<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from __________________ to _________________.
Commission File Number 1-10640
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RELIASTAR FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 41-1620373
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 WASHINGTON AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55401
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(612) 372-5432
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
Number of shares of common stock outstanding as of April 28, 2000 was
89,502,477.
<PAGE>
Part I-Financial Information
Item 1. Financial Statements
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Balance Sheets
(in millions)
(unaudited)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS
Fixed Maturity Securities $ 11,344.7 $ 11,041.8
Equity Securities 55.9 54.9
Mortgage Loans on Real Estate 2,289.2 2,309.7
Real Estate and Leases 16.6 20.6
Policy Loans 744.5 739.9
Other Invested Assets 157.0 138.6
Short-Term Investments 69.9 157.7
----------- -----------
Total Investments 14,677.8 14,463.2
Cash 16.7 47.9
Accounts and Notes Receivable 403.2 334.6
Reinsurance Receivable 601.8 605.4
Deferred Policy Acquisition Costs 1,556.1 1,514.9
Present Value of Future Profits 421.7 436.0
Property and Equipment, Net 131.6 126.5
Accrued Investment Income 204.3 199.1
Other Assets 778.8 730.5
Participation Fund Account Assets 310.7 310.9
Assets Held in Separate Accounts 6,757.9 6,196.7
----------- -----------
TOTAL ASSETS $ 25,860.6 $ 24,965.7
=========== ===========
LIABILITIES
Future Policy and Contract Benefits $ 13,656.1 $ 13,671.4
Pending Policy Claims 604.3 585.7
Other Policyholder Funds 436.2 393.1
Amounts Due Under Reverse Repurchase Agreements 108.5 --
Notes and Mortgages Payable 829.3 803.6
Income Taxes 76.3 58.1
Other Liabilities 866.3 763.4
Participation Fund Account Liabilities 310.7 310.9
Liabilities Related to Separate Accounts 6,752.4 6,191.2
----------- -----------
TOTAL LIABILITIES 23,640.1 22,777.4
----------- -----------
Company-Obligated Mandatorily Redeemable Preferred
Securities Issued by Consolidated Subsidiaries 242.7 242.6
----------- -----------
SHAREHOLDERS' EQUITY
Common Stock (Shares Issued: 2000 and 1999, 98.1) .9 .9
Additional Paid-in Capital 988.6 1,008.1
Retained Earnings 1,376.7 1,321.6
Accumulated Other Comprehensive Income (136.4) (107.5)
Note Receivable from ESOP (16.4) (17.6)
Unamortized Restricted Stock Awards (3.1) (.6)
Treasury Common Stock, at Cost
(Shares Held: 2000, 8.6; 1999, 9.2) (232.5) (259.2)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 1,977.8 1,945.7
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 25,860.6 $ 24,965.7
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Statements of Income
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
2000 1999
--------- ---------
<S> <C> <C>
REVENUES
Premiums $ 301.9 $ 286.1
Net Investment Income 285.6 277.3
Realized Investment Gains (Losses), Net (.8) 2.5
Policy and Contract Charges 103.9 91.2
Other Income 110.0 61.7
--------- ---------
Total 800.6 718.8
--------- ---------
BENEFITS AND EXPENSES
Benefits to Policyholders 413.6 404.5
Sales and Operating Expenses 184.1 148.1
Amortization of Deferred Policy Acquisition Costs
and Present Value of Future Profits 59.5 43.6
Interest Expense 15.8 9.5
Dividends and Experience Refunds to Policyholders 6.6 7.5
--------- ---------
Total 679.6 613.2
--------- ---------
Income Before Income Taxes and Dividends on Preferred
Securities of Subsidiaries 121.0 105.6
Income Tax Expense 43.6 37.9
Dividends on Preferred Securities of Subsidiaries, Net of Tax 3.3 3.3
--------- ---------
Net Income $ 74.1 $ 64.4
========= =========
NET INCOME PER COMMON SHARE
Basic $ .83 $ .73
========= =========
Diluted $ .82 $ .71
========= =========
Weighted Average Common Shares
Basic 89.3 88.8
Diluted 90.2 90.1
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Statements of Shareholders' Equity
and Comprehensive Income
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
------------------------------------------------
Shareholders' Equity Comprehensive Income
----------------------- --------------------
2000 1999 2000 1999
--------- ---------- ------ ------
<S> <C> <C> <C> <C>
Common Stock
Beginning and End of Period $ .9 $ .9
--------- ---------
Additional Paid-in Capital
Beginning of Year 1,008.1 1,003.0
Loss on Treasury Shares Reissued for Benefit Plans (20.3) (9.9)
Tax Benefit on Stock Options Exercised .8 3.9
--------- ---------
End of Period 988.6 997.0
--------- ---------
Retained Earnings
Beginning of Year 1,321.6 1,137.6
Net Income 74.1 64.4 $ 74.1 $ 64.4
Common Dividends to Shareholders: (Per Share: 2000,
$.205; 1999, $.185) (18.3) (16.4)
Other, Net (.7) (.3)
--------- ---------
End of Period 1,376.7 1,185.3
--------- ---------
Accumulated Other Comprehensive Income
Beginning of Year (107.5) 257.2
Change for the Period (28.9) (103.0) (28.9) (103.0)
--------- --------- ------ -------
End of Period (136.4) 154.2
--------- ---------
Note Receivable from ESOP
Beginning of Year (17.6) (19.8)
Repayments, Accrued or Paid 1.2 .6
--------- ---------
End of Period (16.4) (19.2)
--------- ---------
Unamortized Restricted Stock Awards
Beginning of Year (.6) (.7)
Awards, Net (2.7) (.4)
Amortization of Restricted Stock Awards .2 -
--------- --------
End of Period (3.1) (1.1)
--------- ---------
Treasury Common Stock
Beginning of Year (259.2) (258.0)
Acquired (3.5) (27.5)
Reissued 30.2 20.2
--------- ----------
End of Period (232.5) (265.3)
--------- ----------
Comprehensive Income (Loss) $ 45.2 $ (38.6)
====== ========
Total Shareholders' Equity $ 1,977.8 $ 2,051.8
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
2000 1999
------ -------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 74.1 $ 64.4
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in)
Operating Activities
Interest Credited to Insurance Contracts 139.0 138.3
Future Policy Benefits (169.8) (170.1)
Capitalization of Policy Acquisition Costs (97.3) (66.2)
Amortization of Deferred Policy Acquisition Costs and Present
Value of Future Profits 59.5 43.6
Deferred Income Taxes 10.0 10.3
Net Change in Receivables and Payables 129.6 (13.9)
Other Assets (46.2) (16.9)
Realized Investment Losses (Gains), Net .8 (2.5)
Other (10.5) (.5)
------ -------
Net Cash Provided by (Used in) Operating Activities 89.2 (13.5)
------ -------
INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturity Securities 303.6 135.2
Proceeds from Maturities or Repayment of Fixed Maturity Securities 258.8 322.1
Cost of Fixed Maturity Securities Acquired (909.3) (520.8)
Sales of Equity Securities, Net .6 1.6
Proceeds of Mortgage Loans Sold, Matured or Repaid 58.3 96.8
Cost of Mortgage Loans Acquired (38.9) (149.7)
Sales of Real Estate and Leases, Net 4.5 2.9
Policy Loans Issued, Net (4.6) (7.2)
Sales (Purchases) of Other Invested Assets, Net (15.6) .4
Sales of Short-Term Investments, Net 87.8 30.9
Cash Paid for Acquisition, Net (10.3) -
------ -------
Net Cash Used in Investing Activities (265.1) (87.8)
------ -------
FINANCING ACTIVITIES
Deposits to Insurance Contracts 430.9 426.4
Maturities and Withdrawals from Insurance Contracts (408.0) (331.5)
Increase in Amounts Due Under Reverse Repurchase Agreements, Net 108.5 -
Increase in Notes and Mortgages Payable 33.0 20.2
Repayment of Notes and Mortgages Payable (7.8) (.1)
Issuance of Common Stock Under Stock Option and Other Plans 9.9 10.3
Dividends on Common Stock (18.3) (16.4)
Acquisition of Treasury Common Stock (3.5) (27.5)
------ -------
Net Cash Provided by Financing Activities 144.7 81.4
------ -------
Net Decrease in Cash (31.2) (19.9)
Cash at Beginning of Period 47.9 21.5
------ -------
Cash at End of Period $ 16.7 $ 1.6
====== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
RELIASTAR FINANCIAL CORP.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and such principles were applied
on a basis consistent with that reflected in the Annual Report of ReliaStar
Financial Corp. (the Company or ReliaStar) for the year ended December 31, 1999
filed with the Securities and Exchange Commission (SEC). The financial
information included herein, other than the condensed consolidated balance sheet
as of December 31, 1999, has been prepared by management without audit by
independent certified public accountants. The condensed consolidated balance
sheet as of December 31, 1999 has been derived from, and does not include all of
the disclosures contained in, the audited consolidated financial statements for
the year ended December 31, 1999.
The information furnished includes all adjustments and accruals consisting only
of normal, recurring accrual adjustments which are, in the opinion of
management, necessary for a fair statement of results for the interim period.
The results of operations for any interim period are not necessarily indicative
of results for the full year. The unaudited interim condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto contained in the Company's 1999 Annual Report.
Note 2. Segment Information
The Company operates in four reportable segments that are differentiated by
products and/or marketing focus. The ReliaStar Life and Annuities segment sells
life insurance and annuity products to individuals. The Worksite Financial
Services (WFS) segment sells group and individual insurance products, 401(k)
plans and financial services to employers and their employees at the worksite.
The Reinsurance segment sells group life, health and specialty risk reinsurance
and specialty insurance products in the U.S. and internationally. The Mutual
Funds segment manages, markets and distributes open-end and closed-end mutual
funds and structured finance products.
Operations not included in the four reportable segments are classified as Other
Business Units and include the Company's broker/dealer, banking and trust
operations. Financing costs, goodwill amortization, unallocated costs and
consolidating/eliminating adjustments are reported in Corporate.
In the first quarter of 2000, the Company realigned its reporting segments to
conform to changes in responsibility for the management of certain business
operations. The Personal Financial Services (PFS) and Tax-Sheltered and Fixed
Annuity segments, as well as the Company's personal finance education
operations, were combined to form a new segment, ReliaStar Life and Annuities
(RLA). RLA's life and annuity operations are reported separately. In addition,
certain payroll deduction business previously managed and reported with the PFS
segment is now managed and reported with the WFS segment. The mutual fund
operation, previously part of Other Business Units, is now reported separately
as the Mutual Funds segment. Previously reported segment financial data has been
restated to reflect these changes.
6
<PAGE>
Selected segment data follows (in millions):
Three Months Ended March 31
---------------------------
OPERATING INCOME/1/ 2000 1999
- ------------------- ------ ------
ReliaStar Life and Annuities:
Life $23.2 $18.2
Annuities 24.9 26.9
----- -----
Total 48.1 45.1
Worksite Financial Services 15.6 14.9
Reinsurance 7.0 6.7
Mutual Funds 6.6 1.7
----- -----
Total Reportable Segments 77.3 68.4
Other Business Units 2.3 1.4
Corporate (6.0) (7.0)
----- -----
Operating Income 73.6 62.8
Net Realized Investment Gains .5 1.6
----- -----
Consolidated Net Income $74.1 $64.4
===== =====
/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).
Three Months Ended March 31
---------------------------
OPERATING REVENUES 2000 1999
- ------------------ ------- -------
ReliaStar Life and Annuities:
Life $ 188.0 $ 182.3
Annuities 190.3 174.9
------- -------
Total 378.3 357.2
Worksite Financial Services 213.7 197.7
Reinsurance 104.6 110.8
Mutual Funds 37.7 9.1
------- -------
Total Reportable Segments 734.3 674.8
Other Business Units 65.3 37.9
Corporate 1.8 3.6
------- -------
Operating Revenues 801.4 716.3
Net Realized Investment Gains (Losses) (.8) 2.5
------- -------
Consolidated Revenues $ 800.6 $ 718.8
======= =======
March 31 December 31
ASSETS UNDER MANAGEMENT 2000 1999
- ----------------------- ---------- -----------
ReliaStar Life and Annuities:
Life $ 4,939.5 $ 4,816.9
Annuities 11,252.6 10,861.9
---------- ----------
Total 16,192.1 15,678.8
Worksite Financial Services 4,505.3 4,298.6
Reinsurance 480.1 408.9
Mutual Funds 16,705.8 14,590.1
---------- ----------
Total Reportable Segments 37,883.3 34,976.4
Other 505.3 480.2
---------- ----------
Assets Under Management 38,388.6 35,456.6
Net Unrealized Investment Losses (247.1) (206.6)
Other Balance Sheet Assets 4,424.9 4,305.8
Off-Balance Sheet Mutual Fund Client Assets (16,705.8) (14,590.1)
---------- ----------
Consolidated Assets $ 25,860.6 $ 24,965.7
========== ==========
7
<PAGE>
Note 3. Acquisition
On February 29, 2000, the Company signed an agreement to acquire Lexington
Global Asset Managers. Inc. (Lexington) in a stock-and-cash transaction valued
at approximately $47.5 million, subject to adjustment. As of March 31, 2000,
Lexington had 13 mutual funds, including several international equity funds, and
$3.6 billion in assets under management. The transaction is expected to close in
July of 2000.
Note 4. Subsequent Event
On April 30, 2000, the Company, ING Groep, N.V. (ING), ING America Insurance
Holdings, Inc. and SHP Acquisition Corp. executed an agreement and plan of
merger which provides for the acquisition of ReliaStar by ING. In the merger,
each outstanding share of ReliaStar common stock (other than those owned of
record by ReliaStar's ESOP, or shares owned by holders who validly exercise
dissenters' appraisal rights) will be converted into the right to receive $54
per share in cash. Shares owned by Reliastar's ESOP will be exchanged for ING
American Depository Shares of equivalent value. The consummation of the
transaction is subject to various conditions, including receipt of necessary
regulatory approvals, and the approval of the Company's shareholders. The
Company expects the merger to close during the third quarter of 2000.
Note 5. Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation. These reclassifications had no effect on previously reported
shareholders' equity or net income.
8
<PAGE>
Item 2 and 3. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Quantitative and Qualitative
Disclosures About Market Risk
RELIASTAR FINANCIAL CORP.
RESULTS OF OPERATIONS
Results of operations by operating segment are summarized below (in millions):
Three Months
Ended March 31
-----------------------
2000 1999
------ ------
Operating Income (Loss)/1/
ReliaStar Life and Annuities Segment:
Life $23.2 $18.2
Annuities 24.9 26.9
----- -----
Total 48.1 45.1
Worksite Financial Services Segment 15.6 14.9
Reinsurance Segment 7.0 6.7
Mutual Funds Segment 6.6 1.7
Other Business Units 2.3 1.4
Corporate (6.0) (7.0)
----- -----
Operating Income 73.6 62.8
Net Realized Investment Gains .5 1.6
----- -----
Net Income $74.1 $64.4
===== =====
/1/ Operating income is after-tax and excludes realized investment gains and
losses and their impact on the amortization of deferred policy acquisition
costs (DAC) and present value of future profits (PVFP).
ReliaStar Financial Corp. (the Company or ReliaStar) has four reportable
operating segments: ReliaStar Life and Annuities (RLA), Worksite Financial
Services (WFS), Reinsurance and Mutual Funds; and conducts its operations
primarily through its life insurance subsidiaries and its mutual fund
subsidiary. The life insurance subsidiaries include: 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). The life insurance
subsidiaries are sometimes collectively referred to as the Insurers. The mutual
fund subsidiary is Pilgrim Capital Corporation.
In the first quarter of 2000, the Company realigned its reporting segments to
conform to changes in responsibility for the management of certain business
operations. The Personal Financial Services (PFS) and Tax-Sheltered and Fixed
Annuity segments, as well as the Company's personal finance education
operations, were combined to form a new segment, ReliaStar Life and Annuities
(RLA). RLA's life and annuity operations are reported separately. In addition,
certain payroll deduction business previously managed and reported with the PFS
segment is now managed and reported with the WFS segment. The mutual fund
operation, previously part of Other Business Units, is now reported separately
as the Mutual Funds segment. Previously reported segment financial data has been
restated to reflect these changes.
The discussion of segment operating results that follows refers to the above
after-tax segment results and, in each instance, amounts are after-tax unless
otherwise indicated.
ReliaStar Life and Annuities
- ----------------------------
The RLA segment sells life insurance and annuity products to individuals.
Operating income of the RLA segment for the first three months of 2000 increased
$3.0 million, or 7%, compared with the same period in 1999. The increase in
operating income was primarily due to increased assets under management and
lower operating expense levels, offset in part by lower interest spreads and
higher surrender rates.
The interest spread for the life business within RLA (RLA-Life) in the first
quarter of 2000 was 229 basis points, down from 237 basis points in the first
quarter of 1999. This decrease in spreads reflects a 13 basis point decrease in
the portfolio yield and a 5 basis point reduction in the average crediting rate.
For most of the RLA-Life business,
9
<PAGE>
crediting rates on in force business 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 RLA-Life assets under management increased to $4.9 billion as of March 31,
2000, from $4.5 billion as of March 31, 1999. Separate account assets under
management increased to $1.2 billion as of March 31, 2000, from $.8 billion as
of March 31, 1999.
RLA-Life operating results for the first three months of 2000 were also
favorably affected by lower operating expenses and increased levels of fee-based
revenues on interest-sensitive products.
For the annuity business within RLA (RLA-Annuity), the interest spread in the
first quarter of 2000 was 281 basis points, down from 287 basis points in the
first quarter of 1999. This decrease in spreads reflects a 1 basis point
reduction in the average crediting rate and a 7 basis point decrease in the
portfolio yield. For most of the RLA-Annuity business, 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 RLA-Annuity assets under management increased to $11.3 billion as of March
31, 2000, from $10.3 billion as of March 31, 1999. Separate account assets under
management increased to $2.8 billion as of March 31, 2000, from $1.9 billion as
of March 31, 1999.
RLA-Annuity operating results in the first quarter of 2000 were also unfavorably
affected by higher surrender rates and higher operating expenses.
Total RLA sales (annualized new premiums and deposits) increased 31% for the
first three months of 2000 to $302.9 million compared with $231.9 million in the
same period of 1999. Individual life insurance sales for the first three months
of 2000 increased 32% to $35.5 million compared with $26.8 million in the same
period of 1999. The increase in individual life insurance sales reflects strong
growth in variable universal life sales and term life sales, up 49% and 77%,
respectively, from the first quarter of 1999. Individual annuity sales for the
first three months of 2000 increased 30% to $267.4 million compared with $205.1
million in the same period of 1999. The increase reflects a 33% increase in
variable annuity sales and a 27% increase in fixed annuity sales.
Worksite Financial Services
- ---------------------------
The WFS segment sells group and individual life insurance products, retirement
plans and financial services to employers and their employees at the worksite.
Operating income of the WFS segment for the first three months of 2000 increased
$.7 million, or 5%, compared with the same period in 1999. The increase in
operating income was primarily due to higher volume of group life business in
the employee benefits unit and growth in assets under management in the
retirement plans unit. These factors were partially offset by lower earnings
from the closed block of pension business.
Total sales for the first three months of 2000 increased 13% to $232.6 million
compared with $206.2 million in the same period of 1999. The increase in sales
reflects a 129% increase in group health sales, a 105% increase in individual
life sales, a 5% increase in retirement plan sales, and a 5% decrease in group
life sales.
Reinsurance
- -----------
The Reinsurance segment sells group life, health, and specialty risk reinsurance
and specialty insurance products in the United States and internationally.
Operating income of the Reinsurance segment for the first three months of 2000
increased $.3 million, or 4%, compared with the same period in 1999. The
increase in operating income was primarily due to favorable claims experience,
partially offset by an 8% decrease in earned premiums. The ratio of claims to
net earned premium was 65.2% in the first quarter of 2000, compared with 66.8%
in the first quarter of 1999. Claims experience and overall profitability of
workers compensation carve-out reinsurance in the first quarter of 2000 were
consistent with those of the same period in 1999. 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.
10
<PAGE>
Total sales for the first three months of 2000 decreased 39% to $49.9 million
compared with $81.4 million in the same period of 1999. The Company has chosen
to maintain a high level of underwriting discipline on both new and renewing
business in the current industry environment. As a result, sales in the first
quarter of 2000 were lower than expected.
Mutual Funds
- ------------
The Mutual Fund segment manages, markets and distributes open-end and closed-end
mutual funds and structured finance products. Operating income of the Mutual
Fund segment for the first three months of 2000 was $6.6 million, compared with
$1.7 million in the first quarter of 1999. The increase in operating income is
due primarily to increased assets under management resulting from the
acquisition of Pilgrim Capital Corp. in the fourth quarter of 1999. Assets under
management rose from $4.1 billion at March 31, 1999, to $16.7 billion as of
March 31, 2000.
Mutual Fund sales for the first three months of 2000 were $2.3 billion, compared
with $.2 billion in the first quarter of 1999. The increase in sales reflects a
strong equity market, the superior track record of the Pilgrim funds'
performance and the effectiveness of Pilgrim's wholesaling efforts.
Other Business Units
- --------------------
Other Business Units include the Company's broker/dealer, banking and trust
operations. Operating income of the Other Business Units for the first three
months of 2000 increased $.9 million, or 64%, compared with the same period in
1999. The increase in operating income was primarily due to increased
broker/dealer volume.
Corporate
- ---------
Corporate includes financing costs, goodwill amortization, unallocated costs and
consolidating/eliminating adjustments. Operating losses of Corporate for the
first three months of 2000 decreased $1.0 million compared with the same period
in 1999. The decrease in operating losses was primarily due to increased
earnings on corporate invested assets and lower expenses, partially offset by
higher interest expense related to increased borrowings and additional goodwill
amortization expense.
Realized Investment Gains and Losses
The sources of net realized investment gains (losses) were as follows (in
millions):
Three Months
Ended March 31
--------------------
2000 1999
------ ------
Net Gains (Losses) on Sales of Investments
Fixed Maturity Securities
Gross Gains $ 2.4 $ 6.0
Gross Losses (7.0) (2.4)
Equity Securities
Gross Gains .5 1.3
Gross Losses - -
Real Estate and Leases .8 .4
Other 4.2 1.0
Provision for Losses on Investments
Fixed Maturity Securities (1.2) (3.4)
Real Estate and Leases (.5) (.4)
----- -----
Pretax Realized Investment Gains (Losses) (.8) 2.5
DAC/PVFP Amortization 1 1.5 (.1)
Income Taxes (.2) (.8)
----- -----
Net Realized Investment Gains, Net of Tax $ .5 $ 1.6
===== =====
/1/ Due to pretax realized investment gains and losses.
11
<PAGE>
The Company establishes allowances and writes down the value of specific assets
based upon its periodic review of individual problem investments. The Company's
recording of allowances and write-downs based upon a review of individual
problem assets results in fluctuations in the level of the provision for losses
on investments reported in each period. The provision for losses on investments
is affected to a significant degree by general economic conditions and the
status of the real estate market. While the Company believes it has set aside
appropriate reserves and allowances for problem investments, subsequent economic
and market conditions may require the establishment of additional reserves.
FINANCIAL CONDITION
Liquidity and Capital Resources - ReliaStar Financial Corp.
ReliaStar, as parent, is dependent upon 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 insurance laws and regulations.
The payment of future dividends by ReliaStar to its shareholders will be largely
dependent upon the ability of ReliaStar Life to pay dividends to the Company.
Under Minnesota insurance law regulating the payment of dividends by ReliaStar
Life, any such payment must be in an amount deemed prudent by ReliaStar Life's
Board of Directors and, unless otherwise approved by the Commissioner of the
Minnesota Department of Commerce (the Commissioner), must be paid solely from
the adjusted earned surplus of ReliaStar Life. Adjusted earned surplus means the
earned surplus as determined in accordance with statutory accounting practices
(unassigned funds) less 25% of the amount of such earned surplus which is
attributable to net unrealized capital gains. Further, without approval of the
Commissioner, ReliaStar Life may not pay in any calendar year any dividend
which, when combined with other dividends paid within the preceding 12 months,
exceeds the greater of (i) 10% of ReliaStar Life's statutory surplus at the
prior year-end or (ii) 100% of ReliaStar Life's statutory net gain from
operations (not including realized capital gains) for the prior calendar year.
For 2000, the amount of dividends which can be paid by ReliaStar Life without
Commissioner approval is $208.4 million.
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 March 31, 2000, $300 million of debt and equity
securities were available for issuance under this shelf registration.
As of March 31, 2000, the Company had unsecured revolving credit facilities with
banks totaling $350.0 million for general corporate purposes, of which $221.0
million remained available for borrowing under these facilities.
Liquidity and Capital Resources - Insurers
Liquidity for life insurance companies is measured by their ability to pay
scheduled contractual benefits, pay operating expenses and fund investment
commitments. Sources of liquidity include scheduled and unscheduled principal
and interest payments on investments, premium payments and deposits, and the
sale of liquid investments. These sources of liquidity for the Insurers
significantly exceed scheduled uses.
Liquidity is also affected by unscheduled benefit payments, including death
benefits, benefits under insured accident and health policies and contract
withdrawals and surrenders. The amount of withdrawals and surrenders is affected
by a variety of factors such as credited interest rates for competing products,
general economic conditions, the Insurers' claims paying ratings and events in
the industry which affect policyholders' confidence.
The Insurers' investment portfolios represent a significant source of liquid
assets. As of March 31, 2000, the Insurers' investment portfolios included $7.8
billion (30.3% of consolidated assets) of short-term investments and investment
grade marketable bonds. The March 31, 2000 investment portfolio also included
$2.6 billion of investment grade privately placed bonds which, while not
publicly traded, are a source of liquidity.
The Company participates in reverse repurchase transactions. Such transactions
involve the sale of corporate securities to a major securities dealer and a
simultaneous agreement to repurchase the same security in 90 - 180 days. The
proceeds are invested in new securities of intermediate duration. Amounts due
related to reverse repurchase transactions as of March 31, 2000 were $108.5
million.
Some of the policies and annuities issued by the Insurers contain provisions
which allow contractholders to withdraw or surrender their contracts under
defined circumstances. These policies and annuities generally contain provisions
which apply penalties or otherwise restrict the ability of 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.
12
<PAGE>
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.
Consolidated Cash Flows
The Company's cash balance at March 31, 2000 was $16.7 million. During the first
quarter of 2000, net cash provided by operating and financing activities was
$89.2 million and $144.7 million, respectively, which was offset by net cash
used in investing activities of $265.1 million.
The $89.2 million of net cash provided by operating activities was primarily the
result of cash flow from premiums and investment income in excess of cash
outflows for insurance benefits and sales and operating expenses. Net cash
provided by financing activities of $144.7 million was primarily the result of
net proceeds related to reverse repurchase agreements.
INVESTMENTS
The current investment strategy for the Company is designed to maintain the
overall quality of the portfolios, to maintain an appropriate liquidity
position, to assure appropriate asset/liability structures, to achieve asset
type diversification and to avoid issuer concentration.
The Company intends to direct most of its new investment cash flow during the
reminder of 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 which are compatible with
the liabilities they support. All of the investments in the Insurers' portfolios
are subject to diversification, quality and reserving requirements of state laws
regulating the Insurers.
13
<PAGE>
The following table provides information regarding the composition of the
Company's invested assets (in millions):
March 31, 2000 December 31, 1999
------------------- --------------------
Amount Percent Amount Percent
--------- ------- --------- -------
Investment Grade Bonds:
Marketables $ 7,770.4 52.9% $ 7,415.0 51.3%
Private Placements 2,644.0 18.0 2,705.0 18.7
Below Investment Grade Bonds:
Marketables 497.2 3.4 489.4 3.4
Private Placements 407.4 2.8 409.3 2.8
Redeemable Preferred Stock 25.7 .2 23.1 .1
--------- ----- --------- -----
Fixed Maturity Securities 11,344.7 77.3 11,041.8 76.3
Equity Securities 55.9 .4 54.9 .4
Commercial Mortgages 1,849.6 12.6 1,868.5 12.9
Residential and Other Mortgages 439.6 3.0 441.2 3.0
Real Estate 16.6 .1 20.6 .2
Policy Loans 744.5 5.1 739.9 5.1
Short-Term Investments 69.9 .4 157.7 1.1
Other 157.0 1.1 138.6 1.0
--------- ----- --------- -----
Total Invested Assets $14,677.8 100.0% $14,463.2 100.0%
========= ===== ========= =====
Fixed Maturity Securities
The amounts invested in fixed maturity securities as of March 31, 2000, and
December 31, 1999, were $11.3 billion and $11.0 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 March 31, 2000, were $9.3
million and $8.0 million, respectively.
All of the Insurers' marketable and privately placed bonds are required to be
evaluated by the Securities Valuation Office (SVO) of the NAIC. The SVO
evaluates the investments of insurers for regulatory reporting purposes and
assigns securities to one of six investment categories. The NAIC's categories
closely follow the public rating agencies' categories for marketable bonds. NAIC
categories 1 and 2 include bonds considered investment grade (BBB or higher) by
the public rating agencies. Categories 3 through 6 are referred to as below
investment grade (BB or lower).
As of March 31, 2000, the weighted average book yields of the Company's
investment grade portfolio and below investment grade portfolio were 7.6% and
8.6%, respectively. The weighted average book yield is not necessarily
reflective of the net investment income ultimately realized by the Company.
Investments with greater credit risk have a greater risk of default than
investment grade securities, and accordingly, some of the incremental book yield
of the below investment grade portfolio may not be realized.
14
<PAGE>
The following tables identify the amortized cost and the fair value of the
Company's fixed maturity securities with respect to each NAIC credit rating
category (in millions):
<TABLE>
<CAPTION>
March 31, 2000
- ------------------------------------------------------------------------------------------------------------------
Marketables Private Placements
---------------------------------------------- ------------------------------------------------
NAIC Amortized Gross Unrealized Fair Amortized Gross Unrealized Fair
---------------- ----------------
Rating Cost Gains (Losses) Value Cost Gains (Losses) Value
- ------ ---- ----- -------- ----- ---- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $5,290.2 $67.3 $(103.0) $5,254.5 $ 928.6 $ 7.6 $ (26.7) $ 909.5
2 2,578.1 19.3 (81.5) 2,515.9 1,797.9 5.5 (68.9) 1,734.5
3 444.1 1.8 (37.4) 408.5 302.6 .4 (18.0) 285.0
4 105.8 .1 (18.3) 87.6 103.8 1.1 (1.0) 103.9
5 .1 - (.1) - 15.4 - (.2) 15.2
6 1.4 - (.3) 1.1 3.6 - (.3) 3.3
Redeemable
Preferred
Stock 13.9 .1 (2.0) 12.0 13.7 - - 13.7
-------- ------ -------- --------- --------- ----- ------ ---------
Total $8,433.6 $88.6 $(242.6) $8,279.6 $3,165.6 $14.6 $(115.1) $ 3,065.1
======== ===== ======= ======== ======== ===== ======== =========
December 31, 1999
- ------------------------------------------------------------------------------------------------------------------
Marketables Private Placements
---------------------------------------------- ------------------------------------------------
NAIC Amortized Gross Unrealized Fair Amortized Gross Unrealized Fair
---------------- ----------------
Rating Cost Gains (Losses) Value Cost Gains (Losses) Value
- ------ ---- ----- -------- ----- ---- ----- -------- -----
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
======== ===== ======= ======== ======== ===== ====== =========
</TABLE>
The amortized cost and fair value of fixed maturity securities by contractual
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without prepayment penalties (in millions).
March 31, 2000 December 31, 1999
--------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- ---------- ---------
Maturing in:
One Year or Less $ 354.4 $ 354.8 $ 417.1 $ 416.6
One to Five Years 3,427.2 3,374.6 3,467.1 3,455.5
Five to Ten Years 2,928.8 2,829.9 2,858.7 2,782.2
Ten Years or Later 1,215.3 1,181.7 1,195.4 1,154.0
Mortgage-Backed/Structured
Finance 3,673.5 3,603.7 3,316.8 3,233.5
--------- --------- ---------- ---------
Total $11,599.2 $11,344.7 $11,255.1 $11,041.8
========= ========= ========= =========
15
<PAGE>
The Company's marketable and private placement bond portfolios were diversified
by industry (based upon amortized cost) as set forth in the following table:
<TABLE>
<CAPTION>
Marketables Private Placements
-------------------------- ---------------------------
March 31, December 31, March 31, December 31,
2000 1999 2000 1999
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Basic Materials 6.0% 6.2% 6.4% 6.3%
Consumer Non-Cyclical 4.7 5.0 15.2 15.4
Consumer Products/Services 9.9 10.1 15.2 15.2
Energy 5.3 5.3 7.0 7.0
Financial Services 16.7 18.2 14.6 14.2
Government 1.9 2.2 .1 .1
Industrial 4.1 4.4 10.8 11.6
Mortgage-Backed/Structured
Finance 37.2 34.5 17.2 16.9
Real Estate 1.2 1.3 2.1 2.0
Retailing 1.6 1.6 3.9 4.0
Technology 2.2 2.1 1.6 1.7
Utilities 9.2 9.1 5.9 5.6
----- ----- ----- ------
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Below Investment Grade Investments
Issuers of below investment grade debt frequently have relatively high levels of
indebtedness and are more sensitive to adverse economic conditions, such as
recession or increasing interest rates, than are issuers of investment grade
securities.
The largest investment in below investment grade bonds of any one borrower was
approximately two-tenths of one percent of invested assets at March 31, 2000.
The largest investment in below investment grade bonds of any one industry
grouping was approximately 1.4% of invested assets at March 31, 2000. The
portfolio of below investment grade bonds is regularly analyzed and managed in
an effort to avoid concentration risks.
16
<PAGE>
Mortgage-Backed/Structured Finance Securities
The Company's investment policy permits the acquisition of mortgage-backed
securities and collateralized mortgage obligations (collectively referred to as
MBS securities) provided that the Company's aggregate investment in MBS
securities shall not exceed 50% of its statutory assets. The Company's
investment strategy has been to invest primarily in actively traded MBS
securities which are structured to reduce prepayment risk as compared to direct
investments in the underlying mortgage collateral. The amortized cost and
estimated fair value of investments in MBS securities, categorized by interest
rates on the underlying collateral, were as follows (in millions):
March 31, 2000
--------------------------------
Amortized
Cost Fair Value
--------- ----------
Adjustable Rate Pass Through:
Below 7% $ 29.1 $ 29.0
Above 7% 39.8 39.7
Fixed Rate Pass Through:
Below 9% 49.1 48.5
Above 9% 2.3 2.4
Planned Amortization Class:
Below 7% 207.0 211.6
7% - 8% 212.8 217.2
8% - 9% 46.3 47.6
Above 9% .9 .9
Other:
Below 7% 233.6 228.3
7% - 8% 240.8 243.4
8% - 9% 64.1 65.2
Above 9% 4.1 4.1
-------- --------
Total $1,129.9 $1,137.9
======== ========
The Company invests in public and private asset-backed securities in addition to
the MBS securities described above. As of March 31, 2000, the Insurers held
asset-backed securities with an amortized cost of $2,543.6 million and a fair
value of $2,465.8 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 March
31, 2000, approximately 98% of the Company's asset-backed securities had
investment grade ratings. Approximately 33% of these asset-backed securities are
collateralized by manufactured housing loans, 20% by commercial mortgage loans,
19% by high yield bank loans and corporate bonds and 19% 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.
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 March
31, 2000, being approximately $3.1 million.
17
<PAGE>
The commercial mortgage loan portfolio diversification by property type and
geographic region of the United States was as follows:
March 31, December 31,
2000 1999
--------- ------------
Property Type
Apartment 25.1% 25.1%
Special Purpose 22.5 22.8
Retail 20.8 20.6
Industrial 19.4 19.3
Office 10.4 10.4
Hotel/Motel 1.8 1.8
----- -----
Total 100.0% 100.0%
===== =====
March 31, December 31,
2000 1999
--------- ------------
Geographic Region
Midwest 36.4 36.0%
Pacific 23.4 24.0
Southeast 16.0 15.9
Northeast 11.8 11.5
Mountain 8.3 8.3
Southwest 4.1 4.3
----- -----
Total 100.0% 100.0%
===== =====
The weighted average yield and the weighted average maturity of the loans in the
commercial mortgage loan portfolio as of March 31, 2000, were 7.8% and 8.5
years, respectively.
The Company invests in individual and pools of individual residential mortgage
loans in addition to the structured finance securities backed by residential
mortgages. As of March 31, 2000, and December 31, 1999, the Insurers held $439.3
million and $440.9 million, respectively, of non-securitized residential
mortgage loans.
Unrealized Investment Gains and Losses
All of the Company's debt and equity securities are classified as
available-for-sale and carried at fair value on the Condensed Consolidated
Balance Sheets with unrealized investment gains and losses excluded from income
and reported as a component of accumulated other comprehensive income in
shareholders' equity.
The components of net unrealized investment gains and losses included in
accumulated other comprehensive income are shown below (in millions).
March 31, December 31,
2000 1999
--------- ------------
Unrealized Investment Losses $(260.0) $(216.7)
DAC/PVFP 47.6 50.7
Deferred Income Taxes 76.0 58.5
------- -------
Net Unrealized Investment Losses $(136.4) $(107.5)
======= =======
Market-Sensitive Instruments and Risk Management
The Company's market risk-sensitive instruments include those financial
instruments as defined by Statement of Financial Accounting Standards (SFAS) No.
107, "Disclosures about Financial Instruments," and are all considered to be
entered into for other than trading purposes. The Company's primary market risk
exposure associated with these instruments is the risk associated with changes
in market interest rates.
Changes in 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.
18
<PAGE>
The insurance liabilities of the Company are also sensitive to changes in market
interest rates. Changes in interest rates may affect the incidence of policy
surrenders and other withdrawals. In addition to the potential impact on
liquidity, unanticipated withdrawals in a changed interest rate environment
could adversely affect earnings if the Company were required to sell investments
at reduced values in order to meet liquidity demands.
The Company has established procedures for evaluating these liabilities and
attempts to structure investment asset portfolios with yield, cash flow and
interest rate sensitivities appropriate to support the insurance liabilities.
The Company also uses derivative instruments, such as interest rate swaps, to
adjust the duration of the asset and liability portfolios. In addition, the
Insurers monitor the surrender and policy loan activity of their insurance
products and manage the composition of their investment portfolios in light of
such activity.
The Company manages the composition of its capital structure by considering
factors such as market conditions and the ratio of debt and trust-originated
preferred securities to total capital.
The Company manages its interest rate risk by managing its assets within target
duration ranges, based on the Company's liability profile. The Company uses
duration analysis to estimate the amount of sensitivity to market interest rate
changes. The duration of a bond or portfolio can be thought of as the life, in
years, of a notional zero-coupon bond whose fair value would change by the same
amount in response to any change in market interest rates. The portfolio
duration includes the duration impact 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 shown below (in
years):
March 31, 2000
---------------------------------------
Asset Portfolio Target
Duration Duration Duration
-------- --------- --------
ReliaStar Life and Annuities:
Life 4.6 4.6 3.5 - 5.0
Annuities 3.9 4.0 4.0 - 5.5
Worksite Financial Services 3.5 3.7 3.0 - 6.0
Reinsurance 5.1 5.1 3.5 - 8.0
The Company uses interest rate swaps as part of its asset/liability management
program. The Company has acquired a significant amount of certain shorter
duration investments, such as floating rate or adjustable rate investments.
Acquisition of these assets shortens the duration of an asset portfolio. The
Company uses interest rate swaps to extend the duration of these portfolios as
an alternative to purchasing longer duration investments.
At March 31, 2000, the Company had 46 interest rate swap contracts in effect
with a notional amount of $734.5 million. At December 31, 1999, the Company had
51 interest rate swap contracts in effect with a notional amount of $790.5
million. During the first quarter of 2000, five interest rate swap contracts
matured with a notional amount of $56 million. There were no terminations of
interest rate swap contracts prior to maturity during the first quarter of 2000.
The Company had no deferred gains or losses as of March 31, 2000, related to
interest rate swap contracts terminated early. The estimated fair value of the
interest rate swap contracts in effect at March 31, 2000, was an unrealized loss
of $4.9 million, which is reported with other invested assets in the Condensed
Consolidated Balance Sheets.
19
<PAGE>
Most of the interest rate swap contracts are standard contracts whereby the
Company pays a floating rate of interest (generally based upon the LIBOR rate as
determined from time to time) and receives a fixed rate (generally a specified
contract rate). The following table details the characteristics of the Company's
interest rate swap contracts at March 31, 2000 (dollars in millions).
Notional Range of Fixed
Amount Rates Received
-------- --------------
Maturing in:
One Year or Less $314.5 5.3% - 6.5%
One to Three Years 240.0 6.3% - 8.2%
Three to Five Years 180.0 6.0% - 6.8%
------
Total $734.5
======
The Company monitors the effect of the swap position on reported income. The
Company's investment portfolio includes a substantial amount of floating rate
investments. Changes in market interest rates have an opposite (and
approximately offsetting) effect on the reported income from the swap portfolio.
Accordingly, the reported investment income (or loss) attributable to the
Company's swap position will be approximately offset by the changed investment
income of the Company's floating or adjustable rate investments in a changing
rate environment. At March 31, 2000, the Company held $.7 billion of adjustable
rate invested assets, short-term investments and cash.
The Company also uses interest rate caps as part of its overall interest rate
risk management strategy for certain annuity products primarily to hedge the
risk of investment losses due to product surrenders in an increasing interest
rate environment. The Company held 8 interest rate caps with a notional amount
of $510.0 million and a fair value of less than $.1 million as of March 31,
2000.
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 54 call options with a notional amount of
$63.3 million and an estimated fair value of $21.2 million as of March 31, 2000.
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 $34.9 million and $35.8 million as of
March 31, 2000, and December 31, 1999, 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 Condensed
Consolidated Balance Sheets were $32.4 million and $32.2 million as of March 31,
2000, and December 31, 1999, respectively.
The Company also monitors its portfolios in an attempt to identify loans which
are not currently classified as Problem Investments, but where the Company has
knowledge which causes it to have serious doubts as to the ability of borrowers
to comply with the present loan repayment terms. These loans (Potential Problem
Investments) are subject to increased scrutiny and review by the Company. The
amounts of private placements, marketable bonds and mortgage loan Potential
Problem Investments were $26.3 million, $6.3 million and $7.0 million,
respectively, at March 31, 2000.
20
<PAGE>
KNOWN TRENDS AND UNCERTAINTIES WHICH MAY AFFECT FUTURE REPORTED RESULTS
ING Acquisition
On April 30, 2000, the Company, ING Groep, N.V. (ING), ING America Insurance
Holdings, Inc. and SHP Acquisition Corp. executed an agreement and plan of
merger which provides for the acquisition of ReliaStar by ING. In the merger,
each outstanding share of ReliaStar common stock (other than those owned of
record by ReliaStar's ESOP, or shares owned by holders who validly exercise
dissenters' appraisal rights) will be converted into the right to receive $54
per share in cash. Shares owned by ReliaStar's ESOP will be exchanged for ING
American Depository Shares of equivalent value. The consummation of the
transaction is subject to various conditions, including receipt of necessary
regulatory approvals, and the approval of the Company's shareholders. The
Company expects the merger to close during the third quarter of 2000. If the
merger were not to be consummated, such failure could have a material adverse
effect upon the Company's financial condition and results of operations.
Competition
Aggressive competition in insurance premiums or other product fees and
commissions could adversely affect ReliaStar's 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.
The enactment of the Gramm Leach Biley 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.
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
21
<PAGE>
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.
The Company can make no assurances that its motion for summary judgement will
prevail or that if this case goes to trial, such litigation will not result in a
material adverse impact to the Company's results of operations.
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, underwriting
objectives, 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, and 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:
o 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;
o The market value of the Company's investments;
o The lapse rate and profitability of the insurance policies issued by
ReliaStar;
o Mortality and morbidity factors in ReliaStar's insurance business
(including the effect of the Company's reinsurance and retrocession risk
management programs);
o Changes in federal tax laws, which could adversely affect the tax
advantages of certain of the Company's products;
o 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;
o Industry consolidation and competition; and
o 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.
22
<PAGE>
Part II. Other Information
RELIASTAR FINANCIAL CORP.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
2 Agreement and Plan of Merger, dated as of February 28,
2000, among ReliaStar Financial Corp., Pilgrim Capital
Corporation and Lexington Global Asset Managers, Inc.
(LGAM) (incorporated by reference to Exhibit 2.1 to the
LGAM's Annual Report on Form 10-K for the year ended
December 31, 1999, File No. 0-26868)
3(a) Certificate of Incorporation, as amended, of Registrant
(incorporated by reference to Exhibit 4(a) to the
Registrant's Registration Statement on Form S-8,
Registration No. 333-42125)
3(b) Bylaws, as amended, of 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 Amended and Restated Rights Agreement dated as of
February 11, 1999, as amended as of April 30, 2000,
between ReliaStar Financial Corp. and Norwest Bank
Minnesota, National Association, as Rights Agent
(incorporated by reference to Exhibit 1 to the
Registrant's Amendment to Registration Statement of
Form 8-A/A dated February 26, 1999 and May 3, 2000)
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended March 31,
2000:
Form 8-K dated as of February 2, 2000, with respect to the
Registrant's release of financial results for the three
months and twelve months ended December 31, 1999
Form 8-K dated as of February 8, 2000, with respect to the
Registrant's on-site meeting with securities analysts.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated May 12, 2000
--------------------
RELIASTAR FINANCIAL CORP.
/s/ James R. Miller
--------------------------------------
by James R. Miller
Senior Vice President, Chief Financial
Officer and Treasurer
24
<PAGE>
EXHIBIT 11
ReliaStar Financial Corp.
Computation of Per Share Earnings
(in millions, except per share amounts)
Three Months
Ended March 31
------------------
2000 1999
----- -----
NUMERATOR - BASIC AND DILUTED
Net Income $74.1 $64.4
===== =====
DENOMINATOR
Weighted Average Common Shares Outstanding
During the Period (Basic) 89.3 88.8
Dilutive Effect of Stock Options .8 1.2
Other .1 .1
----- -----
Weighted Average Common Shares During the
Period (Diluted) 90.2 90.1
===== =====
NET INCOME PER COMMON SHARE
Basic $ .83 $ .73
===== =====
Diluted $ .82 $ .71
===== =====
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 11,344,700
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 55,900
<MORTGAGE> 2,289,200
<REAL-ESTATE> 16,600
<TOTAL-INVEST> 14,677,800
<CASH> 16,700
<RECOVER-REINSURE> 601,800
<DEFERRED-ACQUISITION> 1,556,100
<TOTAL-ASSETS> 25,860,600
<POLICY-LOSSES> 13,656,100
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 604,300
<POLICY-HOLDER-FUNDS> 436,200
<NOTES-PAYABLE> 829,300
242,700
0
<COMMON> 900
<OTHER-SE> 1,976,900
<TOTAL-LIABILITY-AND-EQUITY> 25,860,600
301,900
<INVESTMENT-INCOME> 285,600
<INVESTMENT-GAINS> (800)
<OTHER-INCOME> 213,900
<BENEFITS> 413,600
<UNDERWRITING-AMORTIZATION> 43,000
<UNDERWRITING-OTHER> 184,100
<INCOME-PRETAX> 121,000
<INCOME-TAX> 43,600
<INCOME-CONTINUING> 74,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,100
<EPS-BASIC> 0.83
<EPS-DILUTED> 0.82
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
