LLP
Minneapolis, Minnesota
March 17, 2000
<PAGE>
EXHIBIT 24
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ Carolyn H. Baldwin
----------------------------------------
Carolyn H. Baldwin
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ David C. Cox
----------------------------------------
David C. Cox
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ Robert C. Salipante
----------------------------------------
Robert C. Salipante
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ Luella G. Goldberg
----------------------------------------
Luella G. Goldberg
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ William A. Hodder
----------------------------------------
William A. Hodder
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ James J. Howard
----------------------------------------
James J. Howard
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ Randy C. James
----------------------------------------
Randy C. James
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ Richard L. Knowlton
----------------------------------------
Richard L. Knowlton
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ David A. Koch
----------------------------------------
David A. Koch
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ John H. Flittie
----------------------------------------
John H. Flittie
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ James J. Renier
----------------------------------------
James J. Renier
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ John G. Turner
----------------------------------------
John G. Turner
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ James R. Miller
----------------------------------------
James R. Miller
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ Chris D. Schreier
----------------------------------------
Chris D. Schreier
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ Richard R. Crowl
----------------------------------------
Richard R. Crowl
<PAGE>
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director or Officer
The undersigned director or officer of ReliaStar Financial Corp., a Delaware
corporation, hereby appoints each of John G. Turner, Robert C. Salipante, James
R. Miller, Richard R. Crowl and Chris D. Schreier as his or her true and lawful
attorney-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
a director or officer of the Corporation to an Annual Report on Form 10-K or
other applicable form, and all amendments thereto, to be filed by the
Corporation with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, with all exhibits thereto and
other supporting documents, granting unto those attorneys-in-fact, and each of
them, full power and authority to perform all acts necessary or incidental to
the performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has set his or her hand this 10th day of
February, 2000.
/s/ Richard U. DeSchutter
----------------------------------------
Richard U. DeSchutter
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 11,041,800
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 54,900
<MORTGAGE> 2,309,700
<REAL-ESTATE> 20,600
<TOTAL-INVEST> 14,463,200
<CASH> 47,900
<RECOVER-REINSURE> 605,400
<DEFERRED-ACQUISITION> 1,477,500
<TOTAL-ASSETS> 24,926,900
<POLICY-LOSSES> 13,671,400
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 585,700
<POLICY-HOLDER-FUNDS> 354,300
<NOTES-PAYABLE> 803,600
242,600
0
<COMMON> 900
<OTHER-SE> 1,944,800
<TOTAL-LIABILITY-AND-EQUITY> 24,926,900
1,192,800
<INVESTMENT-INCOME> 1,115,900
<INVESTMENT-GAINS> (1,300)
<OTHER-INCOME> 729,900
<BENEFITS> 1,715,200
<UNDERWRITING-AMORTIZATION> 127,700
<UNDERWRITING-OTHER> 659,400
<INCOME-PRETAX> 403,100
<INCOME-TAX> 136,300
<INCOME-CONTINUING> 253,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 253,600
<EPS-BASIC> 2.89
<EPS-DILUTED> 2.85
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
