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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1996 Commission File Number 001-12746
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SECURITY-CONNECTICUT CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 06-1383088
State of Incorporation) (I.R.S. Employer Identification Number)
20 Security Drive, Avon, Connecticut 06001
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(Address of Principal Executive Offices)
Registrant's telephone number (860) 677-8621
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
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.
Yes [ X ]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.[ X ]
As of February 28, 1997, 8,572,115 shares of Common Stock were outstanding. The
aggregate market value of such shares (based upon the closing price of these
shares on the New York Stock Exchange) held by non-affiliates was approximately
$395,000,000.
Select materials from the Proxy Statement for the Annual Meeting of
Shareholders, scheduled for May 15, 1997, have been incorporated by reference
into Part III of this Form 10-K.
The exhibit index to this report is located on page 70.
Page 1 of 138
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TABLE OF CONTENTS
Item Page
PART I
1 Business............................................................. 3
2 Properties........................................................... 19
3 Legal Proceedings.................................................... 19
4 Submission of Matters to a Vote of Security Holders.................. 19
PART II
5 Market for Registrant's Common Equity and Related Shareholder
Matters............................................................ 21
6 Selected Financial Data.............................................. 22
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 24
8 Financial Statements and Supplementary Data.......................... 30
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 59
PART III
10 Directors and Executive Officers of the Registrant................... 60
11 Executive Compensation............................................... 60
12 Security Ownership of Certain Beneficial Owners and Management....... 60
13 Certain Relationships and Related Transactions....................... 60
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 60
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PART I
Item 1 - Business
General
Security-Connecticut Corporation ("Security-Connecticut" or the "Company")
was formed in 1993 by its parent corporation, Lincoln National Life Insurance
Company ("LNL") to serve as an insurance holding company for
Security-Connecticut Life Insurance Company ("SCL") and its subsidiary Lincoln
Security Life Insurance Company ("LSL"). On February 2, 1994, LNL sold 100% of
the outstanding shares of Security-Connecticut Corporation through an Initial
Public Offering ("IPO"). Prior to the IPO, LNL effected a reorganization in
which it contributed $10 million in capital and all of its outstanding shares of
SCL to the Company in exchange for 8,500,000 shares of the Company's Common
Stock and a term loan note in the principal amount of $65 million ("Term Note").
On April 26, 1995, Arrowhead Ltd. ("AHL"), a wholly owned subsidiary of the
Company, was incorporated as an insurance company in Bermuda. Although AHL was
funded during 1995, it remained inactive until January 1, 1996. On March 1,
1996, the Company sold $75 million of medium term debt securities and used $65
million of the net proceeds to repay the Term Note to LNL.
On February 23, 1997, ReliaStar Financial Corp. ("ReliaStar") and
Security-Connecticut signed a definitive agreement to combine the two companies
through the statutory merger of Security-Connecticut with and into ReliaStar.
The Board of Directors of Security-Connecticut has unanimously approved the
merger. Completion of the merger is subject to normal closing conditions,
including approval by the Company's shareholders and various regulatory
approvals. Provided there has been no material breach by ReliaStar of the
representations, warranties, covenants and agreements of ReliaStar under the
merger agreement, Security-Connecticut has agreed to pay ReliaStar $8 million if
the merger agreement is terminated either as a result of (a) the modification or
withdrawal, in any way detrimental to ReliaStar, of the recommendation of the
Security-Connecticut Board with respect to the merger, or (b) the execution by
Security-Connecticut of a definitive agreement with a party other than ReliaStar
with respect to a publicly announced offer or intent to make an offer to acquire
all or substantially all Security-Connecticut or its subsidiaries.
Separately and not additionally, if the merger agreement is terminated by
ReliaStar on the basis that the Security-Connecticut shareholders did not
approve the merger, then Security-Connecticut would be required to pay ReliaStar
$2.5 million to reimburse ReliaStar's expenses incurred in connection with the
merger agreement. In addition to the foregoing $2.5 million payment, if an
acquisition proposal is outstanding on the date of such termination, or at any
time within 90 days thereafter, and an acquisition proposal is consummated
within twelve months of the termination of the merger agreement, the Company has
agreed to pay ReliaStar an additional $5.5 million. The foregoing discussion is
qualified in its entirety by reference to the merger agreement filed as an
exhibit to this report. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources-Liquidity
for the Holding Company."
The Company, through SCL and LSL, offers a diverse portfolio of individual
life insurance and annuity products to customers throughout the 50 states, the
District of Columbia and Guam. Both SCL and LSL have specialized in providing
individual life insurance products since their formation in 1955 and 1984,
respectively. In the late 1980s, both began selling annuity products; however,
significant sales did not occur until 1990. In January 1996, AHL began operating
as a small reinsurance company with assumed premiums of approximately $9.5
million in 1996.
Products
Security-Connecticut has designed a diverse line of products which are
tailored to its customer market for distribution through its independent
agencies. Included in the portfolio are universal life, interest-sensitive whole
life, term life, single premium deferred and immediate annuities, as well as a
small amount of group life and accident and health insurance.
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Life premiums in the following table are expressed as first year annualized
premiums, a common industry definition of sales achievement. Such premiums
consist of the initial premium payment for each policy, plus the remaining
payments expected in the first policy year. Amounts in excess of the target
premium on any universal life policy are credited at 10%. Actual premium
payments may be higher or lower than first year annualized life premiums.
Annuity premiums are statutory premiums which reflect actual amounts paid.
Sales Activity by Product
Year Ended December 31,
1996 1995 1994
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(Dollars in millions)
Annualized Life Insurance Premiums
Universal life $ 25.9 $ 27.3 $ 24.9
Term insurance 23.2 18.7 20.5
Other life insurance 0.5 0.9 1.3
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Total life insurance premiums $ 49.6 $ 46.9 $ 46.7
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Annuity Premiums
Single premium deferred annuities $ 48.1 $ 83.6 $ 163.0
Single premium immediate annuities 4.7 14.1 17.8
Other annuities 0.2
------- ------- -------
Total annuity premiums $ 52.8 $ 97.7 $ 181.0
======= ======= =======
The following table sets forth information regarding life insurance,
annuity business and accident and health insurance in-force at the end of each
period presented.
Insurance and Annuities In-Force
Year Ended December 31,
1996 1995 1994
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(Dollars in millions)
Individual Life Insurance (1)
Total number of direct policies 281,193 263,886 249,154
Total in-force annualized direct premiums (2) $ 281 $ 267 $ 247
Total face amounts (3) 33,356 32,204 29,210
Total GAAP life reserves (4) 989 927 858
Annuities
Total number of policies 16,163 16,501 15,352
Total statutory premiums $ 53 $ 98 $ 181
Total GAAP annuity reserves 676 685 610
Group Life Insurance
Total number of lives 11,303 18,463 30,702
Total statutory premiums (3) $ 1 $ 2 $ 2
Total face amount (3) 210 277 347
Accident and Health Insurance
Total number of lives 2,947 23,519 25,720
Total statutory premiums (3) $ 3 $ 2 $ 5
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(1) Includes universal life policies.
(2) In-force annualized direct premiums assumes that (a) all in-force fixed
premium policyholders pay the full scheduled annual premium at the
beginning of the policy year and (b) all flexible premium policyholders pay
the full planned premium at the beginning of the policy year.
(3) Net of reinsurance.
(4) Amounts reported are net of reinsurance. Policy liabilities at December 31,
1996, 1995 and 1994 are reported in the financial statements gross of
reinsurance. Amounts recoverable from reinsurers at December 31, 1996, 1995
and 1994 were $39.6 million, $35.0 million and $41.8 million, respectively,
and are shown as assets with respect to life reserves.
Life Products
Security-Connecticut's life insurance business consists of a diverse
portfolio of term and universal life insurance policies. Two series of term
plans are offered by SCL with varying level rate periods and guarantees ranging
from 5 to 20 years. LSL offers two series with varying level rate periods
ranging from 5 to 15 years with either 5 or 10 year rate guarantee periods.
Multiple term plans and varying guarantee periods are offered by both companies
to meet the diverse needs of the marketplace.
The Company's universal life insurance policies provide permanent life
insurance with adjustable rates of return based on current interest rates.
Universal life policies provide flexibility in both the timing and amount of
premium payments with a corresponding fluctuation in the amount of policy
benefits, although some of the Company's universal life products require minimum
premiums and thus provide minimum policy benefits. Scheduled surrender charges
exist generally for 12 or 19 years (varying by universal life plan) and are
deducted from the account value upon early policy termination. These surrender
penalties serve to discourage premature lapses.
The Company's universal life products include first-to-die and
second-to-die products. The distinguishing features of these products from other
universal life products are that two lives are insured rather than one, and the
policy proceeds are paid upon the first or second death, respectively, of the
two insureds. First-to-die policies are used in business succession planning,
especially for partnerships, and in dual income family markets. Second-to-die
policies are used in individual estate planning, often to fund estate taxes for
a married couple. SCL's second-to-die and one of its individual plans contain
attractive death benefit guarantees which have been very well received in the
marketplace.
The Company's interest-crediting rates on its universal life and
interest-sensitive life products ranged from 6.25% to 7.55% in 1994, 6.00% to
7.25% in 1995 and 5.75% to 7.25% in 1996.
Annuity Products
Security-Connecticut sells two types of single premium annuities: single
premium deferred annuities ("SPDA") and single premium immediate annuities
("SPIA"). A SPDA contract calls for the payment by the annuitant of a single
premium at time of issue, the crediting of interest to the annuitant's account
at a variable interest rate during the accumulation period, and the ultimate
payout of accumulated funds at a date and under an option selected by the
annuitant. The current interest crediting rate in effect at time of issue is
guaranteed for a fixed number of years (1 or 3 years for 1996 issues) at the
annuitant's option and thereafter is subject to change based on market and other
economic conditions at the Company's discretion. The current crediting rates are
set at a level designed to provide an interest spread consistent with the
Company's profit goals.
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Each contract also has a minimum guaranteed crediting rate (e.g., 3.0% for
LSL and 4.0% for SCL on 1996 issues). The accrual of interest during the
accumulation period is on a tax-deferred basis to the annuitant. Up to 10% of
the account value may be withdrawn in a contract year without assessment of a
surrender charge. For contracts sold in 1996, there are several surrender charge
schedules in effect, starting at 7% or 9% and generally declining by 1% per year
depending on the product.
A SPIA contract provides a series of income payments of a fixed amount
beginning immediately in return for a single premium received by the Company at
time of issue. Many payment options are available, but once the contract is
issued, the annuitant cannot be changed, and no change can be made in any of the
payment provisions elected in the application.
The Company's interest-crediting rates on its annuity products ranged from
4.50% to 8.00% in 1994, 4.40% to 8.00% in 1995 and 4.05% to 7.80% in 1996.
Group Term Life and Accident and Health Insurance
Security-Connecticut sells a small amount of group term life and accident
and health insurance. The group life insurance is written either as one-year
term for smaller employers, or as a one-year companion product with stop loss
coverage. The accident and health insurance business consists of specific and
aggregate stop loss coverage for self insured employers with small groups.
Product Development
The Company's product development process includes extensive input from its
distribution system. Internally, the product development process is interactive,
involving employees from many disciplines. Employees from sales, marketing,
product development, actuarial, underwriting, data processing, accounting and
administration are all brought into the process early to ensure that pricing and
underwriting are aligned, and that administrative support is efficient and
developed on a cost-effective basis.
Marketing and Distribution
The Company markets life insurance products through independent general
agents to two principal groups. The first includes professionals, high net worth
and upper middle class individuals and small, closely held businesses.
Management believes this target market is attractive because of its high level
of disposable income, desire for tax efficient investment vehicles, knowledge of
and access to financially sophisticated investment and life insurance products,
and willingness to purchase such products. The second principal market includes
middle-income individuals in need of low-cost term and permanent death benefit
protection. The Company believes it must continue to tailor its products and
respond quickly to the changing needs of its target markets.
Security-Connecticut is one of a number of insurance holding companies
providing life insurance and annuity products through a non-exclusive,
independent general agency system. Within the independent agency distribution
system, the Company accesses three principal distribution channels: wholesale,
retail and special markets which account for 74.3%, 13.3% and 12.4%,
respectively, of the Company's 1996 first year annualized life premiums and
84.8%, 7.4% and 7.8%, respectively, of 1996 annuity premiums.
Wholesale agencies - These general agencies are independently owned
brokerage agencies which operate as wholesalers of the Company's products and
obtain business in turn from independent brokers/producers.
Retail agencies - These independently owned agencies [frequently called
Personal Producing General Agencies (PPGAs) or Direct Associates] sell products
directly to the consumer and write business directly with the Company.
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Special markets - Distributors of Security-Connecticut products not falling
into the wholesale or retail agency categories are termed "special marketing
organizations." These distributors are national or regional organizations and
may be either wholesale or retail in character.
The Company believes that its consistent focus on the independent general
agency distribution system is cost effective since most of the Company's costs
associated with recruiting, training and maintaining agents are variable and may
be managed as business fluctuates.
Security-Connecticut's distribution strategy is to add value to each
distribution channel by providing a balanced package of competitive products,
support and administrative services which is tailored for each distribution
channel and designed to improve the efficiency and reduce the costs within each
channel. To achieve this objective, Security-Connecticut seeks to provide
quality service to each distribution system as well as to meet the product needs
of the insured, and the agents and brokers who sell its products. Two programs,
the Connector Program and the Profit Sharing Plan, help to establish this
value-added marketing approach.
The Connector Program provides improved communication between agencies and
the Company. The Company and the agency share the costs of the Connector
Program, which provides immediate access to an agency's policy level information
(on both pending and in-force policies), immediate access to agent level
information, electronic mail, and the capability to print policies, upon the
Company's approval, at the agency (rather than waiting for multiple-day mail
delivery from the home office). Appropriate security controls limit agency
access to only its own block of business.
The information accessibility and speed of policy delivery provide value to
agencies in their own marketing and service activities, and allow the agency to
increase revenue and/or decrease expenses by allowing employees to perform other
functions. At December 31, 1996, approximately 230 agencies participated in the
Connector Program, accounting for approximately 83% of SCL's paid premiums and
approximately 56% of LSL's paid premiums. All new agencies recruited are
expected to utilize the Connector Program. The Company believes the Connector
Program provides a sustainable competitive advantage because of its flexibility
and range of features.
Beginning in 1989, SCL began offering a Profit Sharing Plan to selected
agencies (both wholesale and retail) and CORE Producers. CORE Producers are
recruited by wholesale agencies and commit to specific production and activity
levels with the brokerage general agency (and with the Company). Under the
Profit Sharing Plan, the agency or CORE Producer can share in the profits of
business written by that agency or CORE Producer. This is a nonqualified
deferred compensation arrangement, providing for contributions to an
accumulation account based on the quantity, persistency and quality of the
agency's or CORE Producer's block of business. The Profit Sharing Plan aims to
increase the quality, quantity and consistency of production from both general
agencies and CORE Producers, and aligns the interests of the agency or producer
with those of the Company. A similar plan is not offered by LSL.
The Company's commitment to and consistent focus on the independent general
agency distribution system has allowed it to develop a strong relationship with
these agencies. In 1996, the 15 largest agencies or groups with the Company,
responsible for approximately 44% of first year annualized life premiums and
approximately 63% of annuity premiums, had been selling the Company's products
for an average of 14 years and 8 years, respectively. The top two groups account
for approximately 8.8% and 7.3%, respectively, of the first year annualized life
premiums and 14.4%, and 7.8%, respectively, of annuity premiums produced in
1996.
The Company's plan for financial institution marketing focuses on the
development of strategic alliances in order to efficiently sell life and annuity
products to the vast middle market customer base served by these institutions.
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The Company's distribution system is geographically diverse. Management
believes that this diversity, both in distribution channels and geographic
location, will enable it to continue to improve its growth in sales by
permitting broad access to its target customer base. In addition, management
believes that this diversity, particularly as it relates to the distribution
components, will prevent the Company from becoming too dependent upon any
particular market group or product type.
The following table identifies the top 10 states, and all other states
combined, in terms of Security-Connecticut's statutory premiums for 1996. The
Company intends to continue its focus on geographic diversity as it continues to
expand its agency distribution system.
Direct Statutory Premiums by State *
December 31, 1996
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% of
Total Direct
State Amount Business
- - ----- ----------- ----------
(Dollars in millions)
New York $ 66.7 18.5%
California 29.2
8.1
Florida 23.0 6.4
Connecticut 20.6 5.7
Pennsylvania 19.5 5.4
Texas 19.5 5.4
Massachusetts 16.1 4.5
Ohio 15.2 4.2
Illinois 13.5 3.8
New Jersey 12.3 3.4
All other jurisdictions 124.7 34.6
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Total $ 360.3 100.0%
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- - ------------
* Includes statutory life and health premiums, annuity considerations and
annuity and other fund deposits.
Service and Policy Administration
Customer service and efficient policy administration are significant
factors in maintaining and expanding Security-Connecticut's distribution system
and customer base. In that regard, management, through formal programs,
continuously focuses attention on productivity improvements and process
reassessments. One program, referred to as "Service Through Excellence Process,"
involves cross-training employees and streamlining operations. Customer needs
are regularly evaluated through extensive surveys and feedback sessions. As part
of this quality process, Security-Connecticut creates quality service standards
based upon industry studies which are used to evaluate the Company's overall
performance. Management believes its service performance compares favorably with
other life insurance companies which utilize the independent distribution
system.
The effectiveness of policyholder administration is maximized by the
application of technology both at the Company and general agency level. Through
the Connector Program, agencies around the country have immediate access to the
Company's home office. This program allows for fast, efficient communication of
information, enabling the independent agents to efficiently serve policyholders.
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Underwriting
Security-Connecticut follows detailed, uniform underwriting practices and
procedures designed to properly assess and quantify risks before issuing
coverage to qualified applicants. A prospective policyholder must submit to a
variety of underwriting tests, which may include medical examinations, blood
tests, electrocardiograms, urine tests, treadmill tests and inspection reports
depending on the product, policy face amount and age of the prospective
policyholder. Underwriting requirement limits are continually compared to
industry standards to minimize the risk of anti-selection and to monitor
industry trends. During 1996, comprehensive blood test screening, including
tests for the AIDS antibody, was performed on approximately 98% of business
written.
The Company separately evaluates each policy application from every
distributor. The Company is not obligated to accept any policy or group of
policies from any distributor. Every policy is underwritten on its own merits,
and no individual policy is issued without its having been reviewed and
underwritten individually.
Security-Connecticut's underwriting management has an average of 27 years
of underwriting experience. Management believes that a particular strength of
Security-Connecticut is the ability to coordinate underwriting and product
pricing. Product specifications are designed to prevent underwriting requirement
anti-selection. Mortality assumptions are thoroughly communicated to
underwriting and monitored. The underwriting department tracks the profitability
indicators of business by each general agent, including the mix of business,
percentage of substandard and declined cases, placement ratio and business
decisions. Ongoing internal underwriting audits, conducted at multiple levels,
monitor consistency of underwriting requirements and philosophy. Routine
independent underwriting audits conducted by its reinsurers have supported the
Company's underwriting policies and procedures.
Life Insurance and Annuity Reserves
In accordance with applicable insurance regulations, Security-Connecticut
records as liabilities in its statutory financial statements actuarially
determined reserves that are calculated to meet future obligations of its
in-force life insurance and annuity contracts. The reserves are based on
actuarially recognized methods using prescribed mortality tables and interest
rates. Reserves also include unearned premiums, premium deposits, claims that
have been reported but not yet paid, claims that have been incurred but have not
been reported, and claims in the process of settlement. Security-Connecticut's
reserves comply with state insurance department statutory requirements.
The reserves reflected in the Consolidated Financial Statements are
calculated based on generally accepted accounting principles ("GAAP"). Reserves
are based upon Security-Connecticut's best estimates of mortality, persistency,
expenses and investment income; and by using methods prescribed in Financial
Accounting Standards Board ("FASB") Nos. 60 and 97. GAAP reserves differ from
statutory reserves due to the use of different assumptions regarding mortality
and interest rates, and the introduction of lapse assumptions into the GAAP
reserve calculation. In addition, the mortality assumptions used in GAAP
reserving contain an explicit provision for AIDS risk for products developed
after 1986.
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Reinsurance
Security-Connecticut follows the usual industry practice of reinsuring
("ceding") portions of its life insurance risks with other companies, a practice
that permits it to write policies in amounts larger than the risk it is willing
to retain on any one life. Security-Connecticut ceded approximately 22% of its
total statutory life premiums in 1996. Security-Connecticut has several
reinsurance treaties in place, established on a first dollar quota share, yearly
renewable term and coinsurance basis. The majority of reinsurance is ceded under
two automatic treaties, each with several highly rated domestic reinsurance
companies. One treaty is for universal life and the other is for term life
insurance. Under each treaty, reinsurers are automatically bound up to a maximum
of 10 times Security-Connecticut's retention. The reinsurance is ceded to the
treaty participants on a percentage basis. The Company remains liable to its
policyholders without regard to whether its reinsurers are able to meet their
contractual obligations under the applicable reinsurance agreements. The Company
has entered into reinsurance treaties with highly rated reinsurers. For 1996, no
one reinsurer assumed more than 18% of the Company's life insurance ceded. Life
Reinsurance Corporation of America ("Life Re"), Life Re International, LTD,
Swiss Re Life Company America, RGA Reinsurance Company and Transamerica
Occidental Life Insurance Company each assumed 10% or more of the Company's
ceded life insurance. All of these reinsurers (except for Life Re International,
LTD) are rated "A (excellent)" or better by A.M.
Best.
The maximum retention limits for SCL are as follows: (i) group, $250,000;
(ii) individuals up to age 70, $500,000; (iii) individuals age 70 and over,
$250,000; and (iv) second-to-die, $1,000,000; (v) joint end age 70 and over,
$500,000. Facultative reinsurance relationships exist for cases where SCL deems
it appropriate to lower its retention limits, desires more competitive rates or
needs greater capacity.
With respect to policies issued by LSL, the maximum retention limits are as
follows: (i) individuals up to age 70, $100,000; (ii) individuals age 70 and
over, $50,000; and (iii) second-to-die, $100,000. Amounts exceeding the maximum
retention limits are ceded to SCL, which retains an additional $400,000 up to
age 70, $200,000 for age 70 and over, and $900,000 on second-to-die up to joint
end age 70, $400,000 for joint end age 70 and over, before retroceding the
remainder with automatic reinsurance pools.
AHL began operations in 1996 and has one agreement in place with Life Re to
reinsure yearly renewable term insurance and a block of 10 year level term
insurance.
Investments
Security-Connecticut's investment philosophy is to invest for total return,
recognizing current income in addition to changes in the underlying value of
invested assets. The rate of return earned on the portfolio must be sufficient
to satisfy the interest assumptions used in product pricing. In addition, the
preservation of principal and the matching of assets and liabilities are
important.
The Company seeks to manage the relationship between risk and return in
setting its investment policy, and is committed to maintaining a prudent balance
of the two. The Company is exposed to two major sources of investment risk:
credit risk, relating to the uncertainty surrounding the amount of principal and
interest payments; and interest rate risk, relating to the economic effects of
changing interest rates. The Company's principal methods for managing credit
risk are diversification and asset allocation. The Company's principal method
for managing interest rate risk is asset/liability management. In 1994, the
Company also began using interest rate caps as a hedge against rising interest
rates in its single premium deferred annuity investment portfolio.
The Company's investment portfolio consists primarily of publicly traded,
investment-grade debt securities. Lincoln Investment Management, Inc. ("LIM"), a
subsidiary of Lincoln National Corporation ("LNC"), and General Re/New England
Asset Management, Inc. ("NEAM") provide investment advisory services for the
Company, pursuant to investment advisory agreements. The Company's investment
policy is established by senior management after consultation with its
investment advisors.
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Shown below are the Company's invested assets by category.
Invested Assets by Category
December 31, 1996
-----------------
(Dollars in millions)
Securities available-for-sale, at fair value:
Fixed maturity securities $ 1,587.3 86.8%
Equity securities 1.9 0.1
Mortgage loans on real estate 128.5 7.0
Policy loans 74.4 4.1
Cash and invested cash 29.1 1.6
Other investments 6.9 0.4
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Total invested assets $ 1,828.1 100.0%
Fixed Maturity Securities by Category
December 31, 1996
-----------------
(Dollars in millions)
Corporate bonds $ 938.1 59.1%
Securitized investments 447.1 28.2
Foreign government bonds 150.3 9.5
United States government and municipal bonds 51.8 3.2
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Total $ 1,587.3 100.0%
========= ======
The Company believes that the liquidity status of its investment portfolio
would allow it to adequately satisfy policy and contract commitments under a
broad range of adverse circumstances. Invested assets, at carrying amounts,
categorized as to liquidity are as follows:
Liquidity of Invested Assets
December 31, 1996
-----------------
(Dollars in millions)
Most liquid:
Cash and invested cash $ 29.1 1.6%
Equity securities 1.9 0.1
Investment-grade publics 1,187.4 65.0
--------- ------
Total most liquid 1,218.4 66.7
--------- ------
Least liquid:
Private, below investment-grade publics and other
investments 481.2 26.3
Mortgage loans on real estate 128.5 7.0
--------- ------
Total least liquid 609.7 33.3
--------- ------
Total invested assets $ 1,828.1 100.0%
========= ======
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At December 31, 1996, approximately 20.8% of the Company's fixed maturity
securities portfolio was invested in private placement securities. These
securities are not registered with the Securities and Exchange Commission and
generally can only be purchased by institutional investors. Since private
placements are negotiated transactions, they are less liquid than public
securities. However, covenants for private placements are generally designed to
mitigate the impact of the increased liquidity risk of such securities. Most of
the Company's private placement securities are participations in securities also
owned by other investors, principally LNC and its affiliates. In addition, some
of the private placement securities are rated by outside rating agencies. To the
extent that such securities are not rated by outside agencies, the Company's
portfolio managers assign ratings for internal monitoring purposes, which the
Company believes generally track methodologies employed by outside agencies. The
Company has also entered into several interest rate cap agreements as a hedge
against rising interest rates in its SPDA investment portfolio. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Liquidity for Insurance
Operations."
Quality distribution of fixed maturity securities at fair value is as follows:
Quality Distribution of Fixed Maturity Securities
December 31, 1996
(Dollars in millions)
U.S. Government and AAA $ 409.3 25.8%
AA 162.9 10.3
A 548.1 34.5
BBB 368.5 23.2
BB 68.4 4.3
Less than BB 30.1 1.9
--------- ------
Total $ 1,587.3 100.0%
========= ======
Securities that have received ratings from nationally recognized
statistical rating organizations are categorized according to those ratings.
Approximately 88% (in terms of principal amount of securities) of the fixed
maturity securities have ratings from nationally recognized statistical rating
organizations. Securities that are not so rated (generally private placements)
are assigned ratings by the Company's investment advisors, LIM or NEAM, for
purposes of the distribution table. LIM and NEAM consider the guidelines and
principles employed by the rating organizations in determining their assigned
ratings.
At December 31, 1996, the Company had approximately 28% of its fixed
maturity portfolio invested in securitized investments. Included in this
category are agency and non-agency planned and target amortization classes,
agency and non-agency pass-through securities and collateralized mortgage
obligations, interest-only securities, as well as commercial and asset-backed
securities. Securitized investments are subject to significant prepayment risk,
especially in a declining interest rate environment since underlying mortgages
may be repaid more rapidly than scheduled. As a result, holders of securitized
investments may receive prepayments which cannot be reinvested at yields
comparable to the rates on such securitized investments. Approximately 28% of
the securitized investment portfolio consists of securities that were current
coupon Planned Amortization Class securities ("PACs") at the time of purchase.
PACs are designed to reduce the risk of prepayments normally associated with
securitized investments by shifting a portion of the risk of prepayment of the
underlying collateral to other investors. Residual CMOs represent less than 0.2%
of the carrying value of the securitized investment portfolio.
-12-
<PAGE>
<TABLE>
Securitized Investments
<CAPTION>
December 31, 1996
--------------------------------------
Amortized Fair
Cost % Value %
-------- -------- -------- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Residential mortgage-backed securities:
Agency and non-agency planned and target
amortization classes $ 121.7 27.7% $ 126.0 28.2%
Agency and non-agency pass-through securities 94.7 21.6 95.3 21.3
Other agency and non-agency collateralized
mortgage obligations 32.8 7.4 31.8 7.1
CMO residual 0.7 0.2 0.7 0.2
-------- -------- -------- --------
Total residential mortgage-backed securities 249.9 56.9 253.8 56.8
Commercial mortgage-backed securities and
asset-backed securities 189.4 43.1 193.3 43.2
-------- -------- -------- --------
Total securitized investments $ 439.3 100.0% $ 447.1 100.0%
======== ======== ======== ========
</TABLE>
The Company's portfolio managers conservatively position the Company's
portfolio relative to prepayment risk. The Company believes it has benefited
from this strategy as early returns of principal have been relatively small.
Mortgage loans are carried at unpaid balances, net of allowances for
uncollectible amounts, and are shown below by type and geographic location.
Mortgage Loans by Type and Region
December 31, 1996
-----------------
(Dollars in millions)
Type:
Apartments $ 32.1 25.0%
Commercial office buildings 30.1 23.4
Retail stores 30.0 23.4
Industrial buildings 24.9 19.4
Hotels/motels 5.5 4.2
Other 5.9 4.6
--------- --------
Total $ 128.5 100.0%
========= ========
Region:
East North Central $ 21.9 17.0%
West North Central 20.0 15.6
South Atlantic 19.2 14.9
New England 15.9 12.4
Pacific 13.6 10.6
Middle Atlantic 11.6 9.0
East South Central 10.0 7.8
West South Central 9.7 7.6
Mountain 6.6 5.1
--------- --------
Total $ 128.5 100.0%
========= ========
-13-
<PAGE>
Mortgage loans are considered impaired when, based on current information
and events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. When the
Company determines that a loan is impaired, a provision for loss is estimated
for the difference between the carrying value of the mortgage loan and the
estimated value. Estimated value is based on either the present value of
expected future cash flows discounted at the loan's effective interest rate, the
loan's observable market price or the fair value of the collateral. Real estate
values have generally fallen during the last several years but appear to have
stabilized in 1995 and 1996. The Company believes it is adequately reserved in
its mortgage loan portfolio and expects to continue to invest in mortgage loans
consistent with the Company's investment policy and the overall trends in the
real estate industry.
Mortgage loans are rated for quality and monitored based on these ratings.
Mortgage loan allowances are established during a quarterly review of the
estimated value of selected mortgage loans versus their carrying value,
irrespective of their payment status. The property is analyzed to determine if
it has sufficient value to support the mortgage loan amount. Factors involved in
the analysis include the property's physical condition, the strengths and
weaknesses of the market place, the financial condition of the borrower, trends
in the market place, the property's location, occupancy and ability to generate
income to cover debt service, financial condition of tenants, tenant lease
maturity dates, the payment history of the loan, the ability to realize the loan
security, as well as other quantitative and qualitative factors. LIM's expertise
is used to conduct this analysis. However, independent appraisal specialists are
contracted when necessary. The Company is a participant in approximately $95
million of mortgage loans with LNL. The participation contracts between LNL and
SCL provide that LNL has the right at any time on 10 day's notice to purchase
the Company's interest for the then-existing principal plus accrued interest.
The Company believes this contractual provision may not be enforceable against
the Company.
Insurance Regulations
General Regulation at State Level
The Company is subject to regulation by the states in which it and SCL and
LSL are domiciled or transact business. State laws require prior notice or
regulatory agency approval of changes in control of an insurer. State insurance
holding company statutes applicable to the Company generally provide that no
person may acquire control of the Company, and thus indirect control of SCL and
LSL, without the prior approval of the appropriate insurance regulators.
Generally, any person who acquires beneficial ownership of 10% or more of the
outstanding shares of the Company's common stock would be presumed to have
acquired such control, unless the appropriate insurance regulators upon
application determine otherwise. Applicable state insurance laws, rather than
federal bankruptcy laws, apply to the liquidation or the reorganization of
insurance companies.
In addition, the laws of the various states establish regulatory agencies
with broad administrative powers to approve policy forms, grant and revoke
licenses to transact business, regulate trade practices, license agents, require
statutory financial statements, and prescribe the type and amount of investments
permitted.
SCL's and LSL's reserves and related actuarial values meet the requirements
of the insurance laws and regulations of the states of Connecticut and New York,
respectively, and are at least as great as the minimum aggregate amounts
required by law. Cash flow testing is performed each year to ensure that assets
and anticipated future cash flows provide adequate provision for future
contractual obligations.
-14-
<PAGE>
Insurance companies are required to file annual statements with the state
insurance regulators in each of the states in which they do business, and their
business and accounts are subject to examination by such agencies at any time.
In addition, insurance regulators periodically examine the insurer's financial
condition, adherence to statutory accounting practices, and compliance with
insurance department rules and regulations. During 1995, the Connecticut
Insurance Department completed its regular examination of SCL for the four years
ended December 31, 1993. The report did not note any issues that had a material
adverse effect on SCL's results of operations or financial condition.
During 1996, the New York Insurance Department commenced its regular
tri-annual examination of LSL for the three years ended December 31, 1995. This
examination was completed on December 31, 1996 and a final report is expected to
be issued in the second or third quarter of 1997. At this time, the Company has
not been informed by the regulators of any issues that would have a material
adverse effect on LSL's results of operations or financial condition.
Security-Connecticut is dependent on receiving dividends from SCL and AHL
to pay operating expenses, make debt service payments and pay dividends to its
shareholders. Under current Connecticut law, any proposed payment of a dividend
or distribution from SCL which, together with dividends or distributions paid
during the preceding 12 months, exceeds the greater of (i) 10% of statutory
surplus as of the preceding December 31, or (ii) statutory net gain from
operations for the preceding calendar year, is designated an "extraordinary
dividend" and may not be paid until either it has been approved, or a 30-day
waiting period shall have passed during which it has not been disapproved, by
the Insurance Commissioner of the State of Connecticut (the "Connecticut
Insurance Commissioner"). The Connecticut insurance law also states that a
Connecticut-domiciled insurer may not pay any dividend or other distribution
without the Connecticut Insurance Commissioner's prior approval in an amount
exceeding such insurer's earned surplus. The Connecticut insurance law requires
that the statutory surplus of SCL following any dividend or distribution be
reasonable in relation to its outstanding liabilities and adequate to meet its
financial needs. The Connecticut Insurance Commissioner may bring an action to
enjoin or rescind the payment of a dividend or distribution that would cause
statutory surplus to be unreasonable or inadequate under this standard.
Under Bermuda regulations, any dividend payments greater than 15% of total
statutory capital and surplus requires prior approval from the Bermuda Registrar
of Companies. AHL must maintain statutory capital and surplus of $250,000.
In the event of a default on Security-Connecticut Corporation's debt or the
bankruptcy, liquidation or other reorganization of Security-Connecticut, the
creditors and shareholders of Security-Connecticut would have no right to
proceed against the assets of SCL or AHL. If SCL were to be liquidated, such
liquidation would be conducted by the Connecticut Insurance Commissioner, as the
receiver with respect to such insurance company's property and business. Under
the Connecticut insurance law, all creditors of such insurance companies,
including without limitation, holders of its reinsurance agreements and the
various state guaranty associations, would be entitled to payment in full from
such assets before Security-Connecticut, as the shareholder of SCL, would be
entitled to receive any distribution therefrom. If AHL were to be liquidated,
such liquidation would be monitored by the Bermuda Registrar of Companies by its
appointment of a liquidator. All creditors of AHL would be entitled to payment
in full prior to any distribution to Security-Connecticut.
-15-
<PAGE>
The NAIC has passed a model regulation for minimum reserve standards for
individual life insurance policies, sometimes referred to as Guideline XXX (the
"Guideline"). This Guideline is intended to require companies selling certain
types of individual life insurance policies, such as term insurance policies
with non-level premiums and/or benefits and universal life insurance products
with secondary guarantees, to modify their reserve standards for future issues
of affected policies. The Guideline provides for stricter valuation standards
but more relaxed valuation mortality; in aggregate, the Guideline may require a
company to hold higher statutory reserves on the aforementioned types of life
insurance policies. In order for the Guideline to be effective in a state, each
state insurance department is required to complete the necessary legislative
process for a regulation to become effective. As of February 28, 1997, no more
than 10 states have moved to adopt the Guideline. In most of those states, the
effective date of the regulation is no earlier than January 1, 1998. New York
has adopted its own form of the Guideline in the form of Regulation 147 as of
January 1, 1994. The Company is currently holding reserves in compliance with
Regulation 147 for LSL.
The NAIC currently is in the process of recodifying statutory accounting
practices, the result of which is expected to constitute the only source of
"prescribed" statutory accounting practices. Accordingly, that project, which is
expected to be completed in 1997, will likely change, to some extent, prescribed
statutory accounting practices, and may result in changes in SCL's and LSL's
statutory surplus.
The increase in the number of insurance companies that are under regulatory
supervision has resulted, and is expected to continue to result, in increased
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated companies. At December 31, 1996, the Company held a
liability for $3.3 million to cover its share of estimated guaranty fund
assessments. This liability was based on estimates provided by the National
Organization of Life and Health Guaranty Associations ("NOLHGA"). Mandatory
assessments may be partially recovered through a reduction in future premium
taxes in certain states, and at December 31, 1996, the Company recorded an asset
of $4.5 million for such expected recoveries.
Regulation at a Federal Level
Although the federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on the business in
a variety of ways. Current and proposed federal measures that may significantly
affect the insurance business include limitations on antitrust immunity, minimum
solvency requirements and the further removal of barriers restricting banks from
engaging in the insurance, annuity and mutual fund businesses.
Congressional initiatives directed at repeal of the McCarran-Ferguson Act
(which exempts the "business of insurance" from most federal laws, including the
antitrust laws, to the extent it is subject to state regulation) and judicial
decisions narrowing the definition of "business of insurance" for
McCarran-Ferguson Act purposes may limit the ability of insurance companies in
general to share information with respect to rate setting, underwriting and
claims management practices.
Congress and certain federal agencies are investigating the current
condition of the insurance industry (encompassing both life and
property-casualty insurance) in the United States in order to decide whether
some form of federal role in the regulation of insurance companies would be
appropriate. It is not possible to predict whether, or in what form, any
legislation would be enacted, or the potential effects of the legislation on the
Company or its competitors.
-16-
<PAGE>
Competition
The Company operates in a highly competitive environment. Numerous life
insurance companies and other entities, including banks and mutual funds,
compete with the Company, many of which have greater resources than the Company.
The Company believes that the principal competitive factors in the sale of
insurance are product features, price, commission structure, perceived stability
of the insurer, claims paying ratings, value-added service and name recognition.
Many other life insurance companies are capable of competing for sales in the
Company's target markets. The Company's ability to compete is affected, in part,
by its ability to provide competitive products and quality service to the
insurance consumer, general agents, licensed insurance agents and brokers.
In addition to competing for sales, the Company competes for distributors
such as insurance agents or brokers. There are relatively low entry barriers to
such competition with the Company. However, management believes competition only
on the basis of pricing or agent compensation cannot be sustained. This may
further enhance the value of the advantages the Company already enjoys in
competing for agents. These advantages include the strong relationships the
Company has developed with its distributors, and the services (Connector, Profit
Sharing Plan, etc.) it provides to them.
Continuing deregulation of the financial services industry is eroding the
exclusivity of life insurance companies. United States Supreme Court decisions
have paved the way for national banks to sell annuities and life insurance under
certain circumstances. Some states have allowed their state banks to follow
suit. Financial institutions continue to gain market share of new annuity
business written and are establishing relationships with insurers and third
party marketers for the sale of life insurance to their customers.
Ratings
Insurers compete with other insurance companies, financial intermediaries
and other institutions on the basis of a number of factors, including the
ratings assigned by A.M. Best, Standard & Poor's Corporation ("S&P"), Moody's
Investor Services ("Moody's") and other nationally recognized statistical rating
organizations. On November 5, 1996 A.M. Best announced that it had reclassified
SCL's rating from "A+ (superior)" to "A (excellent)." A.M. Best assigns ratings
which currently range from "A++ (superior)" to "F (in liquidation)."
Publications of A.M. Best indicate that the "A" rating is assigned to those
companies that in A.M. Best's opinion have achieved excellent overall
performance when compared to the standards established by A.M. Best, and have
demonstrated a strong ability to meet their obligations to policyholders over a
long period of time. In evaluating a company's financial and operating
performance, A.M. Best reviews the company's profitability, leverage and
liquidity, as well as the company's book of business, the adequacy and soundness
of its reinsurance, the quality and estimated fair value of its assets, the
adequacy of its reserves, surplus and capital structure, and the experience and
competency of its management. A.M. Best's ratings are based upon factors
relevant to policyholders, agents, insurance brokers and intermediaries and are
not directed to the protection of investors. A.M. Best has placed SCL's "A"
rating "under review with developing implications" in response to the
announcement regarding the merger of the Company into ReliaStar (see "Business -
General"). The rating will remain under review pending further discussion with
management and the transaction closing.
-17-
<PAGE>
SCL's claims-paying ability is rated "A+" (good) by S&P. The S&P ratings
for insurance companies range from "AAA (superior financial security)" to "CCC
(extremely vulnerable financial security)." S&P's ratings attempt to assess the
relative capacity of insurance companies to meet policyholder obligations,
incorporating both ownership and support factors, if applicable. According to
S&P, a claims-paying ability rating of "A+" (good) indicates that a company has
"good financial security, but capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions." On
February 24, 1997 S&P placed its ratings of SCL and LSL "on creditwatch with
positive implications" in response to the merger announcement made by
Security-Connecticut and ReliaStar. S&P has noted that "with the successful
conclusion of the transaction, it is likely that Security-Connecticut ratings
will be revised upwards to match ReliaStar ratings."
SCL's insurance financial strength is rated Baa1 by Moody's. The Moody's
ratings for insurance companies range from "Aaa (exceptional)" to "C (lowest)."
Moody's ratings are opinions of the ability of insurance companies to repay,
punctually, senior policyholder claims and obligations. Numeric modifiers are
used to refer to the ranking within the group - one being the highest and three
being the lowest. However, the financial strength of companies within a generic
rating symbol (Aa, for example) is broadly the same. According to Moody's, an
insurance financial strength rating of Baa1 indicates that a company "offers
adequate financial security. However, certain protective elements may be lacking
or may be characteristically unreliable over any great length of time." On
February 24, 1997, Moody's placed its rating of SCL "on review for possible
upgrade" in response to the merger announcement made by Security-Connecticut and
ReliaStar.
LSL's A.M. Best rating of "A (excellent)" is "based on the consolidated
financial condition and operating performance of the company" and SCL, while
LSL's S&P assigned claims-paying rating of "A+" is "based on its strategic and
operating fit" with SCL, according to the respective ratings agencies.
The Company believes that ratings may have a material effect on its ability
to sell its products, and on its financial condition and operating results.
SCL's capital and surplus has increased from $121.8 million in 1992 to $148.3
million in 1996 due to favorable earnings offset in part by dividends paid to
its parent. It is expected that SCL will continue to make dividend payments to
its parent and continue to add new business, which may result in a decline of
surplus. Even if SCL's surplus increases, the ratings from A.M. Best, S&P and
Moody's could be subject to a downgrade as the Company experienced in November
1996 by A.M. Best. If a downgrade were to materialize, sales of the Company's
products could be adversely affected. The Company continues to pursue courses of
action, such as expense containment and limits on capital purchases, which could
help mitigate any future decrease in surplus or rating reclassifications. There
are no assurances that any of these or other actions would result in alleviating
future surplus declines or rating reclassifications.
Employees
The Company had approximately 425 full-time equivalent employees as of
December 31, 1996. None of the employees of the Company are covered by
collective bargaining agreements, and the Company believes its employee
relations are satisfactory.
-18-
<PAGE>
Item 2 - Properties
SCL leases its home office complex at 20 Security Drive, Avon, Connecticut
under a lease agreement which provides for a 25-year lease period that expires
in 2009 and contains options for SCL to renew the lease thereafter for six
additional terms of five years each. The lease agreement also grants to SCL (i)
a right to purchase the property at fair market value on the last day of the
25-year period or any renewal period and (ii) a right of first refusal to
purchase the property upon the terms and conditions of any offer by a third
party. The annual rental payment was $1.3 million for 1996. SCL also leases an
office suite at Suite 304, 740 North Blue Parkway, Lee's Summit, Missouri for an
annual cost of approximately $10,000. The lease term expires February 28, 1998
and can be extended for three additional periods of one year each.
LSL leases its property located at Suite 101, Building 100, Southeast
Executive Park, Brewster, New York under the terms of an agreement which
provides for a term through April 30, 1998. The annual rental payment was
$176,000 in 1996.
Item 3 - Legal Proceedings
The Company is from time to time involved in various pending and threatened
legal proceedings relating to the policies and contracts of SCL and LSL and the
actions of the independent agents in the distribution system.
The Company is involved in three class action suits:
Zipf vs. Security-Connecticut Life Insurance Company, et al., Court of
Common Pleas of Allegheny County, Pennsylvania.
Jacobson, et al. vs. Security-Connecticut Life Insurance Company, et al.,
Superior Court, Judicial District of Hartford/New Britain at Hartford,
Connecticut.
Semler vs. First Colony Life Insurance Company, et al., Superior Court, San
Francisco, California.
See Note 12 to the Consolidated Financial Statements for details relating
to these lawsuits.
Item 4 - Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1996, no matters were submitted to the
security holders of Security-Connecticut Corporation for a vote.
-19-
<PAGE>
Executive Officers of the Registrant
Executive Officers of the Registrant as of December 31, 1996 were as
follows:
Position with the Company and business experience
Name Age during the past five years
- - ---- --- -----------------------------------------------------
Ronald D. Jarvis 59 Chairman, President and Chief Executive Officer.
President and Chief Executive Officer of
Security-Connecticut Life and Lincoln Security Life
since 1984. President of Security-Connecticut Life
since 1978. Director of Security-Connecticut Life
since 1976. Director of Lincoln Security Life since
1984. President and Director of Arrowhead Ltd. since
1995.
Robert J. Voight 47 Executive Vice President. Executive Vice President
of Security-Connecticut Life since 1996. Senior Vice
President, Financial Management of
Security-Connecticut Life since 1994. Senior Vice
President, Marketing, and Treasurer of
Security-Connecticut Life (1992-1994). Senior Vice
President and Treasurer of Security-Connecticut Life
(1990-1992). Senior Vice President, Treasurer and
Controller of Security-Connecticut Life (1982-1990).
Director of Security-Connecticut Life since 1994.
Director of Lincoln Security Life since 1984. Vice
President and Director of Arrowhead Ltd. since 1995.
William P. Norris, Jr. 52 Senior Vice President, Sales and Marketing. Senior
Vice President, Sales and Marketing of
Security-Connecticut Life since 1994. Senior Vice
President, Sales of Security-Connecticut Life
(1987-1994). Director of Security-Connecticut Life
since 1994. Director of Lincoln Security Life since
1989.
Barry J. St. Pierre 50 Senior Vice President, Operations. Senior Vice
President, Operations of Security-Connecticut Life
since 1992. Senior Vice President, Marketing
(1982-1992). Director of Security-Connecticut Life
since 1994. Director of Lincoln Security Life since
1986.
Richard D. Mocarski 51 Vice President, Controller and Treasurer. Vice
President, Controller and Treasurer of
Security-Connecticut Life since 1994. Vice
President, Controller and Assistant Treasurer of
Security-Connecticut Life (1990-1994). Treasurer and
Director of Arrowhead Ltd. since 1995.
-20-
<PAGE>
PART II
Item 5 - Market for Registrant's Common Equity and Related Shareholder Matters
Market Information
The common stock of Security-Connecticut was listed for trading on the New
York Stock Exchange (the "NYSE") on January 27, 1994 under the symbol SRC.
As of March 1, 1997, there were approximately 146 holders of record. Based
on information supplied by the NYSE, the high and low sale prices for each
quarterly period from January 1, 1995 to December 31, 1996 were:
Period High Low
--------------------------------- ------- -------
January 1, 1995 - March 31, 1995 $26.125 $22.00
April 1, 1995 - June 30, 1995 25.875 22.625
July 1, 1995 - September 30, 1995 28.50 24.50
October 1, 1995 - December 31, 1995 27.75 23.375
January 1, 1996 - March 31, 1996 27.625 24.875
April 1, 1996 - June 30, 1996 29.625 24.875
July 1, 1996 - September 30, 1996 32.00 25.00
October 1, 1996 - December 31, 1996 35.625 30.50
Dividends
The Board of Directors of the Company has established a policy of declaring
quarterly cash dividends. Dividends of $0.12 per share were paid on April 30,
1995, July 31, 1995, October 31, 1995, January 31, 1996, April 30, 1996, July
31, 1996, October 31, 1996 and January 31, 1997. On February 10, 1997,
Security-Connecticut's Board of Directors declared a dividend of $0.14 per share
to be paid on April 30, 1997 to shareholders of record at the close of business
on April 10, 1997.
The declaration and payment of dividends in the future is subject to the
discretion of the Board of Directors of the Company and will depend upon general
business conditions, the effect of claims-paying ratings and capital
requirements of SCL and AHL, legal restrictions on the payment of dividends, and
other factors the Board of Directors of the Company deems relevant. The
Company's general policy is to retain most of its earnings to finance the growth
and development of its business, and there is no requirement or assurance that
future dividends will be paid. The dividend to be paid on April 30, 1997 was
increased to $0.14 per share as a result of the Company's strong 1996
performance. The availability of funds to pay dividends is dependent on the
ability of SCL and AHL to transfer funds to the Company. Both SCL and AHL are
subject to certain laws and regulations that limit their ability to transfer
funds and pay dividends.
As an insurance holding company, the Company depends on dividends and other
permitted payments from SCL and AHL to pay cash dividends to shareholders as
well as to pay operating expenses and meet debt service requirements. Payment of
dividends and other payments by SCL are subject to restrictions set forth by the
laws of Connecticut. AHL dividend payments are restricted by the Bermuda
Registrar of Companies. Dividends and other payments by LSL to SCL are subject
to restrictions under the laws of New York, and no such payments have been made
since the organization of LSL. The Company does not expect that these regulatory
restrictions will affect its ability to declare and pay dividends at the current
rate. See "Insurance Regulations" and "Management Discussion and Analysis of
Financial Condition."
-21-
<PAGE>
Item 6 - Selected Financial Data
The selected financial data have been derived from the consolidated
financial statements of Security-Connecticut Corporation (1996, 1995 and 1994),
and Security-Connecticut Life Insurance Company and subsidiary (referred to as
"Predecessor Company") for each of the
years in the two-year period ended December 31, 1993.
This information should be read in conjunction with the historical
consolidated financial statements of the Company and SCL and the notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The following selected financial data
presented under the caption "Operating Data" and "Balance Sheet Data" for, and
as at the end of, each of the years ended December 31, 1992 and 1993, were
derived from the consolidated financial statements of SCL. Statutory data has
been derived from the Annual Statements of SCL and LSL as filed with the
insurance regulatory authorities.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
(Predecessor
Company)
---------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Operating Data (Dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Premiums $ 58.3 $ 64.1 $ 66.5 $ 52.1 $ 55.7
Insurance fees 136.8 125.5 116.9 104.2 94.6
Net investment income 135.3 132.0 115.4 109.4 102.1
Realized gains (losses) on investments 7.3 6.2 (0.7) 8.6 (0.5)
Other 0.6 1.4 0.3 0.2 0.5
------ ------ ------ ------ ------
Total revenues 338.3 329.2 298.4 274.5 252.4
Benefits and reserve increases 192.9 207.6 177.1 170.1 153.2
Insurance and other expenses 91.9 85.2 83.3 61.2 63.4
------ ------ ------ ------ ------
Total benefits and expenses 284.8 292.8 260.4 231.3 216.6
Federal income taxes 18.2 12.3 12.8 18.0 9.6
Income before cumulative effect
of accounting changes (1) 35.3 24.1 25.2 25.2 26.2
Cumulative effect of accounting changes (2) (1.2)
------ ------ ------ ------ ------
Net income (1)(2) $ 35.3 $ 24.1 $ 25.2 $ 24.0 $ 26.2
====== ====== ====== ====== ======
Earnings per share before cumulative effect
of accounting changes (1)(3) $ 4.10 $ 2.81 $ 2.94 $ 2.75 $ 2.84
Earnings per share (1)(2)(3) $ 4.10 $ 2.81 $ 2.94 $ 2.61 $ 2.84
Common stock and equivalents (3) 8.6 8.6 8.5 8.5 8.5
Dividends declared $ 4.1 $ 4.1 $ 4.1 $ 6.0 $ 12.0
Cash dividend per common share (3) $ 0.48 $ 0.48 $ 0.48 $ 0.70 $ 1.40
Ratios of Earnings to Fixed Charges:
Excluding interest on annuities
and financial products (3)(4) 8.33 6.73 8.55 10.14 7.89
Including interest on annuities
and financial products (3)(5) 1.58 1.39 1.47 1.54 1.45
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
(Predecessor
Company)
------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollars in millions, except per share and in-force data)
Balance Sheet Data
<S> <C> <C> <C> <C> <C>
Total investments $1,799.1 $1,796.1 $1,510.7 $1,427.4 $1,217.5
Total assets 2,338.3 2,281.4 2,042.0 1,829.1 1,599.7
Long-term debt 75.0 65.0 65.0
Shareholders' equity (6) 355.2 348.4 245.3 355.7 308.5
Statutory Data
Life insurance in-force, in billions (7) $ 33.6 $ 32.5 $ 29.6 $ 25.6 $ 20.8
First year annualized life premiums (8) 49.6 46.9 46.7 45.4 32.0
Capital and surplus (9) 148.3 126.0 120.4 113.2 121.8
Ratio of capital and surplus to insurance
liabilities (10) 11.8% 10.4% 10.4% 9.7% 11.6%
<FN>
(1) Income before cumulative effect of accounting changes and net income for
1993 were affected by the early adoption of FAS 114, and a change in
estimate related to securitized investments.
(2) Cumulative effect of accounting changes for 1993 was the result of adopting
FAS 106.
(3) For years 1992-1993, earnings per share, cash dividend per common share and
earnings to fixed charges ratios are pro-forma for the interest on the debt
outstanding and the change in capitalization as a result of the
reorganization. The calculation is based on 8,547,727 shares outstanding
for these two years.
(4) This ratio is comprised of the relationship of "earnings excluding interest
on annuities and financial products" to "fixed charges excluding interest
on annuities and financial products." (See Exhibit 12.01)
(5) This ratio is comprised of the relationship of "earnings" to "fixed
charges." (See Exhibit 12.01)
(6) Shareholders' equity as of December 31, 1993 and thereafter includes the
effect of the adoption of FAS 115.
(7) Life insurance in-force is net of reinsurance.
(8) First year annualized life premiums consist of the initial premium payment
for each policy, plus the remaining payments expected in the first policy
year. Amounts in excess of the target premium on any universal life policy
are credited at 10%. Actual premium payments may be higher or lower than
first year annualized life premiums.
(9) For years 1992-1993, the decline in the Company's statutory capital and
surplus was primarily due to dividends to LNC (the previous parent) of
$18.0 million and the finalization of the 1980 to 1988 federal income tax
audits, which resulted in nonrecurring charges that reduced surplus by
$20.8 million.
(10) For purposes of computing the ratio of statutory capital and surplus to
insurance liabilities, the numerator includes statutory capital and surplus
plus the asset valuation reserve ("AVR") and/or mandatory securities
valuation reserve ("MSVR"). The denominator consists of liabilities
excluding AVR and/or MSVR.
</FN>
</TABLE>
-23-
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-K contains forward looking statements that are qualified by
the fact that actual results of the Company may differ materially from any such
statement due to the following important factors, among other risks and
uncertainties inherent in the Company's business:
1. Prevailing interest rate levels, which may affect the ability of the
Company to sell its products, mortality experience, the market value
of the Company's investments and the lapse rate of the Company's
policies, notwithstanding product design features intended to enhance
persistency of the Company's products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of the Company's products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the
competitive environment for the Company's products.
4. Other factors affecting the performance of the Company, including, but
not limited to, stock market performance, litigation and industry
insolvencies.
Company Overview
On October 13, 1993, LNL formed the Company to serve as a holding company
for SCL and its subsidiary LSL. On January 19, 1994, LNL effected a
reorganization in which it contributed $10 million in capital and all of the
outstanding shares of SCL to the Company in exchange for 8,500,000 shares of the
Company's Common Stock and a Term Note in the principal amount of $65 million.
On February 2, 1994, LNL sold 100% of the outstanding common stock of the
Company in an IPO for $187 million. All of the proceeds of the IPO, net of
related issuance expenses, were received by LNL. Also at this date, certain
officers were granted 47,727 shares of stock subject to restrictions which
lapsed upon repayment of the Term Note. On March 1, 1996, the Company repaid the
Term Note utilizing proceeds from the public sale of $75 million of medium term
notes with an effective interest rate of 7.39% due in 2003. On April 26, 1995,
AHL, a wholly owned subsidiary of the Company, was incorporated as an insurance
company in Bermuda. AHL commenced operations in 1996, reinsuring life insurance
policies for an unaffiliated reinsurance company.
On February 23, 1997, ReliaStar and Security-Connecticut signed a
definitive agreement to combine the two companies through the statutory merger
of Security-Connecticut with and into ReliaStar. The Board of Directors of
Security-Connecticut has unanimously approved the merger. Completion of the
merger is subject to normal closing conditions, including approval by the
Company's shareholders and various regulatory approvals. Provided there has been
no material breach by ReliaStar of the representations, warranties, covenants
and agreements of ReliaStar under the merger agreement, Security-Connecticut has
agreed to pay ReliaStar $8 million if the merger agreement is terminated either
as a result of (a) the modification or withdrawal, in any way detrimental to
ReliaStar, of the recommendation of the Security-Connecticut Board with respect
to the merger, or (b) the execution by Security-Connecticut of a definitive
agreement with a party other than ReliaStar with respect to a publicly announced
offer or intent to make an offer to acquire all or substantially all
Security-Connecticut or its subsidiaries.
Separately and not additionally, if the merger agreement is terminated by
ReliaStar on the basis that the Security-Connecticut shareholders did not
approve the merger, then Security-Connecticut would be required to pay ReliaStar
$2.5 million to reimburse ReliaStar's expenses incurred in connection with the
merger agreement. In addition to the foregoing $2.5 million payment, if an
acquisition proposal is outstanding on the date of such termination, or at any
time within 90 days thereafter, and an acquisition proposal is consummated
within twelve months of the termination of the merger agreement, the Company has
agreed to pay ReliaStar an additional $5.5 million. The foregoing discussion is
qualified in its entirety by reference to the merger agreement filed as an
exhibit to this report.
-24-
<PAGE>
Industry Overview
The demand for life insurance and tax-advantaged investment products should
continue to increase as the aging population grows and becomes more aware of the
need for income protection and retirement savings. According to the American
Council of Life Insurance ("ACLI"), life insurance companies have realized
significant growth with total industry assets increasing at a compound annual
growth rate of approximately 8% from 1991 to 1995, from $1.6 trillion in 1991 to
$2.1 trillion in 1995. In addition, based on ACLI data, life insurance in-force
increased at a compound annual growth rate of approximately 6% from 1991 to
1995, from $10.0 trillion in 1991 to $12.6 trillion in 1995. The market for
annuity products has grown significantly as well. According to the ACLI, annuity
premiums have grown at an average rate of more than 10% per year since 1991.
Individual annuity considerations increased from $51.7 billion in 1991 to $77.4
billion in 1995, according to ACLI data.
Concurrent with this growth in demand for life insurance and annuity
products, the life insurance business in the United States has undergone major
product and structural changes in response to increased competition from other
financial intermediaries. Until the late 1970s, life insurance products
consisted primarily of fixed premium/guaranteed cost value and death benefit
whole life products, which combined a death benefit with cash accumulation.
These products were competitive under stable and low interest rate environments;
however, the volatile and high interest rate environments of the late 1970s and
early 1980s caused many insurance buyers to consider other higher yielding
financial products. As a result of the increase in competition from savings
products offered by mutual funds, savings and loan associations, banks and other
financial institutions, many insurers responded by offering products such as
low-cost term insurance and higher yielding annuity products, in addition to
their traditional products. In addition, the life insurance industry responded
to the demand for capital accumulation insurance products by introducing
universal life, variable life and variable universal life products which combine
the tax-deferred income accretion of traditional insurance products with
flexible payment features and yields comparable to other investment vehicles. A
consolidation trend emerged in the industry in the 1990s, spurred on by factors
such as intensified competition, focus on profitable growth, increased rating
agency scrutiny and deregulation in the financial services industry.
The following analysis of the consolidated results of operations and
financial condition should be read in conjunction with "Selected Financial Data"
and the consolidated financial statements and accompanying notes included
elsewhere herein.
Results of Operations
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Premiums - Premiums decreased $5.8 million or 9.1% from $64.1 million in
1995 to $58.3 million in 1996 primarily due to the decrease in single premium
immediate annuity premiums of $8.4 million and an increase in ceded premiums
under various reinsurance agreements of $16.7 million, partially offset by an
increase in term insurance premiums of $9.0 million and assumed reinsurance
premiums of $9.5 million.
On a statutory-basis, the Company's first year annualized life premiums on
new life insurance sales for individual life insurance increased $2.7 million,
or 5.6% from $46.9 million in 1995 to $49.6 million in 1996. This was primarily
the result of a 24.1% increase in term life sales offset by a 5.2% decrease in
universal life insurance sales. Although first year annualized life premiums
increased in comparison to the prior year, such premiums decreased during the
second half of 1996 in comparison to both the first half of 1996 and the last
six months of 1995. The Company expects this trend to continue through at least
the first quarter of 1997 due to the highly competitive insurance environment
and the recent downgrade of the Company's claims paying ability by A.M. Best.
Annualized annuity sales decreased $44.9 million or 45.9% from $97.7 million in
1995 to $52.8 million in 1996 due primarily to the relatively flat yield curve
interest rate environment that has made fixed annuity products less attractive
than variable annuity products. In addition, the Company elected to maintain
profit margins on annuity products rather than sacrifice profitability to
increase sales.
-25-
<PAGE>
Insurance Fees - Insurance fees increased $11.4 million, or 9.1%, from
$125.5 million in 1995 to $136.9 million in 1996, reflecting primarily an
increase in the mortality and expense assessments for universal life products of
$5.2 million and $4.9 million, respectively. The mortality and expense
assessment increases resulted from (i) growth of in-force universal life
business from $13.4 billion at December 31, 1995 to $14.1 billion at December
31, 1996 and (ii) aging of the in-force business resulting in higher average
mortality charges.
Net Investment Income - Net investment income increased $3.4 million, or
2.6%, from $132.0 million in 1995 to $135.4 million in 1996. This reflects the
increase in the cost basis of invested assets, offset by a lower effective yield
on such assets. The amortized cost of invested assets was $1.8 billion at
December 31, 1996 compared to $1.7 billion at December 31, 1995, reflecting an
increase due to cash flow from sales of life insurance and annuities. The
effective yield on invested assets was 7.6% for 1996 compared with 7.9% for
1995.
Realized Gains on Investments - Net realized gains on investments were $7.3
million in 1996 compared with $6.2 million in 1995. The 1996 gains were the
result of net realized gains from the sale of investments of $8.8 million,
partially offset by increases in the allowance for losses and permanent
impairment writedowns of $1.0 million and deferred policy acquisition costs
("DAC") associated with realized gains of $0.5 million. The 1995 gains were the
result of net realized gains of $15.1 million from the sale of investments
partially offset by increases in the allowance for losses and permanent
impairment writedowns of $4.3 million and DAC associated with realized gains of
$4.6 million. One investment represented $3.0 million of the $4.3 million
increase in allowance for losses in 1995.
Benefits and Reserve Increases - Benefits and reserve increases decreased
$14.7 million, or 7.0%, from $207.6 million in 1995 to $192.9 million in 1996.
Life and annuity benefits decreased $9.6 million, or 9.4%, from $99.7 million in
1995 to $90.1 million in 1996. The Company's life claim experience for 1996 was
favorable compared to plan by $2.8 million, or approximately $0.21 per share,
after-tax, and was approximately $7.4 million below 1995. Interest credited to
policyholders decreased $2.1 million, or 2.4%, from $87.0 million in 1995 to
$84.9 million in 1996 due primarily to a slight decrease in crediting rates as a
result of rate resets on contract anniversary dates.
Insurance and Other Expenses - Insurance and other expenses increased $6.6
million, or 7.8%, from $85.2 million in 1995 to $91.8 million in 1996.
Commissions, net of DAC, increased $1.0 million, or 3.0%, from $32.0 million in
1995 to $33.0 million in 1996. This increase in net commission expense was due
to a decrease in the deferral of commissions on new business as a result of an
increase in reinsurance ceded in connection with the quota share reinsurance
agreements. General administrative and other operating costs, net of DAC,
increased $5.6 million, or 10.7%, from $53.2 million in 1995 to $58.8 million in
1996 primarily due to: (i) an increase in legal costs, including additions to
reserves, of $3.7 million, (ii) an increase in staff related expenses of $4.6
million, and (iii) an increase in interest expense of $1.0 million, partially
offset by a reduction in taxes, licenses and fees expense of $6.5 million,
primarily due to the release of a portion of the liability for guaranty fund
assessments.
Federal Income Taxes - Federal income taxes increased $5.9 million from
$12.3 million in 1995 to $18.2 million in 1996. This was primarily due to higher
pre-tax operating income. Effective tax rates were 34.0% and 33.8% in 1996 and
1995, respectively, compared to a statutory rate of 35%.
Year Ended December 31, 1995 compared to Year Ended December 31, 1994
Premiums - Premiums decreased $2.4 million, or 3.6%, from $66.5 million in
1994 to $64.1 million in 1995 due principally to a decrease in accident and
health premiums from $4.8 million in 1994 to $2.5 million in 1995.
-26-
<PAGE>
On a statutory-basis, the Company's first year annualized life premiums on
new life insurance sales for individual life insurance increased $0.2 million,
or 0.4%, from $46.7 million in 1994 to $46.9 million in 1995. This was primarily
the result of a 9.5% increase in universal life sales offset by a 8.8% decrease
in term life insurance sales. Annualized annuity sales decreased $83.3 million
or 46.0% from $181.0 million in 1994 to $97.7 million in 1995 due primarily to
the changing interest rate environment that had made longer-term annuities less
attractive than other investments such as certificates of deposit and equity
securities and the Company's election to maintain interest rate spreads on its
annuity products. First year annualized life premium from Lincoln Financial
Group ("LFG") in 1995 accounted for approximately $6.6 million or 14.1% of the
Company's total, compared with $6.6 million or 14.2% in 1994. LFG annuity sales
in 1995 were $6.3 million, or 6.4% of the Company's total, compared with $13.3
million, or 7.3% in 1994. The level of life sales produced by LFG for SCL in
1996 was expected to decrease as LNC subsidiaries are manufacturing similar life
products which LFG was permitted to sell in 1996.
Insurance Fees - Insurance fees increased $8.6 million, or 7.4%, from $116.9
million in 1994 to $125.5 million in 1995, reflecting primarily an increase in
the mortality and expense assessments for universal life products of $4.8
million and $5.0 million, respectively. The mortality and expense assessment
increases resulted from (i) increased sales of universal life products, (ii)
growth of in-force universal life business from $12.4 billion at December 31,
1994 to $13.4 billion at December 31, 1995 and (iii) aging of the in-force
business resulting in higher average mortality charges.
Net Investment Income - Net investment income increased $16.6 million, or
14.3%, from $115.4 million in 1994 to $132.0 million in 1995. This reflects the
increase in the amount of invested assets and a slightly higher effective yield
on such assets. The amortized cost of invested assets was $1.7 billion at
December 31, 1995 compared to $1.6 billion at December 31, 1994, reflecting an
increase due to cash flow from sales of life insurance and annuities. The
effective yield on invested assets was 7.8% for 1994 compared with 7.9% for
1995.
Realized Gains (Losses) on Investments - Net realized losses on investments
were $0.7 million in 1994 compared with net realized gains of $6.2 million in
1995. The 1995 gains were the result of net realized gains from the sale of
investments of $15.1 million, partially offset by increases in the allowance for
losses and permanent impairment writedowns of $4.3 million and DAC associated
with realized gains of $4.6 million. One investment represented $3.0 million of
the increase in allowance for losses. The 1994 losses were the result of net
realized capital gains of $3.5 million from the sale of investments offset by
increases in the allowance for losses and permanent impairment writedowns of
$2.7 million and DAC associated with realized gains of $1.3 million.
Benefits and Reserve Increases - Benefits and reserve increases increased
$30.5 million, or 17.2%, from $177.1 million in 1994 to $207.6 million in 1995.
Life and annuity benefits increased $19.8 million, or 24.9%, from $79.9 million
in 1994 to $99.7 million in 1995. The Company's life claim experience for 1995
was unfavorable compared to expected experience by $14.3 million, or 21.1%, and
was approximately $17.1 million above 1994. Subsequent mortality studies
indicated that the adverse mortality was not attributable to any single source
of business, product or cause of death. Interest credited to policyholders
increased $11.3 million, or 14.9% from $75.7 million in 1994 to $87.0 million in
1995 due primarily to the growth of account values of annuity, universal life
and other interest sensitive products, offset somewhat by a slight decrease in
crediting rates.
Insurance and Other Expenses - Insurance and other expenses increased $1.9
million, or 2.3%, from $83.3 million in 1994 to $85.2 million in 1995.
Commissions, net of DAC, decreased $0.7 million, or 2.3%, from $32.7 million in
1994 to $32.0 million in 1995. This decrease in commission expense was due to
the decrease in annuity sales in 1995. The 1994 net commission expense was
negatively impacted by a refinement in the coinsurance commission DAC estimate
of $1.8 million. General administrative and other operating costs, net of DAC,
increased $2.6 million, or 5.2%, from $50.6 million in 1994 to $53.2 million in
1995 primarily due to (i) an increase in guaranty fund assessments of $3.1
million, and (ii) an increase in interest expense of $1.7 million.
-27-
<PAGE>
Federal Income Taxes - Federal income taxes decreased $0.5 million from
$12.8 million in 1994 to $12.3 million in 1995. This was primarily due to lower
pre-tax operating income. Effective tax rates were 33.8% and 33.7% in 1995 and
1994, respectively compared to a statutory rate of 35%.
Liquidity and Capital Resources
Liquidity for the Holding Company
As a holding company whose principal assets are the investments in AHL and
SCL and its wholly owned insurance subsidiary, the Company's future ability to
pay operating expenses, meet debt service payments and make dividend payments to
shareholders depends upon receiving sufficient funds from SCL and AHL. Those
funds may come either from dividend payments or payments for services, which may
be provided by the Company to SCL.
On June 8, 1995, the Company registered $100 million of debt securities on
Form S-3 with the Securities and Exchange Commission. The Company sold $75
million of medium term debt securities ("Debt") on March 1, 1996 and used $65
million of the net proceeds to repay the Term Note to LNL. The remainder of the
proceeds was used for general corporate purposes. The Debt has an effective rate
of 7.39% and is due March 1, 2003 and may not be redeemed prior to maturity.
Interest on the Debt is payable semiannually in arrears on March 1 and September
1 of each year. Interest payments began on September 1, 1996.
Liquidity for Insurance Operations
The principal requirement for liquidity in connection with SCL's insurance
operations is its contractual obligations to policyholders and annuitants, and
its payment of dividends to the Company. SCL's contractual obligations include
payments of surrender benefits, guaranteed interest, contract withdrawals,
claims under outstanding insurance policies and annuities, and policy loans. The
primary source of meeting these contractual requirements is investment income
from its total investment portfolio, scheduled maturities from its fixed
maturity security portfolio, and principal repayments from its mortgage
portfolio, as well as a portion of premium income.
To provide for additional liquidity to meet normal variations in
contractual obligations, the Company maintains cash and short-term investments,
and a significant portion (65.0% at December 31, 1996) of its invested assets in
readily marketable public debt securities. The Company believes that its
liquidity needs are adequately met with the aforementioned investment policies,
combined with the contractual terms of its life insurance and annuity products.
The Company's net cash flows used in operating activities were $69.0
million in 1996, $60.7 million in 1995 and $38.5 million in 1994. The cash flow
statement for the Company has been prepared in accordance with Statement of
Financial Accounting Standards No. 95, "Statement of Cash Flows" ("FAS 95")
which requires deposits of a financial institution to be recorded as financing
activities. As universal life and single premium deferred annuity contracts are
similar to deposits of a financial institution, cash receipts from policyholders
and payments that represent a return of policyholder balances have been reported
as financing activities in the Company's statement of cash flows. Net cash
receipts of $126.1 million, $180.0 million and $265.1 million from these
contracts were reported in financing activities in 1996, 1995 and 1994,
respectively. If these net cash receipts are considered in conjunction with the
Company's net cash used in operating activities, then cash derived from
operating activities for 1996, 1995 and 1994 were $57.1 million, $119.3 million
and $226.6 million, respectively. Operating cash flows in 1996 were negatively
impacted by higher insurance and operating expenses.
-28-
<PAGE>
At December 31, 1996, the fair value of Security-Connecticut's investment
in fixed maturity securities was $1.6 billion, 93.8% of which were
investment-grade securities. This includes $368.5 million, or 23.2% of the
investment-grade securities that were invested in fixed maturity securities
rated BBB by S&P, which represents the lowest category of investment grade, or
were of a comparable credit quality. A rating of "BBB," according to S&P,
indicates that the security "exhibits adequate protection parameters, but
adverse economic conditions or changing circumstances are more likely to lead to
weakened capacity to pay." Security-Connecticut maintains approximately 66.7%
($1.2 billion at December 31, 1996) of its invested assets in cash, equities and
highly liquid investment-grade securities, which could be sold to meet unusual
liquidity needs.
The Company has entered into several interest rate cap agreements as a
hedge against rising interest rates in its SPDA investment portfolio. As of
December 31, 1996, these agreements established cap rates ranging from 7.07% to
12.5% on notional principal of $510 million with termination dates through 2001.
The aggregate cost of $3.6 million is being amortized to net investment income
over the effective life of the caps. These investments are reported as fixed
maturity securities and classified as available-for-sale and are carried at fair
value ($1.9 million as of December 31, 1996) with unrealized gains and losses
reported in shareholders' equity. The Company is exposed to credit loss in the
event of non-performance by counterparties on the caps. Due to the high quality
rating of the counterparties, the Company does not anticipate non-performance by
any of the counterparties. The amount of such exposure is approximately the
unrealized gain in such contracts as interest rates rise.
The NAIC has a system for assessing the adequacy of statutory capital and
surplus for life and health insurers. The system, known as risk-based capital
("RBC"), augments the states' current fixed dollar minimum capital requirements
and was effective beginning with annual statutory reports in 1993. The focus of
the system is a risk-based formula that applies prescribed factors to various
risk elements in an insurer's business to develop a minimum capital requirement
that is proportional to the amount of risk assumed by the insurer. Based on
computations made by the Company in accordance with the prescribed formula, RBC
at December 31, 1996, for both SCL and LSL, significantly exceeded the minimum
capital requirements as produced by the RBC formula.
SCL's capital and surplus increased from $121.8 million at December 31,
1992 to $148.3 million at December 31, 1996, due to favorable earnings offset,
in part, by dividends paid to its parent. It is expected that SCL will continue
to make dividend payments to its parent and continue to add new business, which
may result in a decline of surplus. Even if SCL's surplus increases, the ratings
from A.M. Best, S&P and Moody's could be subject to a downgrade as the Company
experienced in November 1996 by A.M. Best. If a downgrade were to materialize,
sales of the Company's products could be adversely affected. The Company
continues to pursue courses of action, such as expense containment and limits on
capital purchases, which could help mitigate any future decrease in surplus or
rating reclassifications. There are no assurances that any of these, or other
actions, would result in alleviating future surplus declines or rating
reclassifications.
Inflation and Interest Rate Changes
The Company does not believe that inflation has had a material effect on
its results of operations. The Company manages its investment portfolio, in
part, to reduce its exposure to interest rate fluctuations. In general, the
market value of the Company's fixed maturity portfolio increases or decreases in
inverse relationship with fluctuations in interest rates, and the Company's net
investment income increases or decreases in direct relationship with interest
rate changes. For example, if interest rates decline (as was the case in 1995),
the Company's fixed maturity investments generally will increase in market
value, while net investment income may decrease as fixed maturity investments
mature or are sold and proceeds are reinvested at the declining rates. If
interest rates increase (as was the case in 1996), the Company's fixed maturity
investments generally will decrease in market value, while net investment income
may increase as fixed maturity investments mature or are sold and proceeds are
reinvested at the increased rates.
-29-
<PAGE>
Interest rate changes may have temporary effects on the sale and
profitability of the universal life and annuity products offered by the Company.
For example, if interest rates rise, competing investments (such as annuities or
life insurance offered by the Company's competitors, certificates of deposit,
mutual funds, and similar instruments) may become more attractive to potential
purchasers of the Company's products until the Company increases the rate
credited to holders of its universal life and annuity products. The Company
monitors interest rates with respect to a spectrum of durations and sells
policies and annuities that permit flexible responses to interest rate changes
as part of the Company's management of interest spreads.
Item 8 - Financial Statements and Supplementary Data
Consolidated Financial Statements
The consolidated financial statements of Security-Connecticut and
subsidiaries follow on pages 30 through 58.
Unaudited Operating Results by Quarter
The unaudited operating results by quarter are reported in Note 14 of the
consolidated financial statements of Security-Connecticut Corporation.
-30-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Security-Connecticut Corporation
We have audited the accompanying consolidated balance sheets of
Security-Connecticut Corporation as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. Our audits
also included the financial statement schedule listed in the Index at Item
14(a)(2). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Security-Connecticut Corporation at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Hartford, Connecticut
February 23, 1997
-31-
<PAGE>
<TABLE>
SECURITY-CONNECTICUT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<CAPTION>
December 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost: 1996-$1,555,884;
1995-$1,469,970) $1,587,309 $1,564,576
Equity securities (cost: 1996-$1,913, 1995-$3,435) 1,930 6,331
Mortgage loans on real estate 128,530 145,080
Policy loans 74,393 73,916
Other invested assets 6,914 6,221
---------- ----------
Total investments 1,799,076 1,796,124
Cash and invested cash 29,027 29,753
Deferred policy acquisition costs 388,668 335,821
Premiums and fees receivable 7,860 5,871
Accrued investment income 28,798 28,710
Goodwill 20,653 21,557
Property and equipment 8,516 9,455
Acquired insurance in-force 8,284 8,966
Amounts recoverable from reinsurers 39,616 34,974
Other assets 7,772 10,188
---------- ----------
Total assets $2,338,270 $2,281,419
========== ==========
LIABILITIES
Future policy benefits and claims $1,735,277 $1,682,364
Contractholder funds 61,407 49,978
Long-term debt 75,000 65,000
Federal income taxes payable 20,909 38,178
Dividends payable 1,027 1,066
Accrued expenses and other liabilities 88,185 95,137
Deferred gain on sale/leaseback 1,233 1,334
----------- ----------
Total liabilities 1,983,038 1,933,057
SHAREHOLDERS' EQUITY
Preferred stock, par value $0.01 per share;
Authorized - 10,000,000 shares;
issued and outstanding - none
Common stock, par value $0.01 per share;
Authorized - 50,000,000 shares;
issued and outstanding 1996 - 8,564,626 shares;
less 4,782 treasury shares; 1995 - 8,556,903 shares 86 86
Paid-in capital 82,558 82,405
Deferred compensation (379)
Net unrealized gains on securities available-for-sale 10,873 35,748
Retained earnings 261,715 230,502
---------- ----------
Total shareholders' equity 355,232 348,362
---------- ----------
Total liabilities and shareholders' equity $2,338,270 $2,281,419
========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
-32-
<PAGE>
SECURITY-CONNECTICUT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Year ended December 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
REVENUES
Premiums $ 58,261 $ 64,085 $ 66,503
Insurance fees 136,864 125,481 116,875
Net investment income 135,361 131,974 115,464
Realized gains (losses) on investments 7,251 6,166 (726)
Other 610 1,451 255
--------- --------- ---------
Total revenues 338,347 329,157 298,371
BENEFITS AND EXPENSES
Benefits and reserve increases 192,933 207,558 177,094
Insurance and other expenses 91,843 85,203 83,310
---------- --------- ---------
Total benefits and expenses 284,776 292,761 260,404
--------- --------- ---------
Income before federal income taxes 53,571 36,396 37,967
Federal income taxes 18,226 12,286 12,808
--------- --------- ---------
NET INCOME $ 35,345 $ 24,110 $ 25,159
========= ========= =========
EARNINGS PER COMMON SHARE $ 4.10 $ 2.81 $ 2.94
========= ========= =========
DIVIDENDS DECLARED PER COMMON SHARE $ 0.48 $ 0.48 $ 0.48
========= ========= =========
Common stock and equivalents 8,628,398 8,590,376 8,547,727
See notes to consolidated financial statements.
-33-
<PAGE>
<TABLE>
SECURITY-CONNECTICUT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<CAPTION>
Year ended December 31,
----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Common Stock:
Balance at beginning of year $ 86 $ 85
Issuance of common stock 1 $ 85
--------- --------- ---------
Balance at end of year 86 86 85
Paid-in Capital:
Balance at beginning of year 82,405 82,186
Issuance of common stock 258 219 136,136
Note payable (65,000)
Capital contribution 10,000
Issuance of restricted common stock 1,050
Treasury stock acquired (105)
--------- --------- ---------
Balance at end of year 82,558 82,405 82,186
Common Stock and Paid-in Capital of Predecessor Company:
Balance at beginning of year 136,221
Reorganization of subsidiary, at book value (136,221)
---------
Balance at end of year 0
Deferred Compensation:
Balance at beginning of year (379) (729) 0
Issuance of restricted common stock (1,050)
Change for the year 379 350 321
--------- --------- ---------
Balance at the end of year 0 (379) (729)
Net Unrealized Gains (Losses) on Securities Available-For-Sale:
Balance at beginning of year 35,748 (46,730) 30,050
Change for the year (24,875) 82,478 (76,780)
--------- --------- ---------
Balance at end of year 10,873 35,748 (46,730)
Retained Earnings:
Balance at beginning of year 230,502 210,497 189,442
Net income 35,345 24,110 25,159
Dividends to shareholders (4,108) (4,105) (4,104)
Treasury stock acquired (24)
--------- --------- ---------
Balance at end of year 261,715 230,502 210,497
--------- --------- ---------
Total shareholders' equity at end of year $ 355,232 $ 348,362 $ 245,309
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
-34-
<PAGE>
<TABLE>
SECURITY-CONNECTICUT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
Year ended December 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income $ 35,345 $ 24,110 $ 25,159
Adjustments to reconcile net income to net cash used:
Deferred policy acquisition costs:
Amortization 35,498 35,539 36,506
Deferral (57,873) (68,333) (72,263)
Increase in accrued investment income (88) (1,175) (5,907)
Decrease in policy liabilities and contractholder funds (64,985) (47,269) (24,423)
Decrease in federal income taxes payable (3,867) (10,645) (1,309)
Net amortization of acquired insurance in-force and goodwill 1,586 1,630 1,742
Decrease (increase) in amounts recoverable from reinsurers (4,642) 6,828 (18,051)
Decrease (increase) in premiums and fees receivable (1,989) 3,295 (359)
Realized (gains) losses on investments (7,251) (6,166) 726
Other (765) 1,504 19,631
--------- --------- ---------
Net cash used in operating activities (69,031) (60,682) (38,548)
Investing activities
Fixed maturity securities available-for-sale:
Purchases (373,321) (553,806) (602,712)
Sales 225,842 203,294 281,647
Maturities 63,440 215,128 75,808
Equity securities:
Purchases (3,206) (4,793) (1,008)
Sales 8,178 8,880 5,433
Purchases of other investments (1,532) (6,618) (3,792)
Sales or maturities of other investments 17,989 21,895 18,461
Other (1,592) 3,648 (522)
--------- --------- ---------
Net cash used in investing activities (64,202) (112,372) (226,685)
--------- --------- ---------
Financing activities
Universal life and investment contract deposits 243,430 261,715 325,229
Universal life and investment contract withdrawals (117,284) (81,733) (60,163)
Issuance of long-term debt 75,000
Repayment of long-term debt (65,000)
Dividends to shareholders (4,108) (4,105) (3,060)
Issuance of common stock 258 220
Issuance of restricted common stock 1,050
Acquisition of treasury stock (129)
Capital contribution 10,000
Other 340 372 (729)
--------- --------- ---------
Net cash provided by financing activities 132,507 176,469 272,327
--------- --------- ---------
Net increase (decrease) in cash and invested cash (726) 3,415 7,094
Cash and invested cash at beginning of year 29,753 26,338 19,244
--------- --------- ---------
Cash and invested cash at end of year $ 29,027 $ 29,753 $ 26,338
========= ========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
-35-
<PAGE>
SECURITY-CONNECTICUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization
Security-Connecticut Corporation ("Security-Connecticut" or the "Company")
is an insurance holding company which owns 100% of the outstanding stock of
Security-Connecticut Life Insurance Company ("SCL") and its wholly owned
subsidiary Lincoln Security Life Insurance Company ("LSL"). The Company also
owns 100% of Arrowhead Ltd. ("AHL"), an insurance company incorporated in
Bermuda in 1995. The Company, through SCL and LSL, offers a diverse portfolio of
individual life insurance and annuity products to customers throughout the 50
states, the District of Columbia and Guam. Included in the portfolio of products
are universal life, interest sensitive whole life, term life, single premium
deferred and immediate annuities, as well as a small amount of group life and
accident and health insurance. Most of the Company's sales for 1996 were related
to term, universal life and single premium deferred annuity products. The
Company provides its products through a non-exclusive, independent general
agency system. Within the independent agency system, the Company accesses three
principal distribution channels: wholesale, retail and special markets that are
geographically diverse. In January 1996, AHL began operating as a small
reinsurance company reinsuring life insurance policies of an unaffiliated
reinsurance company. AHL had assumed premiums of approximately $9.5 million, in
1996.
On October 13, 1993, Lincoln National Life Insurance Company ("LNL") formed
the Company to serve as a holding company for SCL and its subsidiary LSL. On
January 19, 1994, LNL effected a reorganization in which it contributed $10
million in capital and all of the outstanding shares of SCL to the Company in
exchange for 8,500,000 shares of the Company's Common Stock and a Term Note in
the principal amount of $65 million. On February 2, 1994, LNL sold 100% of the
outstanding common stock of the Company in an Initial Public Offering ("IPO")
for $187 million. All of the proceeds of the IPO, net of related issuance
expenses, were received by LNL. Also at that date, certain officers were granted
47,727 shares of stock subject to restrictions which lapsed upon repayment of
the Term Note on March 1, 1996. The Company sold $75 million of medium term debt
securities on March 1, 1996 and used $65 million of the net proceeds to repay
the Term Note to LNL. (See Note 4)
On February 23, 1997, ReliaStar Financial Corp. ("ReliaStar") and
Security-Connecticut signed a definitive agreement to combine the two companies
through the merger of Security-Connecticut into ReliaStar in a stock-for-stock
exchange (see Notes 7, 9 and 13).
Basis of Financial Statements
The consolidated financial statements of the Company have been prepared in
conformity with generally accepted accounting principles ("GAAP"), which vary
from statutory accounting practices prescribed or permitted by insurance
regulatory authorities (see Note 9). They include the accounts of the Company
and its subsidiaries, SCL and its wholly owned subsidiary, LSL, and AHL.
Significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities as of the date
of the financial statements, and that affect the reported amounts of revenues
and expenses during the reporting period.
Actual results could differ from these estimates.
-36-
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Investments
All fixed maturity securities (bonds) and equity securities (common and
preferred stock) are classified as available-for-sale and, accordingly, are
carried at fair value. The cost of fixed maturity securities is adjusted for
amortization of premium or discount through charges or credits to net investment
income. Changes in the fair values of available-for-sale securities are reported
directly in shareholders' equity after adjustments for related amortization of
deferred policy acquisition costs ("DAC") and changes in other policy-related
liabilities, net of tax, which would have been required had these securities
actually been sold.
For the securitized investment portion of the fixed maturity securities
portfolio, the Company recognizes income using a constant effective yield based
on anticipated prepayments and the estimated economic lives of the securities.
When actual prepayments differ significantly from anticipated prepayments, the
effective yield is recalculated to reflect actual payments to date and
anticipated future payments. The net investment in the securities is adjusted to
the amount that would have existed had the new effective yield been applied
since the acquisition of the securities. This adjustment is reflected in net
investment income.
Mortgage loans and policy loans are carried at unpaid balances net of
allowances for uncollectible amounts. The determination of declines in value
deemed other than temporary and related adjustments are made on a quarterly
basis by management in consultation with its investment advisor. The change in
these allowances is reported as realized gains (losses) on investments.
Realized gains (losses) on sales of investments are recognized in net
income using the specific identification method. Realized gains (losses) on
investments supporting interest-sensitive policies include adjustments for DAC
and other policy-related liabilities.
Interest on investments is recognized on the accrual basis as earned, and
dividends on equity securities are recognized principally on the ex-dividend
date. Interest on restructured loans is recognized on the cash basis.
Interest Rate Caps
Interest rate caps are used as part of an 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 cost is amortized over the lives of the caps. Interest rate
caps are reported as fixed maturity securities and classified as
available-for-sale and, accordingly, are carried at fair value with unrealized
gains and losses reported as a separate component of shareholders' equity.
Cash and Invested Cash
Cash and invested cash include all highly liquid debt instruments purchased
with a maturity of three months or less. Carrying value approximates fair value.
-37-
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Deferred Policy Acquisition Costs
To the extent recoverable from future policy revenues and gross profits,
commissions and other costs, net of commission and expense allowances for
reinsurance ceded, incurred to acquire or renew universal life insurance and
other interest-sensitive life insurance, traditional life insurance, and
annuities that vary with and are primarily related to the production of new
business, have been deferred. DAC for universal life insurance policies and
deferred annuities is amortized over the lives of the policies in relation to
the present value of estimated gross profits from surrender charges and
investment, mortality and expense margins. Traditional life DAC is amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy reserves.
Acquired Insurance In-Force
The value of acquired insurance in-force represents the present value of
future profits of the business in force on October 31, 1979 (the date LNC
acquired SCL), using a discount rate of 15%. Interest is accreted at 15% per
annum, and the present value of future profits is amortized over the estimated
premium-paying period in proportion to the ratio of annual anticipated premium
revenues to total anticipated premium revenues. Generally, the same assumptions
used in calculating the liability for future policy benefits (also referred to
as policy reserves) were used in computing the anticipated annual profits.
Accumulated amortization was $60.8 million and $60.1 million at December 31,
1996 and 1995, respectively. The carrying value of acquired insurance in-force
is reviewed periodically for indicators of impairment in value.
Goodwill
The excess of the purchase price over the fair value of identifiable net
assets acquired is being amortized on a straight-line basis over a period of 40
years. Accumulated amortization was $16.3 million and $15.4 million at December
31, 1996 and 1995, respectively. The carrying value of goodwill is reviewed
periodically for indicators of impairment in value.
Property and Equipment
Property and equipment owned for Company use is carried at cost less
allowances for depreciation. Depreciation is computed principally on the
straight-line method over the estimated useful lives of the assets.
Future Policy Benefits and Unpaid Claims
The liabilities for future policy benefits for universal life insurance
policies and deferred annuities consist of policy account balances that accrue
to the benefit of the policyholders, without reduction (or offset) for/by
surrender charges. Interest-crediting rates for these products during 1996, 1995
and 1994 ranged from 4.05% to 8.00%. The liabilities for future policy benefits
for traditional life policies and immediate annuities are computed using a net
level premium method (i.e., the benefit and expense net premiums determined as a
level percentage of the corresponding gross premiums) and assumptions of
investment yields, mortality and withdrawals based principally on Company
experience projected at the time of policy issue, with provisions for possible
adverse deviations.
-38-
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Future Policy Benefits and Unpaid Claims (continued)
Interest assumptions for traditional direct individual life reserves for
all policies range from 2.25% level to 10.00% level. Mortality assumptions for
traditional life business issued prior to mid-1987 are equal to varying
percentages of the 1965-70 Select and Ultimate Table depending on age, duration
and underwriting classification; for issues after mid-1987, the underlying table
is the 1975-80 Select and Ultimate Table. Withdrawal assumptions are based on
Company experience and vary by plan and policy duration.
Policy benefits are charged to expense in the period incurred. All
insurance related benefits and expenses are reported net of reinsurance ceded;
policy liabilities and accruals are reported gross of reinsurance ceded.
The liability for unpaid claims is based on estimates of ultimate payments
to be made for the individual claims reported and unreported. In addition SCL
and LSL pay interest to policy beneficiaries in the ordinary course of paying
death claims. Cash paid for interest for 1996, 1995 and 1994, was $3.5 million,
$4.4 million and $3.2 million, respectively.
Recognition of Premium Revenue, Insurance Fees and Benefits
Revenue for universal life insurance policies consists of policy charges
for the cost of insurance, administration, and surrenders that have been
assessed against policy account balances during the period. Universal life
revenue also includes policy initiation fees that are deferred and amortized in
relation to the estimated future gross profits of the policies. Expenses for
universal life insurance policies include interest credited to policy account
balances and benefit claims incurred during the period in excess of policy
account balances. Expenses for deferred annuities include interest credited to
account balances. Premiums for traditional individual life policies and
immediate annuities are recognized as revenue over the premium-paying period.
All insurance related revenue and expenses are reported net of reinsurance
ceded.
In the accompanying financial statements, amounts reported as premiums
include premiums earned from traditional life, group life, health insurance and
immediate annuities, net of related reinsurance amounts.
Reinsurance
The Company is involved in both the cession and assumption of reinsurance
with other companies, including former affiliates. The Company has established
retention limits which it believes are appropriate for its business. The portion
of risk that exceeds the retention limits is reinsured with other insurers.
Risk associated with universal life and traditional life insurance is
reinsured through first dollar quota share, yearly renewable-term and
co-insurance reinsurance contracts. Expenses associated with ceded reinsurance
are recognized over the life of the reinsured policies.
Amounts recoverable from reinsurers for unpaid losses, and future life and
health benefits, are recorded in a manner consistent with the related
liabilities associated with the reinsured policies.
Stock Incentive Plan
The Company grants stock options for a fixed number of shares to employees,
with an exercise price equal to the fair value of the shares at the date of the
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25 and, accordingly, recognizes no compensation expense for the
stock option grants.
-39-
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes in accordance with FAS Statement No.
109 "Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax basis assets and liabilities, principally DAC, unrealized gains (losses) on
available-for-sale securities, acquired insurance in-force and liabilities for
future policy benefits and claims.
Earnings and Dividends Per Common Share
Primary earnings per common share is based on the weighted average number
of common shares outstanding during the periods presented including, if
applicable, dilutive common stock equivalents. Common stock equivalents consist
of stock options for the period prior to their exercise or cancellation. Fully
diluted earnings per common share are not presented as they are not materially
different from primary earnings per common share.
Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
presentation. These reclassifications had no impact on the previously reported
net income.
2. Recently Issued Accounting Standards
Stock-Based Compensation
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") which
became effective in 1996, and provides an alternative to APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), in accounting for
stock-based compensation issued to employees. FAS 123 allows for a fair value
based method of accounting for employee stock options and similar equity
instruments. However, for companies that continue to account for stock-based
compensation arrangements under APB No. 25, FAS 123 requires disclosure of the
pro-forma effect on net income and earnings per share of its fair value based
accounting for those arrangements. The Company has not adopted the recognition
and measurement provisions of FAS 123 and will continue to account for
stock-based compensation under APB No. 25. Accordingly, adoption of FAS 123 only
requires additional financial statement footnote disclosures. See Note 7 for
disclosures.
Investments
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which requires an entity 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 the Statement. The Company will apply
the new rules prospectively to transactions beginning in the first quarter of
1997. Based on current circumstances, the Company believes the application of
the new rules will not have a material impact on the financial statements.
-40-
<PAGE>
3. Investments and Fair Value of Financial Instruments
Major categories of net investment income consisted of the following:
Year ended December 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
(000s omitted)
Fixed maturity securities $ 116,877 $ 112,726 $ 95,323
Equity securities 10 36 98
Mortgage loans 13,634 15,092 17,380
Policy loans 5,104 5,344 4,855
Other invested assets 3,385 1,888 1,671
--------- --------- ---------
Total investment income 139,010 135,086 119,327
Investment expenses 3,649 3,112 3,863
--------- --------- ---------
Net investment income $ 135,361 $ 131,974 $ 115,464
========= ========= =========
Realized gains (losses) on investments consisted of the following:
Year ended December 31,
--------------------------------
1996 1995 1994
--------- --------- ---------
(000s omitted)
Fixed maturity securities available-for-sale:
Gross gains $ 6,306 $ 9,494 $ 7,493
Gross losses (3,091) (1,353) (7,621)
Equity securities:
Gross gains 4,520 5,684 2,154
Gross losses (1,069) (260) (235)
Mortgage loans:
Gross gains 1,335 887 595
Gross losses (678)
Real estate (37)
Policy loans* (18) (11) (4)
Other invested assets* (695) (7,597) (3,108)
--------- --------- ---------
Realized gains (losses) on investments 7,251 6,166 (726)
Tax benefit (expense) (2,533) (2,158) 254
--------- --------- ---------
Net realized gains (losses) on investments $ 4,718 $ 4,008 $ (472)
========= ========= =========
* 1995 and 1994 amounts consist principally of provisions for losses, net of
recoveries. The realized losses on other invested assets also reflect the
amortization of DAC recognized upon the realization of gains above.
Increases (decreases) in provisions for losses, which are included in the
realized gains (losses) on investments shown above are as follows:
Year ended December 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
(000s omitted)
Mortgage loans on real estate $ (896) $ (852) $ (2,586)
Policy loans 22 21 19
Other invested assets (4,601) 2,976 1,625
--------- --------- ---------
Total $ (5,475) $ 2,145 $ (942)
========= ========= =========
-41-
<PAGE>
3. Investments and Fair Value of Financial Instruments (continued)
The cost information for mortgage loans, policy loans and other invested
assets is net of allowances for losses. The cost and allowances for such items
are as follows:
December 31,
---------------------------------------------
1996 1995
---------------------- ---------------------
Cost Allowances Cost Allowances
---------- ---------- ---------- ----------
(000s omitted)
Mortgage loans $ 128,870 $ 340 $ 146,316 $ 1,236
Policy loans 74,719 326 74,220 304
Other invested assets 6,914 10,822 4,601
The change in unrealized gains (losses) on investments consisted of the
following:
Year ended December 31,
---------------------------------
1996 1995 1994
---------- ---------- ----------
(000s omitted)
Fixed maturity securities $ 63,181) $ 153,111 $ (144,232)
Equity securities (2,879) 3,509 (1,041)
---------- ---------- ----------
Total unrealized gains (losses) $ (66,060) $ 156,620 $ (145,273)
========== ========== ==========
The amortized cost, gross unrealized gains and losses, and fair value of
securities available-for-sale are as follows:
<TABLE>
<CAPTION>
December 31, 1996
----------------------
Amortized Gross Unrealized
---------- ----------------------
Cost Gains Losses Fair Value
---------- ---------- --------- ----------
(000s omitted)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Corporate bonds $ 916,150 $ 30,521 $ 8,583 $ 938,088
Securitized investments 439,341 11,092 3,339 447,094
Foreign government bonds 146,137 5,451 1,317 150,271
United States government bonds 52,256 285 2,681 49,860
State and municipal bonds 2,000 4 1,996
---------- ---------- --------- ----------
Total fixed maturity securities 1,555,884 47,349 15,924 1,587,309
Equity securities 1,913 51 34 1,930
---------- ---------- --------- ----------
Total securities available-for-sale $1,557,797 $ 47,400 $ 15,958 $1,589,239
========== ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------
Amortized Gross Unrealized
----------------------
Cost Gains Losses Fair Value
---------- ---------- --------- ----------
(000s omitted)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Corporate bonds $ 837,608 $ 64,495 $ 2,680 $ 899,423
Securitized investments 440,982 23,112 1,326 462,768
United States government bonds 48,070 1,459 111 49,418
Foreign government bonds 143,310 11,701 2,044 152,967
---------- ---------- --------- ----------
Total fixed maturity securities 1,469,970 100,767 6,161 1,564,576
Equity securities 3,435 4,040 1,144 6,331
---------- ---------- --------- ----------
Total securities available-for-sale $1,473,405 $ 104,807 $ 7,305 $1,570,907
========== ========== ========= ==========
</TABLE>
-42-
<PAGE>
3. Investments and Fair Value of Financial Instruments (continued)
Fair values for fixed maturity securities and equity securities are based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, by
discounting expected future cash flows using a current market rate applicable to
the coupon rate, credit quality and maturity of the investments.
At December 31, 1996, fixed maturity securities with a fair value of
approximately $3.4 million were on deposit with state insurance departments to
satisfy regulatory requirements.
The components of the balance sheet caption "net unrealized gains (losses)
on securities available-for-sale" in shareholders' equity are summarized as
follows:
December 31,
-----------------------------------
1996 1995 1994
---------- ---------- ---------
(000s omitted)
Fair value of securities $1,589,239 $1,570,907 $1,267,342
Amortized cost of securities 1,557,797 1,473,405 1,326,460
---------- ---------- ---------
Net unrealized gains (losses) 31,442 97,502 (59,118)
Adjustments:
DAC (16,563) (47,526) 21,002
Other policy liabilities 1,832 5,012 (2,280)
Deferred income taxes (5,838) (19,240) (6,334)
---------- ---------- ---------
Net unrealized gains (losses) on
available-for-sale securities $ 10,873 $ 35,748 $ (46,730)
========== ========== ==========
The increase in net unrealized gains (losses) and the adjustments to DAC
and other policy liabilities reflect the effects the unrealized gains and losses
have on DAC and other policy liabilities as if realized. The above adjustments
to DAC and other policy liabilities are netted against the DAC and the future
policy benefits and claims accounts in the accompanying balance sheets.
The following data for fixed maturity securities is based on contractual
maturities, except for securitized investments which are not due at a single
maturity date. Actual maturities will differ in some cases because borrowers
have the right to call or prepay obligations with or without call or prepayment
penalties.
December 31, 1996
----------------------
Amortized Fair
Cost Value
---------- ----------
(000s omitted)
Due in one year or less $ 50,367 $ 51,300
Due after one year through five years 307,875 318,385
Due after five years through ten years 415,337 425,321
Due after ten years 342,964 345,209
Securitized investments 439,341 447,094
---------- ----------
Total $1,555,884 $1,587,309
========== ==========
The Company's recorded investment in impaired mortgage loans, net of
allowances for loan losses, was $4.2 million, and $7.7 million, as of December
31, 1996 and 1995, respectively. The average recorded investment in impaired
mortgage loans was $2.1 million, $1.5 million and $1.8 million for December 31,
1996, 1995 and 1994, respectively. Interest income of $0.6 million, $0.9 million
and $1.8 million was recorded in 1996, 1995 and 1994, respectively. Progression
of the allowance for loan losses for impaired mortgage loans is as follows:
-43-
<PAGE>
3. Investments and Fair Value of Financial Instruments (continued)
December 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
(000s omitted)
Balance at beginning of period $ 1,236 $ 2,088 $ 4,674
Provisions for losses 616 1,012
Releases, principally due to sales (896) (1,468) (3,598)
--------- --------- ---------
Balance at end of period $ 340 $ 1,236 $ 2,088
========= ========= =========
The Company invests in mortgage loans principally involving commercial real
estate. At December 31, 1996, 43.2% of such mortgages ($55.5 million) involved
properties located in California, Illinois, Massachusetts, Missouri,
Pennsylvania and Texas. Such investments consist of first liens on completed
income-producing properties. The maximum percentage of any one loan to its
property value at the time of the loan is 75 percent. The Company is a
participant in approximately $95 million of mortgage loans with LNL under which
LNL has the right at any time on 10 days notice to purchase the Company's
interest for the then-existing principal plus accrued interest.
The Company has entered into several interest rate cap agreements, as a
hedge against rising interest rates in its single premium deferred annuity
investment portfolio. As of December 31, 1996, these agreements established cap
rates ranging from 7.07% to 12.5% on notional principal of $510 million with
termination dates through 2001. The aggregate cost of $3.6 million is being
amortized to net investment income over the effective life of the caps. These
investments are reported as fixed maturity securities and classified as
available-for-sale and are carried at fair value ($1.9 million and $0.7 million
in 1996 and 1995, respectively) with unrealized gains and losses reported in
shareholders' equity. The Company is exposed to credit loss in the event of
non-performance by counterparties on the caps. Due to the high quality rating of
the counterparties, the Company does not anticipate non-performance by any of
the counterparties. The amount of such exposure is approximately the unrealized
gain in such contracts as interest rates rise.
The following table summarizes the carrying amounts and estimated fair
values of mortgage loans, policy loans, and deposit contract liabilities as of
December 31, 1996 and 1995. The table excludes, other invested assets and cash
and invested cash, all of which had fair values approximating carrying values.
It also excludes fixed maturity and equity securities whose fair values are
disclosed elsewhere in this footnote.
December 31,
------------------------------------------------
1996 1995
----------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- --------- ----------
(000s omitted)
Assets
Mortgage loans (1) $ 128,530 $ 134,280 $ 145,080 $ 153,858
Policy loans (2) 74,393 77,244 73,916 78,840
Liabilities
Deposit contracts (2)(3) $ 21,383 $ 20,884 $ 24,451 $ 24,106
Long-term debt (4) 75,000 74,255 65,000 65,000
-44-
<PAGE>
3. Investments and Fair Value of Financial Instruments (continued)
(1) Estimated fair values for mortgage loans were established using a
discounted cash flow method based on credit rating, maturity and
future income when compared to the expected yield for mortgages having
similar characteristics. The ratings for mortgages in good standing
are based on property type, location, market conditions, occupancy,
debt service coverage, loan to value, caliber of tenancy, borrower and
payment record. Fair values of impaired mortgage loans are measured
based either on the present value of expected future cash flows
discounted at the loan's effective interest rate, at the loan's market
price or the fair value of the collateral if the loan is collateral
dependent. If the estimated fair value of the mortgage loan is less
than the recorded investment in the loan, the difference is recorded
in the allowance for loan losses account.
(2) Estimated fair values for policy loans and deposit contracts were
calculated on a composite discounted cash flow basis using risk free
interest rates consistent with the maturity durations assumed. These
durations were based on historical experience.
(3) Deposit contracts are included in the consolidated balance sheets
under the caption "Contractholder Funds." The remainder of the balance
sheet caption "Contractholder Funds" that does not fit the definition
of "investment-type insurance contracts" (i.e. deposit contracts) is
considered insurance contracts. Fair value disclosures are not
required for these insurance contracts and have not been determined.
However, the fair values of liabilities under all insurance contracts
are taken into consideration in the Company's overall management of
interest rate risk such that the Company's exposure to changing
interest rates is minimized through the matching of investment
maturities with amounts due under insurance contracts. It is important
to note that readers of these financial statements could draw
inappropriate conclusions about the Company's shareholders' equity,
determined on a fair value basis, since only the fair value of assets
and liabilities defined as financial instruments are disclosed. The
Company and other companies in the insurance industry are monitoring
the related actions of the various rule-making bodies and attempting
to determine an appropriate methodology for estimating and disclosing
the "fair value" of their insurance contract liabilities.
(4) Estimated fair value of long-term debt was determined using a
discounted cash flow method based on crediting rate, mortality and
future income when compared to the expected yield for long-term debt
having similar characterstics.
4. Long-term Debt
At December 31, 1995, the Company was obligated under a note payable to LNL
for $65 million which bore interest at the 90-day LIBOR rate plus 0.75%. The
note payable was incurred in connection with the pre-IPO reorganization (see
Note 1).
On June 8, 1995, the Company registered $100 million of debt securities on
Form S-3 with the Securities and Exchange Commission. The Company sold $75
million of medium term debt securities ("Debt") on March 1, 1996 and used $65
million of the net proceeds to repay the Term Note to LNL. The remainder of the
proceeds was used for general corporate purposes. The Debt has an effective rate
of 7.39%, is due March 1, 2003 and may not be redeemed prior to maturity.
Interest on the Debt is payable semiannually in arrears on March 1 and September
1 of each year. Interest payments began on September 1, 1996. In 1996, 1995 and
1994 the Company paid interest of $4.4 million, $4.5 million and $2.2 million,
respectively, on both the LNL note payable and the Debt.
The indenture agreement covering the Debt contains several debt covenants
that, among other things: (i) places limitations on liens, (ii) requires prompt
payments, (iii) requires continued corporate existence and (iv) limits the issue
or disposition of capital stock of any subsidiary. The Company has complied with
all debt covenants during 1996.
-45-
<PAGE>
5. Federal Income Taxes
Federal income tax expense consisted of the following:
Year ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
(000s omitted)
Current $ 25,075 $ 20,247 $ 10,804
Deferred (6,849) (7,961) 2,004
-------- -------- --------
Total $ 18,226 $ 12,286 $ 12,808
======== ======== ========
Federal income taxes paid in 1996, 1995 and 1994 were $22.1 million, $22.9
million and $14.3 million, respectively.
The effective tax rate on pre-tax income is different from the prevailing
corporate federal income tax rate of 35%. A reconciliation of this difference
follows:
Year ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
(000s omitted)
Tax rate times pre-tax income $ 18,750 $ 12,739 $ 13,288
Effect of:
Tax-exempt investment income (212) (295) (397)
Goodwill amortization 317 317 317
R&D tax credit (336)
Other (293) (475) (400)
-------- -------- --------
Provision for income taxes $ 18,226 $ 12,286 $ 12,808
======== ======== ========
Effective tax rate 34.0% 33.8% 33.7%
======== ======== ========
Federal income taxes payable consisted of the following:
December 31,
----------------------
1996 1995
--------- ---------
(000s omitted)
Current $ (510) $ (3,532)
Deferred 21,419 41,710
--------- ---------
Total $ 20,909 $ 38,178
========= =========
-46-
<PAGE>
5. Federal Income Taxes (continued)
The components of the net deferred liabilities were as follows:
December 31,
--------- ---------
1996 1995
--------- ---------
(000s omitted)
Total deferred tax liabilities:
DAC $ 107,486 $ 93,606
Unrealized gains on available-for-sale securities 11,005 34,126
Other 6,183 9,244
--------- ---------
Total deferred tax liabilities 124,674 136,976
Total deferred tax assets:
Acquired insurance in-force 16,540 18,388
Liabilities for future policy benefits and claims 61,339 54,160
Acquisition load liability 16,817 11,618
Tax basis adjustments on invested assets (258) 1,859
Other 8,817 9,241
--------- ---------
Total deferred tax assets 103,255 95,266
--------- ---------
Net deferred tax liability $ 21,419 $ 41,710
========= =========
Security-Connecticut has separate company net operating loss carryforwards
of $11.7 million and capital loss carryforwards of $0.5 million which are
available to offset future separate company taxable income of
Security-Connecticut. The loss carryforwards will expire as follows: $0.5
million in 1999, $3.1 million in 2009, $4.7 million in 2010 and $3.9 million in
2011.
6. Reinsurance
The Company is involved in both the cession and assumption of reinsurance
with other companies. The maximum retention limits for SCL are as follows: (i)
group, $250,000; (ii) individuals up to age 70, $500,000; (iii) individuals age
70 and over, $250,000; and (iv) second-to-die, $1,000,000; (v) joint end age 70
and over, $500,000. Facultative reinsurance relationships exist for cases where
SCL deems it appropriate to lower its retention limits, desires more competitive
rates, or needs greater capacity.
With respect to policies issued by LSL, the maximum retention limit is as
follows: (i) individuals up to age 70, $100,000; (ii) individuals age 70 and
over, $50,000; (iii) Second-to-die, $100,000. Amounts exceeding the maximum
retention limits are then ceded to SCL, which retains an additional $400,000 up
to age 70, $200,000 age 70 and over, and $900,000 on second-to-die up to joint
end age 70, $400,000 for joint end age 70 and over, before retroceding the
remainder with automatic reinsurance pools.
In the accompanying financial statements, premiums, benefits and reserve
increases and insurance and other expenses are reported net of reinsurance
ceded; policy liabilities and accruals are reported gross of reinsurance ceded.
-47-
<PAGE>
6. Reinsurance (continued)
Reinsurance Activity
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
(000s omitted)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Life insurance in-force $47,444,106 $16,342,220 $2,464,233 $33,566,119 7.3%
=========== =========== ========== =========== =====
Premiums:
Life and immediate annuities $ 112,373 $ 66,189 $ 9,531 $ 55,715 17.1%
Accident and health 4,693 2,147 2,546 0.0%
----------- ----------- ---------- ----------- -----
Total $ 117,066 $ 68,336 $ 9,531 $ 58,261 16.4%
=========== =========== ========== =========== =====
Year Ended December 31, 1995
Life insurance in-force $42,784,614 $10,318,323 $ 15,294 $32,481,585 0.0%
=========== =========== ========== =========== =====
Premiums:
Life and immediate annuities $ 111,024 $ 49,445 $ 23 $ 61,602 0.0%
Accident and health 4,689 2,206 2,483 0.0%
----------- ----------- ---------- ----------- -----
Total $ 115,713 $ 51,651 $ 23 $ 64,085 0.0%
=========== =========== ========== =========== =====
Year Ended December 31, 1994
Life insurance in-force $39,509,547 $ 9,973,184 $ 20,566 $29,556,929 0.1%
=========== =========== ========== =========== =====
Premiums:
Life and immediate annuities $ 110,538 $ 49,021 $ 183 $ 61,700 0.3%
Accident and health 6,830 3,894 1,867 4,803 38.9%
----------- ----------- ---------- ----------- -----
Total $ 117,368 $ 52,915 $ 2,050 $ 66,503 3.1%
=========== =========== ========== =========== =====
</TABLE>
Life insurance in-force and life and immediate annuity premiums assumed
from other companies increased in 1996 due to the inclusion of premiums assumed
by AHL. AHL commenced operations January 1, 1996.
The income statement caption, "Benefits and reserve increases," is net of
reinsurance recoveries of $48.7 million, $49.7 million and $39.3 million for the
years ended December 31, 1996, 1995 and 1994, respectively. Amounts recoverable
from reinsurers for claims paid by the Company were $3.0 million and $0.3
million at December 31, 1996 and 1995, respectively. Amounts payable to
reinsureds for claims were $2.8 million and $1.1 million at December 31, 1996
and 1995, respectively.
-48-
<PAGE>
6. Reinsurance (continued
The Company remains liable to its policyholders without regard to whether
its reinsurers are able to meet their contractual obligations under the
applicable reinsurance agreements. To minimize its exposure to significant
losses from reinsurance insolvencies, the Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk arising
from similar geographic regions, activities or economic characteristics of the
reinsurers. The Company seeks to enter into reinsurance treaties with highly
rated reinsurers. For 1996, no one reinsurer assumed more than 18% of the
Company's life insurance ceded. Life Reinsurance Corporation of America, Life Re
International, LTD, Swiss Re Life Company America, RGA Reinsurance Company and
Transamerica Occidental Life Insurance Company had 10% or more. All of these
reinsurers are rated "A" or better by A.M. Best.
7. Stock-Based Compensation Plans
Stock Incentive Plan
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("FASB 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
The Company adopted the 1993 Stock Incentive Plan ("SIP") for the benefit
of employees of the Company and its subsidiary which provides for the issuance
of stock options, stock appreciation rights ("SARs") and restricted stock. Under
the SIP, a maximum of 510,000 shares of common stock may be issued upon the
exercise of options, or in the form of SARs or restricted stock. Stock options
granted under the SIP are at the fair market value at the time of grant and,
subject to termination of employment, expire 10 years from the date of grant.
Such options are not transferable other than on death and are exercisable in
equal increments on the option issuance anniversary in the three years following
issuance. In September 1996, the SIP was amended to provide for accelerated
vesting of issued options by written agreement between the participant and the
Board of Directors.
As of February 2, 1994, 47,727 shares of restricted stock were granted
under the SIP subject to restrictions on transfer, which lapsed upon repayment
of the Term Note on March 1, 1996. The value of the restricted stock awards of
$22.00 per share, was reported as deferred compensation in a separate component
of shareholders' equity. Deferred compensation expense was recognized in equal
amounts over the three year vesting period.
Pro-forma information regarding net income and earnings per share is
required by FASB 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of that FASB. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996
and 1995, respectively: risk-free interest rates of 6.21% and 7.49%; dividend
yields of 0.86% and 1.04%; volatility factors of the expected market price of
the Company's common stock of 24.34%; and a weighted-average expected life of
the options of 10 and 9.9 years.
-49-
<PAGE>
7. Stock-Based Compensation Plans (continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro-forma information follows (in thousands except for earnings per share
information):
1996 1995
---------- ----------
Net income: As Reported $ 35,345 $ 24,110
Pro-Forma 34,767 23,772
Primary EPS: As Reported $ 4.10 $ 2.81
Pro-Forma 4.03 2.77
The weighted-average fair value of options granted during 1996 and 1995 was
$12.02 and $11.58, respectively.
The preceding pro-forma disclosures are not indicative of future amounts
until the new rules are applied to all outstanding nonvested awards; and since
the FASB 123 method of accounting has not been applied to options granted prior
to January 1, 1995, the resulting pro-forma effect will not be fully reflected
until 1997.
A summary of the Company's stock option activity, and related information
for the three years ended December 31, 1996 follows:
Options Outstanding
Shares ------------------------
Available Weighted-Average
for Grant Shares Exercise Price
--------- -------- --------------
Balance at January 1, 1994 510,000
Granted (234,792) 234,792 $ 21.87
Forfeited 11,205 (11,205) 22.00
Restricted stock awards (47,727)
--------- --------- ---------
Balance at December 31, 1994 238,686 223,587 21.87
Granted (75,900) 75,900 24.13
Exercised (909) 22.00
Forfeited 1,818 (1,818) 22.00
--------- --------- ---------
Balance at December 31, 1995 164,604 296,760 22.45
Granted (87,550) 87,550 26.43
Exercised (7,026) 22.26
Forfeited 7,160 (7,160) 23.70
--------- --------- ---------
Balance at December 31, 1996 84,214 370,124 $ 23.34
========= ========= =========
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<PAGE>
7. Stock-Based Compensation Plans (continued)
At December 31, 1996 and 1995, there were 219,452 shares with a
weighted-average exercise price of $22.54 and 85,050 shares with a
weighted-average price of $21.96, respectively, exercisable under the SIP.
Exercise prices for options outstanding as of December 31, 1996 ranged from
$19.25 to $33.875. The weighted-average remaining contractual life of those
options is 7.8 years.
On February 20, 1997, 74,800 options were granted with an exercise price of
$36.50. In connection with the merger of the Company and ReliaStar, each
outstanding Security-Connecticut stock option will be assumed by ReliaStar and
will be exercisable on the same terms and conditions as under the
Security-Connecticut option plan under which such option was granted and related
stock option agreement. However, each option will be exercisable for the number
of shares of ReliaStar common stock as would have been received pursuant to the
merger for the shares of Security-Connecticut common stock subject to the option
had the option been exercisable and exercised immediately prior to the merger
date. The exercise price of the options will be adjusted accordingly.
Management Incentive Plan
The Company has adopted the Security-Connecticut Corporation Management
Incentive Plan ("MIP") for management positions whose level of responsibility is
such as to impact significantly on Company results. The participants are
measured on overall Company performance goals as measured against established
targets. The participants' percentage of eligibility is determined by their
level of responsibility. The level of cash and/or stock payment to the executive
officers is determined based on the Company attaining set performance goals.
Total awards earned in 1996, 1995 and 1994 were $1.2 million, $0.3 million and
$1.0 million, respectively. In 1995, the Company reserved 100,000 shares of the
Company's common stock for issuance under the MIP. As of December 31, 1996 and
1995, 8,964 and 8,267 shares, respectively, had been issued.
Long Term Incentive Plan
The Company also adopted the Security-Connecticut Corporation Long-Term
Incentive Plan ("LTIP") for management positions whose level of responsibility
is such as to impact significantly on Company results. The participants are
measured on the attainment of established target adjusted return on equity goals
during a three year performance cycle. The participants' award percentage is
determined by their level of responsibility. The awards are paid out 80% in SCC
stock and 20% in cash. Each participant may elect to receive a greater portion
of their award in stock. The total amount awarded for the 1994-1996 performance
cycle was $0.7 million.
Employment Contracts
The Company is a party to employment contracts with certain key executives
which provide for employment terms and benefits upon a change of control of the
Company. These contracts generally provide that, upon a change in control of the
Company, the executive will be guaranteed employment with the Company for a
specified period of time following the change in control. In the event of a
termination of employment or a diminution in the executive's compensation,
benefits, responsibilities or working conditions, the executive is entitled to
severance pay and a continuation of certain benefits. These contracts are not
expected to have a material impact on the Company's financial statements.
-51-
<PAGE>
8. Employee Benefit Plans
Pension Plans
The Company has adopted an Employees' Retirement Plan, which is a
noncontributory, defined benefit plan (the "Retirement Plan"), and covers all
employees of the Company who meet age and service requirements. Benefits for
employees are based on total years of service and the highest 60 months of
compensation during the last 10 years of employment. The plan is funded by
contributions to a tax-exempt trust. The Company's funding policy is consistent
with the funding requirements of federal law and regulations. Contributions are
intended to provide not only benefits attributable to service to date, but also
those expected to be earned in the future. Plan assets consist principally of
deposits in separate accounts of LNL.
The Company also sponsors unfunded, nonqualified defined benefit pension
plans. A supplemental retirement plan provides employees with defined pension
benefits in excess of limits imposed by federal tax law, and a salary
continuation plan provides certain officers of the Company with defined pension
benefits based on years of service and final average salary as well as with a
pre-retirement death benefit.
The status of the funded defined benefit pension plan and the amounts
recognized on the balance sheets were as follows:
December 31,
-------------------
1996 1995
-------- --------
(000s omitted)
Actuarial present value of benefit obligation:
Vested benefits $ (5,445) $ (4,760)
Nonvested benefits (86) (140)
-------- --------
Accumulated benefit obligation (5,531) (4,900)
Effect of projected future compensation increases (3,442) (3,127)
-------- --------
Projected benefit obligation (8,973) (8,027)
Plan assets at fair value 8,871 8,132
-------- --------
Plan assets in excess of (less than) projected
benefit obligations (102) 105
Unrecognized transition asset (117) (126)
Unrecognized net gain (1,255) (946)
-------- --------
Pension liability included in other liabilities $ (1,474) $ (967)
======== ========
The status of the unfunded nonqualified defined benefit pension plans and
the amounts recognized on the balance sheets were as follows:
December 31,
-------------------
1996 1995
-------- --------
(000s omitted)
Actuarial present value of benefit obligation:
Vested benefits $ (1,244) $ (1,207)
-------- --------
Accumulated benefit obligation (1,244) (1,207)
Effect of projected future compensation increases (933) (707)
-------- --------
Projected benefit obligation (2,177) (1,914)
Unrecognized transition obligation 111 124
Unrecognized net gain 327 271
-------- --------
Accrued pension costs included in other liabilities $ (1,739) $ (1,519)
======== ========
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<PAGE>
8. Employee Benefit Plans (continued)
Net pension cost for the defined benefit pension plans consists of the
following components:
Year ended December 31,
-------------------------
1996 1995 1994
------- ------- -------
(000s omitted)
Service cost-benefits earned during the year $ 766 $ 633 $ 649
Interest cost on projected benefit obligation 767 636 570
Actual return on plan assets including
realized gains and losses on investments (823) (1,616) (310)
Net amortization (deferral) 146 1,044 (254)
------- ------- -------
Net pension cost $ 856 $ 697 $ 655
======= ======= =======
Determination of the projected obligation for the defined benefit plans was
based on an assumed discount rate of 7.75% and 7.5% for December 31, 1996 and
1995, respectively. The assumed long-term rate of increase in compensation was
4.5% (6.5% for the salary continuation plan) for December 31, 1996 and 1995. The
assumed long-term rate of return on plan assets was 9.0% for 1996, 1995 and
1994.
401(k) Plan
The Company also sponsors a contributory defined contribution plan for
eligible employees. The Company's contributions to the plan are equal to a
participant's pre-tax contributions, not to exceed 6% of base pay, multiplied by
a percentage, ranging from 25% to 100%, which varies according to the
achievement of predetermined goals. Expenses for the plan amounted to $0.7
million, $0.2 million and $0.7 million in 1996, 1995 and 1994, respectively.
Postretirement Medical and Life Insurance Benefit Plans
The Company sponsors unfunded, defined benefit plans that provide
postretirement medical and life insurance benefits to full-time employees who
work for the Company 10 years and have attained age 65. Medical benefits are
also available to spouses and other dependents of employees. Limited
contributions, which can be adjusted annually based on such items as years of
service and retirement age are required from individuals. The life insurance
benefits are noncontributory, although participants can elect supplemental
contributory benefits.
The status of the postretirement medical and life insurance benefit plans
and the amount recognized on the balance sheets was as follows:
December 31,
----------------
1996 1995
------- -------
(000s omitted)
Accumulated postretirement benefit obligation:
Retirees $ (72) $ (45)
Fully eligible active plan participants (77) (79)
Other active plan participants (199) (239)
------- -------
Accumulated postretirement benefit obligation (348) (363)
Unrecognized prior service costs (2,166) (2,282)
Unrecognized transition obligation (126) (66)
------- -------
Accrued plan cost included in other liabilities $(2,640) $(2,711)
======= =======
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<PAGE>
8. Employee Benefit Plans (continued)
Post-retirement Medical and Life Insurance Benefit Plans (continued)
The components of periodic postretirement benefit costs were as follows:
Year ended December 31,
------------------------
1996 1995 1994
------- ------- -------
(000s omitted)
Service cost $ 27 $ 193 $ 183
Interest cost 28 174 153
Amortization of prior service costs (116) (28)
Amortization of (gain) loss (1) 10
------- ------- -------
Net periodic postretirement (benefit) cost $ (62) $ 349 $ 336
======= ======= =======
Effective January 1, 1996, the following changes to the Plan occurred which
reduced the net periodic postretirement benefit cost: (i) retirees must attain
age 65 (previously 55), and (ii) benefits are now administered through a managed
care organization which has reduced the Company's medical premiums to zero.
The calculation of the accumulated postretirement benefit obligation
assumes a weighted-average annual rate of increase in the per capita cost of
covered benefits (i.e. health care cost trend-rate) of 3.5% for 1996 and
thereafter and a long-term rate of increase in compensation of 4.5% for December
31, 1996 and 1995, respectively. The weighted-average discount rate used in
determining the accumulated postretirement benefit obligation was 7.75% and 7.5%
for December 31, 1996 and 1995, respectively. A one percentage point increase in
the assumed health care cost trend-rate would not be material to the financial
statements.
9. Shareholders' Equity
Generally, the net assets of the Company's insurance subsidiaries available
for transfer to the parent company are limited to the amounts that the insurance
subsidiaries' net assets, as determined in accordance with statutory accounting
practices, exceed minimum statutory capital requirements; however, payments of
such amounts as dividends are subject to approval by regulatory authorities. In
1997, the Company's insurance subsidiary, SCL, can transfer approximately $22.1
million in the form of dividends to the parent without prior approval of the
regulatory authorities. AHL can transfer up to 15% of total statutory capital
and surplus, or approximately $0.3 million as of December 31, 1996, without
prior permission from the Bermuda Registrar of Companies.
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount of
capital and surplus maintained by the life insurance company is to be determined
based on the various risk factors related to it. At December 31, 1996, the
Company met the RBC requirements.
The Company's Board of Directors has adopted a Shareholder Rights Plan. The
rights provide protection against coercive or unfair takeover tactics, and are
intended to encourage anyone seeking to acquire the Company to negotiate with
the Board of Directors first. The plan was not adopted in response to any known
effort to acquire the Company. This plan is similar to plans adopted by many
public companies, and should provide a sound and reasonable means of
safeguarding the interest of all shareholders if an effort is made to acquire
the Company at a price not reflective of its fair value. The distribution of the
rights were made on March 6, 1995, payable to shareholders of record at the
close of business on that date. The rights expire on February 16, 2005. The
rights distribution is not taxable to shareholders. Pursuant to the merger
agreement the Company signed with ReliaStar, prior to the effective date of the
merger, Security-Connecticut intends to amend the Shareholder Rights Plan to
provide for the expiration of the rights issued under the plan prior to the
effective date of the merger.
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<PAGE>
9. Shareholders' Equity (continued)
The following table reconciles consolidated net income and shareholders'
equity as reported herein on the basis of GAAP with SCL's consolidated
statutory-basis net income and consolidated statutory-basis capital and surplus.
SCL's consolidated results include those of its wholly owned subsidiary, LSL.
Year ended December 31,
1996 1995 1994
--------- --------- ---------
(000s omitted)
Consolidated GAAP income $ 35,345 $ 24,110 $ 25,159
Eliminate parent company loss 4,693 3,271 2,814
Eliminate AHL income (2,955)
--------- --------- ---------
SCL consolidated GAAP income 37,083 27,381 27,973
Add (subtract) GAAP adjustments:
DAC (21,883) (28,216) (34,274)
Deferred income tax expense (5,913) (6,199) 3,519
Change in future policy benefits 16,554 22,057 5,471
Policyholders' share of earnings on
participating business 355 335 1,002
Acquired insurance in-force and goodwill 1,586 1,630 1,742
Other (6,391) (2,731) 4,518
--------- --------- ---------
SCL consolidated statutory-basis net income $ 21,391 $ 14,257 $ 9,951
========= ========= =========
Consolidated GAAP shareholders' equity $ 355,232 $ 348,362 $ 245,309
Eliminate parent company deficit 71,101 61,313 58,846
Eliminate AHL surplus (2,221)
---------- --------- ---------
SCL consolidated GAAP shareholders' equity 424,112 409,675 304,155
Add (subtract) GAAP adjustments
DAC (405,231) (383,347) (355,132)
Change in future policy benefits 153,475 136,921 114,863
Unrealized (gains) losses on fixed
maturity securities available-for-sale (31,425) (94,606) 58,505
DAC (FAS 115) 16,563 47,526 (21,002)
Future policy benefit costs (FAS 115) (1,832) (5,012) 2,280
Asset valuation reserve (17,770) (17,840) (13,377)
Deferred income tax liabilities 25,683 44,988 38,279
Acquired insurance in-force and goodwill (28,937) (30,523) (32,153)
Policyholders' share of surplus on
participating business 8,023 7,667 7,332
Other 5,684 10,511 16,661
--------- --------- ---------
SCL consolidated statutory-basis
capital and surplus $ 148,345 $ 125,960 $ 120,411
========= ========= =========
10. Commitments
During 1984, SCL entered into a sale/leaseback agreement for its home
office property. The agreement provides for a 25-year lease period with options
to renew for six additional terms of five years each. The agreement also
provides SCL with right of first refusal to purchase the property during the
term of the lease, including renewal periods, at a price as defined in the
agreement. In addition, SCL has the right to purchase the leased property at
fair market value as defined in the agreement on the last day of the initial
25-year lease period or the last day of any of the renewal periods.
-55-
<PAGE>
10. Commitments (continued)
In addition, SCL leases an office suite in Lee's Summit, Missouri and LSL
leases property in Brewster, New York. Both of these lease agreements expire in
1998. The Missouri lease can be extended for three additional periods of one
year each.
Total rental expense on operating leases was $3.3 million in 1996, $2.9
million in 1995 and $2.8 million in 1994. Future minimum rental commitments are
as follows (000s omitted) at December 31, 1996:
1997 $ 2,515
1998 2,391
1999 3,075
2000 3,190
2001 2,927
Thereafter 19,870
---------
Total $ 33,968
=========
Data processing for the Company is provided by Electronic Data Systems
Corporation ("EDS"). Pursuant to an agreement expiring December 31, 2011, EDS
provides the Company with services, including: (i) systems development and
operations for existing products and in-force business, (ii) technology
planning, (iii) programming and development for new products and (iv) ongoing
systems management. The agreement was amended effective October 1, 1996. The
amendment extended the term of the agreement from 2008 to 2011. It also provides
for various termination options available to the Company after December 31,
1998, provided 12 months written notice is given. If the agreement is terminated
between December 1998 and 2001 the Company must pay EDS a termination fee. If
termination occurs on or subsequent to December 31, 2001, no additional fee must
be paid. The Company incurred expenses of $7.8 million, $7.7 million and $8.4
million in 1996, 1995 and 1994, respectively, for services provided under the
EDS agreement. Future minimum service costs are as follows (000s omitted) at
December 31, 1996:
1997 $ 4,126
1998 4,007
1999 3,918
2000 3,809
2001 3,705
Thereafter 23,555
---------
Total $ 43,120
=========
11. Value of Acquired Insurance In-Force
The following table presents an analysis of the value of acquired insurance
in-force:
December 31,
------------------------------
1996 1995 1994
-------- -------- --------
(000s omitted)
Balance at beginning of year $ 8,966 $ 9,691 $ 10,528
Interest accretion at 15% 1,344 1,454 1,579
Amortization (2,026) (2,179) (2,416)
-------- -------- --------
Balance at end of year $ 8,284 $ 8,966 $ 9,691
======== ======== ========
-56-
<PAGE>
11. Value of Acquired Insurance In-Force (continued)
The amortization, net of interest accretion, is included in insurance and
other expenses in the accompanying consolidated statements of income. During
each of the next five years, the balance of the value of acquired insurance
in-force at December 31, 1996 is expected to decrease (representing the net of
amortization and interest accretion) at a rate of approximately 8% per year.
12. Litigation and Other Contingencies
The Company is involved in litigation concerning policy terms and benefits
and the actions of independent agents, which seek both punitive and compensatory
damages. Management believes these suits are substantially without merit, that
valid defenses exist, and that the results of such litigation will not have a
material adverse effect on the accompanying financial statements.
In addition, the Company is involved in three class action lawsuits as
follows:
Zipf vs. Security-Connecticut Life Insurance Company, et al., Court of
Common Pleas of Allegheny County, Pennsylvania.
The complaint, seeking actual and punitive damages, alleges that SCL has a
practice of misleading and/or misinforming policyholders on the basis of a
policy rate class designation. Specifically, the plaintiff alleges that the
"special non-smoker" designation leads policyholders to believe that they are
being charged premiums based on a "superior" rate when the actual premiums are
based on an "inferior, substandard or rated class."
In June 1995, the Pennsylvania court ordered the case certified as a class
action. The court later limited the class to Pennsylvania residents "who
purchased life insurance policies from Security-Connecticut Life Insurance
Company designated as 'Premium Rate Class Special Non-Smoker' on or after
November 17, 1986." SCL has filed a motion for revocation of class
certification. Management believes this suit is without merit and will continue
to vigorously defend the action.
Jacobson, et al. vs. Security-Connecticut Life Insurance Company, et al.,
Superior Court, Judicial District of Hartford/New Britain at Hartford,
Connecticut.
Plaintiffs originally filed a class action complaint in November 1995,
alleging breach of contract, fraud and violation of Connecticut's Unfair Trade
Practices Act. Plaintiffs claimed that SCL improperly charged additional
premiums to pay for the tax on DAC incurred by defendants LNL and the Company.
In November 1996, the plaintiffs filed a Request for Leave to Amend
Complaint, alleging in the proposed Complaint that SCL misled purchasers about
the cost of insurance and insurance rates and improperly increased premiums for
factors other than changes in mortality. Plaintiffs now seek to assert a class
action claim against SCL and SCC on behalf of "all persons . . . who purchased a
life insurance policy from defendant Security-Connecticut Life Insurance Company
and thereafter had their premiums increased," as well as on behalf of a
sub-class of Connecticut policyholders under an Unfair Trade Practices count.
The proposed amended complaint alleges breach of contract, fraud, fraud in
the sale of insurance contracts, and violation of Connecticut's Unfair Trade
Practices Act. It does not allege, as before, that SCL charged additional
premiums to pay for tax on DAC. SCL has filed an objection to the plaintiffs'
request to amend the Complaint. The plaintiffs also have moved to withdraw their
claims against LNL, stating that the claims in the proposed amended complaint do
not directly implicate LNL.
-57-
<PAGE>
12. Litigation and Other Contingencies (continued)
Plaintiffs seek contractual damages, punitive damages, attorneys' fees and
the imposition of a constructive trust as to any excess amounts allegedly paid
by the plaintiffs. The parties are presently pursuing settlement discussions;
however, management does not believe that any resulting settlement would be
material to the Company's financial statements.
Semler vs. First Colony Life Insurance Company, et al., Superior Court, San
Francisco, California.
The plaintiff filed a class action complaint in February 1997 against SCL
and twenty-nine other insurance companies, alleging that those companies have
improperly collected "unearned premiums" for a period of time when they do not
actually provide insurance coverage. The plaintiff, who purchased a life
insurance policy from First Colony Life Insurance Company, claims that all the
defendant companies provide in their contracts that no insurance shall take
effect until the policy is delivered and the first premium paid during the
continued good health of the proposed insured. The companies bill premiums,
however, from either an issue date or policy date, which allegedly might precede
the effective date of coverage. The plaintiff claims that this industry practice
violates certain provisions of California's Business and Professions Code.
The plaintiff seeks restitution, injunctive relief, attorneys' fees and
expenses. Management believes this suit is without merit and will vigorously
defend the action.
Guaranty Funds
The increase in the number of insurance companies that are under regulatory
supervision has resulted, and is expected to continue to result, in increased
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated insurance companies. At December 31, 1996 and 1995,
the Company held a liability for $3.3 million and $8.4 million, respectively, to
cover its share of estimated guaranty fund assessments. This liability was based
on estimates provided by the National Organization of Life and Health Guaranty
Associations ("NOLHGA"). Mandatory assessments may be partially recovered
through a reduction in future premium taxes in certain states; and at December
31, 1996 and 1995, the Company recorded an asset of $4.5 million and $6.1
million, respectively, for such expected recoveries.
13. Subsequent Events
On February 23, 1997, ReliaStar and Security-Connecticut signed a
definitive agreement to combine the two companies through the statutory merger
of Security-Connecticut with and into ReliaStar. The Board of Directors of
Security-Connecticut has unanimously approved the merger. Completion of the
merger is subject to normal closing conditions, including approval by the
Company's shareholders and various regulatory approvals. Provided there has been
no material breach by ReliaStar of the representations, warranties, covenants
and agreements of ReliaStar under the merger agreement, Security-Connecticut has
agreed to pay ReliaStar $8 million if the merger agreement is terminated either
as a result of (a) the modification or withdrawal, in any way detrimental to
ReliaStar, of the recommendation of the Security-Connecticut Board with respect
to the merger, or (b) the execution by Security-Connecticut of a definitive
agreement with a party other than ReliaStar with respect to a publicly announced
offer or intent to make an offer to acquire all or substantially all
Security-Connecticut or its subsidiaries.
Separately and not additionally, if the merger agreement is terminated by
ReliaStar on the basis that the Security-Connecticut shareholders did not
approve the merger, then Security-Connecticut would be required to pay ReliaStar
$2.5 million to reimburse ReliaStar's expenses incurred in connection with the
merger agreement. In addition to the foregoing $2.5 million payment, if an
acquisition proposal is outstanding on the date of such termination, or at any
time within 90 days thereafter, and an acquisition proposal is consummated
within twelve months of the termination of the merger agreement, the Company has
agreed to pay ReliaStar an additional $5.5 million. The foregoing discussion is
qualified in its entirety by reference to the merger agreement filed as an
exhibit to this report.
-58-
<PAGE>
<TABLE>
<CAPTION>
14. Unaudited Operating Results by Quarter
(Dollars in millions, except per share data) 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- - -------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
1996 Data
Premiums and insurance fees $ 47.9 $ 49.7 $ 49.9 $ 47.6
Net investment income 33.5 34.0 34.1 33.8
Realized gains (losses) on investments 4.1 3.2 0.5 (0.6)
Net income 9.2 10.5 8.4 7.3
Earnings per share $ 1.07 $ 1.21 $ 0.97 $ 0.84
Common stock and equivalents 8,598,410 8,614,340 8,628,955 8,660,697
1995 Data
Premiums and insurance fees $ 48.8 $ 48.0 $ 48.7 $ 44.1
Net investment income 31.6 33.4 32.6 34.4
Realized gains (losses) on investments (1.4) 1.9 0.7 4.9
Net income 3.5 8.0 7.8 4.8
Earnings per share $ 0.41 $ 0.93 $ 0.90 $ 0.56
Common stock and equivalents 8,579,979 8,584,348 8,600,625 8,599,322
</TABLE>
In the fourth quarter of 1996, lower-than-expected life claims increased
after-tax earnings by $0.18 per share. A release of a portion of the liability
held for anticipated guaranty fund assessments based on the Company's
understanding of information provided by NOLHGA also increased after-tax
earnings by $0.25 per share. Partially offsetting these positive factors in 1996
was a $0.20 per share increase in litigation expenses, including additions to
reserves, compared to 1995.
In the fourth quarter of 1995, a charge of $0.26 per share, after tax, was
incurred for anticipated guaranty fund assessments based on the Company's
understanding of information provided by NOLHGA. Also, in the fourth quarter of
1995, higher-than-expected life claims reduced after-tax earnings by $0.41 per
share.
Due to changes in the number of average common stock and equivalent shares
outstanding, quarterly earnings per share may not add to the totals for the
years.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in, or disagreements with, the Company's
independent auditors, which are reportable pursuant to Item 304 of Regulation
S-K.
-59-
<PAGE>
PART III
Item 10 - Directors and Executive Officers of the Registrant
Information for this item relating to directors of Security-Connecticut
Corporation is incorporated by reference to the sections captioned "NOMINEE FOR
DIRECTORS" and "DIRECTORS CONTINUING IN OFFICE" of Security-Connecticut
Corporation's Proxy Statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 1996. Information regarding
the executive officers of the Company is contained on page 19 of this report.
Item 11 - Executive Compensation
Information for this item is incorporated by reference to the section
captioned "EXECUTIVE COMPENSATION" of Security-Connecticut Corporation's Proxy
Statement to be filed with the Commission pursuant to Regulation 14A within 120
days after December 31, 1996.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Information for this item is incorporated by reference to the section
captioned "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, SECURITY OWNERSHIP
OF DIRECTORS, NOMINEE AND EXECUTIVE OFFICERS" of Security-Connecticut
Corporation's Proxy Statement to be filed with the Commission pursuant to
Regulation 14A within 120 days after December 31, 1996.
Item 13 - Certain Relationships and Related Transactions
Information for this item is incorporated by reference to
Security-Connecticut Corporation's Proxy Statement to be filed with the
Commission pursuant to Regulation 14A within 120 days after December 31, 1996.
PART IV
Item 14 -Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following consolidated financial statements of Security-Connecticut
Corporation and subsidiaries are included in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years ended December 31, 1996, 1995 and
1994
Consolidated Statements of Shareholders' Equity - Years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995
and 1994
Notes to Consolidated Financial Statements
-60-
<PAGE>
Item 14 (a)(2) - Financial Statement Schedules
The following financial statement schedule of Security-Connecticut
Corporation is included in Item 14 (d):
II - Condensed Financial Information of Registrant
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable, or the required
information is included in the consolidated financial statements, and therefore
have been omitted.
Item 14 (a)(3) - Listing of Exhibits
The following exhibits of the Registrant are included in Item 14(c) -
(Note: the numbers preceding the exhibits correspond to the specific numbers
within Item 601 of Regulation S-K):
2.01 Agreement and Plan of Merger dated February 23, 1997 by and between
ReliaStar Financial Corp. and Security-Connecticut Corporation. (7)
3.01 Certificate of Incorporation of the Registrant, dated October 13,
1993.(1)
3.02 Bylaws of the Registrant. (1)
4.01 Instruments Defining the Rights of Security Holders (see Exhibits 3.1
and 3.2 above). (1)
4.02 Rights Agreement, dated as of February 16, 1995, between the Company
and the First National Bank of Boston. (3)
4.03 Form of Fixed Rate Note. (5)
4.04 Form of Floating Rate Note. (5)
10.01 Term Note Agreement, dated January 19, 1994, between the Registrant
and Lincoln National Life Insurance Company ("LNL"). (2)
10.02 Form of Investment Advisory Agreement between Registrant and Lincoln
National Investment Management Company ("LNIMC"). (1)
10.03 Form of Investment Advisory Agreement between Security-Connecticut
Life Insurance Company ("SCL") and LNIMC. (1)
10.04 Form of Investment Advisory Agreement between Lincoln Security Life
Insurance Company ("LSL") and LNIMC. (1)
10.05 Form of Administration Agreement between SCL and Lincoln National
Sales Corporation. (1)
10.06 Guarantee, dated as of March 1, 1984, from Lincoln National
Corporation to Avon Associates Limited Partnership. (1)
10.07 Equipment Lease Agreement, dated December 18, 1984, between SCL and
LNL. (1)
10.08 Form of Tax Sharing Agreement between SCL, the Registrant and LNL. (1)
10.09 Form of Services Agreement between Registrant and LNL. (1)
10.10 Agreement for Information Technology Services, dated as of January 1,
1994 between SCL and Electronic Data Systems Corporation. (2)
10.11 1993 Stock Incentive Plan of the Registrant. (2)
10.12 Management Incentive Plan of the Registrant, amended through February
16, 1995. (4)
10.13 Form of Employment Agreement between the Registrant and Certain
Executive Officers. (2)
10.14 Executive Savings and Profit Sharing Plan. (2)
10.15 Employees' Excess Benefit Plans. (2)
10.16 Form of Indenture Agreement between the Company and The First
National Bank of Boston. (5)
10.17 Supplemental Executive Retirement Plans Trust Agreement. (6)
10.18 Amendment to Amended and Restated Agreement for Information
Technology Services between SCL and Electronic Data Systems
Corporation. (8)
10.19 First Amendment to Security-Connecticut Corporation 1993 Stock
Incentive Plan. (8)
10.20 Form of Employment Agreement between Registrant and Chief Executive
Officer. (8)
10.21 Form of Employment Agreement between Registrant and Certain Executive
Officers. (8)
10.22 Investment Management Agreement between LSL and General Re/New England
Asset Management, Inc. (8)
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<PAGE>
10.23 Investment Accounting Agreement between Conning Asset Management
Company and SCL. (8)
10.24 Investment Accounting Agreement between Conning Asset Management
Company and LSL. (8)
10.25 Form of Participation Agreement between LNL and/or Affiliates and SCL.
(8)
11.01 Computation of Earnings Per Common Share. (8)
12.01 Calculation of Ratios of Earnings to Fixed Charges. (8)
21.01 Subsidiaries of the Registrant. (6)
23.01 Consent of Ernst & Young LLP. (8)
27.01 Financial Data Schedule. (8)
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-70358).
(2) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1993, as filed with the Securities and Exchange
Commission on March 25, 1994.
(3) Incorporated by reference to the Company's Form 8-K as filed with the
Securities and Exchange Commission on February 16, 1995.
(4) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1994, as filed with the Securities and Exchange
Commission on March 22, 1995.
(5) Incorporated by reference to the Company's Form S-3 as filed with the
Securities and Exchange Commission June 8, 1995.
(6) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1995, as filed with the Securities and Exchange
Commission on March 14, 1996.
(7) Incorporated by reference to the Company's Form 8-K as filed with the
Securities and Exchange Commission on February 26, 1997.
(8) Filed herewith.
Item 14 (b) - Reports on Form 8-K
1. A report on Form 8-K dated October 21, 1996 relating to Moody's Investors
Service, Inc. assigning a Baa1 insurance financial strength rating to
Security-Connecticut Life Insurance Company, the principal insurance
operating subsidiary of Security-Connecticut Corporation.
2. A report on Form 8-K dated November 13, 1996 relating to the amendment to a
class action suit filed against Security-Connecticut Life Insurance
Company, Security-Connecticut Corporation and Lincoln National Life
Insurance Company in Superior Court, Judicial District of Hartford/New
Britain at Hartford, Connecticut.
-62-
<PAGE>
SECURITY-CONNECTICUT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SECURITY-CONNECTICUT CORPORATION
BALANCE SHEETS
(Parent Company)
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Equity securities available-for-sale (cost: $417) $ 383
Investment in subsidiaries 424,112 $ 409,975
Other invested assets 200
Cash and invested cash 1,299 1,227
Property and equipment 1,387 1,894
Deferred federal income taxes 4,264 3,277
Other assets 1,568 2,976
---------- ----------
Total assets $ 433,213 $ 419,349
========== ==========
LIABILITIES
Long-term debt $ 75,000 $ 65,000
Dividends payable 1,027 1,066
Accrued expenses and other liabilities 1,954 4,921
---------- ----------
Total liabilities 77,981 70,987
SHAREHOLDERS' EQUITY
Preferred stock, par value $0.01 per share; Authorized
10,000,000 shares; none issued
Common stock, par value $0.01 per share; Authorized
50,000,000 shares; issued and outstanding 1996 - 8,564,626 shares;
less 4,782 treasury shares; 1995 - 8,556,903 shares 86 86
Paid-in capital 82,558 82,405
Deferred compensation (379)
Net unrealized gains on securities available-for-sale,
principally of subsidiaries 10,873 35,748
Retained earnings 261,715 230,502
---------- ----------
Total shareholders' equity 355,232 348,362
---------- ----------
Total liabilities and shareholders' equity $ 433,213 $ 419,349
========== ==========
<FN>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes thereto.
</FN>
</TABLE>
-63-
<PAGE>
SECURITY-CONNECTICUT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SECURITY-CONNECTICUT CORPORATION
STATEMENTS OF INCOME
(Parent Company)
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Net investment income $ 170 $ 46 $ 515
Other revenue 778 872
Realized gains (losses) on investments 356 (834)
---------- ---------- ----------
Total revenues 1,304 918 (319)
BENEFITS AND EXPENSES
Interest expense 5,268 4,495 3,208
Other operating expenses 1,665 1,456 802
---------- ---------- ----------
Total benefits and expenses 6,933 5,951 4,010
---------- ---------- ----------
Loss before federal income tax benefit and
equity in net income of subsidiaries (5,629) (5,033) (4,329)
Federal income tax benefit (936) (1,762) (1,515)
---------- ---------- ----------
Net loss before equity in net income of subsidiaries (4,693) (3,271) (2,814)
Equity in net income of subsidiaries 40,038 27,381 27,973
---------- ---------- ----------
NET INCOME $ 35,345 $ 24,110 $ 25,159
========== ========== ==========
<FN>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes thereto.
</FN>
</TABLE>
-64-
<PAGE>
SECURITY-CONNECTICUT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SECURITY-CONNECTICUT CORPORATION
STATEMENTS OF CASH FLOW
(Parent Company)
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Operating activities
Net income $ 35,345 $ 24,110 $ 25,159
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in net income of subsidiaries (40,038) (27,381) (27,973)
Increase in deferred federal income taxes (936) (1,762) (1,515)
Realized losses (gains) on investments (356) 834
Other (1,058) 2,010 (2,925)
---------- ---------- ----------
Net cash used in operating activities (7,043) (3,023) (6,420)
Investing activities Securities available-for-sale:
Purchases (989) (11,812)
Sales 932 10,903
Maturities 81
Purchases of other investments (200)
---------- ---------- ----------
Net cash used in investing activities (257) (828)
Financing activities
Dividends to shareholders (4,108) (4,105) (3,060)
Dividends from subsidiary 1,050 5,000 2,750
Issuance of long-term debt 75,000
Repayment of long-term debt (65,000)
Issuance of common stock 258 220
Issuance of restricted common stock 1,050
Capital contribution 10,000
Acquisition of treasury stock (129)
Other 301 372 (729)
---------- ---------- ----------
Net cash provided by financing activities 7,372 1,487 10,011
---------- ---------- ----------
Net increase (decrease) in cash and invested cash 72 (1,536) 2,763
Cash and invested cash at beginning of year 1,227 2,763
---------- ---------- ----------
Cash and invested cash at end of year $ 1,299 $ 1,227 $ 2,763
========== ========== ==========
<FN>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes thereto.
</FN>
</TABLE>
-65-
<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.
SECURITY-CONNECTICUT CORPORATION
By: /s/Ronald D. Jarvis
-------------------
Ronald D. Jarvis, Chairman,
President and Chief Executive
Officer
March 21, 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ronald D. Jarvis, Richard D. Mocarski and
Patricia A. DeVita, and each of them severally, his true and lawful
attorney-in-fact, or attorneys-in-fact, each with power to act with or without
the other, and with power of substitution and resubstitution, to execute in
his/her name, place and stead in his/her capacity as a director or officer of
Security-Connecticut Corporation any and all amendments to this Report on Form
10-K for the year ended December 31, 1996, with exhibits thereto, and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact or their substitutes, may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated in each case on March 21, 1997.
/s/ Ronald D. Jarvis Chairman,President and Chief Executive Officer
- - ----------------------- (Principal Executive Officer); Director
Ronald D. Jarvis
/s/ Robert J. Voight Executive Vice President
- - ----------------------- (Principal Financial Officer)
Robert J. Voight
/s/ Richard D. Mocarski Vice President, Controller and Treasurer
- - ----------------------- (Principal Accounting Officer)
Richard D. Mocarski
/s/ J. Michael Divney Director
- - -----------------------
J. Michael Divney
/s/ Daniel F. Flynn Director
- - -----------------------
Daniel F. Flynn
/s/ Harvey S. Levenson Director
- - -----------------------
Harvey S. Levenson
/s/ John E. Silliman Director
- - -----------------------
John E. Silliman
-66-
<PAGE>
EXHIBIT 11.01
SECURITY-CONNECTICUT CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Primary
Average shares outstanding 8,556,032 8,555,112 8,547,727
Net effect of incremental shares assumed to be
outstanding for stock options 72,366 35,264
--------- --------- ---------
Total 8,628,398 8,590,376 8,547,727
========= ========= =========
Earnings applicable to common shareholders
(000s omitted) $ 35,345 $ 24,110 $ 25,159
========= ========= =========
Earnings per common share $ 4.10 $ 2.81 $ 2.94
========= ========= =========
Fully Diluted
Average shares outstanding 8,556,032 8,555,112 8,547,727
Net effect of incremental shares assumed to be
outstanding for stock options 122,449 43,366
--------- --------- ---------
Total 8,678,481 8,598,478 8,547,727
========= ========= =========
Earnings applicable to common shareholders
(000s omitted) $ 35,345 $ 24,110 $ 25,159
========= ========= =========
Earnings per common share $ 4.07 $ 2.80 $ 2.94
========= ========= =========
</TABLE>
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<PAGE>
EXHIBIT 12.01
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1996 1995 1994 1993(1) 1992(1)
-------- -------- -------- -------- --------
(thousands of dollars, except ratio data)
<S> <C> <C> <C> <C> <C>
Earnings:
Income before federal
income tax and
cumulative effect
of accounting changes $ 53,571 $ 36,396 $ 37,967 $ 40,513 $ 32,815
Fixed charges, excluding
interest on annuities
and financial products 7,305 6,355 5,027 4,434 4,760
-------- -------- -------- -------- --------
Earnings, excluding interest
on annuities and
financial products 60,876 42,751 42,994 44,947 37,575
Interest on annuities and
financial products 84,939 87,034 75,747 70,785 67,708
-------- -------- -------- -------- --------
Earnings $145,815 $129,785 $118,741 $115,732 $105,283
======== ======== ======== ======== ========
Fixed Charges:
Interest expense on debt $ 5,409 $ 4,495 $ 3,208 $ 2,641 $ 2,990
Interest component of
rent expense 1,896 1,860 1,819 1,793 1,770
-------- -------- -------- -------- --------
Fixed charges, excluding
interest on annuities and
financial products 7,305 6,355 5,027 4,434 4,760
Interest on annuities and
financial products 84,939 87,034 75,747 70,785 67,708
-------- -------- -------- -------- --------
Fixed charges $ 92,244 $ 93,389 $ 80,774 $ 75,219 $ 72,468
======== ======== ======== ======== ========
Ratios of Earnings to Fixed Charges:
Excluding interest on annuities
and financial products (2) 8.33 6.73 8.55 10.14 7.89
Including interest on annuities
and financial products (3) 1.58 1.39 1.47 1.54 1.45
<FN>
(1) The amounts reported are pro-forma and assume the $65 million Term Note was
outstanding in years 1993 and 1992, at LIBOR plus .75%, as more fully
described in the Company's financial statements included in its Annual
Report on Form 10-K, for the year ended December 31, 1996.
(2) This ratio is comprised of the relationship of "earnings excluding interest
on annuities and financial products" to "fixed charges excluding interest
on annuities and financial products" as disclosed above.
(3) This ratio is comprised of the relationship of "earnings" to "fixed
charges" as disclosed above.
</FN>
</TABLE>
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<PAGE>
Commission File No. 001-12746
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO FORM 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
SECURITY-CONNECTICUT CORPORATION
(Exact name of registrant as specified in its charter)
-69-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page Number
2.01 - Agreement and Plan of Merger dated February 23, 1997 by and
between ReliaStar Financial Corp. and Security-Connecticut
Corporation. (7)
3.01 - Certificate of Incorporation of the Registrant, dated
October 13, 1993. (1)
3.02 - Bylaws of the Registrant. (1)
4.01 - Instruments Defining the Rights of Security Holders
(see Exhibits 3.1 and 3.2 above). (1)
4.02 - Rights Agreement, dated as of February 16, 1995, between
the Company and the First National Bank of Boston. (3)
4.03 - Form of Fixed Rate Note. (5)
4.04 - Form of Floating Rate Note (5)
10.01 - Term Note Agreement, dated January 19, 1994, between the
Registrant and Lincoln National Life Insurance Company
("LNL"). (2)
10.02 - Form of Investment Advisory Agreement between Registrant
and Lincoln National Investment Management Company
("LNIMC"). (1)
10.03 - Form of Investment Advisory Agreement between Security-
Connecticut Life Insurance Company ("SCL") and LNIMC. (1)
10.04 - Form of Investment Advisory Agreement between Lincoln
Security Life Insurance Company ("LSL") and LNIMC. (1)
10.05 - Form of Administration Agreement between SCL and Lincoln
National Sales Corporation. (1)
10.06 - Guarantee, dated as of March 1, 1984, from Lincoln National
Corporation to Avon Associates Limited Partnership. (1)
10.07 - Equipment Lease Agreement, dated December 18, 1984, between
SCL and LNL. (1)
10.08 - Form of Tax Sharing Agreement between SCL, the Registrant
and LNL.(1)
10.09 - Form of Services Agreement between Registrant and LNL.(1)
10.10 - Agreement for Information Technology Services, dated as of
January 1, 1994 between SCL and Electronic Data Systems
Corporation. (2)
10.11 - 1993 Stock Incentive Plan of the Registrant. (2)
10.12 - Management Incentive Plan of the Registrant, amended through
February 16, 1995. (4)
10.13 - Form of Employment Agreement between the Registrant and
Certain Executive Officers. (2)
10.14 - Executive Savings and Profit Sharing Plan. (2)
10.15 - Employees' Excess Benefit Plans. (2)
10.16 - Form of Indenture Agreement between the Company and The
First National Bank of Boston. (5)
10.17 - Supplemental Executive Retirement Plans Trust Agreement. (6)
10.18 - Amendment to Amended and Restated Agreement for
Information Technology Services between SCL and Electronic
Data Systems Corporation. (8) 72
10.19 - First Amendment to Security-Connecticut Corporation 1993
Stock Incentive Plan. (8) 74
10.20 - Form of Employment Agreement between Registrant and Chief
Executive Officer. (8) 76
10.21 - Form of Employment Agreement between Registrant and Certain
Executive Officers. (8) 90
10.22 - Investment Management Agreement between LSL and General Re/New
England Asset Management, Inc. (8) 101
10.23 - Investment Accounting Agreement between Conning Asset Management
Company and SCL.(8) 111
10.24 - Investment Accounting Agreement between Conning Asset Management
Company and LSL. (8) 120
10.25 - Form of Participation Agreement between LNL and/or
Affiliates and SCL. (8) 129
11.01 - Computation of Earnings Per Common Share. (8) 67
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<PAGE>
12.01 - Calculation of Ratios of Earnings to Fixed Charges. (8) 68
21.01 - Subsidiaries of the Registrant. (6)
23.01 - Consent of Ernst & Young LLP. (8) 137
27.01 - Financial Data Schedule. (8) 138
- - ------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-70358).
(2) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1993, as filed with the Securities and Exchange
Commission on March 25, 1994.
(3) Incorporated by reference to the Company's Form 8-K as filed with the
Securities and Exchange Commission on February 16, 1995.
(4) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1994, as filed with the Securities and Exchange
Commission on March 22, 1995.
(5) Incorporated by reference to the Company's Form S-3 as filed with the
Securities and Exchange Commission June 8, 1995.
(6) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1995, as filed with the Securities and Exchange
Commission on March 14, 1996.
(7) Incorporated by reference to the Company's Form 8-K as filed with the
Securities and Exchange Commission on February 26, 1997.
(8) Filed herewith.
-71-
<PAGE>
Exhibit 10.18
AMENDMENT
TO
AMENDED AND RESTATED
AGREEMENT FOR INFORMATION TECHNOLOGY SERVICES
AMONG
SECURITY-CONNECTICUT LIFE INSURANCE COMPANY,
SECURITY-CONNECTICUT CORPORATION
AND
ELECTRONIC DATA SYSTEMS CORPORATION
THIS AMENDMENT, dated to be effective as of October 1, 1996, is among
Security-Connecticut Life Insurance Company, a Connecticut corporation
("Company"), Security Connecticut Corporation, a Delaware corporation ("SCC")
and Electronic Data Systems Corporation ("EDS") and is in amendment of that
certain Amended and Restated Agreement for Information Technology Services among
Company, SCC and EDS dated as of January 1, 1994 ("the Restated Agreement).
WHEREAS, the parties desire to amend the Expiration Date and the initial
elective termination date of the Restated Agreement; and
WHEREAS, Company desires that EDS acquire a license to certain third party
software and modify such software for Company's use as an STP Project;
NOW, THEREFORE, Company and EDS agree as follows:
1. Terms used in this Amendment and not otherwise defined shall have the
meaning set forth in the Restated Agreement.
2. Section 1.2(a) of the Restated Agreement is hereby amended to read in its
entirety as follows:
"The term of this Agreement shall commence on January 1, 1994 (the
"Effective Date"), and shall expire on December 31, 2011 (the "Expiration
Date"), unless terminated earlier in accordance with the terms of this
Agreement."
3. Section 1.2(b) of the Restated Agreement is hereby amended to read in its
entirety as follows:
"COMPANY may elect to terminate this Agreement as of December 31, 2001 or
any December 31 thereafter by giving EDS written notice at least twelve
(12) months prior to the termination date elected by COMPANY.
If there is a material change in ownership of COMPANY (defined as a third
party which is not an affiliate of COMPANY, having acquired over fifty
percent (50%) of COMPANY's common stock entitling the third party to
exercise a majority of votes on COMPANY business), COMPANY shall have the
option to terminate this Agreement after December 31, 1998 and prior to
December 31, 2001 by giving EDS written notice at least twelve (12) months
prior to the termination date elected by COMPANY. If COMPANY elects this
termination option, COMPANY shall pay EDS, in addition to any applicable
savings reduction fees, a termination fee based on the invoice credits
received by COMPANY and defined in Section 5 of this AMENDMENT to the
RESTATED AGREEMENT dated October 1, 1996. Upon notification of intended
termination, EDS will cease issuing any further invoice credits.
-72-
<PAGE>
The applicable termination fees are:
Termination Date Termination Fee
---------------- ---------------
After December 31, 1998, but
prior to June 30,1999 100 percent of invoice credits
After June 30, 1999 but
prior to July 1, 2000 66 percent of invoice credits
After June 30, 2000 but
prior to July 1, 2001 33 percent of invoice credits
4. Pursuant to Section 4.3 of the Restated Agreement, EDS will purchase a
license to Insurance Software Solutions Corp.'s ("SOLCORP") proprietary
software known as Ingenium ("Ingenium") and will install it at its IPC
located in Camp Hill, PA. or at any other EDS facility which EDS deems
appropriate. EDS will perform such modifications to Ingenium as Company and
EDS determine as part of the STP Project.
Upon expiration or termination of the Restated Agreement, EDS will assign
to Company its license to Ingenium in accordance with Section 5.3 of that
certain Joint Marketing and Master Software License Agreement between
E.D.S. of Canada, Ltd. and SOLCORP dated November 29, 1994.
5. EDS will issue invoice credits to be applied to the EDS Monthly Invoice as
mutually agreed upon and acceptable to EDS and Company. However, the
aggregate amount of all such credits will not exceed $2,000,000.
6. Except as expressly modified or supplemented by this Amendment, the
provisions of the Restated Agreement remain in full force and effect and
will be applicable to the performance of the Ingenium Services.
IN WITNESS WHEREOF, EDS and Company have executed and delivered this
Amendment as of the date first set forth above.
ELECTRONIC DATA SYSTEMS SECURITY-CONNECTICUT LIFE
CORPORATION INSURANCE COMPANY
By: /s/ Thomas A. Egan By: /s/ Barry J. St. Pierre
----------------------- ------------------------
Title: Vice President Title: Senior Vice President
----------------------- ------------------------
Date: October 29, 1996 Date: October 28, 1996
----------------------- ------------------------
SECURITY-CONNECTICUT CORPORATION
By: /s/ Barry J. St. Pierre
-----------------------
Title: Senior Vice President
-----------------------
Date: October 28, 1996
-----------------------
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<PAGE>
Exhibit 10.19
FIRST AMENDMENT TO
SECURITY-CONNECTICUT CORPORATION 1993 STOCK INCENTIVE PLAN
This Amendment made this 12th day of September , 1996, by
SECURITY-CONNECTICUT CORPORATION, for the purpose of amending its 1993 Stock
Incentive Plan,
W I T N E S S E T H :
WHEREAS, Security-Connecticut Corporation ("SCC") established the
Security-Connecticut Corporation 1993 Stock Incentive Plan (the "Plan")
effective November 16, 1993; and
WHEREAS, the Board of Directors of SCC has the authority to amend the Plan
in accordance with subsection 1.4(b) thereof, subject to the limitations set
forth in said subsection 1.4; and
WHEREAS, the Board of Directors of SCC wishes to amend the Plan in the
particulars set forth below;
NOW, THEREFORE, the Board of Directors of SCC hereby amends the Plan as
follows:
1. The second sentence of subsection 3.3 is deleted and the following new
sentence is added in its place:
"The Committee shall also have the authority to accelerate the time when
any ISO or NQSO shall be or become exercisable by written agreement with
the Participant, amending an existing stock option agreement, subject to
the limitations of subsection 3.2"
2. Except as hereinabove modified and amended, the Plan shall remain in
full force and effect.
-74-
<PAGE>
IN WITNESS WHEREOF, the First Amendment is hereby executed by a duly
authorized officer of Security-Connecticut Corporation.
ATTEST: SECURITY-CONNECTICUT CORPORATION
/s/ Patricia A. DeVita By /s/ Ronald D. Jarvis
- - ---------------------- -----------------------
ITS PRESIDENT
-75-
<PAGE>
Exhibit 10.20
AGREEMENT
AGREEMENT made as of April 11, 1996, by and between SECURITY-CONNECTICUT
CORPORATION (hereinafter called the "Company"), a Delaware corporation having
its principal place of business in the Town of Avon, County of Hartford in the
state of Connecticut, and RONALD D. JARVIS (hereinafter called "Employee").
W I T N E S S E T H :
WHEREAS, Employee desires to continue to render faithful and efficient
service to the Company; and
WHEREAS, the Company desires to continue to receive the benefit of
Employee's service; and
WHEREAS, Employee is willing to continue to be employed by the Company; and
WHEREAS, the Board of Directors of the Company (the "Board"), has
determined that it is in the best interests of the Company and its shareholders
to assure that the Company will have the continued dedication of the Employee,
notwithstanding the possibility, threat of occurrence of a Change of Control (as
defined below) of the Company. The Board believes it is imperative to diminish
the inevitable distraction of the Employee by virtue of the personal
uncertainties and risks created by a pending or threatened Change of Control and
to encourage the Employee's full attention and dedication to the Company
currently and in the event of any threatened or pending Change of Control, and
to provide the Employee with compensation and benefits arrangements upon a
Change of Control which ensure that the compensation and benefits expectations
of the Employee will be satisfied and which are competitive with those of other
corporations; and
WHEREAS, by Agreement dated as of December 3, 1993, the Company and the
Employee entered into an Agreement setting forth the conditions of Employee's
employment; and
WHEREAS, the Company and the Employee deem it advisable to amend and
restate the conditions of Employee's employment by written agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties agree to amend and restate said Agreement
dated December 3, 1993, as follows:
1. Office. The Company hereby employs Employee as its President, and if
elected by the Board, its Chairman; and Employee hereby agrees to serve the
Company in such capacities.
2. Term of Employment. Employee's employment shall be for the "Employment
Period", with the term commencing April 11, 1996 and continuing for a period of
three (3) years and thirty (30) days commencing as of said date. Such three (3)
year, thirty (30) day term shall automatically be renewed on the same terms and
conditions contained herein at the end of each thirty (30) day period such that
at no time will the balance of the term of Employee's employment hereunder be
less than three (3) years, unless the Employee elects to retire or unless this
Agreement is sooner terminated in accordance with the terms hereof.
-76-
<PAGE>
3. Disability. If the Company determines in good faith that the Disability
of the Employee has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Employee written
notice in accordance with Section 18(b) of this Agreement of its intention to
terminate the Employee's employment. In such event, the Employee's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Employee (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Employee shall not have returned to
full-time performance of the Employee's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Employee from the Employee's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Employee or the Employee's legal representative.
4. Death. The Employment Period shall automatically terminate upon the
death of Employee.
5. Responsibilities. During the Employment Period, and excluding any
periods of vacation and sick leave to which the Employee is entitled, the
Employee agrees to devote reasonable attention and time during normal business
hours to the business and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Employee hereunder, to use the
Employee's reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Employee to (a) serve on corporate, civic or charitable
boards or committees, (b) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (c) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Employee's responsibilities as an employee of the Company in accordance with
this Agreement.
6. Compensation. During the Employment Period, Employee shall receive a
base salary that shall be at an annual rate of not less than $345,000, payable
in accordance with the payroll practices of the Company as from time to time in
effect with regard to executive personnel, plus, commencing with January 1,
1997, any annual adjustment to such salary as determined by the Board.
7. Benefit Plans and Programs. During the Employment Period, Employee shall
be eligible for participation in all incentive, bonus and benefit plans and
programs, including those for executive employees, made available by the Company
to its respective employees.
8. Expenses. During the Employment Period the Company shall allow Employee
his reasonable expenses of travel and business entertainment incurred in the
performance of his duties hereunder, subject to the rules and regulations
adopted by the Company for the handling of such business expenses.
9. Termination Without Cause. In the event that Employee is terminated
without Cause and while this Agreement is in effect:
(a) the Company shall pay to Employee an amount equal to his then
current annual base salary; plus the average of the Employee's annual bonus
paid under the Company's Management Incentive Plan (or successor thereto)
for the three full fiscal years preceding the date of termination of the
Employment Period; plus any amounts payable to the Employee under any
severance pay plan maintained by the Company for its employees if the
Employee is eligible for payment thereunder; and
(b) all options granted to him shall be vested and exercisable to the
extent provided in the applicable agreements relating thereto.
-77-
<PAGE>
(c) For purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of the Employee to perform
substantially the Employee's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial
performance is delivered to the Employee by the Board which specifically
identifies the manner in which the Board believes that the Employee has not
substantially performed the Employee's duties, or
(ii) the willful engaging by the Employee in illegal conduct or
gross misconduct which is materially and demonstrably injurious to the
Company.
Any act, or failure to act, based upon authority given pursuant to a resolution
duly adopted by the Board or any committee of the Board or based upon the advice
of counsel for the Company shall be conclusively presumed to be done, or omitted
to be done, by the Employee in good faith and in the best interests of the
Company. The cessation of employment of the Employee shall not be deemed to be
for Cause unless and until there shall have been delivered to the Employee a
copy of a resolution duly adopted by the affirmative vote of not less than
three-quarters of the entire membership of the Board at a meeting of the Board
called and held for such purpose (after reasonable notice is provided to the
Employee and the Employee is given an opportunity, together with counsel, to be
heard before the Board), finding that, in the good faith opinion of the Board,
the Employee is guilty of the conduct described in subparagraph (i) or (ii)
above, and specifying the particulars thereof in detail.
10. Grounds for Termination of Employment. The Board may terminate the
Employment Period by written notice to Employee, specifying the ground or
grounds for such termination, if any, but should the Employee's termination be
without Cause, the provisions of Section 9 of this Agreement will be applicable.
11. Effect of Termination of the Employment Period. Upon the termination of
the Employment Period, this Agreement shall terminate, and all of the parties'
obligations hereunder shall forthwith terminate, except that rights and remedies
accruing prior to such termination or arising out of this Agreement shall
survive.
12. Change of Control. In the event of a Change of Control, as defined
herein, the provisions of this Section 12 shall supersede the provisions of
Sections 3 through 10 of this Agreement, except as otherwise provided herein.
(a) Effective Date. The "Effective Date" shall mean the date upon
which a Change of Control occurs. Anything in this Agreement to the
contrary notwithstanding, if a Change of Control occurs and if the
Employee's employment with the Company is terminated prior to the date on
which the Change of Control occurs, and if it is reasonably demonstrated by
the Employee that such termination of employment (i) was at the request of
a third party who has taken steps reasonably calculated to effect a Change
of Control or (ii) otherwise arose in connection with or anticipation of a
Change of Control, then for all purposes of this Agreement the "Effective
Date" shall mean and a Change of Control shall be deemed to occur on the
date immediately prior to the date of such termination of employment.
(b) Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
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<PAGE>
(i) the acquisition by any individual, entity or Group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 20% or more of either (A) the then
outstanding shares of common stock of the Company (the "Outstanding
Company Common Stock") or (B) the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company
Voting Securities"); provided, however, that for purposes of this
subparagraph (i), the following acquisitions shall not constitute a
Change of Control: (A) any acquisition directly from the Company, (B)
any acquisition by the Company, (C) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company or (D) any acquisition by
any corporation pursuant to a transaction which complies with clauses
(A), (B) and (C) of subparagraph (iii) of this paragraph (b); or
(ii) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming
a director subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or
removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a person other than the Board;
or
(iii) Consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of the assets
of the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (A) all or substantially all of
the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 50%
of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of
such transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more subsidiaries)
in substantially the same proportions as their ownership, immediately
prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be
(B) no Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to
the Business Combination and (C) at least a majority of the members of
the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(iv) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
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<PAGE>
(c) Terms of Employment Following Change of Control.
(i) Position and Duties.
(A) During the Employment Period following a Change of
Control,(1) the Employee's position (including status, offices, titles
and reporting requirements), authority, duties and responsibilities
shall be at least commensurate in all material respects with the most
significant of those held, exercised and assigned at any time during
the 120-day period immediately preceding the Effective Date and (2)
the Employee's services shall be performed at the location or
locations where the Employee was employed immediately preceding the
Effective Date or any office or location within the State of
Connecticut.
(B) During the Employment Period following a Change of
Control, and excluding any periods of vacation and sick leave to which
the Employee is entitled, the Employee agrees to continue to devote
reasonable attention and time during normal business hours to the
business and affairs of the Company as provided in Section 5 hereof.
It is expressly understood and agreed that to the extent that any
activities referenced in Section 5 have been conducted by the Employee
prior to the Effective Date, the continued conduct of such activities
(or the conduct of activities similar in nature and scope thereto)
subsequent to the Effective Date shall not thereafter be deemed to
interfere with the performance of the Employee's responsibilities to
the Company.
(ii) Compensation.
(A) Base Salary. During the Employment Period following a
Change of Control, the Employee shall receive an annual base salary
("Annual Base Salary"), which shall be paid at a monthly rate, at
least equal to twelve times the highest monthly base salary paid or
payable, including any base salary which has been earned but deferred,
to the Employee by the Company and its affiliated companies in respect
of the twelve-month period immediately preceding the month in which
the Effective Date occurs. During the Employment Period following a
Change of Control, the Annual Base Salary shall be reviewed no more
than 12 months after the last salary increase awarded to the Employee
prior to the Effective Date and thereafter at least annually. Any
increase in Annual Base Salary shall not serve to limit or reduce any
other obligation to the Employee under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term
Annual Base Salary as utilized in this Agreement shall refer to Annual
Base Salary as so increased. As used in this Agreement, the term
"affiliated companies" shall include any company controlled by,
controlling or under common control with the Company.
(B) Incentive, Savings, and Retirement Plans. During the
Employment Period following a Change of Control, the Employee shall be
entitled to participate in all bonus, incentive, savings and
retirement plans, practices, policies and programs applicable
generally to other peer executives of the Company and its affiliated
companies, but in no event shall such plans, practices, policies and
programs provide the Employee with incentive opportunities (measured
with respect to both regular and special incentive opportunities, to
the extent, if any, that such distinction is applicable), savings
opportunities and retirement benefit opportunities, in each case, less
favorable, in the aggregate, than the most favorable of those provided
by the Company and its affiliated companies for the Employee under
such plans, practices, policies and programs as in effect at any time
during the 120-day period immediately preceding the Effective Date or
if more favorable to the Employee, those provided generally at any
time after the Effective Date to other peer executives of the Company
and its affiliated companies.
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<PAGE>
(C) Welfare Benefit Plans. During the Employment Period
following a Change of Control, the Employee and/or the Employee's
family, as the case may be, shall be eligible for participation in and
shall receive all benefits under welfare benefit plans, practices,
policies and programs provided by the Company and its affiliated
companies including, without limitation, medical, prescription,
dental, disability, employee life, group life, accidental death and
travel accident insurance plans and programs) to the extent applicable
generally to other peer executives of the Company and its affiliated
companies, but in no event shall such plans, practices, policies and
programs provide the Employee with benefits which are less favorable,
in the aggregate, that the most favorable of such plans, practices,
policies and programs in effect for the Employee at any time during
the 120-day period immediately preceding the Effective Date or, if
more favorable to the Employee, those provided generally at any time
after the Effective Date to other peer executives of the Company and
its affiliated companies.
(D) Expenses. During the Employment Period following a
Change of Control, the Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in
accordance with the most favorable policies, practices and procedures
of the Company and its affiliated companies in effect for the Employee
at any time during the 120 day period immediately preceding the
Effective Date or, if more favorable to the Employee, as in effect
generally at any time thereafter with respect to other peer executives
of the Company and its affiliated companies.
(E) Fringe Benefits. During the Employment Period following
a Change of Control, the Employee shall be entitled to fringe
benefits, including, without limitation, tax and financial planning
services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the
most favorable plans, practices, programs and policies of the Company
and its affiliated companies in effect for the Employee at any time
during the 120-day period immediately preceding the Effective Date or,
if more favorable to the Employee, as in effect generally at any time
thereafter with respect to other peer executives of the Company and
its affiliated companies.
(F) Office and Support Staff. During the Employment Period
following a Change of Control, the Employee shall be entitled to an
office or offices of a size and with furnishings and other
appointments, and to personal secretarial and other assistance, at
least equal to the most favorable of the foregoing provided to the
Employee by the Company and its affiliated companies at any time
during the 120-day period immediately preceding the Effective Date or,
if more favorable to the Employee, as provided generally at any time
thereafter with respect to other peer executives of the Company and
its affiliated companies.
(G) Vacation. During the Employment Period following a
Change of Control, the Employee shall be entitled to paid vacation in
accordance with the most favorable plans, policies, programs and
practices of the Company and its affiliated companies as in effect for
the Employee at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Employee, as
in effect generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
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(d) Termination of Employment Following Change of Control.
(i) Death or Disability. The Employee's employment shall
terminate automatically upon the Employee's death during the Employment
Period following a Change of Control. If the Company determines in good
faith that the Disability of the Employee has occurred during the
Employment Period following a Change of Control, the provisions of Section
3 hereof shall be applicable.
(ii) Cause. The Company may terminate the Employee's employment
during the Employment Period following a Change of Control for Cause, as
said term is defined in Section 9(c) hereof.
(iii) Good Reason. The Employee's employment may be terminated by
the Employee during the Employment Period following a Change of Control for
Good Reason. For purposes of this Agreement, "Good Reason" shall mean:
(A) the assignment to the Employee of any duties
inconsistent in any respect with the Employee's position (including
status, offices, titles and reporting requirements), authority, duties
or responsibilities as contemplated by subparagraph (c)(i) of this
Section 12, or any other action by the Company which results in a
diminution in such position, authority, duties or responsibilities,
excluding for that purpose an isolated, insubstantial and inadvertent
action not taken in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the Employee;
(B) any failure by the Company to comply with any of the
provisions of subparagraph (c)(ii) of this Section 12, other than an
isolated, insubstantial and inadvertent failure not occurring in bad
faith and which is remedied by the Company promptly after receipt of
notice thereof given by the Employee;
(C) the Company's requiring the Employee to be based at any
office or location other than as provided in subparagraph (c)(i)(A)(2)
hereof or the Company's requiring the Employee to travel on Company
business to a substantially greater extent that required immediately
prior to the Effective Date:
(D) any purported termination by the Company of the
Employee's employment otherwise than as expressly permitted by this
Agreement; or
(E) any failure by the Company to comply with and satisfy
Section 20(c) of this Agreement.
For purposes of this subparagraph (d)(iii), any good faith determination of
"Good Reason" made by the Employee shall be conclusive. Anything in this
Agreement to the contrary notwithstanding, a termination by the Employee for any
reason during the period commencing on the Effective Date of a Change of Control
and ending one (1) year from the Effective Date of a Change of Control shall be
deemed to be a termination for Good Reason for all purposes of this Agreement.
(iv) Notice of Termination. Any termination by the Company for
Cause, or by the Employee for Good Reason, shall be communicated by Notice
of Termination to the other party hereto given in accordance with Section
18 of this Agreement. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (A) indicates the specific
termination provision in this Agreement relied upon, (B) to the extent
applicable, sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Employee's employment
under the provision so indicated and (C) if the Date of Termination (as
defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than thirty days after
the giving of such notice). The failure by the Employee or the Company to
set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right
of the Employee or the Company, respectively, hereunder or preclude the
Employee or the Company, respectively, from asserting such fact or
circumstance in enforcing the Employee's or the Company's rights hereunder.
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(v) Date of Termination. "Date of Termination" means (A) if the
Employee's employment is terminated by the Company for Cause, or by the
Employee for Good Reason, the date of receipt of the Notice of Termination
or any later date specified therein, as the case may be, (B) if the
Employee's employment is terminated by the Company other than for Cause or
Disability, the Date of Termination shall be the date on which the Company
notifies the Employee of such termination and (C) if the Employee's
employment is terminated by reason of death or Disability, the Date of
Termination shall be the date of death of the Employee or the Disability
Effective Date, as the case may be.
(e) Obligations of the Company upon Termination of Employment
Following a Change of Control.
(i) Good Reason: Other Than for Cause, Death or Disability and
Within Two Years. If, during the Employment Period following a Change of
Control and within the two (2) year period following a Change of Control,
the Company shall terminate the Employee's employment other than for Cause
or Disability or the Employee shall terminate employment for Good Reason:
(A) the Company shall pay to the Employee in a lump sum in
cash within 30 days after the Date of Termination the aggregate of the
following amounts:
(1) the sum of (I) the Employee's Annual Base Salary
through the Date of Termination to the extent not theretofore
paid, (II) the product of (x) the average of the Employee's
annual bonus paid under the Company's Management Incentive Plan
(or successor thereto) for the three full fiscal years preceding
the date of termination of the Employment Period and (y) a
fraction, the numerator of which is the number of days in the
current fiscal year through the Date of Termination, and the
denominator of which is 365; and (III) any compensation
previously deferred by the Employee (together with any accrued
interest or earnings thereon) and any accrued vacation pay, in
each case to the extent not theretofore paid (the sum of the
amounts described in clauses (I), (II), and (III) shall be
hereinafter referred to as the "Accrued Obligation"); and
(2) An amount equal to the product of (I) three (3) and
(II) the sum of (x) the Employee's Annual Base Salary in effect
at the Date of Termination and (y) the average of the Employee's
annual bonus paid under the Company's Management Incentive Plan
(or successor thereto) for the three full fiscal years preceding
the date of termination of the Employment Period; and
(3) An amount equal to the excess of (I) the actuarial
equivalent of the benefit under the Company's qualified defined
benefit retirement plan (the "Security-Connecticut Corporation
Employees' Retirement Plan") (utilizing actuarial assumptions no
less favorable to the Employee than those in effect under the
Security-Connecticut Corporation Employees' Retirement Plan
immediately prior to the Effective Date), and the
Security-Connecticut Corporation Excess Pension Benefit Plan and
Security-Connecticut Corporation Excess Compensation Pension
Benefit Plan in which the Employee participates (the "SERPS")
which the Employee would receive if the Employee's employment
continued for three years after the Date of Termination assuming
for this purpose that all accrued benefits are fully vested, and,
assuming that the Employee's Annual Base Salary in each of the
three years is equal to his Annual Base Salary at the Date of
Termination, over (II) the actuarial equivalent of the
Executive's actual benefit (paid or payable), if any, under the
Security-Connecticut Corporation Employees' Retirement Plan and
the SERPS as of the Date of Termination.
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(B) for three years after the Employee's Date of
Termination, or such longer period as may be provided by the terms of
the appropriate plan, program, practice or policy, the Company shall
continue benefits to the Employee and/or the Employee's family at
least equal to those which would have been provided to them in
accordance with the plans, programs, practices and policies described
in subparagraph (c)(ii)(C) of this Section 12 if the Employee's
employment had not been terminated or, if more favorable to the
Employee, as in effect generally at any time thereafter with respect
to other peer employees of the Company and its affiliated companies
and their families, provided, however, that if the Employee becomes
reemployed with another employer and is eligible to receive medical or
other welfare benefits under another employer-provided plan, the
medical and other welfare benefits described herein shall be secondary
to those provided under such other plan during such applicable period
of eligibility. For purposes of determining eligibility (but not the
time of commencement of benefits) of the Employee for retiree benefits
pursuant to such plans, practices, programs and policies, the Employee
shall be considered to have remained employed until three years after
the Date of Termination and to have retired on the last day of such
Period;
(C) for three years after the Employee's Date of
Termination, or such longer period as may be provided by the terms of
the appropriate plan, program, practice or policy, the Company shall
continue fringe benefits to the Employee at least equal to those which
would have been provided to him in accordance with the plans, programs
and policies described in subparagraph (c)(ii)(E) of this Section 12
if the Employee's employment had not been terminated or, if more
favorable to the Employee, as in effect generally at any time
thereafter with respect to other peer employees of the Company and its
affiliated companies;
(D) the Company shall, at its sole expense as incurred,
provide the Employee with reasonable outplacement services;
(E) to the extent not theretofore paid or provided, the
Company shall timely pay or provide to the Employee any other amounts
or benefits required to be paid or provided or which the Employee is
eligible to receive under any plan, program, policy or practice or
contract or agreement of the Company and its affiliated companies
(such other amounts and benefits shall be hereinafter referred to as
the "Other Benefits"); and
(F) the provisions of paragraph (b) of Section 9 shall also
apply.
(ii) Good Reason: Other Than for Cause, Death or Disability and
After Two Years. If, during the Employment period following a Change of
Control, and after two (2) years have elapsed following a Change of
Control, the Company shall terminate the Employee's employment other than
for Cause or Disability or the Employee shall terminate employment for Good
Reason, the provisions of subparagraph (e)(i) of this Section 12 shall not
apply, and the following provisions shall apply instead:
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(A) the Company shall pay to Employee an amount equal to his
then current annual base salary; plus the average of the Employee's
annual bonus paid under the Company's Management Incentive Plan (or
successor thereto) for the three full fiscal years preceding the date
of termination of the Employment Period; plus any amounts payable to
the Employee under any severance pay plan maintained by the Company
for its employees if the Employee is eligible for payment thereunder;
and
(B) all options granted to him shall be vested and
exercisable to the extent provided in the applicable agreements
relating thereto.
(iii) Death. If the Employee's employment is terminated by reason
of the Employee's death during the Employment Period following a Change of
Control, this Agreement shall terminate without further obligations to the
Employee's legal representatives under this Agreement, other than for
payment of Accrued Obligations and the timely payment or provision of Other
Benefits. Accrued Obligations shall be paid to the Employee's estate or
beneficiary, as applicable, in a lump sum in cash within 30 days of the
Date of Termination. With respect to the provision of Other Benefits, the
term Other Benefits as utilized in this subparagraph (iii) shall include,
without limitation, and the Employee's estate and/or beneficiaries shall be
entitled to receive, benefits at least equal to the most favorable benefits
provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated
companies under such plans, programs, practices and policies relating to
death benefits, if any, as in effect with respect to other peer executives
and their beneficiaries at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Employee's estate
and/or the Employee's beneficiaries, as in effect on the date of the
Employee's death with respect to other peer executives of the Company and
its affiliated companies and their beneficiaries.
(iv) Disability. If the Employee's employment is terminated by
reason of the Employee's Disability during the Employment Period following
a Change of Control, this Agreement shall terminate without further
obligations to the Employee, other than for payment of Accrued Obligations
and the timely payment or provision of Other Benefits. Accrued Obligations
shall be paid to the Employee in a lump sum in cash within 30 days of the
Date of Termination. With respect to the provision of Other Benefits, the
term Other Benefits as utilized in this subparagraph (iv) shall include,
and the Employee shall be entitled after the Disability Effective Date to
receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in
effect generally with respect to other peer executives and their families
at any time during the 120 day period immediately preceding the Effective
Date or, if more favorable to the Employee and/or the Employee's family, as
in effect at any time thereafter generally with respect to other peer
executives of the Company and its affiliated companies and their families.
(v) Cause: Other than for Good Reason. If the Employee's
employment shall be terminated for Cause during the Employment Period
following a Change of Control, this Agreement shall terminate without
further obligations to the Employee other than the obligation to pay to the
Employee (x) his Annual Base Salary through the Date of Termination, (y)
the amount of any compensation previously deferred by the Employee, and (z)
Other Benefits, in each case to the extent theretofore unpaid. If the
Employee voluntarily terminates employment during the Employment Period
following a Change of Control, excluding a termination for Good Reason,
this Agreement shall terminate without further obligations to the Employee,
other than for Accrued Obligations and the timely payment or provision of
Other Benefits. In such case, all Accrued Obligations shall be paid to the
Employee in a lump sum in cash within 30 days of the Date of Termination.
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13. Payment Limit. (a) Notwithstanding the other provisions of this
Employment Agreement, the Company shall make no payment that would constitute an
"excess parachute payment" within the meaning of Section 280G of the Internal
Revenue Code of 1986 or any successor provision.
(b) In the event that the accounting firm selected in accordance with
paragraph (e) hereof (the "Auditors") determines that any payment or benefit
provided by the Company to or for the benefit of the Employee, whether paid,
payable or provided pursuant to the terms of this Agreement or otherwise (a
"Payment") would constitute an excess parachute payment, then the aggregate
present value of the Payments pursuant to this Agreement shall be reduced (but
not below zero) to the Reduced Amount. The "Reduced Amount" shall be an amount
expressed in present value which maximizes the aggregate present value of
Payments without causing any Payment to constitute an excess parachute payment.
(c) If the Auditors determine that any Payment would constitute an excess
parachute payment, then the Company shall promptly give the Employee notice to
that effect and a copy of the detailed calculation thereof and of the Reduced
Amount, and the Employee may then elect, in his sole discretion, which and how
much of the Payments under this Agreement shall be eliminated or reduced in
order that no Payment shall constitute an excess parachute payment, and shall
advise the Company in writing of his election within 10 days of receipt of
notice. If no such election is made by the Employee within such 10-day period,
then the Company may elect which and how much of the Payments under this
Agreement shall be eliminated or reduced and shall notify the Employee promptly
of such election.
(d) All determinations made by the Auditors shall be binding upon the
Company and the Employee and shall be made within 60 days of the Employee's Date
of Termination.
(e) The Auditors shall be a national accounting firm selected by mutual
agreement of the Company and the Employee and may, but need not be, the auditors
of the Company.
14. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Employee's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Employee may qualify, nor shall anything herein limit or
otherwise affect such rights as the Employee may have under any contract or
agreement with the Company or any of its affiliated companies. Amounts which are
vested benefits or which the Employee is otherwise entitled to receive under any
plan, policy, practice or program of or any contract or agreement with the
Company or any of its affiliated companies shall be payable in accordance with
such plan, policy, practice or program or contract or agreement except as
explicitly modified by this Agreement.
15. Full Settlement. The Company's obligation to make the payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company may have against the Employee or
others. In no event shall the Employee be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to the
Employee under any of the provisions of this Agreement and such amounts shall
not be reduced whether or not the Employee obtains other employment. The Company
agrees to pay as incurred, to the full extent permitted by law, all legal fees
and expenses which the Employee may reasonably incur as a result of any contest
(regardless of the outcome thereof) by the Company, the Employee or others of
the validity or enforceability of, or liability under, any provision of this
Agreement or any guarantee of performance thereof (including as a result of any
contest by the Employee about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").
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16. Restrictive Covenants. Employee shall not, during the Employment
Period, directly or indirectly, alone or as a member of a partnership or
association, or as an officer, director, advisor, consultant, agent or employee
of any other company, be engaged in or concerned with any other duties or
pursuits requiring his personal services except with the prior written consent
of the Board of Directors of the Company. Nothing herein contained shall
preclude the ownership by Employee of stocks or other investment securities.
Nothing herein contained shall preclude service by Employee on boards of
directors or trustees of other entities not engaged in any business competitive
with the business of the Company.
17. Trade Secrets and Non-compete. Employee acknowledges that as a result
of his employment by the Company, he may develop, obtain or learn about specific
confidential information or trade secrets which are the property of the Company.
Employee hereby covenants and agrees to use his best efforts and the utmost
diligence to guard and protect such confidential information and trade secrets
and that he will not, without the prior written consent of the Company, for a
period of three (3) years use for himself or others or disclose or permit to be
disclosed to any third party by any method whatsoever any such confidential
information or trade secret of the Company. For purposes of this paragraph,
confidential information or trade secrets shall include, but not be limited to,
any and all records, notes, memoranda, data, ideas, processes, methods, devices,
programs, computer software, writings, research, personnel information, customer
information, financial information, plans or any information of whatever nature,
in the possession or control of the Company which give to the Employee an
opportunity to obtain an advantage over competitors who do not know or use it.
Employee recognizes that the Company is engaged in a highly competitive
business, and that personal contact is of primary importance in securing and
retaining current business and in protecting the business of the Company.
Therefore, Employee further covenants that for a period of one (1) year after
ceasing employment with the Company he shall not, without the prior written
approval of the Board of Directors of the Company:
(a) become an officer, employee, agent or partner of any business
enterprise in substantial direct competition with the Company (or any of its
subsidiaries or affiliates), as the business of the Company (or any such
subsidiary or affiliate) may be constituted during the term of employment or at
the termination thereof. For purposes of this paragraph (a), a business
enterprise will be considered to be in "substantial direct competition" if,
during a year when such competition is prohibited, its sales of any product or
service which is competitive with a product or service sold by the Company (or
its subsidiaries and affiliates), including, without limitation, sales of life
insurance or annuity products, amount to more than either ten percent (10%) of
its total sales or twenty-five million dollars ($25,000,000);
(b) interfere with the relationship of the Company and any employee,
agent or representative;
(c) directly or indirectly divert or attempt to divert from the
Company any business in which the Company has been actively engaged during the
past three (3) years nor interfere with relationships of the Company with
policyholders, dealers, distributors, marketers, sources of supply, or
customers; or
(d) engage in any pattern of conduct that involves the making or
publishing or written or oral statements or remarks (including, without
limitation, the repetition or distribution of derogatory rumors, allegations,
negative reports or comments) which are disparaging or damaging to the
integrity, reputation or good will of the Company and its management.
Employee further specifically acknowledges that the geographic area to
which the covenants contained in paragraphs (a) through (d) applies is the same
geographic area in which he performed services for the Company during the past
three (3) years. In the event that Employee is terminated without Cause,
Employee will not be subject to the covenants set forth in this Section.
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If the provisions of this Section 17 are violated, in whole or in part, the
Company shall be entitled to seek, upon application to any court of proper
jurisdiction and an appropriate showing to such court, a temporary restraining
order or preliminary injunction to restrain and enjoin the Employee from such
violation without prejudice to any other remedies the Company may have at law or
in equity. Further, in the event that the provisions of this Section 17 should
ever be deemed to exceed the time, geographic or occupational limitations
permitted by applicable laws, the Employee and the Company agree that such
provisions shall be and hereby are reformed to the maximum time, geographic or
occupational limitations permitted by the applicable laws.
18. Notice. Any notice required to be given by the Company hereunder to
Employee shall be in proper form and signed by an officer or Director of the
Company. Until one party shall advise the other in writing to the contrary,
notices shall be deemed delivered:
(a) to the Company if delivered to the Secretary of the Company, or if
mailed, certified or registered mail, postage prepaid, to the Secretary of the
Company at 20 Security Drive, Avon, Connecticut 06001;
(b) to Employee if delivered to Employee, or if mailed to him,
certified or registered mail, postage prepaid, at 165 Westmont, West Hartford,
Connecticut 06117.
19. Alternative Dispute Resolution. Any controversy, dispute or questions
arising out of, in connection with or in relation to this Agreement or its
interpretation, performance or nonperformance or any breach thereof shall be
resolved through mediation. In the event mediation fails to resolve the dispute
within 60 days after a mediator has been agreed upon or such other longer period
as may be agreed to by the parties, such controversy, dispute or question shall
be settled by arbitration in accordance with the Center for Public Resources
Rules for Non-Administered Arbitration of Business Disputes, by a sole
arbitrator. The arbitration shall be governed by the United States Arbitration
Act, 9 U.S.C. Sec. 1-16, and judgment upon the award rendered by the arbitrator
may be entered by any court having jurisdiction thereof. The place of the
arbitration shall be Hartford, Connecticut.
20. Successors.
(a) This Agreement is personal to the Employee and without the prior
written consent of the Company shall not be assignable by the Employee otherwise
than by will or the laws of descent and distribution. This Agreement shall inure
to the benefit of and be enforceable by the Employee's legal representatives.
(b) This Agreement shall inure to the benefit or and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company 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. 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 assumes and agrees to perform this Agreement by operation of
law, or otherwise.
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21. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Connecticut, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force and effect. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(c) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(d) The Employee's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Employee or the Company may have hereunder, including, without
limitation, the right of the Employee to terminate employment for Good Reason
following a Change of Control pursuant to Section 12(d)(iii) of this Agreement,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
(e) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
22. Effect on Previous Agreements. This Agreement amends and restates the
Agreement dated December 3, 1993, between Employee and Security-Connecticut
Corporation, and supersedes other previous agreements pertaining to the subject
matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
Attest: SECURITY-CONNECTICUT CORPORATION
/s/Patricia A. DeVita By /s/John E. Silliman
- - --------------------- ----------------------
Witness:
/s/Patricia A. DeVita /s/Ronald D. Jarvis
- - --------------------- -------------------
Ronald D. Jarvis
Employee
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Exhibit 10.21
AGREEMENT
AGREEMENT by and between SECURITY-CONNECTICUT CORPORATION (the "Company")
and ________________ (the "Executive"), dated as of the 11th day of April, 1996.
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall mean the first date
during the Change of Control Period (as defined in Section 1 (b)) on which a
Change of Control as defined in Section 2) occurs. Anything in this Agreement to
the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean, and a
Change of Control shall be deemed to occur on, the date immediately prior to the
date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate three years from such Renewal Date, unless at least 60 days prior
to the Renewal Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) the acquisition by any individual, entity or Group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or (iv)
any acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
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(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be (ii) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the board
of directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination;
(d) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary of such
date (the "Employment Period").
4. Terms of Employment.
(a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities shall be at least commensurate in all material
respects with the most significant of those held, exercised and assigned at
any time during the 120-day period immediately preceding the Effective Date
and (B) the Executive's services shall be performed at the location or
locations where the Executive was employed immediately preceding the
Effective Date or any office or location within the State of Connecticut.
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(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive
agrees to devote reasonable attention and time during normal business hours
to the business and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive hereunder, to use
the Executive's reasonable best efforts to perform faithfully and
efficiently such responsibilities. During the Employment Period it shall
not be a violation of this Agreement for the Executive to (A) serve on
corporate, civic or charitable boards or committees, (B) deliver lectures,
fulfill speaking engagements or teach at educational institutions and (C)
manage personal investments, so long as such activities do not
significantly interfere with the performance of the Executive's
responsibilities as an employee of the Company in accordance with this
Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the
Effective Date, the continued conduct of such activities (or the conduct of
activities similar in nature and scope thereto) subsequent to the Effective
Date shall not thereafter be deemed to interfere with the performance of
the Executive's responsibilities to the Company.
(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive shall
receive an annual base salary ("Annual Base Salary"), which shall be paid
at a monthly rate, at least equal to twelve times the highest monthly base
salary paid or payable, including any base salary which has been earned but
deferred, to the Executive by the Company and its affiliated companies in
respect of the twelve-month period immediately preceding the month in which
the Effective Date occurs. During the Employment Period, the Annual Base
Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and
thereafter at least annually. Any increase in Annual Base Salary shall not
serve to limit or reduce any other obligation to the Executive under this
Agreement. Annual Base Salary shall not be reduced after any such increase
and the term Annual Base Salary as utilized in this Agreement shall refer
to Annual Base Salary as so increased. As used in this Agreement, the term
"affiliated companies" shall include any company controlled by, controlling
or under common control with the Company.
(ii) Incentive, Savings, and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all bonus,
incentive, savings and retirement plans, practices, policies and programs
applicable generally to other peer executives of the Company and its
affiliated companies, but in no event shall such plans, practices, policies
and programs provide the Executive with incentive opportunities (measured
with respect to both regular and special incentive opportunities, to the
extent, if any, that such distinction is applicable), savings opportunities
and retirement benefit opportunities, in each case, less favorable, in the
aggregate, than the most favorable of those provided by the Company and its
affiliated companies for the Executive under such plans, practices,
policies and programs as in effect at any time during the 120 day period
immediately preceding the Effective Date or if more favorable to the
Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(iii) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be
eligible for participation in and shall receive all benefits under welfare
benefit plans, practices, policies and programs provided by the Company and
its affiliated companies including, without limitation, medical,
prescription, dental, disability, employee life, group life, accidental
death and travel accident insurance plans and programs) to the extent
applicable generally to other peer executives of the Company and its
affiliated companies, but in no event shall such plans, practices, policies
and programs provide the Executive with benefits which are less favorable,
in the aggregate, that the most favorable of such plans, practices,
policies and programs in effect for the Executive at any time during the
120 day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
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(iv) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses
incurred by the Executive in accordance with the most favorable policies,
practices and procedures of the Company and its affiliated companies in
effect for the Executive at any time during the 120 day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
(v) Fringe Benefits. During the Employment Period, the Executive shall
be entitled to fringe benefits in accordance with the most favorable plans,
practices, programs and policies of the Company and its affiliated
companies in effect for the Executive at any time during the 120-day period
immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to
other peer executives of the Company and its affiliated companies.
(vi) Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to personal secretarial and other
assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time
during the 120 day period immediately preceding the Effective Date or, if
more favorable to the Executive, as provided generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies.
(vii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans,
policies, programs and practices of the Company and its affiliated
companies as in effect for the Executive at any time during the 120 day
period immediately preceding the Effective Date or, if more favorable to
the Executive, as in effect generally at any time thereafter with respect
to other peer executives of the Company and its affiliated companies.
5. Termination of Employment.
(a) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 12(b) of this Agreement of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company shall
terminate effective on the 30th day after receipt of such notice by the
Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during the
Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean:
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(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board or the Chief
Executive Officer of the Company which specifically identifies the manner
in which the Board or Chief Executive Officer believes that the Executive
has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
Any act, or failure to act, based upon authority given pursuant to a resolution
duly adopted by the Board or upon the instructions of the Chief Executive
Officer or a senior officer of the Company or based upon the advice of counsel
for the Company shall be conclusively presumed to be done, or omitted to be
done, by the Executive in good faith and in the best interests of the Company.
The cessation of employment of the Executive shall not be deemed to be for Cause
unless and until there shall have been delivered to the Executive a copy of a
resolution duly adopted by the affirmative vote of not less that three-quarters
of the entire membership of the Board at a meeting of the Board called and held
for such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles
and reporting requirements), authority, duties or responsibilities as
contemplated by Section 4(a) of this Agreement, or any other action by the
Company which results in a diminution in such position, authority, duties
or responsibilities, excluding for that purpose an isolated, insubstantial
and inadvertent action not taken in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions
of Section 4(b) of this Agreement, other than an isolated, insubstantial
and inadvertent failure not occurring in bad faith and which is remedied by
the Company promptly after receipt of notice thereof given by the
Executive;
(iii) the Company's requiring the Executive to be based at any office
or location other than as provided in Section 4(a)(i)(B) hereof or the
Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the
Effective Date:
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy Section
11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive.
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(d) Notice of Termination. Any termination by the Company for Cause, or by
the Executive for Good Reason, shall be communicated by Notice of Termination to
the other party hereto given in accordance with Section 12(b) of this Agreement.
For purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than thirty days after the
giving of such notice). The failure by the Executive or the Company to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason or Cause shall not waive any right of the Executive or
the Company, respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstance in enforcing the
Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the Executive's
employment is terminated by the Company for Cause, or by the Executive for Good
Reason, the date of receipt of the Notice of Termination or any later date
specified therein, as the case may be, (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination and (iii) if the Executive's employment is terminated by reason
of death or Disability, the Date of Termination shall be the date of death of
the Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination.
(a) Good Reason: Other Than for Cause, Death or Disability and Within Two
Years. If, during the Employment Period within the two year period following a
Change of Control, the Company shall terminate the Executive's employment other
than for Cause or Disability or the Executive shall terminate employment for
Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary through the
Date of Termination to the extent not theretofore paid, (2) the
product of (x) the annual bonus paid or payable under the Company's
Management Incentive Plan (or successor thereto), including any bonus
or portion thereof which has been earned but deferred (and annualized
for any fiscal year consisting of less than twelve full months or
during which the Executive was employed for less than twelve full
months), for the most recently completed fiscal year during the
Employment Period, if any and (y) a fraction, the numerator of which
is the number of days in current fiscal year through the Date of
Termination, and the denominator of which is 365 and (3) any
compensation previously deferred by the Executive (together with any
accrued interest or earnings thereon) and any accrued vacation pay, in
each case to the extent not theretofore paid (the sum of the amounts
described in clauses (1), (2), and (3) shall be hereinafter referred
to as the "Accrued Obligation"); and
B. the amount equal to the product of (1) two (2) and (2) the sum
of (x) the average of the Executive's Annual Base Salary for the
Company's three full fiscal years preceding the Date of Termination
and (y) the average of the Executive's annual bonus paid under the
Company's Management Incentive Plan (or successor thereto) for the
three full fiscal years preceding the Date of Termination; and
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(ii) for two years after the Executive's Date of Termination, or such
longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which would
have been provided to them in accordance with the plans, programs,
practices and policies described in Section 4(b)(iii) of this Agreement if
the Executive's employment had not been terminated or, if more favorable to
the Executive, as in effect generally at any time thereafter with respect
to other peer executives of the Company and its affiliated companies and
their families, provided, however, that if the Executive becomes reemployed
with another employer and is eligible to receive medical or other welfare
benefits under another employer provided plan, the medical and other
welfare benefits described herein shall be secondary to those provided
under such other plan during such applicable period of eligibility. For
purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until three years after the Date of Termination and to
have retired on the last day of such Period;
(iii) the Company shall, at its sole expense as incurred, provide the
Executive with reasonable outplacement services;
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or contract or
agreement of the Company and its affiliated companies (such other amounts
and benefits shall be hereinafter referred to as the "Other Benefits");
provided, however, that if Employee is eligible for payments under any
severance pay plan maintained by the Company or its affiliates, any
payments thereunder shall reduce dollar for dollar the amount of any
payments to be made under subparagraph (a)(i) hereunder; and
(v) all options granted to him shall be vested and exercisable to the
extent provided in the applicable agreements relating thereto.
(b) Good Reason: Other Than for Cause, Death or Disability and After Two
Years. If, during the Employment period following a Change of Control, and after
two (2) years have elapsed following a Change of Control, the Company shall
terminate the Employee's employment other than for Cause or Disability or the
Employee shall terminate employment for Good Reason, the provisions of
subparagraph (a) of this Section 6 shall not apply, and the following provisions
shall apply instead:
(A) the Company shall pay to Employee an amount equal to his then
current annual base salary; plus the average of the Employee's annual
bonus paid under the Company's Management Incentive Plan (or successor
thereto) for the three full fiscal years preceding the date of
termination of the Employment Period; plus any amounts payable to the
Employee under any severance pay plan maintained by the Company for
its employees if the Employee is eligible for payment thereunder; and
(B) all options granted to him shall be vested and exercisable to
the extent provided in the applicable agreements relating thereto.
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(c) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, benefits at least equal to the most favorable
benefits provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated companies
under such plans, programs, practices and policies relating to death benefits,
if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(d) Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their families at any time
during the 120 day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect at any
time thereafter generally with respect to other peer executives of the Company
and its affiliated companies and their families.
(e) Cause: Other than for Good Reason. If the Executive's employment shall
be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.
7. Payment Limit.
(a) Notwithstanding the other provisions of this Employment Agreement, the
Company shall make no payment that would constitute an "excess parachute
payment" within the meaning of Section 280G of the Internal Revenue Code of 1986
or any successor provision.
(b) In the event that the accounting firm of Ernst & Young or its successor
(the "Auditors") determines that any payment or benefit provided by the Company
to or for the benefit of the Employee, whether paid, payable or provided
pursuant to the terms of this Agreement or otherwise (a "Payment") would
constitute an excess parachute payment, then the aggregate present value of the
Payments pursuant to this Agreement shall be reduced (but not below zero) to the
Reduced Amount. The "Reduced Amount" shall be an amount expressed in present
value which maximizes the aggregate present value of Payments without causing
any Payment to constitute an excess parachute payment.
(c) If the Auditors determine that any Payment would constitute an excess
parachute payment, then the Company shall promptly give the Employee notice to
that effect and a copy of the detailed calculation thereof and of the Reduced
Amount, and the Employee may then elect, in his sole discretion, which and how
much of the Payments under this Agreement shall be eliminated or reduced in
order that no Payment shall constitute an excess parachute payment, and shall
advise the Company in writing of his election within 10 days of receipt of
notice. If no such election is made by the Employee within such 10-day period,
then the Company may elect which and how much of the Payments under this
Agreement shall be eliminated or reduced and shall notify the Employee promptly
of such election.
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(d) All determinations made by the Auditors shall be binding upon the
Company and the Employee and shall be made within 60 days of the Employee's Date
of Termination.
8. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan, policy, practice or program of or any
contract or agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
9. Full Settlement. The Company's obligation to make the payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company may have against the Executive or
others. In no event shall the Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement and such amounts shall
not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit to the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 9 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive and without
the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company 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. 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 assumes and agrees to
perform this Agreement by operation of law, or otherwise.
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12. Miscellaneous. (a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Connecticut, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
____________________________
____________________________
____________________________
____________________________
If to the Company:
Security-Connecticut Corporation
20 Security Drive
Avon, Connecticut 06001
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
(d) The Company may withhold from any amounts payable under this Agreement
such Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c) (v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge this agreement supersedes any
other agreement between the parties with respect to the subject matter hereof
and, in particular, supersedes the Employment Agreement between the Executive
and the Company dated December 3, 1993 and that agreement is of no further force
or effect.
(g) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
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IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
/s/
----------------------
Executive
SECURITY-CONNECTICUT CORPORATION
By /s/Ronald D. Jarvis
----------------------
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Exhibit 10.22
GENERAL RE/NEW ENGLAND ASSET MANAGEMENT, INC.
Investment Management Agreement
This Agreement is made as of the 1st day of October, 1996, between
1. GENERAL RE/NEW ENGLAND ASSET MANAGEMENT, INC., a corporation organized
under the laws of the State of Delaware ( "Manager"); and
2. LINCOLN SECURITY LIFE INSURANCE COMPANY, a corporation organized under the
laws of the State of New York ("Client").
WHEREAS, Client desires to appoint Manager as the investment manager of
that portion of Client's assets constituting the Account (as defined below);
NOW THEREFORE, in consideration of the mutual agreements herein contained,
it is agreed as follows:
Section 1. The Account
The cash, securities and other assets placed by Client in the account to be
managed under this Agreement (the "Account") are listed on Schedule A. Assets
may be added to the Account at any time with the consent of the Manager. The
Account will include these assets and any changes in them resulting from
transactions directed by Manager, withdrawals made by Client, or dividends,
interest, stock splits and other earnings, gains or losses on the assets.
Section 2. Management of the Account
Manager will make all investment decisions for the Account, in Manager's
sole discretion and without first consulting or notifying Client, in accordance
with the investment restrictions and guidelines which are attached as Schedule B
(the "Investment Guidelines"). Client may change these Investment Guidelines at
any time, but Manager will be bound by the changes only after Manager has
received and agreed to the changes in writing. Other than by the Investment
Guidelines and the terms of this Agreement, the investments made by Manager on
behalf of the Client will not be restricted in any manner, except by operation
of law.
Manager will have full power and authority, on behalf of Client, to
instruct any brokers, dealers or banks to buy, sell, exchange, convert or
otherwise trade in all securities, futures or other investments for the Account,
in accordance with what is further defined in the Statement of Investment Policy
attached to this contract.
Manager will not be responsible for giving Client investment advice or
taking any other action with respect to assets not in the Account ("Unmanaged
Assets").
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Section 3. Transactions for the Account
Manager will arrange for securities transactions for the Account to be
executed through those brokers, dealers or banks that Manager believes will
provide best execution. In choosing a broker, dealer or bank, Manager will
consider the broker, dealer or bank's execution capability, reputation and
access to the markets for the securities being traded for the Account. Manager
will seek competitive commission rates, but not necessarily the lowest rates
available.
Manager may also send transactions for the Account to brokers who charge
higher commissions than other brokers, provided that Manager determines in good
faith that the amount of commissions Manager pays is reasonable in relation to
the value of the brokerage and research services provided, viewed in terms
either of that particular transaction or Manager's overall responsibilities with
respect to all clients whose accounts Manager manages on a discretionary basis.
If Manager decides to purchase or sell the same securities for Client and
other clients at about the same time, Manager may combine Client's order with
those of other clients if Manager reasonably believes that it will be able to
negotiate better prices or lower commission rates or transaction costs for the
combined order than for Client's order alone. Client will pay the average price
and transaction costs obtained for such combined orders. If Manager cannot
obtain execution of the combined orders at prices or for transaction costs that
Manager believes to be desirable, Manager will allocate the securities purchased
or sold as part of the combined order by following its order allocation
procedures.
Manager generally will allocate securities purchased or sold as part of a
combined order to Client's Account and to accounts of other clients pro rata in
proportion to the size of the order placed for each client. However, Manager may
increase or decrease the amounts of securities allocated to each client if
necessary to avoid having odd or small numbers of shares held for the account of
any client. Each client that participates in a combined order will receive or
pay the average share price for all transactions executed as part of the
combined order and will pay its pro rata share of the transaction costs.
If Client directs Manager to use particular brokers, dealers or banks to
execute transactions for the Account, Manager will do so, but Manager will not
seek better execution services or prices for Client from other brokers, dealers
or banks, and Client may pay higher prices or transaction costs as a result.
Manager also may not be able to seek better execution services for Client by
combining Client's orders with those of other clients.
Client may direct all transactions for the Account to a particular broker,
dealer or bank, by writing the name and address of that broker, dealer or bank
in the space provided on Schedule A.
Section 4. Transaction Confirmations
Manager will instruct the brokers, dealers or banks who execute
transactions for the Account to send Client all transaction confirmations,
unless Client chooses not to receive confirmations by written notice to Manager.
Manager will notify Client of each transaction for the account as soon as it is
known by Manager but, in any event, no later than the trade date.
Section 5. Custody of Account Assets
The assets in the Account will be held for Client by the custodian
appointed by Client and named on Schedule A (the "Custodian"). Manager will not
have custody of any Account assets. Client will pay all fees of the Custodian.
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Client will authorize the Custodian to follow Manager's instructions to
make and accept payments for, and to deliver or to receive, securities, cash or
other investments purchased, sold, redeemed, exchanged, pledged or loaned for
the Account. Client also will instruct the Custodian to send Client and Manager
monthly statements showing the assets in and all transactions for the Account
during the month, including any payments of Manager's fees.
Client will provide Manager with a copy of its agreement with the
Custodian, and will give Manager reasonable advance notice of any change of
Custodian.
Section 6. Reports to Client
Manager will send Client monthly written reports showing the identity,
cost, par, and current market value of the assets in the Account and each
transaction made for the Account during the period covered by the report. The
Account's performance will be sent quarterly.
Section 7. Account Valuation
Manager will value the securities in the Account that are listed and traded
on a national securities exchange or on NASDAQ on the valuation date at the
closing price on the principal market where the securities are traded. Manager
will value other securities or investments in the Account in a manner that
Manager believes in good faith reflects their fair market value.
Section 8. Manager's Fees
For Manager's services, Client will pay a percentage of the value, as
determined under Section 7 of this Agreement, of all assets in the Account as of
the last trading day of each calendar month. The fees are payable at the end of
each calendar quarter for services provided by Manager during the prior three
months. The percentage amount of the fees is shown on Schedule A. In any partial
quarter, the fees will be reduced pro rata based on the number of days the
Account was managed.
Client agrees to pay Manager's fees as follows:
[ ] The Custodian will deduct the fees from Client's Account and pay them
to Manager each quarter. Manager will send Client and the Custodian at
the same time a bill showing the amount of Manager's fees, the Account
value on which they were based and how they were calculated. The
Custodian will send Client a monthly statement showing all amounts
paid from the Account, including Manager's fees.
[X] Client will be billed directly by Manager and will pay Manager's fees
within 30 days of receiving the bill.
If Manager invests in securities issued by money market funds or other
investment companies for the Account, these securities will be included in the
value of the Account when Manager's fees are calculated. These same assets will
be subject to additional investment management and other fees that are paid by
the investment company but ultimately borne by its shareholders. These
additional fees are described in each investment company's prospectus.
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Section 9. Proxy Voting
Proxies for securities in the Account should be voted as follows:
[X] Client directs Manager to vote all proxies for securities in Client's
Account. Except if otherwise notified by Client by a prior writing,
Manager will vote Client's proxies in accordance with Manager's
internal proxy voting policies. Client will direct Custodian to send
promptly all proxies and related shareholder communications to Manager
and to identify them as relating to Client's Account. Client
understands that Manager will have no responsibility to vote proxies
if they are not received on a timely basis from the Custodian as
properly identified as relating to Client's Account.
[ ] Client directs Manager not to vote proxies for securities held for the
Account.
This proxy voting election may be changed at any time by notifying Manager
in writing.
Section 10. Risk
Manager cannot guarantee the future performance of the Account, promise any
specific level of performance or promise that its investment decisions,
strategies or overall management of the Account will be successful. The
investment decisions Manager will make for Client are subject to various market,
currency, economic, political and business risks, and will not necessarily be
profitable.
Section 11. Standard of Care; Limitation of Liability
Except as may otherwise be provided by law, Manager will not be liable to
Client for any loss (i) that Client may suffer as a result of Manager's good
faith decisions or actions where Manager exercises the degree of care, skill,
prudence and diligence that a prudent person acting in a like fiduciary capacity
would use; (ii) caused by following Client's instructions; or (iii) caused by
the Custodian, any broker, dealer or bank to which Manager directs transactions
for the Account or any other person.
Federal and state securities laws impose liabilities under certain
circumstances on persons who act in good faith, and this Agreement does not
waive or limit Client's rights under those laws.
Manager will not be responsible for Client's own compliance with the
insurance investment laws of Client's state of domicile or for Client's
compliance with applicable tax laws.
In managing the Account, Manager will not consider any other securities,
cash, or other investments or assets Client owns for diversification or other
purposes. Manager shall have no responsibility whatsoever for the management of
the Unmanaged Assets or any assets of Client other than the Account and shall
incur no liability for any loss or damage which may result from the management
of such other assets.
Section 12. Client Directions
The names and specimen signatures of each individual who is authorized to
give directions to Manager on Client's behalf under this Agreement are set forth
on Schedule C. Directions received by Manager from Client must be signed by at
least one such person. If Manager receives directions from Client which are not
signed by a person that Manager reasonably believes is authorized to do so,
Manager shall not be required to comply with such directions until it verifies
that the directions are properly authorized by Client.
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Manager shall be fully protected in relying upon any direction signed or
given by a person that Manager reasonably believes is authorized to give such
directions on Client's behalf. Manager also shall be fully protected when acting
upon an instrument, certificate, or paper that Manager reasonably believes to be
genuine and to be signed or presented by any such person or persons. Manager
shall be under no duty to make any investigation or inquiry as to any statement
contained in any writing and may accept the same as conclusive evidence of truth
and accuracy of statements contained therein.
Section 13. Confidentiality
Except as Client and Manager otherwise agree in writing or as may be
required by law, all information concerning the Account and services provided
under this Agreement shall be kept confidential.
Section 14. Non-Exclusive Agreement
Manager provides investment advice to other clients and may give them
advice or take actions for them, for Manager's own accounts or for accounts of
persons related to or employed by Manager, that is different from advice
provided to or actions taken for Client.
Manager is not obligated to buy, sell or recommend for Client's Account any
security or other investment that Manager may buy, sell or recommend for other
clients or for the account of Manager or its related persons or employees.
If Manager obtains material, non-public information about a security or its
issuer that Manager may not lawfully use or disclose, Manager will have no
obligation to disclose the information to Client or to use it for Client's
benefit.
Section 15. Term of Agreement
Either Client or Manager may cancel this Agreement at any time upon 30 days
written notice. This Agreement will remain in effect for 30 days following
written notice. Termination of this Agreement will not affect (i) the validity
of any action that Manager or Client has previously taken; (ii) the liabilities
or obligations of Manager or Client for transactions started before termination;
or (iii) Client's obligation to pay Manager's fees through the date of
termination. Upon termination, Manager will have no obligation to recommend or
take any action with regard to the securities, cash or other assets in the
Account.
Section 16. Agreement Not Assignable
This Agreement may not be assigned within the meaning of the Investment
Advisers Act of 1940 (the "Advisers Act") by Manager without Client's written
consent.
Section 17. Governing Law
The internal law of Connecticut will govern this Agreement. However,
nothing in this Agreement will be construed contrary to any provision of the
Advisers Act or the rules thereunder.
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Section 18. Arbitration Clause
Any dispute, controversy or claim which relates to, arises out of or is
connected with this Agreement, including, without limitation, the creation,
validity, interpretation, breach or termination of this Agreement, and which has
not been mutually resolved by the parties shall, on the written demand by either
party to the other party, be determined and settled in Hartford, Connecticut by
a panel of three arbitrators in accordance with the Commercial Arbitration Rules
of the American Arbitration Association.
Section 19. Miscellaneous
If any provision of this Agreement is or becomes inconsistent with any
applicable law or rule, the provision will be deemed rescinded or modified to
the extent necessary to comply with such law or rule. In all other respects,
this Agreement will continue in full force and effect. This Agreement contains
the entireunderstanding between Manager and Client and may not be changed except
in writing signed by both parties. Failure to insist on strict compliance with
this Agreement or with any of its terms or any continued conduct will not be
considered a waiver by either party under this Agreement.
Section 20. Notices
All notices and instructions with respect to the Account or other matters
covered by this Agreement may be sent by U.S. mail, overnight courier, or
facsimile transmission (with a hard copy sent by U.S. mail) to Client and to
Manager at the addresses at the end of this agreement or to another address
provided in writing.
Section 21. Representations of Client
Client represents and warrants to Manager that (a) Client is the beneficial
owner of all assets in the Account and that there are no restrictions on
transfer or sale of any of those assets; (b) this Agreement has been duly
authorized, executed, and delivered by Client and is Client's valid and binding
obligation; (c) the names of the individuals who are authorized to act under
this Agreement on behalf of Client have been given to Manager in writing; (d) no
government authorizations, approvals, consents, or filings not already obtained
are required in connection with the execution, delivery, or performance of this
Agreement by Client; and (e) the assets in the Account are not and are not
deemed to be assets of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended. Client agrees to indemnify
and hold harmless Manager from all liability and costs (including costs of
defense) which may be asserted or incurred by reason of any defect in Client's
authority to appoint Manager or any defect in the conduct of Client in making
the appointment under this Agreement.
Section 22. Representations of Manager
Manager represents and warrants that this Agreement has been duly
authorized, executed and delivered by Manager and is its valid and binding
obligation. Manager represents and warrants to Client that Manager is registered
as an Investment Adviser under the Investment Advisers Act of 1940, as amended.
Section 23. Disclosure
Client has received and reviewed a copy of Part II of Manager's Form ADV
and a copy of this Agreement.
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AGREED TO AND ACCEPTED BY:
GENERAL RE/NEW ENGLAND LINCOLN SECURITY LIFE
ASSET MANAGEMENT, INC. INSURANCE COMPANY
By: /s/ Gerald T. Lynch By: /s/ Robert J. Voight
---------------------- -----------------------
(Signature) (Signature)
Gerald T. Lynch Robert J. Voight
- - ---------------------- -----------------------
(Name) (Name)
President Executive Vice President
- - ---------------------- -----------------------
(Title) (Title)
30 Waterside Drive Route 312, Southeast Executive Park
Farmington, Connecticut 06032-3065 Brewster , NY 10509-0565
(Principal Address)
22-2491079
----------
(Taxpayer Identification Number)
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SCHEDULE A
- - --------------------------------------------------------------------------------
I. ACCOUNT ASSETS. Client has deposited the following securities, cash and
other assets with the Custodian identified below to be managed under this
Agreement:
Schedule D, dated 9/30/96, as attached.
- - --------------------------------------------------------------------------------
II. CUSTODY OF ACCOUNT ASSETS. The assets to be managed under this Agreement
will be held by:
Chase Manhattan Bank G04847
(Name) (Custodial Account Number)
(Address)
- - --------------------------------------------------------------------------------
III. FEES. Manager's fees for services provided under this Agreement shall
be as follows:
Annual fee of .10 of 1% of market value of invested assets.
- - --------------------------------------------------------------------------------
IV. BROKERAGE DIRECTION. Client directs Manager to cause all transactions
for the Account to be executed through the following broker, dealer or bank:
None
- - -----------------------------
(Name)
- - ------------------------------------------------------------------------------
(Address)
- - ------------------------------------------------------------------------------
Client has read, understands and accepts the limitations that this direction
will place on Manager's ability to seek best execution for the Account. This
direction may be changed by Client at any time by notifying Manager in writing.
- - -------------------------------------------------------------------------------
V. Name of Client: VI. Date:
Lincoln Security Life Insurance Company
/s/ Robert J. Voight
---------------------
By: Robert J.Voight, Executive Vice President October 1, 1996
- - --------------------------------------------------------------------------------
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SCHEDULE B
- - --------------------------------------------------------------------------------
INVESTMENT GUIDELINES: The investment guidelines to be followed by Manager in
managing Client's Account are set forth below:
Statement of Investment Policy, dated 9/17/96 , as attached.
- - --------------------------------------------------------------------------------
Name of Client: Date:
Lincoln Security Life Insurance Company
/s/ Robert J. Voight
- - ---------------------
By: Robert J. Voight, Executive Vice President October 1, 1996
- - --------------------------------------------------------------------------------
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SCHEDULE C
SECRETARY'S CERTIFICATE
I, Patricia Ann DeVita, the Secretary of Lincoln Security Life Insurance
Company (the "Corporation"), a Corporation organized and existing under the laws
of the State of New York , hereby certify that each of the following officers of
the Corporation, acting singly, is authorized in the name and on behalf of the
Corporation, to give instructions to General Re/New England Asset Management,
Inc. ("Manager") with respect to any and all matters, including investment and
reinvestment of securities, pertaining to the Investment Management Agreement
between the Corporation and Manager, and to execute and deliver any and all
documents and to take any and all other action to carry out the purposes of said
Investment Management Agreement. I further certify that the specimen signature
set forth next to the names of such officers, is the true and genuine signature
of such persons.
Name of Officer Title Signature
Robert J. Voight Executive Vice President /s/ Robert J. Voight
- - ---------------- ------------------------ --------------------
Richard D. Mocarski Vice President, Controller & Treasurer /s/Richard D.Mocarski
- - ------------------- ------------------------------------- ---------------------
This Certificate shall be in effect from the date hereof until written
notice is given on behalf of the Corporation to terminate or revise it.
IN WITNESS WHEREOF, I set my hand and seal of the corporation.
Patricia Ann DeVita October 1,1996
------------------------------- --------------
Secretary Date
(Corporate Seal)
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Exhibit 10.23
INVESTMENT ACCOUNTING AGREEMENT
THIS INVESTMENT ACCOUNTING AGREEMENT, (the "Agreement"), dated as of this
first day of August, 1996, (the "Effective Date"), is by and between Conning
Asset Management Company ("Conning") and Security-Connecticut Life Insurance
Company, (the "Company" and collectively, "the Parties").
WHEREAS, the Company and/or other investment advisors retained by the
Company, ("Advisors"), intend to manage a portion or all of the securities of
the Company held in the Custody Accounts (as defined herein);
WHEREAS, the Company desires Conning to provide certain investment
accounting services, ("Investment Accounting Services"), and data conversion
assistance services substantially in accordance with the terms of this
Agreement; and
WHEREAS, the Company has requested that Conning provide the aforementioned
Investment Accounting Services and certain data conversion assistance services
to the Company and Conning desires to accept such duties and responsibilities.
NOW THEREFORE, in consideration of the foregoing and the mutual promises
recited below, the parties agree as follows:
1. DEFINITIONS. The following terms used in this Agreement shall have the
meanings ascribed to them below:
"Advisor" shall have the meaning set forth in the first WHEREAS clause of
this Agreement; provided, that, Conning is given at least fifteen (15) days
prior written notice by the Company of any additions or deletions of
Advisors.
"Allocation" shall mean that portion of the Assets that is initially
allocated to an Advisor and transferred to a Custody Account.
"Assets" shall mean those assets held in the Custody Accounts.
"Business Day" shall mean end of day on which Advisor, Conning and the
Custodian, as applicable, are open for business, except as otherwise noted
in this Agreement.
"Custodian" shall mean the bank and such other custodians as the Company
may from time to time designate in writing to Conning as custodians of all
or part of the Assets.
"Custody Account(s)" shall mean the custody accounts at the bank,
securities held directly by the Company and such other custody accounts as
the Company may designate in writing to Conning as the custody accounts for
the deposit of its securities of the Company.
2. INVESTMENT ACCOUNTING SERVICES. Conning shall, as of the Effective
Date, assume responsibility for and provide to the Company, and to its
advisors and designees, which shall be designated to Conning in writing,
certain investment accounting services set forth in Schedule 2 of this
Agreement, provided that: the Company and each Advisor shall promptly
provide to Conning all information reasonably requested by Conning with
respect to the purchase, sale, investment, re-investment and supervision
of that portion of the Company's Assets managed by such person and in
furtherance of this requirement, the Company shall authorize the
Custodians to allow Conning on-line access to view the Company's account
activity.
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With respect to each Custody Account, each Advisor and the Company shall be
solely responsible for: (i) buying, selling, exchanging, converting,
modifying or otherwise trading in any securities in the Custody Account;
(ii) selecting the brokers, dealers and currency merchants to execute each
such transaction; and (iii) placing orders for the execution of such
securities transactions with or through such brokers, dealers or issuers.
The Company shall be responsible for: (i) coordinating communication among
Conning, the Custodian and each applicable Advisor, of all respective
trades and settlement activity; (ii) filing any settlement claims and
making payment of any claims filed against the Company; (iii) representing
the Company's interest in any class action suit and/or any other litigation
relating to or involving the invested assets of the Company arising after
the Effective Date; (iv) coordinating and controlling any movement of
assets between portfolios not relating to trades and resolving any
discrepancies related to the movement of such assets; and (v) notifying
Conning of all such asset movement activity.
3. DATA ACCESS. Conning agrees to provide the Company access to the
Company's investment accounting data maintained in Conning's automated
systems via ASCII download or other format agreed to by the Company and
Conning.
In the event that the Company requests on-line read-only access to such
accounting data on Conning's automated accounting system, Conning will
assist the Company and make such modifications to its systems environment
to permit such access, providing that Conning shall not be required to make
any modifications which Conning determines is not practicable and provides
written notice to the Company of such determination. The Company shall
reimburse Conning promptly for the reasonable cost of all modifications
made pursuant to this section.
4. FEES. Conning's fee for performing services under this Agreement shall
be determined and paid as shown in Schedule 1 of the Agreement. Such
fee shall begin to accrue upon completion of installation and conversion
to Conning which will be deemed to have been completed on October 1,
1996. This fee will be billed quarterly in arrears and will be
calculated based on the book value of total reported assets at the end
of each calendar quarter. All partial quarters will be prorated. Book
value shall be determined by Conning in consultation with the Company in
accordance with Statutory Accounting Principles.
In addition to the compensation calculated and paid in accordance with the
fee schedule, the Company shall be obligated to pay all applicable sales
taxes, if any, assessed in connection with the investment accounting
services, conversion assistance and other special services rendered by
Conning hereunder. The Company shall reimburse Conning within thirty (30)
days of receipt of Conning's invoice for expenses directly related to the
NAIC asset valuation system ("SVO") annual licensing fee and to the
provision of investment accounting services under this Agreement.
5. AUTHORIZED PERSONS. In addition to the individuals authorized to act in
connection with specific matters covered by this Agreement, as
contemplated by particular provisions of this Agreement, the President
and/or Treasurer of the Company or their designees, which will be
designated to Conning in writing by the Company, shall be authorized to
make and communicate to Conning on behalf of the Company, any decisions
or instructions pertaining to this Agreement, and Conning may rely on
and act upon a communication purporting to be from any of such persons
or designees.
6. TERM AND TERMINATION. This Agreement will commence on the effective
date specified on the Execution Page of this Agreement and shall
continue in force for a period of at least three years and thereafter
shall be automatically renewed for additional one year terms on each
anniversary of the effective date, unless terminated earlier according
to the provisions of this Agreement. This Agreement may be terminated by
either party at any time upon 90 days prior written notice to the other
party
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In the event of termination by the Company without cause within three years
of the Effective Date, Conning shall be paid a termination fee which shall
be $80,000 as of the Effective Date, and which fee will be reduced by the
amount of $2,200 for each month thereafter during which this Agreement is
in effect. This termination fee is to compensate Conning for the
installation and conversion that is not being charged for.
Upon the termination without cause of this Agreement, the fees payable
hereunder per Schedule 1 shall be pro-rated to the date of termination and
such fees shall be paid by the Company to Conning promptly following
receipt of an invoice therefor. If the Company terminates this contract for
cause no termination fee will be payable. For purposes of this paragraph,
the material breach of this Agreement, gross negligence or willful
misconduct shall be considered cause.
Upon termination of this Agreement, the payment of the final fee shall be
contingent upon the timely completion of installation and conversion to a
subsequent provider to Conning not to exceed 90 days of written notice of
termination.
7. NOTICES. All notices and other communications hereunder shall be in writing
and shall be sufficient if (i) delivered by overnight delivery by a
nationally recognized air courier service; or (ii) mailed by registered or
certified mail, return receipt requested, postage prepaid, addressed as
follows:
A. Notices to the Company shall be delivered to:
Security-Connecticut Corporation
20 Security Drive
Avon, CT 06001
Telefax No: (860) 674-7612
Attention: Richard D. Mocarski, Vice President, Controller and
Treasurer
B. Notices to Conning shall be sent or delivered to:
Conning Asset Management Company
CityPlace II
185 Asylum Street
Hartford, CT 06103
Telefax No. (860) 520-1253
Attention: Fred M. Schpero, Vice President
The parties may by like notice, designate any future or different address or
telefax number to which subsequent notices shall be sent. Any notice shall be
deemed given when received.
8. AUDITING. The Company shall have the right to audit all books and
records directly pertaining to the performance of services for the
Company only by Conning pursuant to this Agreement, and to obtain copies
of such books and records as its auditors may reasonably request in
connection with such audit, provided that the Company gives reasonable
notice of the audit, reviews the books and records during Conning's
normal business hours, and promptly reimburses Conning for any
reasonable costs of photocopying or delivering copies of books and
records.
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9. CONFIDENTIALITY. Conning agrees that the information and reports
furnished pursuant to this Agreement marked as confidential shall be
treated as confidential unless available through other public sources
and shall not be disclosed to third parties except as specified pursuant
to the terms of this Agreement or by law. The Company agrees that
reports furnished by Conning to the Company will not be disclosed by
the Company to third parties, provided that the Company shall be
permitted to disclose all information required to be disclosed pursuant
to financial reporting requirements or by law. Conning may disclose to
its clients the fact that the Company is a client of Conning.
10. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
11. LIMITATION OF LIABILITY; INDEMNIFICATION. (a) Neither Conning nor any
of its shareholders, officers, directors or employees shall be liable to
the Company, or to the Board of Directors of the Company for (i)
mistakes of judgment, mistakes of law or any act or omission suffered or
taken by any such person, or for losses due to any such mistakes, act or
omission (including, without limitation, any losses that may be
sustained in connection with the performance of Conning on behalf of
the Company), except to the extent such liability or losses result from
the (A) willful misconduct, bad faith or negligence of such person or
(B) reckless disregard by Conning of obligations and duties under this
Agreement, (ii) the willful misconduct, negligence or bad faith of any
independent representative, consultant, independent contractor, broker,
agent or other person who is selected, engaged or retained by Conning
on behalf of the Company in the performance of this Agreement or in
connection herewith, unless such person was in a negligent manner
selected, engaged or retained by Conning.
Nothing herein shall constitute a restriction or waiver of any rights under
federal or state securities laws.
12. SEVERABILITY. In the event that any one or more of the provisions of this
Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, or becomes inconsistent with any applicable
rule or law, such invalidity, illegality, unenforceability or inconsistency
shall not affect any other provision of this Agreement.
13. COMPLETE AGREEMENT. This Agreement together with the attached schedules
embodies the entire agreement and understanding between Conning and the
Company and supersedes all prior agreements and understandings relating
to the subject matter hereof.
14. AMENDMENT. This Agreement may only be amended or revised in writing,
signed by both parties.
15. HEADINGS. The headings of the parts of this Agreement are for purposes
of reference only and shall not limit or otherwise affect the meaning of
this Agreement.
16. ASSIGNMENT. This Agreement may not be assigned by either party to any
other organization without the prior written approval of the other.
17. NON-WAIVER. No failure of either party to exercise any power or right given
either party hereunder or to insist upon strict compliance by either party
with its obligations hereunder, and no custom or practice of the parties at
variance with the terms hereof, shall constitute a waiver of either party's
right to demand exact compliance with the terms hereof. A waiver of the
breach of one provision of this Agreement shall not be deemed a waiver of
any other provision of this Agreement.
18. RELIANCE ON INFORMATION. Conning shall be entitled to rely, without
independent verification, on the accuracy and completeness of all
information furnished to it by the Company or the Advisors in
furtherance of this Agreement, and on all information obtained by
Conning from third parties reasonably believed by Conning to be
reliable. Conning shall not be responsible for any loss or expense
relating to the accuracy of the information contained in trade tickets
or other reports furnished by the Company or its Advisors to Conning
pursuant to Section 2 hereof.
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19. FORCE MAJEURE. Neither party shall be considered in default in the
performance of its obligations under this Agreement, to the extent that the
performance of any such obligation is prevented or delayed by any cause
which is beyond the reasonable control and without the fault or negligence
of such party.
20 SURVIVAL. The provisions of paragraph 9, 10 and 11 shall survive any
termination of this Agreement.
21. ARBITRATION CLAUSE. Any dispute, controversy or claim which relates to,
arises out of or is connected with this Agreement, including, without
limitation, the creation, validity, interpretation, breach or
termination of this Agreement, and which has not been mutually resolved
by the parties shall, on the written demand by either party to the other
party, be determined and settled in Hartford, Connecticut by a panel of
three arbitrators in accordance with the Commercial Arbitration Rules of
the American Arbitration Association.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
Conning Asset Management Company
/s/Mark E. Hansen
------------------------------
By: Mark E. Hansen
Title: Executive Vice President
Security-Connecticut Life Insurance Company
/s/Richard D. Mocarski
------------------------------
By: Richard D. Mocarski
Title: Vice President, Controller and
Treasurer
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Schedule 1
ATTACHED TO AND FORMING PART OF THE
INVESTMENT ACCOUNTING AGREEMENT
DATED AS OF THIS FIRST DAY OF AUGUST 1996
BETWEEN
CONNING ASSET MANAGEMENT COMPANY
AND
SECURITY-CONNECTICUT LIFE INSURANCE COMPANY
================================================================================
Conning's annual fee as described in Section 4 of this Agreement is stated
below:
.0175 percent of the book value of the assets stated in Schedules D1, D2.1
and D2.2 of the statutory statements filed by the Company.
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Schedule 2
ATTACHED TO AND FORMING PART OF THE
INVESTMENT ACCOUNTING AGREEMENT
DATED AS OF THIS FIRST DAY OF AUGUST 1996
BETWEEN
CONNING ASSET MANAGEMENT COMPANY
AND
SECURITY-CONNECTICUT LIFE INSURANCE COMPANY
================================================================================
Investment Accounting Services
Pursuant to the Agreement, Conning shall provide the following Investment
Accounting Services:
A. Trade Processing. Conning shall provide to the Company and each Advisor
services regarding input of securities trades subject to the following:
(1) Conning shall review trade tickets furnished by the Company and/or its
Advisors to determine whether they include all items of information
concerning security trades that must be completed by the party
effecting a trade in order to allow Conning to perform the investment
accounting services set forth in this Agreement (e.g. FASB 115,
ratings, purchase PSA). Simultaneously with booking a securities
trade, Conning shall make a determination of the accounting treatment
for such trade under GAAP, statutory, and tax principles provided that
the Company shall retain ultimate responsibility for the financial
impact of this determination. In addition, Conning shall notify the
Company of any information which has not been completed and shall
request the Company or the Advisor to complete any such information.
(2) Conning may require the addition or deletion of items to be completed
on trade tickets or of other forms necessary to process the securities
trades as warranted by changes in investment accounting practices or
systems by giving each Advisor and the Company seven (7) Business
Days' written notice of its further requirements.
(3) Conning shall file all required registrations and applications with
the SVO and apply for private placement numbers as necessary.
(4) Conning shall maintain separate records of Advisors' trades on both an
Advisor and a cumulative basis.
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B. Reconciliation Services. Conning shall endeavor to update, verify and
reconcile the information on the Company's investment portfolio
contained in Conning's securities accounting system and the reports
provided to the Company therefrom with the records and reports of the
Company's Custodian and each Advisor concerning the Company's investment
portfolio. Discrepancies and unreconciled items shall promptly be
brought to the attention of the Company and the effecting Advisor.
Ultimate resolution of discrepancies and unreconciled items shall be
made by Conning with assistance from the Company only when required.
C. Income Processing. Conning shall provide the following services to the
Company, monthly (except as provided otherwise herein) or as requested
by the Company and agreed to by Conning, on an aggregate and a Custody
Account basis, as applicable: (i) daily reporting of cash flow expected
to be available for reinvestment arising from principal and interest
payments due on securities that are recorded on Conning's securities
accounting system as part of the Company's investment portfolio,
together with book/income projections; (ii) processing and
reconciliation of income and principal due/received as payment on
securities that are recorded on Conning's securities accounting system
as part of the Company's investment portfolio against the records and
reports of the Company's custodians concerning the Company's investment
portfolio; (iii) notifying the Company and the applicable Advisor of
past due income and/or principal, and undertaking the preliminary
investigation with respect thereto; (iv) will provide to the Custodian
such documentation as the Custodian should request relating to such
past due income and/or principal; and (v) in those cases where the
Custodian has no such responsibility, filing the appropriate claims for
past due income and/or principal.
D. Services, Data Base and Report Distribution. In furtherance of its duties
and responsibilities hereunder, Conning shall provide to the Company and/or
its designees, as applicable, reports and services provided that, the
Company and each Advisor shall promptly provide to Conning all information
reasonably requested by Conning with respect to the purchase, sale,
investment, reinvestment and supervision of that portion of the Company's
investment portfolio managed by such person.
E. Outside Services. To the extent that Conning charges the Company for
such services, Conning shall obtain prior approval by the Company
regarding the use of outside data services (for pricing, dividend
accruals, involuntary corporate actions, ratings, etc.).
F. System Releases and Enhancements. Conning shall endeavor to add new
releases and/or enhancements to the investment accounting systems used
by Conning to provide the services hereunder to the Company
substantially similar to those added to the systems used by Conning in
the ordinary course of its provision of investment accounting services
to clients with similar investment portfolios and accounting
requirements, provided that, (i) in the reasonable judgment of Conning,
such releases or enhancements are necessary or desirable for the
provision of such services and (ii) the Company shall pay such amounts
for such nonstandard upgrade and enhancement services which are agreed
upon with Conning.
G. Regulatory Examinations, Retention of Records. Conning shall provide
such information and assistance as required to insurance regulatory
examiners authorized by the Company to examine the data maintained by
Conning on behalf of the Company concerning its investment portfolio.
Upon termination of this Agreement, all trade authorization files
relating to the investment accounting services provided hereunder will
be inventoried and sent to the Company. Conning shall maintain for the
time period required by the Advisors Act and make available for
inspection and duplication by the Company or its agents (reasonably
satisfactory to Conning) at the Company's expense all records pertaining
to the investment accounting services provided hereunder and not
delivered to the Company.
H. Monthly Investment Transaction / Income / General Ledger Summary.
Preliminary entries, excluding market valuations, will be made available to
the Company, no later than 1:00 pm on the third business day following the
last day of each calendar month, by Conning with final entries and any
potential revisions made available to the Company by Conning by the close
of the fifth business day following the last day of each calendar month.
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<PAGE>
I. Market Valuation of Assets. Not later than five (5) Business Days following
the last day of each calendar month, Conning will deliver monthly market
valuation reports of the Reported Assets using appropriate outside services
and internal valuation analysis approved by the Company.
J. Fixed Income/Equity Portfolio. Listed below are the standard report
categories which are to be prepared for the Company by Conning. All
reports may be provided monthly, quarterly and annually, or on an as
needed basis, depending on the Company's needs and may be in hard copy,
text file, or ASCII formats.
Standard Report Categories
1. Domestic Accounting
2. Foreign Accounting
3. Accounting Control and Exception Reports
4. Regulatory
5. Tax
6. Planning & Forecasting
7. Financial & Management
8. Compliance
9. Performance
K. Reporting Requirements. Conning shall provide to the Company such
information as the Company shall reasonably request relating to its
investment portfolio which is necessary for the Company to fulfill
reporting requirements of any regulatory bodies, rating agencies and taxing
authorities. Conning will maintain FASB 115 classification reports based
upon information received from the Company and its Advisors and will
provide FASB 91 updates quarterly.
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Exhibit 10.24
INVESTMENT ACCOUNTING AGREEMENT
THIS INVESTMENT ACCOUNTING AGREEMENT, (the "Agreement"), dated as of this
first day of August, 1996, (the "Effective Date"), is by and between Conning
Asset Management Company ("Conning") and Lincoln Security Life Insurance
Company, (the "Company" and collectively, "the Parties").
WHEREAS, the Company and/or other investment advisors retained by the
Company, ("Advisors"), intend to manage a portion or all of the securities of
the Company held in the Custody Accounts (as defined herein);
WHEREAS, the Company desires Conning to provide certain investment
accounting services, ("Investment Accounting Services"), and data conversion
assistance services substantially in accordance with the terms of this
Agreement; and
WHEREAS, the Company has requested that Conning provide the aforementioned
Investment Accounting Services and certain data conversion assistance services
to the Company and Conning desires to accept such duties and responsibilities.
NOW THEREFORE, in consideration of the foregoing and the mutual promises
recited below, the parties agree as follows:
1. DEFINITIONS. The following terms used in this Agreement shall have the
meanings ascribed to them below:
"Advisor" shall have the meaning set forth in the first WHEREAS clause of
this Agreement; provided, that, Conning is given at least fifteen (15) days
prior written notice by the Company of any additions or deletions of
Advisors.
"Allocation" shall mean that portion of the Assets that is initially
allocated to an Advisor and transferred to a Custody Account.
"Assets" shall mean those assets held in the Custody Accounts.
"Business Day" shall mean end of day on which Advisor, Conning and the
Custodian, as applicable, are open for business, except as otherwise noted
in this Agreement.
"Custodian" shall mean the bank and such other custodians as the Company
may from time to time designate in writing to Conning as custodians of all
or part of the Assets.
"Custody Account(s)" shall mean the custody accounts at the bank,
securities held directly by the Company and such other custody accounts as
the Company may designate in writing to Conning as the custody accounts for
the deposit of its securities of the Company.
2. INVESTMENT ACCOUNTING SERVICES. Conning shall, as of the Effective Date,
assume responsibility for and provide to the Company, and to its advisors
and designees, which shall be designated to Conning in writing, certain
investment accounting services set forth in Schedule 2 of this Agreement,
provided that: the Company and each Advisor shall promptly provide to
Conning all information reasonably requested by Conning with respect to the
purchase, sale, investment, re-investment and supervision of that portion
of the Company's Assets managed by such person and in furtherance of this
requirement, the Company shall authorize the Custodians to allow Conning
on-line access to view the Company's account activity.
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With respect to each Custody Account, each Advisor and the Company shall be
solely responsible for: (i) buying, selling, exchanging, converting,
modifying or otherwise trading in any securities in the Custody Account;
(ii) selecting the brokers, dealers and currency merchants to execute each
such transaction; and (iii) placing orders for the execution of such
securities transactions with or through such brokers, dealers or issuers.
The Company shall be responsible for: (i) coordinating communication among
Conning, the Custodian and each applicable Advisor, of all respective
trades and settlement activity; (ii) filing any settlement claims and
making payment of any claims filed against the Company; (iii) representing
the Company's interest in any class action suit and/or any other litigation
relating to or involving the invested assets of the Company arising after
the Effective Date; (iv) coordinating and controlling any movement of
assets between portfolios not relating to trades and resolving any
discrepancies related to the movement of such assets; and (v) notifying
Conning of all such asset movement activity.
3. DATA ACCESS. Conning agrees to provide the Company access to the Company's
investment accounting data maintained in Conning's automated systems via
ASCII download or other format agreed to by the Company and Conning.
In the event that the Company requests on-line read-only access to such
accounting data on Conning's automated accounting system, Conning will
assist the Company and make such modifications to its systems environment
to permit such access, providing that Conning shall not be required to make
any modifications which Conning determines is not practicable and provides
written notice to the Company of such determination. The Company shall
reimburse Conning promptly for the reasonable cost of all modifications
made pursuant to this section.
4. FEES. Conning's fee for performing services under this Agreement shall be
determined and paid as shown in Schedule 1 of the Agreement. Such fee shall
begin to accrue upon completion of installation and conversion to Conning
which will be deemed to have been completed on October 1, 1996. This fee
will be billed quarterly in arrears and will be calculated based on the
book value of total reported assets at the end of each calendar quarter.
All partial quarters will be prorated. Book value shall be determined by
Conning in consultation with the Company in accordance with Statutory
Accounting Principles.
In addition to the compensation calculated and paid in accordance with the
fee schedule, the Company shall be obligated to pay all applicable sales
taxes, if any, assessed in connection with the investment accounting
services, conversion assistance and other special services rendered by
Conning hereunder. The Company shall reimburse Conning within thirty (30)
days of receipt of Conning's invoice for expenses directly related to the
NAIC asset valuation system ("SVO") annual licensing fee and to the
provision of investment accounting services under this Agreement.
5. AUTHORIZED PERSONS. In addition to the individuals authorized to act in
connection with specific matters covered by this Agreement, as contemplated
by particular provisions of this Agreement, the President and/or Treasurer
of the Company or their designees, which will be designated to Conning in
writing by the Company, shall be authorized to make and communicate to
Conning on behalf of the Company, any decisions or instructions pertaining
to this Agreement, and Conning may rely on and act upon a communication
purporting to be from any of such persons or designees.
6. TERM AND TERMINATION. This Agreement will commence on the effective date
specified on the Execution Page of this Agreement and shall continue in
force for a period of at least three years and thereafter shall be
automatically renewed for additional one year terms on each anniversary of
the effective date, unless terminated earlier according to the provisions
of this Agreement. This Agreement may be terminated by either party at any
time upon 90 days prior written notice to the other party
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<PAGE>
In the event of termination by the Company without cause within three years
of the Effective Date, Conning shall be paid a termination fee which shall
be $20,000 as of the Effective Date, and which fee will be reduced by the
amount of $550 for each month thereafter during which this Agreement is in
effect. This termination fee is to compensate Conning for the installation
and conversion that is not being charged for.
Upon the termination without cause of this Agreement, the fees payable
hereunder per Schedule 1 shall be pro-rated to the date of termination and
such fees shall be paid by the Company to Conning promptly following
receipt of an invoice therefor. If the Company terminates this contract for
cause no termination fee will be payable. For purposes of this paragraph,
the material breach of this Agreement, gross negligence or willful
misconduct shall be considered cause.
Upon termination of the Agreement, the payment of the final fee shall be
contingent upon the timely completion of installation and conversion to a
subsequent provider to Conning not to exceed 90 days of written notice of
termination.
7. NOTICES. All notices and other communications hereunder shall be in writing
and shall be sufficient if (i) delivered by overnight delivery by a
nationally recognized air courier service; or (ii) mailed by registered or
certified mail, return receipt requested, postage prepaid, addressed as
follows:
A. Notices to the Company shall be delivered to:
Lincoln Security Life Insurance Company
20 Security Drive
Avon, CT 06001
Telefax No: (860) 674-7612
Attention: Richard D. Mocarski, Vice President, Controller and
Treasurer
B. Notices to Conning shall be sent or delivered to:
Conning Asset Management Company
CityPlace II
185 Asylum Street
Hartford, CT 06103
Telefax No. (860) 520-1253
Attention: Fred M. Schpero, Vice President
The parties may by like notice, designate any future or different address or
telefax number to which subsequent notices shall be sent. Any notice shall be
deemed given when received.
8. AUDITING. The Company shall have the right to audit all books and records
directly pertaining to the performance of services for the Company only by
Conning pursuant to this Agreement, and to obtain copies of such books and
records as its auditors may reasonably request in connection with such
audit, provided that the Company gives reasonable notice of the audit,
reviews the books and records during Conning's normal business hours, and
promptly reimburses Conning for any reasonable costs of photocopying or
delivering copies of books and records.
9. CONFIDENTIALITY. Conning agrees that the information and reports furnished
pursuant to this Agreement marked as confidential shall be treated as
confidential unless available through other public sources and shall not be
disclosed to third parties except as specified pursuant to the terms of
this Agreement or by law. The Company agrees that reports furnished by
Conning to the Company will not be disclosed by the Company to third
parties, provided that the Company shall be permitted to disclose all
information required to be disclosed pursuant to financial reporting
requirements or by law. Conning may disclose to its clients the fact that
the Company is a client of Conning.
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<PAGE>
10. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
11. LIMITATION OF LIABILITY; INDEMNIFICATION. (a) Neither Conning nor any of
its shareholders, officers, directors or employees shall be liable to the
Company, or to the Board of Directors of the Company for (i) mistakes of
judgment, mistakes of law or any act or omission suffered or taken by any
such person, or for losses due to any such mistakes, act or omission
(including, without limitation, any losses that may be sustained in
connection with the performance of Conning on behalf of the Company),
except to the extent such liability or losses result from the (A) willful
misconduct, bad faith or negligence of such person or (B) reckless
disregard by Conning of obligations and duties under this Agreement, (ii)
the willful misconduct, negligence or bad faith of any independent
representative, consultant, independent contractor, broker, agent or other
person who is selected, engaged or retained by Conning on behalf of the
Company in the performance of this Agreement or in connection herewith,
unless such person was in a negligent manner selected, engaged or retained
by Conning.
Nothing herein shall constitute a restriction or waiver of any rights under
federal or state securities laws.
12. SEVERABILITY. In the event that any one or more of the provisions of this
Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, or becomes inconsistent with any applicable
rule or law, such invalidity, illegality, unenforceability or inconsistency
shall not affect any other provision of this Agreement.
13. COMPLETE AGREEMENT. This Agreement together with the attached schedules
embodies the entire agreement and understanding between Conning and the
Company and supersedes all prior agreements and understandings relating to
the subject matter hereof.
14. AMENDMENT. This Agreement may only be amended or revised in writing, signed
by both parties.
15. HEADINGS. The headings of the parts of this Agreement are for purposes of
reference only and shall not limit or otherwise affect the meaning of this
Agreement.
16. ASSIGNMENT. This Agreement may not be assigned by either party to any other
organization without the prior written approval of the other.
17. NON-WAIVER. No failure of either party to exercise any power or right given
either party hereunder or to insist upon strict compliance by either party
with its obligations hereunder, and no custom or practice of the parties at
variance with the terms hereof, shall constitute a waiver of either party's
right to demand exact compliance with the terms hereof. A waiver of the
breach of one provision of this Agreement shall not be deemed a waiver of
any other provision of this Agreement.
18. RELIANCE ON INFORMATION. Conning shall be entitled to rely, without
independent verification, on the accuracy and completeness of all
information furnished to it by the Company or the Advisors in furtherance
of this Agreement, and on all information obtained by Conning from third
parties reasonably believed by Conning to be reliable. Conning shall not be
responsible for any loss or expense relating to the accuracy of the
information contained in trade tickets or other reports furnished by the
Company or its Advisors to Conning pursuant to Section 2 hereof.
19. FORCE MAJEURE. Neither party shall be considered in default in the
performance of its obligations under this Agreement, to the extent that the
performance of any such obligation is prevented or delayed by any cause
which is beyond the reasonable control and without the fault or negligence
of such party.
20 SURVIVAL. The provisions of paragraph 9, 10 and 11 shall survive any
termination of this Agreement.
21. ARBITRATION CLAUSE. Any dispute, controversy or claim which relates to,
arises out of or is connected with this Agreement, including, without
limitation, the creation, validity, interpretation, breach or termination
of this Agreement, and which has not been mutually resolved by the parties
shall, on the written demand by either party to the other party, be
determined and settled in Hartford, Connecticut by a panel of three
arbitrators in accordance with the Commercial Arbitration Rules of the
American Arbitration Association.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
Conning Asset Management Company
/s/Mark E. Hansen
----------------------
By: Mark E. Hansen
Title: Executive Vice President
Lincoln Security Life Insurance Company
/s/Richard D. Mocarski
----------------------
By: Richard D. Mocarski
Title: Vice President, Controller and
Treasurer
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Schedule 1
ATTACHED TO AND FORMING PART OF THE
INVESTMENT ACCOUNTING AGREEMENT
DATED AS OF THIS FIRST DAY OF AUGUST 1996
BETWEEN
CONNING ASSET MANAGEMENT COMPANY
AND
LINCOLN SECURITY LIFE INSURANCE COMPANY
================================================================================
Conning's annual fee as described in Section 4 of this Agreement is stated
below:
.0175 percent of the book value of the assets stated in Schedules D1, D2.1
and D2.2 of the statutory statements filed by the Company.
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Schedule 2
ATTACHED TO AND FORMING PART OF THE
INVESTMENT ACCOUNTING AGREEMENT
DATED AS OF THIS FIRST DAY OF AUGUST 1996
BETWEEN
CONNING ASSET MANAGEMENT COMPANY
AND
LINCOLN SECURITY LIFE INSURANCE COMPANY
================================================================================
Investment Accounting Services
Pursuant to the Agreement, Conning shall provide the following Investment
Accounting Services:
A. Trade Processing. Conning shall provide to the Company and each Advisor
services regarding input of securities trades subject to the following:
(1) Conning shall review trade tickets furnished by the Company and/or its
Advisors to determine whether they include all items of information
concerning security trades that must be completed by the party
effecting a trade in order to allow Conning to perform the investment
accounting services set forth in this Agreement (e.g. FASB 115,
ratings, purchase PSA). Simultaneously with booking a securities
trade, Conning shall make a determination of the accounting treatment
for such trade under GAAP, statutory, and tax principles provided that
the Company shall retain ultimate responsibility for the financial
impact of this determination. In addition, Conning shall notify the
Company of any information which has not been completed and shall
request the Company or the Advisor to complete any such information.
(2) Conning may require the addition or deletion of items to be completed
on trade tickets or of other forms necessary to process the securities
trades as warranted by changes in investment accounting practices or
systems by giving each Advisor and the Company seven (7) Business
Days' written notice of its further requirements.
(3) Conning shall file all required registrations and applications with
the SVO and apply for private placement numbers as necessary.
(4) Conning shall maintain separate records of Advisors' trades on both an
Advisor and a cumulative basis.
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B. Reconciliation Services. Conning shall endeavor to update, verify and
reconcile the information on the Company's investment portfolio contained
in Conning's securities accounting system and the reports provided to the
Company therefrom with the records and reports of the Company's Custodian
and each Advisor concerning the Company's investment portfolio.
Discrepancies and unreconciled items shall promptly be brought to the
attention of the Company and the effecting Advisor. Ultimate resolution of
discrepancies and unreconciled items shall be made by Conning with
assistance from the Company only when required.
C. Income Processing. Conning shall provide the following services to the
Company, monthly (except as provided otherwise herein) or as requested by
the Company and agreed to by Conning, on an aggregate and a Custody Account
basis, as applicable: (i) daily reporting of cash flow expected to be
available for reinvestment arising from principal and interest payments due
on securities that are recorded on Conning's securities accounting system
as part of the Company's investment portfolio, together with book/income
projections; (ii) processing and reconciliation of income and principal
due/received as payment on securities that are recorded on Conning's
securities accounting system as part of the Company's investment portfolio
against the records and reports of the Company's custodians concerning the
Company's investment portfolio; (iii) notifying the Company and the
applicable Advisor of past due income and/or principal, and undertaking the
preliminary investigation with respect thereto; (iv) will provide to the
Custodian such documentation as the Custodian should request relating to
such past due income and/or principal; and (v) in those cases where the
Custodian has no such responsibility, filing the appropriate claims for
past due income and/or principal.
D. Services, Data Base and Report Distribution. In furtherance of its duties
and responsibilities hereunder, Conning shall provide to the Company and/or
its designees, as applicable, reports and services provided that, the
Company and each Advisor shall promptly provide to Conning all information
reasonably requested by Conning with respect to the purchase, sale,
investment, reinvestment and supervision of that portion of the Company's
investment portfolio managed by such person.
E. Outside Services. To the extent that Conning charges the Company for such
services, Conning shall obtain prior approval by the Company regarding the
use of outside data services (for pricing, dividend accruals, involuntary
corporate actions, ratings, etc.).
F. System Releases and Enhancements. Conning shall endeavor to add new
releases and/or enhancements to the investment accounting systems used by
Conning to provide the services hereunder to the Company substantially
similar to those added to the systems used by Conning in the ordinary
course of its provision of investment accounting services to clients with
similar investment portfolios and accounting requirements, provided that,
(i) in the reasonable judgment of Conning, such releases or enhancements
are necessary or desirable for the provision of such services and (ii) the
Company shall pay such amounts for such nonstandard upgrade and enhancement
services which are agreed upon with Conning.
G. Regulatory Examinations, Retention of Records. Conning shall provide such
information and assistance as required to insurance regulatory examiners
authorized by the Company to examine the data maintained by Conning on
behalf of the Company concerning its investment portfolio. Upon termination
of this Agreement, all trade authorization files relating to the investment
accounting services provided hereunder will be inventoried and sent to the
Company. Conning shall maintain for the time period required by the
Advisors Act and make available for inspection and duplication by the
Company or its agents (reasonably satisfactory to Conning) at the Company's
expense all records pertaining to the investment accounting services
provided hereunder and not delivered to the Company.
H. Monthly Investment Transaction / Income / General Ledger Summary.
Preliminary entries, excluding market valuations, will be made available to
the Company, no later than 1:00 pm on the third business day following the
last day of each calendar month, by Conning with final entries and any
potential revisions made available to the Company by Conning by the close
of the fifth business day following the last day of each calendar month.
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<PAGE>
I. Market Valuation of Assets. Not later than five (5) Business Days following
the last day of each calendar month, Conning will deliver monthly market
valuation reports of the Reported Assets using appropriate outside services
and internal valuation analysis approved by the Company.
J. Fixed Income/Equity Portfolio. Listed below are the standard report
categories which are to be prepared for the Company by Conning. All reports
may be provided monthly, quarterly and annually, or on an as needed basis,
depending on the Company's needs and may be in hard copy, text file, or
ASCII formats.
Standard Report Categories
1. Domestic Accounting
2. Foreign Accounting
3. Accounting Control and Exception Reports
4. Regulatory
5. Tax
6. Planning & Forecasting
7. Financial & Management
8. Compliance
9. Performance
K. Reporting Requirements. Conning shall provide to the Company such
information as the Company shall reasonably request relating to its
investment portfolio which is necessary for the Company to fulfill
reporting requirements of any regulatory bodies, rating agencies and taxing
authorities. Conning will maintain FASB 115 classification reports based
upon information received from the Company and its Advisors and will
provide FASB 91 updates quarterly.
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<PAGE>
Exhibit 10.25
FORM OF PARTICIPATION AGREEMENT
BETWEEN
LINCOLN NATIONAL LIFE INSURANCE COMPANY AND/OR AFFILIATES AND
SECURITY-CONNECTICUT LIFE INSURANCE COMPANY
This Sale and Participation Agreement ("Agreement") is made as of September
30, 1993, by and between Lincoln National Life Insurance Company ("Seller") and
Security-Connecticut Life Insurance Company ("Purchaser"), a Connecticut
corporation whose address is 20 Security Drive, Avon, Connecticut 06001.
RECITALS
WHEREAS, Seller has made or acquired a loan in the amount of Four Million
One Hundred Fifty Thousand Dollars ($4,150,000.00) (the "Loan") to (the
"Borrower"), a general partnership, with respect to a real estate project known
as , on the terms and conditions set forth in Loan Documents (as defined
herein); and
WHEREAS, Seller and Purchaser entered into that certain Loan Participation
Agreement dated May 13, 1993 (the "Original Agreement") whereby Purchaser
purchased from Seller and Seller sold to Purchaser, subject to the terms and
provisions set forth therein, an undivided interest in the Loan; and
WHEREAS, Seller and Purchaser which to amend and restate the Original
Agreement so that from and after the date hereof the terms and provisions of
this Agreement shall supersede and replace the Original Agreement and shall
fully govern all of the rights, privileges and obligations of the parties
hereto; and
WHEREAS, Seller and Purchaser have agreed to share their interests Pro Rata
and Ratably (as defined herein) in the Loan, Loan Documents and Collateral
securing the Loan.
NOW, THEREFORE, in consideration of the foregoing, and of the sale and
purchase of Purchaser's Interest, and of the mutual covenants hereinafter set
forth, the parties hereto agree as follows:
1. Definitions. The following capitalized terms used in this Agreement
shall have the meanings set forth below:
Collateral All collateral securing payment of the Loan or any
guaranty therefor.
Loan The loan to Borrower evidenced by the Loan Documents.
Loan Documents The loan agreement, note, security documents,
guaranties and all other documents executed or delivered
in connection with the Loan.
Pro Rata and/or In proportion to Purchaser's Interest and Seller's
Ratably Interest
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<PAGE>
Purchase Date The effective date of this Agreement.
Purchaser's Interest An undivided interest in the Loan, Loan
Documents and all Collateral, which interest is
presently equal to Two Million Dollars ($2,000,000.00)
of the Loan, and which represents and shall represent a
48% undivided interest therein.
Seller's Interest An undivided interest in the Loan, Loan
Documents and all Collateral, which interest is
presently equal to Two Million One Hundred Fifty
Thousand Dollars ($2,150,000.00) of the Loan, and which
represents and shall represent a 52% undivided interest
therein.
2. Loan. Seller has made or acquired the Loan to Borrower on substantially
the terms and conditions set forth in the Loan Documents.
3. Sale and Participation.
(a) Subject to the terms and conditions of this Agreement, Seller
hereby sells to Purchaser the Purchaser's Interest.
(b) Seller's Interest and Purchaser's Interest shall be Ratably
concurrent undivided interests and neither Purchaser's Interest nor Seller's
Interest shall have priority over the other.
(c) Purchaser shall be the owner of Purchaser's Interest. This
Agreement constitutes a sale of Purchaser's Interest on a nonrecourse basis and
shall in no way be construed as a loan by Purchaser to Seller or as creating
any fiduciary relationship or other relationship whatsoever beyond the
contractual undertakings set forth in this Agreement. Purchaser's Interest is
an equitable interest in the Loan, Loan Documents and the Collateral as
contemplated by Section 541(d)of the Bankruptcy Code (11 U.S.C. Section 541(d)).
(d) Seller has previously delivered to Purchaser true and complete
copies of all Loan Documents, together with any appropriate filing and
recordation data as reflected in the records of Seller.
(e) Purchaser will not communicate with Borrower concerning Loan, Loan
Documents, or Collateral.
4. Reports, Collections and Expenses.
(a) Whenever Seller receives a payment of principal, interest, premium
(if any) or other payment, in connection with Loan or Collateral, Seller shall
promptly pay over to Purchaser in the kind of funds received by Seller,
Purchaser's Pro Rata share of such amounts, less the deduction, if any, of
Purchaser's Pro Rata share of any disbursements which have been made or expenses
which have been incurred by Seller as hereinafter provided.
(b) In the event of a failure of Borrower or any guarantor to pay
taxes, assessments, insurance premiums, claims against the Collateral or any
other amount required to be paid by any of the Loan Documents, or in the event
that it is otherwise, in the sole discretion of Seller, desirable to protect and
preserve Collateral, Seller may, but shall not be obligated to, advance amounts
necessary to pay the same, and Purchaser will reimburse Seller for Purchaser's
Pro Rata share of the amount thereof immediately upon receiving notice thereof
from Seller.
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<PAGE>
(c) Purchaser shall, on receiving notice from Seller, immediately
deliver to Seller, Purchaser's Pro Rata share of any costs or expenses
including, without limitation, attorneys' fees reasonably incurred or to be
incurred by Seller in connection with the administration of the Loan, the
enforcement of the Loan or the Loan Documents and the protection and
preservation of the Collateral.
5. Servicing.
(a) Seller shall service the Loan, and shall take or refrain from
taking action with respect thereto, as Seller would normally do with respect to
loans solely for its own account.
(b) Purchaser shall have the right to examine and make copies of all
original Loan Documents at any reasonable time during Seller's normal business
hours.
(c) Seller shall deliver to Purchaser copies of annual financial
statements of Borrower and copies of all other financial statements required by
the Loan Documents promptly following Seller's receipt thereof, but Seller
assumes no responsibility with respect to the authenticity, validity, accuracy
or completeness thereof.
(d) Seller shall hold any escrows for tax, insurance or other purposes
for its benefit and the benefit of Purchaser, Pro Rata.
(e) Seller may employ an agent of its choosing for the administration
of any or all of Seller's obligations under this Agreement.
6. Modification and Waiver. Notwithstanding anything in this agreement or
in the Loan Documents to the contrary, Seller reserves the right in Seller's
sole discretion, in each instance, and without prior notice to Purchaser, to
agree to the modification, waiver or release of any of the terms of the Loan
Documents, to consent to any action or failure to act by Borrower, and to
exercise or refrain from exercising any powers or rights which Seller may have
under or in respect of Loan Documents or any Collateral, including, without
limitation, the right to enforce or refrain from enforcing the obligations of
Borrower and of any person liable for the payment of Loan or the performance of
any Loan Documents, except that Seller shall not, without Purchaser's prior
consent, exercise any such rights which would increase the principal balance of
the Loan, except through the capitalization of interest or expenses advanced
pursuant to the authority of the Loan Documents.
7. Default and Enforcement.
(a) Upon learning of the existence of any event or condition which
would constitute a default or event of default under any Loan Document, Seller
may take action, or refrain from taking action as Seller may determine in its
sole discretion. Seller shall have exclusive discretion to enforce or refrain
from enforcing Loan Documents. Purchaser shall share the costs and expenses of
such action and any proceedings Ratably.
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<PAGE>
(b) If, as the result of any default under the Loan Documents,
Collateral is acquired by foreclosure, deed in lieu of foreclosure or otherwise,
title shall, as determined by Seller, be taken in Seller's name alone or in
Seller's and Purchaser's names jointly or in the name of a corporation which
will hold, manage, operate, improve, complete and attempt to sell the
Collateral. Seller shall make all decisions with respect to, and the agreement
of Purchaser shall not be required for matters and decisions relating to the
management, operation, improvement, completion and disposition of Collateral and
any capital expenditures with respect to Collateral. Purchaser shall be
responsible for its Pro Rata share of any expenses and shall be distributed its
Pro Rata Share of any surplus funds generated by Collateral as Seller may
determine.
(c) It is the intention of the parties that all amounts received by
either of them on account of the Loan shall be shared Pro Rata. Therefore, for
example, should Borrower make any payment directly to Purchaser intending to
prefer Purchaser over Seller in repayment of the Loan, the payment shall
nevertheless be applied Pro Rata between Seller and Purchaser.
8. Risks and Standard of Care.
(a) Purchaser acknowledges that it has become a party hereto in
reliance upon its own independent investigation of the Borrower's financial
condition and creditworthiness to the extent deemed necessary or advisable by
Purchaser and not in reliance on any information, representation or advice
provided by Seller. Purchaser further acknowledges that Purchaser will,
independently and without reliance on Seller and based on such documents and
information as Purchaser deems appropriate at the time, continue to make its own
credit decisions in connection with this Agreement.
(b) The sole responsibility of Seller shall be to administer the Loan
with the same care it exercises on loans solely for its own account.
Notwithstanding any other provision hereof, Seller and its officers, directors,
attorneys, employees and agents shall not be liable to Purchaser or to any other
person for any error of judgment or for any action or failure to act, including
such party's own negligence, except for such party's own gross negligence or
willful misconduct.
(c) Without limiting the generality of the foregoing, Seller: (i) may
consult with legal counsel (including Borrower's counsel), independent public
accountants and other experts selected by Seller and shall not be liable for any
action taken or omitted in good faith by Seller in accordance with the advice of
such counsel, accountants or experts; (ii) makes no warranty or representation,
express or implied, and shall not be responsible for any statement, warranty or
representation made in or in connection with the Loan Documents or for the
financial condition or business affairs of Borrower or any person liable for the
payment of Loan or performance of Loan Documents or for the existence or value
of any Collateral; (iii) shall not be responsible for the performance or
observance of any term, covenant or condition of the Loan Documents on the part
of Borrower and shall not have any duty to inspect the Collateral, property or
books and records of Borrower; (iv) makes no warranty or representation as to,
and shall not be responsible for, the due execution, legality, accuracy,
completeness, legal effect, validity, enforceability, genuineness, authenticity,
sufficiency or collectability of the Loan Documents or Collateral or any other
matter; and (v) shall incur no liability under or in respect of Loan Documents
or Collateral by acting on any notice, consent, certificate or other document,
instrument or writing (which may be by telegram, cable, telex, telecopy or
comparable transmission) believed by Seller in good faith to be genuine or
signed or sent by the proper person.
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<PAGE>
9 Assignments.
(a) Purchaser shall not encumber, assign or otherwise transfer its
interest in the Loan, the Loan Documents or this Agreement, or any part of any
of the foregoing, or its duties and obligations hereunder, absent the prior
written consent of Seller, which may withhold or grant such consent in its sole
discretion.
(b) Seller may sell additional participations in all or a part of
Seller's Interest, without notice to Purchaser. Seller may assign its legal and
equitable interest in the Loan in full to any party at any time. Purchaser shall
be promptly notified of any such complete assignment, which shall be made
expressly subject to the rights of Purchaser. Seller shall have no further
responsibility to Purchaser following a complete assignment of Seller's legal
and equitable interests in the Loan.
(c) Subject to the foregoing, all of the terms, covenants and
conditions of this Agreement shall inure to the benefit of, and be binding upon,
the successors and permitted assigns of Seller and Purchaser.
10. Rights to Purchase. Seller shall have the right, on ten (10) business
days' prior written notice to Purchaser, to purchase Purchaser's Interest for a
purchase price equal to Purchaser's then-existing principal interest in the Loan
on the date of such purchase plus accrued interest thereon through the date of
such purchase. This Agreement shall thereupon terminate; provided, however, that
the provisions of paragraph 11 hereof shall remain in full force and effect as
to matters relating to the period of Purchaser's ownership of Purchaser's
Interest.
11. Indemnification. Purchaser hereby agrees to indemnify Seller, its
officers, directors, attorneys, employees and agents, for its Pro Rata share of
any loss, liability, claim or expense, including attorneys' fees, arising out of
any action taken or to be taken by Seller, its officers, directors, attorneys,
employees and agents or any other matter whatsoever with respect to the Loan,
Collateral or Loan Documents, except for any such matters arising from such
party's gross negligence or willful misconduct.
12. Purchaser's Default. In the event that Purchaser fails to make any
payment to Seller in accordance with this Agreement, Purchaser shall be deemed
to be in default under this Agreement. Seller shall be entitled to the full
amount of all payments and recoveries from the Borrower or any other obligor
and/or the Collateral until such time as the outstanding principal amount of the
amount due Seller from Purchaser and all interest (at the same rate charged on
the Loan) and other sums due thereon have been repaid in full.
13. Confidentiality of Borrower Information. Purchaser agrees to maintain
in confidence all financial information and other information regarding Borrower
or Seller that Purchaser may receive with respect to the Loan, and to make
disclosure thereof to third parties only pursuant to legal process (of which
Seller shall be given prompt notice and an opportunity to respond) or disclosure
requirements of government regulators.
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<PAGE>
14. Responses from Purchaser. Should Seller ask in writing for Purchaser's
opinion on a possible course of action with respect to the Loan or Collateral at
any time, Purchaser shall be deemed to have endorsed the proposed conduct unless
Purchaser states objections in writing within ten (10) days. This provision does
not evidence or create an obligation on Seller to consult with or obtain the
consent of Purchaser as to any matter except as expressly required in this
Agreement.
15. Investment Representation. Purchaser represents to Seller that
Purchaser has acquired the Purchaser's Interest for investment only and without
an intention to sell or otherwise distribute the Purchaser's Interest.
16. Miscellaneous.
(a) Neither the execution of this Agreement, nor the sharing in the
Loan or Collateral or the Loan Documents, nor any agreements to share in the
profits or losses resulting from the transaction, is intended to be, nor shall
it be construed to be the formation of a partnership or joint venture between
Seller and Purchaser or create a fiduciary relationship or other relationship
beyond the contractual obligations expressly set forth herein.
(b) This Agreement supersedes any prior negotiations, discussions or
communications between Seller and Purchaser and constitutes the entire agreement
of Seller and Purchaser with respect to the Loan, the Loan Documents and the
Collateral and shall survive any foreclosure of Collateral.
(c) Seller, Purchaser and their affiliates may accept deposits from,
lend money to, act as trustee under indentures for and generally engage in any
kind of business with the Borrower, any person who may do business with or own
securities of the Borrower, or any affiliate or subsidiary of the Borrower, all
without any duty to account therefor to the other party hereto or to disclose
such financial accommodations.
(d) Seller and Purchaser each shall advise the other with reasonable
promptness if it becomes aware of facts constituting a default or event of
default under the Loan Documents.
(e) Any notice or demand to be given under this Agreement shall be
duly and properly given if delivered personally or sent by private delivery
service for next business-day delivery or mailed, postage prepaid, to the party
entitled to such notice or demand at the address set forth above, or at such
other address as such party may, from time to time, specify in writing and shall
be effective when actually received by such party.
(f) The headings contained in this Agreement are for convenience only
and shall not affect the interpretation of any provision hereof.
(g) This Agreement and the rights and duties described herein shall be
governed by, and interpreted in accordance with the internal laws of the State
of Indiana.
(h) This Agreement and the duties and obligations contained herein
shall be, except as otherwise provided in paragraph 9 above, solely for the
benefit of the parties hereto and no third party shall have any rights hereunder
as a third party beneficiary or otherwise.
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<PAGE>
(i) Purchaser represents and warrants to Seller, and Seller represents
and warrants to Purchaser, that it has the power and authority to execute,
deliver and perform this Agreement.
(j) In the event of any dispute hereunder, the parties shall attempt
in good faith to resolve by mediation any dispute arising out of or relating to
this Agreement. Either party may initiate a mediation proceeding by a request in
writing to the other party. Thereupon, both parties will be obligated to engage
in mediation, to be conducted in accordance with the CPR Model Procedure for
Mediation of Business Disputes as then in effect. Should litigation arise in
connection with this Agreement, the prevailing party shall be entitled to
recover from the other any costs and expenses, including attorneys' fees,
incurred in enforcing this Agreement and the duties of the other contained
herein.
(k) This Agreement may be executed in several counterparts, and by the
parties hereto on separate counterparts, each of which is an original but all of
which together shall constitute one document.
(l) Notwithstanding any other provision hereof, Purchaser shall have
no interest in any property, goods or interest of Borrower or any other person
liable for payment of Loan or performance of Loan Documents, now or hereafter
taken as collateral for any other loans or extensions of credit made to or for
Borrower or any such person by Seller or acquired by Seller, or in any property
now or hereafter in Seller's possession or control, or in any deposit now or
hereafter held by Seller or other indebtedness now or hereafter owing to Seller,
which may be or become Collateral for or otherwise available for payment of Loan
or performance of Loan Documents by reason of any cross-collateralization or any
general description of secured obligations contained in any mortgage, security
agreement or other agreement, instrument or document held by Seller, or by
reason of the right to setoff, counterclaim or otherwise, except that if such
property, deposit or indebtedness, or proceeds thereof, shall, in Seller's sole
discretion, be applied in reduction of amounts owing under Loan Documents, then
Purchaser shall be entitled to share Ratably in such application.
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<PAGE>
IN WITNESS WHEREOF, The parties hereto each has caused this Agreement to be
executed by its duly authorized officer all as of the day and year first set
forth above.
SELLER: Lincoln National Life Insurance Company
By: Lincoln National Investment
Management Company, attorney-in-fact
By_________________________________________
PURCHASER: Security-Connecticut Life Insurance Company
By_________________________________________
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<PAGE>
EXHIBIT 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-74408) pertaining to the 1993 Stock Incentive Plan and in the
Registration Statement (Form S-8 No. 33-74410) pertaining to the
Security-Connecticut Corporation Savings and Profit Sharing Plan of our report
dated February 23, 1997, with respect to the consolidated financial statements
and schedule of Security-Connecticut Corporation included in the Annual Report
(Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Hartford, Connecticut
March 17, 1997
-137-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the year ended December 31, 1996 as filed on Form 10-K
and is qualified in its entirety by reference to such 10-K.
</LEGEND>
<CIK> 0000913601
<NAME> Security-Connecticut Corporation
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 1,587,309,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,930,000
<MORTGAGE> 128,530,000
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,799,076,000
<CASH> 29,027,000
<RECOVER-REINSURE> 39,616,000
<DEFERRED-ACQUISITION> 388,668,000
<TOTAL-ASSETS> 2,338,270,000
<POLICY-LOSSES> 1,735,277,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 61,407,000
<NOTES-PAYABLE> 75,000,000
0
0
<COMMON> 86,000,000
<OTHER-SE> 355,146,000
<TOTAL-LIABILITY-AND-EQUITY> 2,338,270,000
195,125,000
<INVESTMENT-INCOME> 135,361,000
<INVESTMENT-GAINS> 7,251,000
<OTHER-INCOME> 610,000
<BENEFITS> 192,933,000
<UNDERWRITING-AMORTIZATION> 35,498,000
<UNDERWRITING-OTHER> 55,990,000
<INCOME-PRETAX> 53,571,000
<INCOME-TAX> 18,226,000
<INCOME-CONTINUING> 35,345,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,345,000
<EPS-PRIMARY> 4.10
<EPS-DILUTED> 4.07
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
