Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
----------------
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 1-14925
----------------
STANCORP FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-1253576
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1100 SW Sixth Avenue, Portland, Oregon, 97204
(Address of principal executive offices)
Registrant's telephone number, including area code: (503) 321-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock New York Stock Exchange
Series A Preferred Stock
Registered Rights 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 10-K or any amendment
to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 2, 2000, was approximately $771,420,000.
As of March 2, 2000, there were 32,480,828 shares of the Registrant's common
stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement dated March 29, 2000 in
connection with the 2000 Annual Meeting of Shareholders are incorporated by
reference in Part III.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Item Page
---- ----
PART I
1. Business.......................................................... 3
1A. Executive Officers of the Registrant.............................. 8
2. Properties........................................................ 9
3. Legal Proceedings................................................. 9
4. Submission of Matters to a Vote of Security Holders............... 9
PART II
Market for the Registrant's Common Equity and Related Stockholder
5. Matters........................................................... 10
6. Selected Financial Data........................................... 11
Management's Discussion and Analysis of Financial Condition and
7. Results of Operations............................................. 12
7A. Quantitative and Qualitative Disclosures About Market Risk........ 22
8. Financial Statements and Supplementary Data....................... 23
Changes in and Disagreements with Accountants on Accounting and
9. Financial Disclosure.............................................. 48
PART III
10. Directors of the Registrant....................................... 49
11. Executive Compensation............................................ 49
12. Security Ownership of Certain Beneficial Owners and Management.... 49
13. Certain Relationships and Related Transactions.................... 49
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 50
Signatures........................................................ 51
Exhibits Index.................................................... 53
2
PART I
ITEM 1. BUSINESS
General
StanCorp Financial Group, Inc. ("StanCorp") was incorporated under the laws
of Oregon in 1998. StanCorp was specifically organized as a parent holding
company for its subsidiaries Standard Insurance Company; StanCorp Mortgage
Investors, LLC; StanCorp Real Estate, LLC; and Standard Management, Inc.
StanCorp is based in Portland, Oregon, and through its subsidiaries
(collectively with StanCorp, the "Company") has operations throughout the
United States.
StanCorp's principal subsidiary, Standard Insurance Company ("The
Standard"), underwrites group and individual disability, life and annuity
products, and dental insurance for groups. The Standard is domiciled in Oregon
and licensed in 49 states, the District of Columbia and the U.S. Territory of
Guam. The Standard is licensed for reinsurance only in New York.
StanCorp's other subsidiaries provide complementary financial and management
service businesses. The largest is StanCorp Mortgage Investors, LLC ("StanCorp
Mortgage Investors"), which has developed a recognized expertise in
originating and servicing small commercial mortgage loans. This ability has
been recognized by rating agencies as a strength. StanCorp Mortgage Investors
originates and services mortgage loans primarily for The Standard's investment
portfolio as well as generating fee income from the origination and servicing
of mortgage loans sold to institutional investors. StanCorp Mortgage Investors
began operations in 1996, and as of December 31, 1999 was servicing $1.91
billion in loans for The Standard and $270.8 million in loans for other
institutional investors.
Forward-looking Statements
The management of the Company has made in this Form 10-K, and from time to
time may make in its public filings, press releases and in oral presentations
and discussions, certain statements including statements regarding anticipated
development and expansion of the Company's business. Such statements may
include the effects of regulatory actions, the intent, belief, or current
expectations of the Company's management, the future operating performance of
the Company and other statements regarding matters that are not historical
facts. These statements are "forward-looking" statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. Because such
statements are subject to risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements include, but are not
limited to (i) deterioration in morbidity, mortality, and persistency, (ii)
changes in interest rates or the condition of the national economy, (iii)
changes in the regulatory environment on the state or Federal level, (iv)
competition from other insurers and financial institutions, (v) achievement of
growth in new products, (vi) achievement of operating expense management
objectives (vii) changes in claims paying ability ratings, (viii) adverse
findings in litigation or other legal proceedings, (ix) deterioration in the
experience of the closed block, and (x) on-going risks associated with Year
2000 non-compliance by StanCorp, its subsidiaries, or third parties (including
vendors and suppliers).
Recent Business Developments
In December 1997, The Standard's board of directors authorized management to
proceed with the development of a plan of reorganization to convert from a
mutual life insurance company to a stock life insurance company, a process
known as demutualization. On April 21, 1999, pursuant to an order by the
Director of the Oregon Department of Consumer and Business Services approving
the Plan of Reorganization, dated September 28, 1998, as amended on
December 14, 1998 (the "Plan"), The Standard converted from a mutual life
insurance company to a stock life insurance company and became a wholly owned
subsidiary of StanCorp. Also, on April 21, 1999, StanCorp completed an initial
public offering (the "IPO") of 15.2 million shares (including 1.3 million
shares subsequently sold pursuant to the underwriters' over-allotment option)
of its
3
common stock at the IPO price of $23.75 per share. The shares of common stock
issued in the IPO were in addition to 18.7 million shares of StanCorp common
stock distributed to The Standard policyholders, pursuant to the Plan, in
exchange for their membership interests in The Standard.
On the completion of its reorganization, The Standard established a closed
block for the payment of future benefits, policyholder dividends and certain
expenses and taxes related to certain classes of policies. The Standard
allocated to the closed block an amount of assets expected to produce cash
flows which, together with future revenues from the policies included in the
closed block, will be sufficient to support these policies. Such support
includes payment of claims, certain expenses and taxes and continuation of
policyholder dividend scales in effect for 1998 (the period used to determine
the closed block funding), if the experience underlying such dividend scales
including the portfolio interest rate, continues. These assets totaled $599.8
million at December 31, 1999, and are for the benefit of the policies in the
closed block.
The contribution to income before Federal income taxes and extraordinary
item from the closed block is reported as a single line item in the
consolidated statements of income and comprehensive income. Accordingly, all
components of revenues, benefits and expenses for the closed block are shown
as a net amount under the caption "Contribution from closed block". Federal
income tax expense applicable to the closed block is reflected as a component
of total tax expense. Reporting of the contribution from the closed block as a
single line item results in material reductions in the respective line items
in the consolidated statements of income and comprehensive income while having
no effect on net income. All assets allocated to the closed block are combined
and shown as a separate line item in the consolidated balance sheets under the
caption "Closed block assets". All liabilities attributable to the closed
block are treated similarly and disclosed as a separate line item under the
caption "Closed block liabilities". Management believes that a better
understanding of the business results when closed block amounts are presented
on a combined basis as if the closed block had not been established.
Accordingly, the combined presentation set forth below includes revenues,
benefits and expenses associated with policies included in the closed block.
Such presentation does not affect the Company's reported net income. As a
result, amounts presented herein may differ from those presented in Item 8,
"Financial Statements and Supplementary Data". See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Reorganization Plan" and Item 8, "Financial Statements and Supplementary
Data--Notes to Consolidated Financial Statements".
Segments
The Company has three business segments: Group Insurance, Retirement Plans
and Individual Insurance.
Group Insurance Segment
The Group Insurance segment accounted for $1.01 billion, or 77.4%, of the
Company's total revenues of $1.30 billion in 1999. The Standard is a leading
provider of group life and disability insurance products, serving over 30,000
employer groups representing 4.5 million employees. The Group Insurance
segment also markets group accidental death and dismemberment and dental
insurance. Over 131 sales representatives and managers market group products
exclusively. These sales representatives, who are employees of The Standard,
are compensated through salary and incentive compensation programs. They sell
The Standard's group insurance products through a nationwide network of
approximately 13,000 employee benefits brokers, agents and consultants. The
Standard's group insurance sales representatives are located in 33 offices in
principal cities of the United States. These group field offices also provide
field underwriting, sales support and service through a field administrative
staff of 175 employees.
The Standard's group insurance products are designed for groups ranging in
size from two lives to over 150,000 lives. The Standard is one of the leading
providers of group long term and short term disability insurance, insuring
approximately 1,600 such groups, including state governments and other public
entities. The Standard endeavors to market its group products to many
different industries to provide industry diversification, reducing potential
claim fluctuations that may be associated with specific businesses or
professional groups.
4
Long Term Disability Insurance. Long term disability plans provide partial
replacement of earnings to insured employees who become disabled for extended
periods of time. The Standard's basic long term disability product covers
disabilities that occur both at work and elsewhere. In order to receive
disability benefits, an employee must be continuously disabled for a specified
waiting period, generally ranging from 30 to 180 days, as provided by the
policy. Monthly benefit payments ranging from 50% to 70% of salary are
provided as long as the employee remains continuously disabled. These benefits
usually are offset by other income that the disabled employee receives from
sources such as social security disability, workers compensation and sick
leave. These benefits also may be subject to certain maximum amounts and to
maximum benefit periods. According to the 1998 U.S. Group Disability Market
Survey, based on 1998 total in force premiums, The Standard had a 6.5% market
share in long term disability insurance. Long term disability accounted for
41.6%, 39.6%, and 39.0% of total Company premiums for 1999, 1998, and 1997,
respectively.
Short Term Disability Insurance. Short term disability plans provide partial
replacement of earnings to insured employees who are temporarily disabled.
Short term disability plans generally require a short waiting period, ranging
from one to thirty days, before an employee may receive benefits. Maximum
benefit periods generally do not exceed 26 weeks. Short term disability
benefits also may be offset by other income, such as sick leave, that a
disabled employee may receive. Standard's basic short term disability policy
covers non-occupational disabilities only. Short term disability accounted for
8.5%, 8.6% and 7.6% of total Company premiums for 1999, 1998 and 1997,
respectively.
Life and Accidental Death and Dismemberment Insurance. Group life insurance
provides coverage on the insured for a specified period and has no cash value
(amount of cash available to a policyholder on the surrender of or withdrawal
from the life insurance policy). Coverage is offered to employees and their
dependents. Accidental death and dismemberment insurance is usually provided
in conjunction with group life and is payable after the accidental death of
the insured employee in an amount based on the face amount of the policy.
Accidental death and dismemberment also covers dismemberment of the insured
employee in an amount based on a schedule contained in the policy. Group life
and accidental death and dismemberment insurance accounted for 32.8%, 32.0%,
and 31.9% of total Company premiums for 1999, 1998, and 1997, respectively.
Since 1991, the Group Insurance segment has pursued geographic expansion
beyond the Western United States by opening sales offices in the Central and
Eastern regions of the United States. The Standard intends to pursue further
sales growth in the Central and Eastern regions by opening additional sales
offices and adding sales representatives to the existing offices in those
regions. For the year ended December 31, 1999, premiums were 48.2%, 29.1% and
22.7% from the Western, Central and Eastern regions, respectively.
Retirement Plans Segment
The Retirement Plans segment accounted for $66.5 million, or 5.1%, of the
Company's total revenues in 1999. The Retirement Plans segment offers full-
service 401(k) and other pension plan products and services to private and
public employers. The Standard markets retirement plan products and services
primarily to employers with 50 to 500 employees through brokers, agents,
employee benefit consultants, and other distributors served by The Standard's
11 regional Retirement Plans sales offices. Most sales of The Standard's
retirement plans products include both financial services and record-keeping
arrangements, although either financial services or record-keeping may be
provided on a stand-alone basis. Assets managed by the Retirement Plans
segment grew 26.8%, 16.0%, and 15.4% for each of the three years ended
December 31, 1999, 1998, and 1997, respectively.
Individual Insurance Segment
The Individual Insurance segment accounted for $209.0 million, or 16.1%, of
the Company's total revenues in 1999. This segment markets life insurance,
disability insurance and annuities to individuals. Individual insurance
products are distributed by licensed agents and brokers in the Western,
Central and Southeast regions of the United States. Management believes the
market for the fixed life products offered by The Standard's Individual
Insurance segment has matured and provides limited growth opportunities.
However, management believes potential growth opportunities exist in other
products within this segment.
5
Competition
The life insurance business is highly competitive for all types of group and
individual insurance and retirement plans products offered by The Standard.
Competition comes from other insurers, financial services companies such as
banks, broker-dealers and mutual funds, managed care providers for employer
groups, individual consumers and distributors, many of which have greater
financial resources, offer a broader array of products and, with respect to
other insurers, may have higher claims paying ability ratings. Passage of
financial institution reform legislation, such as the Gramm-Leach-Bliley Act,
may also impact our ability to compete.
The principal competitive factors are reputation, financial strength,
quality of service, underwriting, distribution, product design and price. At
December 31, 1999, The Standard was rated: A (Excellent) by A.M. Best--3rd of
13 ratings, A+ (Good) by Standard & Poor's--5th of 17 ratings, AA- (Very High
Claims Paying Ability) by Duff & Phelps--4th of 16 ratings, and A2 (Good) by
Moody's--6th of 16 ratings.
Investments
The Company maintains a diversified investment portfolio. The Standard's
investment portfolio is regulated by the insurance laws of the state of Oregon
and other states in which The Standard does business. Oregon law generally
limits investments to bonds and other fixed maturity securities, mortgage
loans, common and preferred stock, real estate, and obligations collateralized
by cash values of life insurance policies. Decisions to acquire and dispose of
investments are made in accordance with guidelines adopted and modified from
time to time by The Standard's board of directors. Each transaction requires
the approval of one or more members of The Standard's senior investment staff,
with increasingly higher approval authorities required for more significant
investments. All transactions are reported quarterly to the Finance &
Operations Committee of the board of directors of The Standard.
Asset allocation is dependent on factors such as asset/liability matching
and liquidity considerations, economic conditions, tax issues, regulatory
considerations and social/community considerations. The Standard's policy
reserves and other liabilities are calculated in accordance with regulations
and contract provisions that must assume compounding interest at fixed rates
of return. Maturities and provisions for early withdrawal vary widely by
product type and contract form and are monitored continuously by The
Standard's actuaries. Cash flow testing is performed annually to ensure that
asset types and maturities are appropriate for The Standard's product mix and
that The Standard can meet its obligations to policyholders under a wide
variety of economic conditions. The Standard's cash flow testing consistently
supports the allocation of a large majority of assets to fixed income
investments under a wide range of economic scenarios. For additional
information see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Item 8, "Financial Statements and
Supplementary Data".
Reinsurance
The Standard routinely assumes and cedes reinsurance with other companies.
The primary purpose of ceded reinsurance is to limit losses from large
exposures. However, if the reinsurer is unable to meet its obligations, the
originating issuer of the insurance contract retains the liability. The
Standard maintains maximum retention limits of $500,000 aggregated per
individual for both group and individual life policies. For disability
policies, The Standard maintains a maximum monthly retention limit of $10,000
gross benefit aggregated per individual for group policies and $2,000 for
individual policies. The Standard generally enters into yearly renewable term
reinsurance agreements with each reinsurer. In addition to product-specific
reinsurance arrangements, The Standard is covered by reinsurance for certain
catastrophic losses.
The Standard is involved in a reinsurance/third-party administration
arrangement with Northwestern Mutual Life Insurance Company ("NML") to market
NML's long term disability and short term disability products using NML's
agency distribution system. Under this arrangement, The Standard reinsures 60%
of the risk, and receives 60% of the premiums, for policies issued on or after
January 1, 1993. For disability policies issued prior to January 1, 1993, The
Standard assumes 80% of the risk and premiums. In addition to assuming
reinsurance
6
risk, The Standard provides product design, pricing, state regulatory filings,
underwriting, legal support, claims management and other administrative
services under this arrangement. Premiums received by The Standard for the
assumed NML business accounted for 3.9%, 4.2% and 4.0% of the Company's total
premiums in 1999, 1998, and 1997, respectively.
Total reinsurance premiums ceded and assumed were $18.9 million and $39.1
million, respectively, for the year ended December 31, 1999 and $17.0 million
and $36.4 million, respectively, for the year ended December 31, 1998.
Reserves
The Standard establishes and carries as a liability actuarially determined
reserves that are calculated to meet obligations for future policy benefits
and claims. The reserves are computed at amounts that, with additions from
premiums to be received and with interest on such reserves at certain assumed
rates, are expected to be sufficient to meet The Standard's policy obligations
at their maturities or in the event of an insured's death or disability.
Reserves include unearned premiums, premium deposits, claims reported but not
yet paid, claims incurred but not reported, and claims in the process of
settlement. The Standard's reserves are based on actuarially recognized
methods for developing assumptions for estimating future policy benefits and
claims experience, including an evaluation of interest rates, mortality,
morbidity, persistency and expenses. Reserves for assumed reinsurance are
computed on bases essentially comparable to direct insurance reserves.
Due to the nature of the underlying risks and the high degree of uncertainty
associated with the determination of the liability for future policy benefits
and claims, the amounts which will ultimately be paid to settle this liability
cannot be determined precisely and may vary from the estimated amounts. The
Standard evaluates its reserves periodically. Based on changes in the
assumptions used to establish the reserves, as well as The Standard's actual
policy benefits and claims experience, adjustments are made when appropriate.
The establishment of reserves (or the increase of reserves in later periods)
is charged as expense in the period the reserves are established or increased.
Regulation and Litigation
The Company's business is subject to comprehensive state regulation and
supervision throughout the United States primarily to protect policyholders,
not shareholders. The United States Federal government does not directly
regulate the insurance industry. Federal legislation and administrative
policies in certain areas can, however, significantly and adversely affect the
insurance industry. These areas include pension and employee welfare benefit
plan regulation, financial services regulation and Federal taxation.
The laws of the various states establish insurance departments with broad
powers such as licensing companies to transact business; licensing agents;
mandating certain insurance benefits; regulating premium rates; approving
policy forms; regulating unfair trade and claims practices; establishing
reserve requirements and solvency standards; fixing maximum interest rates on
life insurance policy loans and minimum rates for accumulation of surrender
values; restricting certain transactions between affiliates; and regulating
the types, amounts and valuation of investments. State insurance regulators
and the National Association of Insurance Commissioners continually reexamine
existing laws and regulations and may impose changes in the future that
materially adversely affect The Standard's business, financial condition and
results of operations.
While the Company cannot predict the impact of potential or future state or
Federal legislation or regulation on its business, future laws and
regulations, and the interpretation of those laws and regulations, may
materially adversely affect the Company's business, financial condition and
results of operations.
Insolvency regulations exist in many of the jurisdictions in which The
Standard is doing business. Such regulations may require life insurance
companies within the jurisdiction to participate in guaranty associations.
These associations levy assessments against their members for the purpose of
paying benefits due to policyholders of impaired, insolvent or failed
insurance companies. Association assessments levied against The Standard from
January 1, 1997 through December 31, 1999 aggregated $2.3 million. At December
31, 1999,
7
The Standard maintained a reserve of $1.0 million for future assessments in
respect of currently impaired, insolvent or failed insurers.
StanCorp and its subsidiaries are involved in various legal actions and
other state and Federal proceedings. For additional information see Item 8,
"Financial Statements and Supplementary Data--Notes to Consolidated Financial
Statements".
Risk-Based Capital
The National Association of Insurance Commissioners has implemented a tool
to aid in the assessment of the statutory capital and surplus of life and
health insurers. This tool, known as Risk-Based Capital ("RBC"), augments
statutory minimum capital and surplus requirements. The RBC system employs a
risk-based formula that applies prescribed factors to the various risk
elements inherent in an insurer's business to arrive at minimum capital
requirements in proportion to the amount of risk assumed by the insurer. At
December 31, 1999, The Standard's RBC level was significantly in excess of
that which would require corrective action by The Standard or regulatory
agencies.
Employees
At December 31, 1999, StanCorp and its subsidiaries had 1,971 full- and
part-time employees.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of StanCorp are as follows:
Age (as of
Name March 2, 2000) Position
---- -------------- --------
Ronald E. Timpe..... 60 Chairman, President, Chief Executive
Officer and Director of StanCorp and The
Standard
Patricia J. Brown*.. 41 Vice President, Information Systems of The
Standard
Dwight L. Cramer.... 47 Vice President, General Counsel and
Corporate Secretary of StanCorp and The
Standard
Kim W. Ledbetter*... 47 Senior Vice President, Retirement Plans
and Individual Insurance of The Standard
Douglas T. Maines*.. 47 Senior Vice President, Group Insurance of
The Standard
Cindy J. McPike..... 37 Assistant Vice President, Controller &
Treasurer of StanCorp and The Standard
J. Gregory Ness*.... 42 Senior Vice President, Investments of The
Standard
Eric E. Parsons..... 51 Senior Vice President and Chief Financial
Officer of StanCorp and The Standard
- --------
* Denotes an officer of a subsidiary who is not an officer of StanCorp but
who is considered an "executive officer" under the regulations of the
Securities and Exchange Commission.
Set forth below is biographical information for the executive officers.
Ronald E. Timpe, FSA, CLU, has been chairman, president and chief executive
officer of StanCorp since its incorporation. He was appointed president and
chief executive officer of The Standard in 1994 and became chairman of The
Standard in 1998. Prior to 1994 he served as president and chief operating
officer, and senior vice president of The Standard. He formerly held
management positions in each of The Standard's operating divisions.
8
Patricia J. Brown, CPA, FLMI, has been vice president, Information Systems,
of The Standard since 1999. Ms. Brown formerly served in officer positions at
StanCorp and The Standard, including assistant vice president, controller and
treasurer. She has served in various management positions since 1992.
Dwight L. Cramer, J.D., has been vice president, general counsel and
corporate secretary of StanCorp and The Standard since February 2000. Prior to
joining StanCorp, Mr. Cramer served in various management positions at
American General Annuity Insurance Company since 1993, most recently, as
senior vice president-specialty products.
Kim W. Ledbetter, FSA, CLU, has been senior vice president, Individual
Insurance and Retirement Plans, of The Standard since 1997. From 1994 to 1997,
Mr. Ledbetter was vice president, Retirement Plans, of The Standard.
Douglas T. Maines has been senior vice president, Group Insurance, of The
Standard since 1998. From 1996 to 1998, Mr. Maines was vice president and
general manager, claims, for Liberty Mutual Insurance Company. From 1993 to
1996, Mr. Maines was vice president, Business Development for the same
company.
Cindy J. McPike, CPA, has been assistant vice president, controller and
treasurer of StanCorp and The Standard since February 2000. Ms. McPike was the
assistant vice president, controller of StanCorp and assistant vice president,
controller and treasurer of The Standard since 1999. Ms. McPike was the
manager, Corporate Accounting for The Standard from 1998 to 1999. Prior to
joining The Standard, Ms. McPike was director of Internal Audit for NW
Natural.
J. Gregory Ness, LLIF, has been senior vice president, Investments of The
Standard since 1999. Mr. Ness was vice president and corporate secretary of
StanCorp from its incorporation to February 2000. From 1997 to 1999, Mr. Ness
was vice president and corporate secretary of The Standard. From 1996 to 1997,
Mr. Ness was vice president, Retirement Plans Sales and Marketing, of The
Standard. He has served in various management positions with The Standard
since 1988.
Eric E. Parsons, FLMI, has been senior vice president and chief financial
officer of StanCorp since its incorporation. Mr. Parsons has been senior vice
president and chief financial officer of The Standard since 1998. From 1997 to
1998, Mr. Parsons was senior vice president and chief financial officer and
chief investment officer of The Standard. From 1993 to 1997, Mr. Parsons was
vice president, Investments.
ITEM 2. PROPERTIES
Principal properties owned by The Standard consist of two office buildings
in downtown Portland, Oregon: the Standard Insurance Center, with
approximately 459,000 square feet; and the Standard Plaza, with approximately
216,000 square feet. In addition, The Standard leases 116,000 square feet of
office space in a third office building, also located in downtown Portland,
Oregon, and 42,000 square feet of offsite storage. The Standard also leases
offices under commitments of varying terms to support its sales offices
throughout the United States.
Management believes that the capacity and types of facilities are suitable
and adequate for the present and foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
See Item 8, "Financial Statements and Supplementary Data--Notes to
Consolidated Financial Statements", for the information incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of StanCorp's shareholders during
the fourth quarter of 1999.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
StanCorp's common stock is listed on the New York Stock Exchange under the
symbol "SFG". As of March 2, 2000 there were 77,590 shareholders of record of
common stock.
The high and low sales prices (as reported by the New York Stock Exchange)
and cash dividends paid, per share of common stock, by calendar quarter since
the initial public offering on April 21, 1999 through December 31, 1999, were
as follows:
4Q 3Q 2Q 1Q
------- ------- ------- ---
High............................................. $28.250 $27.813 $30.000 N/A
Low.............................................. 21.250 21.750 22.750 N/A
Close............................................ 25.188 22.375 30.000 N/A
Dividends Paid................................... 0.060 0.060 -- N/A
Although StanCorp intends to declare quarterly cash dividends on the common
stock, the declaration and payment of dividends in the future is subject to
the discretion of the board of directors and will depend on StanCorp's
financial condition, results of operations, cash requirements, future
prospects, regulatory restrictions on the payment of dividends by The Standard
(see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Financing") and other
factors deemed relevant by StanCorp's board of directors.
On April 21, 1999, StanCorp completed an initial public offering of common
stock, issuing 15,209,400 shares (including 1,289,400 shares subsequently sold
pursuant to the underwriters' over-allotment option) at $23.75 per share, and
received proceeds, net of IPO expenses, of $336.5 million. Of the proceeds,
$276.9 million was contributed to The Standard, of which $267.9 million was
used to retire obligations to policyholders arising out of The Standard's
conversion to a stock life insurance company, and $9.0 million was paid in
exchange for ownership of The Standard's non-insurance subsidiaries. The
remaining $59.6 million was retained by StanCorp for general corporate
purposes. The shares of common stock issued in the IPO were in addition to
18,718,015 shares of StanCorp common stock distributed to The Standard
policyholders, pursuant to the Plan, in exchange for their membership
interests in The Standard.
On November 1, 1999, the board of directors of StanCorp authorized the
repurchase of up to 1,700,000 shares of StanCorp's common stock to be effected
before November 1, 2000. As of December 31, 1999, 1,277,391 shares had been
repurchased at a total cost of $34.2 million. On February 23, 2000 the board
of directors of Stancorp authorized the repurchase of up to 1,600,000 shares
of StanCorp's common stock to be effected before February 23, 2001. Both
repurchases are to be effected in the open market or in negotiated
transactions in compliance with the safeharbor provisions of Rule 10b-18 under
regulations of the Securities Exchange Act of 1934.
During 1999, the board of directors of StanCorp granted 67,704 shares of
restricted stock to key management employees. The shares vest during 2001
dependent on the recipients' continued employment with StanCorp or The
Standard.
10
ITEM 6. SELECTED FINANCIAL DATA (1)
The following financial data should be read in conjunction with Item 8,
"Financial Statements and Supplementary Data" and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
(Dollars in millions, except share data)
Income Statement Data: (2)
Revenues:
Premiums................ $ 959.2 $ 892.8 $ 827.5 $ 747.1 $ 676.8
Net investment income... 337.6 323.1 303.2 285.2 273.5
Net realized investment
gains.................. 0.4 11.6 11.8 15.1 8.0
Other................... 3.0 3.4 2.6 1.2 0.9
---------- -------- -------- -------- --------
Total revenues........ 1,300.2 1,230.9 1,145.1 1,048.6 959.2
---------- -------- -------- -------- --------
Benefits and expenses:
Policyholder benefits
(3).................... 904.5 875.3 831.2 781.1 689.8
Operating expenses (4).. 272.3 247.0 218.6 191.9 174.8
---------- -------- -------- -------- --------
Total benefits and
expenses............. 1,176.8 1,122.3 1,049.8 973.0 864.6
---------- -------- -------- -------- --------
Income before Federal
income taxes and
extraordinary item....... 123.4 108.6 95.3 75.6 94.6
Federal income taxes...... 39.0 33.0 31.4 28.6 25.5
---------- -------- -------- -------- --------
Income before
extraordinary item....... 84.4 75.6 63.9 47.0 69.1
Extraordinary item (5).... 4.5 6.1 -- -- --
---------- -------- -------- -------- --------
Net income................ $ 79.9 $ 69.5 $ 63.9 $ 47.0 $ 69.1
========== ======== ======== ======== ========
Per Common Share:
Basic and diluted
operating income (6)(7).. $ 2.50
Basic and diluted net
income (7)............... 2.37
Book value at year-end
(excluding accumulated
other comprehensive
income).................. 26.83
Market value at year-end.. 25.19
Dividends declared and
paid..................... 0.12
Basic weighted-average
shares outstanding (7)... 33,630,692
Diluted weighted-average
shares outstanding (7)... 33,674,367
Ending shares
outstanding.............. 32,706,394
Balance Sheet Data:
General account assets.... $ 4,864.8 $4,610.4 $4,243.0 $3,967.9 $3,771.9
Separate account assets... 992.3 668.5 483.3 322.8 195.6
---------- -------- -------- -------- --------
Total assets.............. 5,857.1 5,278.9 4,726.3 4,290.7 3,967.5
Total liabilities......... 5,017.2 4,439.6 3,994.3 3,643.2 3,340.4
Total equity.............. 839.9 839.3 732.0 647.5 627.1
Statutory Data:
Premium and deposits...... $ 1,290.2 $1,127.4 $1,050.3 $ 946.2 $ 869.1
Net income................ 116.8 95.7 40.9 15.7 60.5
Policyholder surplus and
asset valuation reserve.. 547.8 432.8 341.1 302.9 287.6
Net investment yield...... 7.71% 8.11% 8.27% 8.37% 8.54%
- --------
(1) Data is presented on a combined basis as if the closed block had not been
established, and therefore the data may not agree with amounts presented
in Item 8, "Financial Statements and Supplementary Data". See Item 7,
"Management's Discussions and Analysis of Financial Condition and Results
of Operations".
11
(2) Certain 1998, 1997, 1996, and 1995 amounts were reclassified to conform
with the current year's presentation.
(3) Includes policyholder benefits and interest paid on policyholder funds.
(4) Includes operating expenses, commissions and the net increase in deferred
policy acquisition costs.
(5) Represents costs related to the plan of reorganization of The Standard.
(6) Excludes realized capital gains and extraordinary item, net of tax.
(7) Weighted-average shares outstanding, basic and diluted, are pro forma as
if the initial public offering had occurred on January 1, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis of the consolidated financial condition and results
of operations of StanCorp Financial Group, Inc. ("StanCorp") and its
subsidiaries (collectively, the "Company") should be read in conjunction with
the consolidated financial statements and related notes thereto.
Forward-looking Statements
The management of the Company has made in this Form 10-K, and from time to
time may make in its public filings, press releases and in oral presentations
and discussions, certain statements including statements regarding anticipated
development and expansion of the Company's business. Such statements may
include the effects of regulatory actions, the intent, belief, or current
expectations of the Company's management, the future operating performance of
the Company and other statements regarding matters that are not historical
facts. These statements are "forward-looking" statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. Because such
statements are subject to risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements include, but are not
limited to (i) deterioration in morbidity, mortality, and persistency, (ii)
changes in interest rates or the condition of the national economy, (iii)
changes in the regulatory environment on the state or Federal level, (iv)
competition from other insurers and financial institutions, (v) achievement of
growth in new products, (vi) achievement of operating expense management
objectives, (vii) changes in claims paying ability ratings, (viii) adverse
findings in litigation or other legal proceedings, (ix) deterioration in the
experience of the closed block, and (x) on-going risks associated with Year
2000 non-compliance by StanCorp, its subsidiaries, or third parties (including
vendors and suppliers).
Reorganization Plan
In December 1997, Standard Insurance Company's ("The Standard") board of
directors authorized management to proceed with the development of a plan of
reorganization to convert from a mutual life insurance company to a stock life
insurance company, a process known as demutualization. Prior to the
reorganization, StanCorp was a wholly owned subsidiary of The Standard and was
formed for the purpose of becoming an insurance holding company upon the
completion of The Standard's reorganization. On April 21, 1999, pursuant to an
order by the Director of the Oregon Department of Consumer and Business
Services approving the Plan of Reorganization, dated September 28, 1998, as
amended on December 14, 1998 (the "Plan"), The Standard converted from a
mutual life insurance company to a stock life insurance company and became a
wholly owned subsidiary of StanCorp. Also, on April 21, 1999, StanCorp
completed an initial public offering (the "IPO") of 15.2 million shares
(including 1.3 million shares subsequently sold pursuant to the underwriters'
over-allotment option) of its common stock at the IPO price of $23.75 per
share, and received proceeds, net of IPO expenses, of $336.5 million. Of the
proceeds, $276.9 million was contributed to The Standard, of which $267.9
million was used to retire obligations to policyholders arising out of The
Standard's conversion to a stock life company, and $9.0 million was paid in
exchange for ownership of The Standard's non-insurance subsidiaries. The
remaining
12
$59.6 million was retained by StanCorp for general corporate purposes (see "--
Liquidity and Capital Resources--Financing"). The shares of common stock
issued in the IPO were in addition to 18.7 million shares of StanCorp common
stock distributed to The Standard policyholders, pursuant to the Plan, in
exchange for their membership interests in The Standard. The costs incurred
and expensed in 1999 and 1998 related to the reorganization totaled $4.5
million and $6.1 million, respectively, and are included in the financial
statements as an extraordinary item. There are no additional reorganization
costs to be incurred.
On the completion of its reorganization, The Standard established a closed
block for the payment of future benefits, policyholder dividends and certain
expenses and taxes related to certain classes of policies. The Standard
allocated to the closed block an amount of assets expected to produce cash
flows which, together with future revenues from the policies included in the
closed block, will be sufficient to support these policies. Such support
includes payment of claims, certain expenses and taxes and continuation of
policyholder dividend scales in effect for 1998 (the period used to determine
the closed block funding) if the experience underlying such dividend scales
including the portfolio interest rate continues. These assets totaled $599.8
million at December 31, 1999, and are for the benefit of the policies in the
closed block.
The contribution to income before Federal income taxes and extraordinary
item from the closed block is reported as a single line item in the
consolidated statements of income and comprehensive income. Accordingly, all
components of revenues, benefits and expenses for the closed block are shown
as a net amount under the caption "Contribution from closed block". Federal
income tax expense applicable to the closed block is reflected as a component
of total tax expense. Reporting of the contribution from the closed block as a
single line item results in material reductions in the respective line items
in the consolidated statements of income and comprehensive income while having
no effect on net income. All assets allocated to the closed block are combined
and shown as a separate line item in the consolidated balance sheets under the
caption "Closed block assets". All liabilities attributable to the closed
block are treated similarly and disclosed as a separate line item under the
caption "Closed block liabilities". Management believes that a better
understanding of the business results when closed block amounts are presented
on a combined basis as if the closed block had not been established. Such
presentation does not affect the Company's reported net income. Accordingly,
the combined presentation set forth below includes revenues and expenses
associated with policies included in the closed block for the years ended
December 31.
1999 1998 1997
-------- -------- --------
(In millions)
Revenues:
Premiums................................... $ 959.2 $ 892.8 $ 827.5
Net investment income...................... 337.6 323.1 303.2
Net realized investment gains.............. 0.4 11.6 11.8
Other...................................... 3.0 3.4 2.6
-------- -------- --------
Total revenues........................... 1,300.2 1,230.9 1,145.1
-------- -------- --------
Benefits and expenses:
Policyholder benefits...................... 904.5 875.3 831.2
Operating expenses......................... 201.3 185.6 161.3
Commissions................................ 71.2 65.6 64.0
Net increase in deferred policy acquisition
costs..................................... (0.2) (4.2) (6.7)
-------- -------- --------
Total benefits and expenses.............. 1,176.8 1,122.3 1,049.8
-------- -------- --------
Income before Federal income taxes and
extraordinary item.......................... $ 123.4 $ 108.6 $ 95.3
======== ======== ========
13
Consolidated Results of Operations
Premiums
Premiums, which include policy and contract charges, increased $66.4
million, or 7.4%, in 1999 compared to 1998, and $65.3 million, or 7.9%, in
1998 compared to 1997. The increases resulted primarily from growth in group
insurance premiums of $71.1 million in 1999 compared to 1998, and $67.4
million in 1998 compared to 1997. Partially offsetting these increases were
decreases in individual insurance premiums of $7.3 million in 1999 compared to
1998, and $4.9 million in 1998 compared to 1997 (See "--Selected Segment
Information").
Net Investment Income
Net investment income increased $14.5 million, or 4.5%, in 1999 compared to
1998, and $19.9 million, or 6.6%, in 1998 compared to 1997. The increases were
the result of an increase in average invested assets of 6.9% to $4.34 billion
in 1999 from $4.06 billion in 1998, and a 7.7% increase in 1998 from $3.77
billion in 1997. Partially offsetting the effect of the increase in average
invested assets was a decrease in the portfolio yields for both fixed maturity
securities and mortgage loans, which resulted from turnover of investments
acquired in periods with higher yields. The portfolio yield for fixed maturity
securities decreased to 6.94% at December 31, 1999, from 7.05% at December 31,
1998 and 7.21% at December 31, 1997. The portfolio yield for mortgage loans
decreased to 8.37% at December 31, 1999, from 8.70% at December 31, 1998 and
9.13% at December 31, 1997. Portfolio yields may increase or decrease in the
future depending on changes in the overall interest rate environment and other
factors.
Although the Company's net investment income fluctuates with changes in the
overall interest rate environment, these fluctuations are offset, in part, by
inverse fluctuations in newly established reserve liabilities due to the use
of current interest rate assumptions in discounting those reserve liabilities.
Net Realized Investment Gains
Net realized gains and losses occur primarily as a result of dispositions of
the Company's invested assets in the regular course of investment management.
The sale of real estate holdings contributed net realized investment gains of
$3.2 million, $6.0 million and $6.3 million in 1999, 1998, and 1997,
respectively. Also in 1999 $4.3 million in losses were recognized on the sale
of fixed maturity securities. Dispositions of invested assets and associated
gains or losses may or may not continue into the future.
Policyholder Benefits
Policyholder benefits, including policyholder dividends and interest paid on
policyholder funds, increased $29.2 million, or 3.3%, in 1999 compared to
1998, and $44.1 million, or 5.3%, in 1998 compared to 1997. The increases for
both periods primarily related to the growth in group insurance business,
offset in part by improvements in the group insurance benefit ratios due to
favorable claims experience in the latter parts of both 1999 and 1998. Because
benefit ratios are heavily affected by actual claims experience, the
improvements in the benefit ratio may or may not continue in the future. (See
"--Selected Segment Information ".)
Operating Expenses
Operating expenses increased $15.7 million, or 8.5%, in 1999 compared to
1998, and $24.3 million, or 15.1%, in 1998 compared to 1997. Operating
expenses for both periods increased primarily due to growth in the Group
Insurance segment, as evidenced by premium growth. (See "--Selected Segment
Information".) Year 2000 computer system remediation and replacement expenses
of $2.2 million, $7.6 million, and $3.7 million for 1999, 1998 and 1997,
respectively, also contributed to the increases.
Commissions
Commissions increased $5.6 million, or 8.5%, in 1999 compared to 1998, and
$1.6 million, or 2.5%, in 1998 compared to 1997. Commissions generally
fluctuate with premiums, however not directly as commissions
14
on new sales tend to be at higher rates than for renewals. The increases for
both periods related to premium growth for those same periods of 7.4% and
7.9%, respectively.
Net Increase in Deferred Policy Acquisition Costs
Declines in new sales and a slight decrease in persistency for the
Individual Insurance segment resulted in an increase in net expense related to
deferred policy acquisition costs of $4.0 million in 1999 compared to 1998,
and $2.5 million in 1998 compared to 1997.
Federal Income Taxes
The Company's provision for Federal income taxes will differ from the
amounts calculated at the corporate Federal tax rate primarily due to
permanent differences, including nontaxable investment income and tax credits.
The effective Federal income tax rates for 1999, 1998 and 1997 were 31.6%,
30.4% and 32.9%, respectively, compared to the corporate Federal tax rate of
35.0% for each of these years. In addition to the differences described above,
the 1999 and 1998 effective tax rates are less than the corporate Federal tax
rate primarily due to adjustments related to the resolution of uncertainties
provided for in prior years. See Item 8, "Financial Statements and
Supplementary Data--Notes to Consolidated Financial Statements".
Income Before Extraordinary Item
Income before extraordinary item increased $8.8 million, or 11.6%, in 1999
compared to 1998, and $11.7 million, or 18.3%, in 1998 compared to 1997. The
increases resulted primarily from business growth and favorable claims
experience in the Group Insurance segment. These increases were partially
offset by a decrease in net realized investment gains to $0.4 million in 1999
from $11.6 million in 1998.
Selected Segment Information
The following table sets forth selected segment information for the years
indicated:
At or for the Year Ended
December 31,
---------------------------
1999 1998 1997
-------- -------- --------
(In millions)
Revenues:
Group Insurance segment.......................... $1,007.0 $ 933.1 $ 851.9
Retirement Plans segment......................... 66.5 69.1 66.0
Individual Insurance segment..................... 209.0 221.1 221.2
Other............................................ 17.7 7.6 6.0
-------- -------- --------
Total revenues................................. $1,300.2 $1,230.9 $1,145.1
======== ======== ========
Income (loss) before Federal income taxes and
extraordinary item:
Group Insurance segment.......................... $ 99.6 $ 83.6 $ 64.5
Retirement Plans segment......................... (2.7) 0.4 1.1
Individual Insurance segment..................... 12.1 19.2 24.2
Other............................................ 14.4 5.4 5.5
-------- -------- --------
Total income before Federal income taxes and
extraordinary item............................ $ 123.4 $ 108.6 $ 95.3
======== ======== ========
Reserves:(1)
Group Insurance segment.......................... $1,578.8 $1,409.7 $1,260.4
Retirement Plans segment......................... 655.3 651.2 637.7
Individual Insurance segment..................... 1,566.0 1,483.5 1,443.4
-------- -------- --------
Total reserves................................. $3,800.1 $3,544.4 $3,341.5
======== ======== ========
- --------
(1) Reserves are comprised of future policy benefits and claims and other
policyholder funds.
15
Group Insurance Segment
The Group Insurance segment markets long and short term disability, life,
accidental death and dismemberment, and dental insurance. As the largest of
the Company's three segments, Group Insurance premiums accounted for 89.2%,
87.9% and 86.7% of the Company's total premiums for the years ended December
31, 1999, 1998 and 1997, respectively.
Income before Federal income taxes and extraordinary item for the Group
Insurance segment increased $16.0 million, or 19.1%, in 1999 compared to 1998,
following an increase of $19.1 million, or 29.6%, in 1998 compared to 1997.
The increases were primarily the result of business growth and favorable
claims experience, which experience may or may not continue in future periods.
The following table sets forth selected financial data for this segment for
the periods indicated:
At or for the Year Ended
December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in millions)
Revenues:
Premiums................................ $ 855.6 $ 784.5 $ 717.1
Net investment income................... 151.8 143.7 131.4
Net realized investment gains (losses).. (3.3) 2.5 1.0
Other................................... 2.9 2.4 2.4
--------- --------- ---------
Total revenues........................ 1,007.0 933.1 851.9
--------- --------- ---------
Benefits and expenses:
Policyholder benefits................... 706.6 666.5 625.5
Operating expenses...................... 147.0 134.4 116.7
Commissions............................. 56.8 50.0 47.2
Net increase in deferred policy
acquisition costs...................... (3.0) (1.4) (2.0)
--------- --------- ---------
Total benefits and expenses........... 907.4 849.5 787.4
--------- --------- ---------
Income before Federal income taxes and
extraordinary item....................... $ 99.6 $ 83.6 $ 64.5
========= ========= =========
Benefit ratio (% of premiums)............. 82.6% 85.0% 87.2%
Operating expense ratio (% of premiums)... 17.2 17.1 16.3
Persistency (% of premiums)............... 86.0 84.8 86.1
Life insurance in force................... $99,418.9 $81,039.7 $74,798.3
Premiums increased $71.1 million, or 9.1%, in 1999 compared to 1998, and
$67.4 million, or 9.4%, in 1998 compared to 1997. The increases included
premium growth for group long term disability products of 5.8% in 1999
compared to 1998, and 4.3% in 1998 compared to 1997. The remaining increases
were primarily attributable to increases in group life insurance premiums,
which were primarily the result of improved persistency and expanded
distribution.
Net investment income increased $8.1 million, or 5.6%, in 1999 compared to
1998, and $12.3 million, or 9.4%, in 1998 compared to 1997, respectively. The
increase was due to an increase in average assets supporting this segment,
which was partially offset by a decrease in the portfolio yield. (See "--
Consolidated Results of Operations--Net Investment Income".)
Policyholder benefits increased $40.1 million, or 6.0%, in 1999 compared to
1998, and $41.0 million, or 6.6%, in 1998 compared to 1997. The increases were
primarily a result of business growth, as evidenced by growth in premiums for
these periods. Offsetting the impact of business growth was an improvement in
the benefit ratio to 82.6% in 1999 from 85.0% in 1998, and 87.2% in 1997. The
1999 and 1998 benefit ratios reflect favorable claims experience in the latter
parts of each of those years. Policyholder benefits for 1997 were negatively
impacted by adverse claims experience on a few large long term disability
cases. In response, management increased renewal rates on those cases and
modified underwriting practices. Because the benefit ratio is heavily affected
by actual claims experience, the improvements in the benefit ratio may or may
not continue in the future.
16
Operating expenses increased $12.6 million, or 9.4%, in 1999 over 1998, and
$17.7 million, or 15.2%, in 1998 over 1997. The increases were due in part to
business growth for the same periods as discussed above, and the opening of
five sales offices in 1999. Operating expenses proportional to premiums have
remained relatively stable for the years ended December 31, 1999, 1998 and
1997.
Retirement Plans Segment
The Retirement Plans segment offers full-service 401(k) and other pension
plan products and services. The loss before Federal income taxes and
extraordinary item in 1999 was $2.7 million, compared to income of
$0.4 million and $1.1 million in 1998 and 1997, respectively. Management
believes that profitability in this segment depends upon significant increases
in assets under management in future years to achieve economies of scale.
Separate account assets under management grew 48.4%, 38.3%, and 49.7% in 1999,
1998, and 1997, respectively. The following table sets forth selected
financial data for the Retirement Plans segment for the years indicated:
At or for the Year Ended
December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in millions)
Revenues:
Premiums...................................... $ 16.6 $ 14.0 $ 11.2
Net investment income......................... 50.6 54.0 54.3
Net realized investment gains (losses)........ (0.7) 1.1 0.8
Other......................................... -- -- (0.3)
-------- -------- --------
Total revenues.............................. 66.5 69.1 66.0
-------- -------- --------
Benefits and expenses:
Policyholder benefits......................... 43.0 46.6 47.0
Operating expenses............................ 23.9 20.4 16.5
Commissions................................... 2.3 1.7 1.4
-------- -------- --------
Total benefits and expenses................. 69.2 68.7 64.9
-------- -------- --------
Income (loss) before Federal income taxes and
extraordinary item............................. $ (2.7) $ 0.4 $ 1.1
======== ======== ========
Operating expense ratio (% of average assets
under management).............................. 1.6% 1.7% 1.6%
Assets under management:
General account............................... $ 655.4 $ 631.3 $ 637.7
Separate accounts............................. 992.3 668.5 483.3
-------- -------- --------
Total....................................... $1,647.7 $1,299.8 $1,121.0
======== ======== ========
Premiums are derived from charges for administrative services on assets
managed in both the general account and separate accounts, and also include
premiums on life contingent annuities. Premiums increased $2.6 million, or
18.6%, in 1999 compared to 1998, and $2.8 million, or 25.0%, in 1998 compared
to 1997. The increases for both years resulted primarily from the growth in
assets under management.
Net investment income decreased $3.4 million, or 6.3%, in 1999 compared to
1998, and $0.3 million, or 0.6%, in 1998 compared to 1997 primarily due to a
decline in portfolio yield (see "--Consolidated Results of Operations--Net
Investment Income"). The profitability of the Retirement Plans segment is, in
part, dependent on the maintenance of targeted interest rate spreads.
Therefore, policyholder benefits (which include interest credited to
policyholders) should generally trend with net investment income. Policyholder
benefits decreased 7.7% in 1999 compared to 1998, and 0.9% in 1998 compared to
1997. The decreases were consistent with the decreases in net investment
income for this segment for these same periods.
17
Although operating expenses increased $3.5 million, or 17.2%, in 1999
compared to 1998, and $3.9 million, or 23.6%, in 1998 compared to 1997,
operating expenses as a percentage of average assets managed remained
relatively stable at 1.6%, 1.7%, and 1.6% for 1999, 1998 and 1997,
respectively. The primary factor contributing to increased operating expenses
in 1999 was the opening of four field offices. Operating expenses in 1999 and
1998 also were impacted by this segment's conversion of its traditional plans
to daily plans. Daily plans, which allow daily investment directives, are
believed to be more attractive to customers than traditional plans, which only
allow quarterly investment directives. The segment completed the conversion of
the traditional plans in 1999 and while efficiencies and cost savings of the
strategy cannot be readily estimated, management believes future expense
savings will be realized.
Individual Insurance Segment
The Individual Insurance segment sells life insurance, disability insurance,
and annuities to individuals. In the individual insurance market, a growing
percentage of consumers are now reaching 45 years of age or older and are
shifting their focus from loss avoidance to asset accumulation. Moreover, the
strong stock market has increased competition from non-traditional individual
life insurance and annuities such as variable life and variable annuity
products.
Income before Federal income taxes and extraordinary item for this segment
declined $7.1 million in 1999 compared to 1998, and $5.0 million in 1998
compared to 1997. The overall market considerations discussed above were the
primary causes of the decreases. The following table sets forth selected
financial data for the Individual Insurance segment for the years indicated:
At or for the Year Ended
December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in millions)
Revenues:
Premiums....................................... $ 87.0 $ 94.3 $ 99.2
Net investment income.......................... 121.5 124.0 119.9
Net realized investment gains.................. 0.5 1.8 1.7
Other.......................................... -- 1.0 0.4
-------- -------- --------
Total revenues............................... 209.0 221.1 221.2
-------- -------- --------
Benefits and expenses:
Policyholder benefits.......................... 154.9 162.2 158.7
Operating expenses............................. 27.1 28.6 27.6
Commissions.................................... 12.1 13.9 15.4
Net (increase) decrease in deferred policy
acquisition costs............................. 2.8 (2.8) (4.7)
-------- -------- --------
Total benefits and expenses.................. 196.9 201.9 197.0
-------- -------- --------
Income before Federal income taxes and
extraordinary item.............................. $ 12.1 $ 19.2 $ 24.2
======== ======== ========
Operating expense ratio (% of premiums).......... 31.1% 30.3% 27.8%
Individual life persistency (% of face amount)... 88.6 89.5 90.9
Life insurance in force.......................... $7,645.9 $7,952.0 $7,732.9
Premiums decreased $7.3 million, or 7.7%, in 1999 compared to 1998, and $4.9
million, or 4.9% in 1998 compared to 1997. The decrease resulted primarily
from declining demand for life insurance due to the maturing individual
insurance market.
Net investment income decreased $2.5 million, or 2.0%, in 1999 compared to
1998, and increased $4.1 million, or 3.4%, in 1998 compared to 1997. The
changes reflect similar changes in average invested assets supporting this
segment, as well as fluctuations in market prices for those same assets.
18
Policyholder benefits decreased $7.3 million, or 4.5%, in 1999 compared to
1998, and increased $3.5 million, or 2.2%, in 1998 compared to 1997. The
changes are consistent with management's expectations given fluctuations in
premiums and net investment income for the same periods.
Operating expenses decreased $1.5 million, or 5.2% in 1999 compared to 1998,
and increased $1.0 million, or 3.6%, in 1998 compared to 1997. When taken as a
percent of premiums, operating expenses were 31.1%, 30.3% and 27.8% in 1999,
1998 and 1997, respectively.
Declines in new sales and a slight decrease in persistency for the segment
resulted in an increase in net expense related to deferred policy acquisition
costs of $5.6 million in 1999 compared to 1998, and $1.9 million in 1998
compared to 1997.
Other
Other businesses primarily include return on capital held by the holding
company, income from StanCorp Mortgage Investors and gains and losses related
to real estate investments owned by The Standard.
Income before Federal income taxes and extraordinary item for the years
ended December 31, 1999, 1998 and 1997 was $14.4 million, $5.4 million and
$5.5 million, respectively. Net realized investment gains for these same
periods were $3.9 million, $6.2 million and $8.3 million, respectively.
Dispositions of invested assets, and therefore associated gains and losses,
may or may not continue into the future.
Liquidity and Capital Resources
Operating Cash Flows
Operating cash inflows consist primarily of premiums, annuity deposits and
net investment income. Operating cash outflows consist primarily of benefits
to policyholders and beneficiaries, operating expenses, commissions and taxes.
Investing Cash Flows
Investing cash inflows consist primarily of the proceeds from sales or
maturities of investments. Investing cash outflows consist primarily of
payments for investments acquired. Since future benefit payments are
principally intermediate- and long-term obligations, the Company's investments
are predominantly intermediate- and long-term fixed-rate instruments, such as
fixed maturity securities and mortgage loans, which are expected to provide
sufficient cash flow to cover these obligations. The nature and quality of
various types of investments purchased by The Standard must comply with
statutes and regulations imposed by Oregon and other states in which The
Standard is licensed.
It is management's objective to generally align the cash flow
characteristics of assets and liabilities to ensure that the Company's
financial obligations can be met under a wide variety of economic conditions.
Most of The Standard's policy liabilities result from long term disability
reserves that have proven to be very stable over time, participating
individual life insurance products and other life insurance and annuity
products on which interest rates can be adjusted periodically, and products
associated with the separate accounts. Annual cash flow scenario testing is
used to assess interest rate risk and to permit The Standard's investment
policy to be modified whenever necessary to address changing economic
environments. See "--Interest Rate Risk Management".
The market values of the Company's investments vary with changing economic
and market conditions and interest rates. The Company is subject to the risk
of default on principal and interest payments by the issuers of the fixed
maturity securities it owns. Although almost all of the fixed maturity
securities are investment-grade and the Company believes it maintains prudent
issuer diversification, a major economic downturn could result in issuer
defaults. Since fixed maturity securities represent 50.9% of the Company's
total general account invested assets at December 31, 1999, such defaults
could materially adversely affect the Company's business, financial condition
and results of operations.
19
Policyholders or claimants may not withdraw from The Standard's large block
of disability reserves. Instead, claim payments are issued monthly over
periods that may extend for many years. This holding of stable long-term
reserves makes it possible for The Standard to allocate a greater portion of
its assets to long-term commercial mortgage loans, a benefit many other
insurance companies do not experience.
At December 31, 1999, mortgage loans represented 42.9% of the total general
account invested assets and were collateralized by properties located in the
Central region representing 22.4% of the portfolio, the Eastern region
representing 11.3%, and the Western region representing 66.3%. Of the total
mortgage loan portfolio, 41.5% of the collateralized properties were located
in the state of California. The Standard generally does not require earthquake
insurance for properties on which it makes mortgage loans. The most
significant types of collateralized properties in the mortgage loan portfolio
include retail properties, representing 48.5% of the portfolio, industrial
properties, representing 26.5%, and office properties, representing 17.4%. The
remaining 7.6% balance of properties in the portfolio include commercial,
apartment, residential and agricultural properties. The Company's mortgage
loans face both delinquency and default risk. The delinquency and loss
performance of The Standard's mortgage loan portfolio has consistently
outperformed the industry averages, as reported by the American Council of
Life Insurance, by wide margins. At December 31, 1999, there were no loans
either delinquent or in process of foreclosure. The performance of the
Company's mortgage loan portfolio, however, may fluctuate in the future.
Should the delinquency rate of the Company's mortgage loan portfolio increase,
the increase could have a material adverse effect on the Company's business,
financial condition and results of operations.
At December 31, 1999, the Company had outstanding commitments to fund or
acquire various assets totaling $101.2 million. Such commitments were
principally mortgage loans with interest rates ranging from 7.50% to 10.50%.
The Company's capital expenditures are estimated to be $8.4 million for 2000.
Financing Cash Flows
Financing cash flows consist primarily of policyholder fund deposits and
withdrawals, borrowings and repayments on lines of credit, issuance and
repurchase of common stock, and dividends paid on common stock.
The Company has available lines of credit totaling $110 million, including a
$100 million unsecured revolving line of credit, which expire during the first
half of 2000 and are expected to be renewed. Under the terms of the $100
million line of credit agreement, the Company is subject to customary
covenants, including limitations on indebtedness, minimum retained earnings
and minimum claims paying ability ratings. Such covenants could have the
effect of limiting StanCorp's ability to pay dividends to its shareholders. At
December 31, 1999 there were no outstanding borrowings under the credit
agreements.
On November 1, 1999, the board of directors of StanCorp authorized the
repurchase of up to 1.7 million shares of StanCorp's common stock to be
effected before November 1, 2000. As of December 31, 1999, 1.3 million shares
had been repurchased at a total cost of $34.2 million. On February 23, 2000
the board of directors of StanCorp authorized the repurchase of up to 1.6
million shares of StanCorp's common stock to be effected before February 23,
2001. Both repurchases are to be effected in the open market or in negotiated
transactions in compliance with the safeharbor provisions of Rule 10b-18 under
regulations of the Securities Exchange Act of 1934.
StanCorp's ability to pay dividends to its shareholders and meet its
obligations substantially depends upon the receipt of dividends from The
Standard. The Standard's ability to pay dividends to StanCorp is regulated
under Oregon law. Under Oregon law, The Standard may pay dividends only from
the earned surplus arising from its business. It also must receive the prior
approval of the Director of the Oregon Department of Consumer and Business
Services (the "Department") to pay a dividend, if such dividend would exceed
certain statutory limitations. The current statutory limitation is the greater
of (a) 10% of The Standard's combined capital and surplus as of December 31st
of the preceding year or (b) the net gain from operations after dividends to
20
policyholders and Federal income taxes and before capital gains or losses for
the twelve-month period ending on the December 31st last preceding. In each
case the limitation must be determined under statutory accounting practices.
Oregon law gives the Department broad discretion to disapprove requests for
dividends in excess of these limits. Based on its statutory results, The
Standard paid a $50.0 million dividend to StanCorp effective January 31, 2000,
and will be permitted to pay an additional $65.7 million in dividends to
StanCorp in 2000 without obtaining the Department's approval. The Standard
would have been permitted to pay $93.9 million, $38.7 million and $26.5
million in 1999, 1998 and 1997, respectively, without obtaining the
Department's approval. The foregoing limitations on dividends would not apply
to any dividends to StanCorp from the non-insurance subsidiaries. Combined net
income of the non-insurance subsidiaries, before elimination of intercompany
amounts, was $6.2 million, $4.8 million and $4.9 million in 1999, 1998 and
1997, respectively.
Risk-Based Capital
The National Association of Insurance Commissioners has implemented a tool
to aid in the assessment of the statutory capital and surplus of life and
health insurers. This tool, known as Risk-Based Capital ("RBC"), augments
statutory minimum capital and surplus requirements. The RBC system employs a
risk-based formula that applies prescribed factors to the various risk
elements inherent in an insurer's business to arrive at minimum capital
requirements in proportion to the amount of risk assumed by the insurer. At
December 31, 1999, The Standard's RBC level was significantly in excess of
that which would require corrective action by The Standard or regulatory
agencies.
Interest Rate Risk Management
The Company manages interest rate risk, in part, through asset/liability
duration analyses. As part of this strategy, detailed actuarial models of the
cash flows associated with each type of insurance liability and the financial
assets related to these liabilities are generated under various interest rate
scenarios. These actuarial models include those used to support the statutory
Statement of Actuarial Opinion required by insurance regulators. According to
presently accepted actuarial standards of practice, The Standard's current
reserves and related items make adequate provision for the anticipated cash
flows required to meet The Standard's contractual obligations and related
expenses.
The Company does not currently use derivatives, such as interest rate swaps,
currency swaps, futures or options, to manage interest rate risk or for
speculative purposes, but may use such instruments to manage interest rate
risk in the future. In the normal course of business, the Company commits to
fund mortgage loans generally up to 60 days in advance.
The Company's financial instruments are exposed to financial market
volatility and potential disruptions in the market that may result in certain
financial instruments becoming less valuable. The Company's primary market
risk is interest rate risk, which exposes the Company's earnings and cash
flows and the fair value of its financial assets. In accordance with Item 305
of Regulation S-K of the Securities and Exchange Commission, the Company has
analyzed the estimated loss in fair value of certain market sensitive
financial assets held at December 31, 1999 and 1998, given a hypothetical ten
percent increase in interest rates, and related qualitative information on how
the Company manages interest rate risk.
The interest rate sensitivity analysis is based upon the Company's fixed
maturity securities, mortgage loans and collateral loans held at December 31,
1999 and 1998. For the fixed maturity securities portfolio, the analysis
estimates the reduction in fair value of the portfolio utilizing a duration-
based analysis that assumes a hypothetical ten percent increase in treasury
rates. For mortgage and collateral loan portfolios, the analysis estimates the
reduction in fair value by discounting expected cash flows at theoretical
treasury spot rates in effect at December 31, 1999 and 1998. These analyses
discount cash flows using an average of possible discount rates to provide for
the potential effects of interest rate volatility. These analyses do not
provide for the possibility of non-parallel shifts in the yield curve, which
would involve discount rates for different maturities being increased by
different amounts. The actual decrease in fair value of the Company's
financial assets that would have resulted
21
from a ten percent increase in interest rates could be significantly different
from that estimated by the model. The hypothetical reduction in the fair value
of the Company's financial assets that results from the model is estimated to
be $124.4 million and $58.9 million at December 31, 1999 and 1998,
respectively.
Insolvency Assessments
Insolvency regulations exist in many of the jurisdictions in which The
Standard is doing business. Such regulations may require life insurance
companies within the jurisdiction to participate in guaranty associations.
These associations levy assessments against their members for the purpose of
paying benefits due to policyholders of impaired or insolvent life insurance
companies. Association assessments levied against The Standard from January 1,
1997 through December 31, 1999 aggregated $2.3 million. At December 31, 1999,
The Standard maintained a reserve of $1.0 million for future assessments in
respect of currently impaired, insolvent or failed insurers.
Year 2000
The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that include date sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruption of
operations, including, among other things, a temporary inability to process
transactions and engage in normal business activities.
At the time of this release, the Company had not experienced interruptions
from the Year 2000 issue and is not aware of any material interruptions to any
of its significant suppliers or customers. While management continues to
believe that the Company is not at significant risk, the possibility still
exists that failures or incompatibilities may arise in the future.
Accordingly, the Company continues to monitor significant systems, suppliers
and customers in an effort to minimize the potential impact of this possible,
but unlikely, circumstance.
Litigation
See Item 8, "Financial Statements and Supplementary Data--Notes to
Consolidated Financial Statements".
New and Adopted Accounting Pronouncements
See Item 8, "Financial Statements and Supplementary Data--Notes to
Consolidated Financial Statements".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Interest Rate Risk Management".
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Independent Auditors' Report............................................. 24
Consolidated Statements of Income and Comprehensive Income for the years
ended December 31, 1999, 1998 and 1997.................................. 25
Consolidated Balance Sheets at December 31, 1999 and 1998................ 26
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997........................................ 27
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997..................................................... 28
Notes to Consolidated Financial Statements............................... 29
23
INDEPENDENT AUDITORS' REPORT
StanCorp Financial Group, Inc.
Portland, Oregon
We have audited the accompanying consolidated balance sheets of StanCorp
Financial Group, Inc. and subsidiaries (formerly known as Standard Insurance
Company prior to the April 21, 1999 reorganization discussed in Note 1) as of
December 31, 1999 and 1998, and the related consolidated statements of income
and comprehensive income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of StanCorp Financial Group,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Portland, Oregon
February 2, 2000 (February 23, 2000 as to Note 14)
24
STANCORP FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In millions--except share data)
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
Revenues:
Premiums.......................................... $ 914.4 $ 892.8 $ 827.5
Net investment income............................. 306.7 323.1 303.2
Net realized investment gains..................... 0.5 11.6 11.8
Contribution from closed block.................... 9.9 -- --
Other............................................. 3.0 3.4 2.6
------- ------- -------
Total........................................... 1,234.5 1,230.9 1,145.1
------- ------- -------
Benefits and expenses:
Policyholder benefits............................. 756.0 783.8 736.0
Interest paid on policyholder funds............... 88.0 91.5 95.2
Operating expenses................................ 198.7 185.6 161.3
Commissions....................................... 69.7 65.6 64.0
Net increase in deferred policy acquisition
costs............................................ (1.3) (4.2) (6.7)
------- ------- -------
Total........................................... 1,111.1 1,122.3 1,049.8
------- ------- -------
Income before Federal income taxes and extraordinary
item............................................... 123.4 108.6 95.3
Federal income taxes................................ 39.0 33.0 31.4
------- ------- -------
Income before extraordinary item.................... 84.4 75.6 63.9
Extraordinary item, net of tax...................... 4.5 6.1 --
------- ------- -------
Net income.......................................... 79.9 69.5 63.9
------- ------- -------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities available-
for-sale......................................... (106.2) 40.1 22.3
Adjustment for realized gains..................... (5.6) (2.3) (1.7)
------- ------- -------
Total........................................... (111.8) 37.8 20.6
------- ------- -------
Comprehensive income (loss)......................... $ (31.9) $ 107.3 $ 84.5
======= ======= =======
Net income per share (pro forma):
Basic............................................. $ 2.37
Diluted........................................... 2.37
Weighted-average shares outstanding (pro forma):
Basic............................................................. 33,630,692
Diluted........................................................... 33,674,367
See Notes to Consolidated Financial Statements.
25
STANCORP FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In millions--except share data)
December 31,
------------------
1999 1998
-------- --------
ASSETS
------
Investments:
Investment securities..................................... $2,064.7 $2,214.2
Mortgage loans............................................ 1,779.1 1,708.1
Real estate, net.......................................... 98.5 93.0
Policy loans.............................................. 20.5 111.0
Collateral loans.......................................... -- 71.2
-------- --------
Total investments....................................... 3,962.8 4,197.5
Cash and cash equivalents................................... 38.9 60.4
Deferred policy acquisition costs........................... 54.2 114.9
Premiums and other receivables.............................. 75.3 73.2
Accrued investment income................................... 53.3 53.5
Property and equipment, net................................. 69.0 65.9
Other assets................................................ 11.5 45.0
Separate account assets..................................... 992.3 668.5
Closed block assets......................................... 599.8 --
-------- --------
TOTAL................................................... $5,857.1 $5,278.9
======== ========
LIABILITIES AND EQUITY
----------------------
Liabilities:
Future policy benefits and claims......................... $1,643.4 $2,065.2
Other policyholder funds.................................. 1,538.6 1,479.2
Deferred tax liabilities.................................. 66.5 106.0
Other liabilities......................................... 136.9 120.7
Separate account liabilities.............................. 992.3 668.5
Closed block liabilities.................................. 639.5 --
-------- --------
Total liabilities....................................... 5,017.2 4,439.6
-------- --------
Commitments and Contingencies
Equity:
Preferred stock, 100,000,000 shares authorized; none
issued or outstanding.................................... -- --
Common stock, no par, 300,000,000 shares authorized;
32,774,098 shares issued and 32,706,394 outstanding...... 819.7 --
Accumulated other comprehensive income (loss)............. (37.6) 74.2
Retained earnings......................................... 57.8 765.1
-------- --------
Total equity............................................ 839.9 839.3
-------- --------
TOTAL................................................... $5,857.1 $5,278.9
======== ========
See Notes to Consolidated Financial Statements.
26
STANCORP FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions--except share data)
Accumulated
Common Stock Other Total
------------------ Comprehensive Retained Shareholders'
Shares Amount Income (Loss) Earnings Equity
---------- ------ ------------- -------- -------------
Balance, January 1,
1997................... -- $ -- $ 15.8 $ 631.7 $ 647.5
Net income.............. -- -- -- 63.9 63.9
Other comprehensive
income, net of tax..... -- -- 20.6 -- 20.6
---------- ------ ------- ------- -------
Balance, December 31,
1997................... -- -- 36.4 695.6 732.0
---------- ------ ------- ------- -------
Net income.............. -- -- -- 69.5 69.5
Other comprehensive
income, net of tax..... -- -- 37.8 -- 37.8
---------- ------ ------- ------- -------
Balance, December 31,
1998................... -- -- 74.2 765.1 839.3
---------- ------ ------- ------- -------
Reorganization.......... 18,718,015 515.3 -- (783.2) (267.9)
Net income.............. -- -- -- 79.9 79.9
Other comprehensive
loss, net of tax....... -- -- (111.8) -- (111.8)
Common stock:
Initial public
offering............. 15,209,400 336.5 -- -- 336.5
Repurchase............ (1,277,931) (34.2) -- -- (34.2)
Sales to employees.... 56,910 1.1 -- -- 1.1
Restricted grant...... -- 1.0 -- -- 1.0
Dividends declared on
common stock........... -- -- -- (4.0) (4.0)
---------- ------ ------- ------- -------
Balance, December 31,
1999................... 32,706,394 $819.7 $ (37.6) $ 57.8 $ 839.9
========== ====== ======= ======= =======
See Notes to Consolidated Financial Statements.
27
STANCORP FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
Operating:
Net income.................................... $ 79.9 $ 69.5 $ 63.9
Adjustments to reconcile net income to net
cash provided by operating activities:
Net realized investment gains............... (0.5) (11.6) (11.8)
Depreciation and amortization............... 25.1 22.3 22.1
Deferral of policy acquisition costs........ (15.9) (17.8) (18.9)
Deferred income taxes....................... 35.1 34.3 2.1
Changes in other assets and liabilities:
Trading securities......................... (23.9) (25.4) --
Receivables and accrued income............. (10.1) (6.6) (1.1)
Future policy benefits and claims.......... 160.0 189.8 182.9
Closed block, net.......................... (10.6) -- --
Other, net................................. 43.6 (27.8) 0.2
------- ------- -------
Net cash provided by operating
activities............................... 282.7 226.7 239.4
------- ------- -------
Investing:
Proceeds from investments sold, matured, or
repaid:
Fixed maturity securities--available-for-
sale....................................... 241.0 117.0 236.3
Fixed maturity securities--held-to-
maturity................................... -- 9.1 23.0
Mortgage loans.............................. 298.5 334.9 302.5
Real estate................................. 10.9 20.3 22.5
Other investments........................... -- -- 19.5
Costs of investments acquired:
Fixed maturity securities--available-for-
sale....................................... (444.0) (221.0) (429.8)
Fixed maturity securities--held-to-
maturity................................... -- -- (21.4)
Mortgage loans.............................. (500.1) (440.9) (394.7)
Real estate................................. (15.4) (6.3) (6.3)
Other investments........................... (18.1) (1.4) --
Property and equipment........................ (8.7) (7.8) (8.3)
------- ------- -------
Net cash used in investing activities..... (435.9) (196.1) (256.7)
------- ------- -------
Financing:
Policyholder fund deposits.................... 615.5 379.4 357.1
Policyholder fund withdrawals................. (522.7) (366.4) (347.0)
Borrowings on line of credit.................. 41.9 42.5 76.0
Repayments on line of credit.................. (41.9) (42.5) (76.0)
Other notes payable........................... 7.4 -- --
Issuance of common stock...................... 337.6 -- --
Repurchase of common stock.................... (34.2) -- --
Dividends paid on common stock................ (4.0) -- --
Payments to eligible policyholders upon
reorganization............................... (267.9) -- --
------- ------- -------
Net cash provided by financing
activities............................... 131.7 13.0 10.1
------- ------- -------
Increase (decrease) in cash and cash
equivalents.................................... (21.5) 43.6 (7.2)
Cash and cash equivalents, beginning of year.... 60.4 16.8 24.0
------- ------- -------
Cash and cash equivalents, end of year.......... $ 38.9 $ 60.4 $ 16.8
======= ======= =======
Supplemental disclosure of cash flow
information:
Cash paid (received) during the year for:
Interest.................................... $ 90.0 $ 91.6 $ 95.0
Income taxes................................ (7.0) 13.8 43.4
See Notes to Consolidated Financial Statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and principles of consolidation. On April 21, 1999, pursuant to
an order by the Director of the Oregon Department of Consumer and Business
Services (the "Department") approving the Plan of Reorganization dated
September 28, 1998, as amended on December 14, 1998 (the "Plan"), Standard
Insurance Company ("The Standard") converted from a mutual life insurance
company to a stock life insurance company and became a wholly owned subsidiary
of StanCorp Financial Group, Inc. ("StanCorp"), an Oregon corporation. Also,
on April 21, 1999, StanCorp completed an initial public offering (the "IPO")
of 15.2 million shares (including 1.3 million shares subsequently sold
pursuant to the underwriters' over-allotment option) of its common stock at
the IPO price of $23.75 per share. The shares of common stock issued in the
IPO were in addition to 18.7 million shares of StanCorp common stock
distributed to The Standard policyholders, pursuant to the Plan, in exchange
for their membership interests in The Standard.
StanCorp was incorporated under the laws of Oregon in 1998. StanCorp was
specifically organized as a parent holding company for its subsidiaries The
Standard, StanCorp Mortgage Investors, LLC, StanCorp Real Estate, LLC and
Standard Management, Inc. StanCorp is based in Portland, Oregon, and through
its subsidiaries has operations throughout the United States.
StanCorp's principal subsidiary, The Standard, underwrites group and
individual disability, life and annuity products and dental insurance for
groups. The Standard is domiciled in Oregon and licensed in 49 states, the
District of Columbia and the U.S. Territory of Guam. The Standard is licensed
for reinsurance only in New York.
StanCorp's other subsidiaries are complementary financial and management
service businesses. The largest of StanCorp's other subsidiaries is StanCorp
Mortgage Investors, LLC, which originates and services mortgage loans for
StanCorp's investment portfolio as well as generating fee income from the
origination and servicing of mortgage loans sold to institutional investors.
The consolidated financial statements include StanCorp Financial Group, Inc.
and its subsidiaries (collectively the "Company"). All significant
intercompany balances and transactions have been eliminated.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles ("GAAP") requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities and contingent assets and contingent liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The estimates most susceptible to significant
changes are those used in determining the liability for future policy benefits
and claims, deferred policy acquisition costs, and the provision for Federal
income taxes. Changes in such estimates may affect amounts reported in future
periods. Actual results could differ from those estimates.
Investments. Investment securities include fixed maturity and equity
securities. Securities are categorized as held-to-maturity, stated at
amortized cost; trading, stated at fair value with changes in fair value
reflected as net realized investment gains and losses; or available-for-sale,
stated at fair value with net unrealized gains and losses recorded as an
increase or decrease to other comprehensive income or loss.
Mortgage loans are stated at amortized cost less a valuation allowance for
estimated uncollectible amounts.
Real estate held for investment is stated at cost less accumulated
depreciation. Depreciation generally is provided on the straight-line method,
with property lives varying from 30 to 40 years. Accumulated depreciation
totaled $27.0 million and $26.0 million at December 31, 1999 and 1998,
respectively. Real estate acquired in satisfaction of debt is stated at the
lower of cost or fair value less estimated costs to sell.
Policy and collateral loans are stated at their aggregate unpaid principal
balances and are secured by policy cash values.
29
Investment income is presented net of investment expenses. Net investment
income and realized investment gains (losses) related to separate accounts are
included in the separate account assets and liabilities. For all investments
except investment securities, realized investment gains and losses are
recognized using the specific identification method. For investment
securities, realized investment gains and losses are recognized on a first-in,
first-out basis. For all investments, declines in fair values below amortized
cost are recorded as realized investment losses if the declines are determined
to be other than temporary.
Cash equivalents. Cash equivalents include investments purchased with
original maturities of three months or less.
Deferred policy acquisition costs. Acquisition costs related to the
production of new business have been deferred to accomplish matching against
related future premiums and gross profits. Such costs include commissions,
certain costs of policy issuance and underwriting and certain variable field
office expenses. For group life and health and individual term life insurance
products, the costs are amortized in proportion to expected future premiums.
The amortization periods for these contracts generally range from five to ten
years. For universal life-type policies, individual life insurance policies,
individual deferred annuities and investment-type contracts, the costs are
amortized over periods ranging from 20 to 30 years, in proportion to the
present value of estimated gross profits. The discount rate applied to
expected gross profits is revised for actual changes in rates. Deferred policy
acquisition costs are charged to current earnings to the extent it is
determined that future premiums or gross profits are not adequate to cover
amounts deferred.
The amounts deferred and amortized were as follows for the years ended
December 31:
1999 1998 1997
------ ------ ------
(In millions)
Deferred policy acquisition costs.................. $ 15.9 $ 17.8 $ 18.9
Less: amortization................................. (14.6) (13.6) (12.2)
------ ------ ------
Net increase in deferred policy acquisition
costs........................................... $ 1.3 $ 4.2 $ 6.7
====== ====== ======
Property and equipment. The following table sets forth the major
classifications of the Company's property and equipment and accumulated
depreciation at December 31:
1999 1998
------ ------
(In millions)
Home office properties........................................ $ 89.8 $ 87.8
Office furniture and equipment................................ 52.1 46.5
Leasehold improvements........................................ 3.4 2.3
------ ------
Subtotal.................................................... 145.3 136.6
Less: accumulated depreciation................................ 76.3 70.7
------ ------
Property and equipment, net................................... $ 69.0 $ 65.9
====== ======
Property and equipment are stated at cost less accumulated depreciation. The
Company provides for depreciation of property and equipment using the
straight-line method over the estimated useful lives, which are generally 40
years for properties, and from three to seven years for equipment.
Depreciation expense for 1999, 1998 and 1997 was $8.5 million, $7.8 million
and $6.7 million, respectively. Non-affiliated tenants leased approximately
43% of the home office properties for the three years ended December 31, 1999.
Income from the leases is included in net investment income.
Separate accounts. Separate account assets and liabilities represent
segregated funds for non-guaranteed account assets held for the exclusive
benefit of contractholders. The activities of the account primarily relate to
contractholder-directed 401(k) contracts. The Standard charges the separate
accounts for asset management fees
30
and administrative expenses associated with the contracts. Separate account
assets and liabilities are carried at fair value.
Future policy benefits and claims.
The Standard establishes and carries as a liability actuarially determined
reserves that are calculated to meet obligations for future policy benefits
and claims. The reserves are computed at amounts that, with additions from
premiums to be received and with interest on such reserves at certain assumed
rates, are expected to be sufficient to meet The Standard's policy obligations
at their maturities or in the event of an insured's death or disability.
Reserves include unearned premiums, premium deposits, claims reported but not
yet paid, claims incurred but not reported, and claims in the process of
settlement. The Standard's reserves are based on actuarially recognized
methods for developing assumptions for estimating future policy benefits and
claims experience, including an evaluation of interest rates, mortality,
morbidity, persistency and expenses. Reserves for assumed reinsurance are
computed on bases essentially comparable to direct insurance reserves.
Other policyholder funds. Other policyholder funds are liabilities for
universal life-type and investment-type contracts and are based on the policy
account balances including accumulated interest.
Dividends. Certain life insurance policies, including certain policies in
the closed block (see additional discussion of the closed block in Note 2
below), contain dividend payment provisions that enable the policyholder to
participate in the earnings of The Standard. Participating policies, including
those in the closed block, accounted for 3.7%, 4.7% and 5.3% of life insurance
in force at December 31, 1999, 1998 and 1997, respectively, and 15.3%, 18.8%
and 20.6% of life insurance premiums for the years ended December 31, 1999,
1998 and 1997, respectively. Annual policyholder dividends totaled $24.6
million, $24.6 million and $22.2 million for the years ended December 31,
1999, 1998, and 1997, respectively. Annual policyholder dividends, are
determined using dividend scales that are approved annually by The Standard's
board of directors. If, over time, cash flows from the assets allocated to the
closed block and claims and other experience relating to the closed block are,
in the aggregate, more or less favorable than assumed in establishing the
closed block, total dividends paid to the closed block policyholders in the
future may be greater than or less than that which would have been paid to
these policyholders if the dividend scales in effect when the closed block was
established had been continued.
Federal income taxes. The provision for Federal income taxes includes
amounts currently payable and deferred that result from temporary differences
between financial reporting and tax bases of assets and liabilities as
measured by current tax rates and laws. If it is determined more likely than
not that a deferred tax asset will not be realized, a valuation allowance will
be established.
Recognition of premiums and policyholder benefits. Premiums from group life,
group and individual disability, and traditional life insurance contracts are
recognized as revenue when due. Benefits and expenses are matched with
recognized premiums to result in recognition of profits over the life of the
contracts. This match is accomplished by recording a provision for future
policy benefits and unpaid claims and claim adjustment expenses and by
amortizing deferred policy acquisition costs.
Universal life-type and investment-type contract premiums and other policy
fee revenues consist of charges for the cost of insurance, policy
administration and surrender charges assessed during the period. Charges
related to services to be performed are deferred until earned. The amounts
received in excess of premiums and fees are included in other policyholder
funds in the consolidated balance sheets.
Experience rated refunds are computed in accordance with the terms of the
contracts with certain group policyholders and are accounted for as a
reduction of premiums.
Extraordinary item. Expenses incurred in conjunction with the Plan have been
classified as an extraordinary item. These expenses are generally non-
deductible for tax purposes. The pro forma basic and diluted expense for the
extraordinary item was $0.13 per share for the year ended December 31, 1999.
31
Other comprehensive income. Other comprehensive income consists of the
current increase or decrease in net unrealized investment gains and losses on
securities available-for-sale, net of the related tax effects. Unrealized
gains and losses and the adjustment for realized gains and losses, both gross
and net of tax, were as follows for the years ended December 31:
1999 1998 1997
------- ----- -----
(In millions)
Unrealized gains (losses) on securities available-
for-sale, gross of tax............................ $(163.4) $61.7 $34.3
Less: tax effects.................................. (57.2) 21.6 12.0
------- ----- -----
Unrealized gains (losses) on securities available-
for-sale, net of tax.............................. $(106.2) $40.1 $22.3
======= ===== =====
Adjustment for realized gains, gross of tax........ $(8.6) $(3.5) $(2.6)
Less: tax effects.................................. (3.0) (1.2) (0.9)
------- ----- -----
Adjustment for realized gains, net of tax.......... $(5.6) $(2.3) $(1.7)
======= ===== =====
Net income per share. Basic net income per share was calculated based on the
weighted-average number of shares outstanding. Diluted net income per share
reflects the potential effects of the restricted stock grant and the exercise
of outstanding options. The weighted-average share and share equivalents
outstanding used to compute the dilutive effect of common stock options
outstanding were computed using the treasury stock method. Pro forma shares
and net income per share are presented as if the IPO had occurred as of
January 1, 1999. Diluted net income per share for the year ended December 31,
1999 was calculated as follows:
Net income (in millions)......................................... $ 79.9
==========
Basic weighted-average shares outstanding (pro forma)............ 33,630,692
Stock options.................................................... 24,405
Restricted stock................................................. 19,270
----------
Diluted weighted-average shares outstanding (pro forma).......... 33,674,367
==========
Diluted net income per share (pro forma)......................... $ 2.37
==========
Reclassification. Certain 1998 and 1997 amounts have been reclassified to
conform to the current year's presentation.
Accounting Pronouncements. Effective July 1, 1998, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting
and disclosure requirements for derivative instruments, including certain
instruments embedded in other financial instruments, and for hedging
activities. The Company does not have any derivative instruments that meet the
scope of this statement. The statement also allows, on the date of initial
application, an entity to transfer any held-to-maturity securities into the
available-for-sale or trading categories. During 1998, the Company transferred
all held-to-maturity securities with a book value and fair value of
$315.1 million and $335.4 million, respectively, to its available-for-sale
portfolio. The transfer was recorded as an increase to other comprehensive
income of $13.2 million (net of Federal income tax of $7.1 million).
In March 1998, the Accounting Standards Executive Committee issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", which establishes accounting requirements for the
capitalization of software costs incurred for the use of the organization. The
Company adopted this pronouncement beginning January 1, 1999. The amortization
period for these costs is approximately three to five years.
32
2. CLOSED BLOCK
On the completion of its reorganization, The Standard established a closed
block for the payment of future benefits, policyholder dividends and certain
expenses and taxes related to certain classes of policies. The Standard
allocated to the closed block an amount of assets expected to produce cash
flows which, together with future revenues from the policies included in the
closed block, will be sufficient to support these policies. Such support
includes payment of claims, certain expenses and taxes and continuation of
policyholder dividend scales in effect for 1998 (the period used to determine
the closed block funding) if the experience underlying such dividend scales
including the portfolio interest rate, continues.
The contribution to income before Federal income taxes and extraordinary
item from the closed block is reported as a single line item in the
consolidated statements of income and comprehensive income. Accordingly, all
components of revenues, benefits and expenses for the closed block are shown
as a net amount under the caption "Contribution from closed block". Federal
income tax expense applicable to the closed block is reflected as a component
of total tax expense. Reporting of the contribution from the closed block as a
single line item results in material reductions in the respective line items
in the consolidated statements of income and comprehensive income while having
no effect on net income. All assets allocated to the closed block are combined
and shown as a separate line item in the consolidated balance sheets under the
caption "Closed block assets". All liabilities attributable to the closed
block are treated similarly and disclosed as a separate line item under the
caption "Closed block liabilities". Such presentation does not affect the
Company's reported net income.
Summarized financial information of the closed block at December 31, 1999
was as follows (in millions):
ASSETS
------
Investments:
Investment securities................................................. $220.3
Mortgage loans........................................................ 147.1
Policy loans.......................................................... 90.3
Collateral loans...................................................... 68.1
------
Total investments................................................... 525.8
Cash and cash equivalents............................................. 1.8
Deferred policy acquisition costs..................................... 66.0
Premiums and other receivables........................................ 3.3
Accrued investment income............................................. 2.9
------
Closed block assets................................................. $599.8
======
LIABILITIES
-----------
Future policy benefits and claims....................................... $585.0
Other policyholder funds................................................ 33.1
Deferred tax liabilities................................................ 17.8
Other liabilities....................................................... 3.6
------
Closed block liabilities............................................ $639.5
======
33
Summarized financial results for the closed block for the period from April
21, 1999 through December 31, 1999 were as follows (in millions):
Revenues:
Premiums............................................................... $44.8
Net investment income.................................................. 30.9
Net realized investment losses......................................... (0.1)
-----
Total revenues....................................................... 75.6
-----
Benefits and expenses:
Policyholder benefits.................................................. 59.7
Interest paid on policyholder funds.................................... 0.8
Operating expenses..................................................... 2.6
Commissions............................................................ 1.5
Net decrease in deferred policy acquisition costs...................... 1.1
-----
Total benefits and expenses.......................................... 65.7
-----
Contribution from closed block....................................... $ 9.9
=====
The excess of closed block liabilities over closed block assets at December
31, 1999 represented the estimated future contribution from the closed block,
which will be recognized in the Company's consolidated statements of income
and comprehensive income over the period the underlying policies and contracts
remain in force.
If, over the period the closed block remains in existence, the actual
cumulative contribution is greater than expected, only such expected
contribution will be recognized in the Company's consolidated statements of
income and comprehensive income. The excess will be paid to closed block
policyholders as additional policyholder dividends. Alternatively, if the
actual cumulative contribution is less than expected, only such actual
contribution will be recognized in the Company's consolidated statements of
income and comprehensive income. If such circumstances arise, future
policyholder dividends will be changed to increase actual contributions until
the actual cumulative contributions equal expected cumulative contributions.
3. SEGMENTS
Three reportable segments comprise a substantial majority of the Company's
operations: Group Insurance, Retirement Plans and Individual Insurance. The
Group Insurance segment markets long term and short term disability insurance,
life, accidental death and dismemberment, and dental insurance. The Retirement
Plans segment sells full-service 401(k) and other pension plan products and
services to employers. The Individual Insurance segment sells life insurance,
disability insurance and annuities to individuals. Performance assessment and
resource allocation are done at this level.
Amounts reported as "Other" include net investment income not associated
with product segments, other financial service businesses, and adjustments
made in consolidation. Other financial service businesses are generally non-
insurance related and include StanCorp's mortgage lending and real estate
management subsidiaries.
34
The following table sets forth selected segment information for the years
ended December 31:
Group Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(In millions)
Year ended December 31, 1999:
Revenues:
Premiums................... $ 855.6 $ 16.6 $ 42.2 $ -- $ 914.4
Net investment income...... 151.8 50.6 90.6 13.7 306.7
Net realized investment
gains (losses)............ (3.3) (0.7) 0.6 3.9 0.5
Contribution from closed
block..................... -- -- 9.9 -- 9.9
Other...................... 2.9 -- -- 0.1 3.0
-------- -------- -------- ------ --------
Total..................... 1,007.0 66.5 143.3 17.7 1,234.5
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits...... 699.9 9.5 46.6 -- 756.0
Interest paid on
policyholder funds........ 6.7 33.5 47.8 -- 88.0
Operating expenses......... 147.0 23.9 24.5 3.3 198.7
Commissions................ 56.8 2.3 10.6 -- 69.7
Net (increase) decrease in
deferred policy
acquisition costs......... (3.0) -- 1.7 -- (1.3)
-------- -------- -------- ------ --------
Total..................... 907.4 69.2 131.2 3.3 1,111.1
-------- -------- -------- ------ --------
Income (loss) before Federal
income taxes and
extraordinary item.......... $ 99.6 $ (2.7) $ 12.1 $ 14.4 $ 123.4
======== ======== ======== ====== ========
Total assets................. $2,228.3 $1,641.3 $1,772.7 $214.8 $5,857.1
======== ======== ======== ====== ========
Year ended December 31, 1998:
Revenues:
Premiums................... $ 784.5 $ 14.0 $ 94.3 $ -- $ 892.8
Net investment income...... 143.7 54.0 124.0 1.4 323.1
Net realized investment
gains..................... 2.5 1.1 1.8 6.2 11.6
Other...................... 2.4 -- 1.0 -- 3.4
-------- -------- -------- ------ --------
Total..................... 933.1 69.1 221.1 7.6 1,230.9
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits...... 660.3 10.5 113.0 -- 783.8
Interest paid on
policyholder funds........ 6.2 36.1 49.2 -- 91.5
Operating expenses......... 134.4 20.4 28.6 2.2 185.6
Commissions................ 50.0 1.7 13.9 -- 65.6
Net increase in deferred
policy acquisition costs.. (1.4) -- (2.8) -- (4.2)
-------- -------- -------- ------ --------
Total..................... 849.5 68.7 201.9 2.2 1,122.3
-------- -------- -------- ------ --------
Income before Federal income
taxes and extraordinary
item........................ $ 83.6 $ 0.4 $ 19.2 $ 5.4 $ 108.6
======== ======== ======== ====== ========
Total assets................. $2,012.3 $1,318.0 $1,573.1 $375.5 $5,278.9
======== ======== ======== ====== ========
Year ended December 31, 1997:
Revenues:
Premiums................... $ 717.1 $ 11.2 $ 99.2 $ -- $ 827.5
Net investment income
(expense)................. 131.4 54.3 119.9 (2.4) 303.2
Net realized investment
gains..................... 1.0 0.8 1.7 8.3 11.8
Other...................... 2.4 (0.3) 0.4 0.1 2.6
-------- -------- -------- ------ --------
Total..................... 851.9 66.0 221.2 6.0 1,145.1
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits...... 619.5 8.7 107.8 -- 736.0
Interest paid on
policyholder funds........ 6.0 38.3 50.9 -- 95.2
Operating expenses......... 116.7 16.5 27.6 0.5 161.3
Commissions................ 47.2 1.4 15.4 -- 64.0
Net increase in deferred
policy acquisition costs.. (2.0) -- (4.7) -- (6.7)
-------- -------- -------- ------ --------
Total..................... 787.4 64.9 197.0 0.5 1,049.8
-------- -------- -------- ------ --------
Income before Federal income
taxes and extraordinary
item........................ $ 64.5 $ 1.1 $ 24.2 $ 5.5 $ 95.3
======== ======== ======== ====== ========
Total assets................. $1,784.3 $1,140.5 $1,524.7 $276.8 $4,726.3
======== ======== ======== ====== ========
35
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
4. INVESTMENT SECURITIES
Investment securities at fair value were composed of the following at
December 31:
1999 1998
-------- --------
(In millions)
Fixed maturity securities:
Available-for-sale......................................... $2,015.5 $2,188.5
Trading securities......................................... 49.2 25.4
Equity securities............................................ -- 0.3
-------- --------
Total investment securities.............................. $2,064.7 $2,214.2
======== ========
Amortized cost and fair value of investment securities, excluding trading
securities, were as follows at December 31:
1999
---------------------------------
Unrealized
Amortized ------------ Estimated
Cost Gains Losses Fair Value
--------- ----- ------ ----------
(In millions)
Available-for-sale:
U.S. Government bonds....................... $ 465.2 $ 5.2 $ 5.3 $ 465.1
States and political subdivision bonds...... 31.6 0.3 0.2 31.7
Corporate bonds............................. 1,496.8 6.0 58.0 1,444.8
Foreign bonds............................... 68.7 0.4 1.8 67.3
Redeemable preferred stock.................. 6.6 0.3 0.3 6.6
-------- ----- ----- --------
Total fixed maturity securities........... $2,068.9 $12.2 $65.6 $2,015.5
======== ===== ===== ========
1998
----------------------------------
Unrealized
Amortized ------------- Estimated
Cost Gains Losses Fair Value
--------- ------ ------ ----------
(In millions)
Available-for-sale:
U.S. Government bonds...................... $ 565.1 $ 33.7 $0.1 $ 598.7
States and political subdivision bonds..... 34.6 2.2 -- 36.8
Corporate bonds............................ 1,398.6 79.3 1.2 1,476.7
Foreign bonds.............................. 64.7 3.7 -- 68.4
Redeemable preferred stock................. 7.8 0.6 0.5 7.9
-------- ------ ---- --------
Total fixed maturity securities.......... $2,070.8 $119.5 $1.8 $2,188.5
======== ====== ==== ========
Equity securities............................ $ 0.3 $ -- $ -- $ 0.3
======== ====== ==== ========
36
The contractual maturities of fixed maturity securities, excluding trading
securities, were as follows at
December 31:
1999 1998
-------------------- --------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
(In millions)
Available-for-sale:
Due in 1 year or less........... $ 105.1 $ 105.9 $ 77.8 $ 79.1
Due 1 through 5 years........... 849.3 846.9 887.4 931.3
Due 5 through 10 years.......... 854.4 813.3 817.8 866.2
Due after 10 years.............. 260.1 249.4 287.8 311.9
-------- -------- -------- --------
Total available-for-sale...... $2,068.9 $2,015.5 $2,070.8 $2,188.5
======== ======== ======== ========
Actual maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations.
Investment income summarized by type of investment was as follows for the
years ended December 31:
1999 1998 1997
------ ------ ------
(In millions)
Fixed maturity securities:
Available-for-sale................................. $144.0 $135.9 $112.0
Held-to-maturity................................... -- 11.0 25.3
Mortgage loans....................................... 155.2 159.6 146.1
Real estate.......................................... 16.6 15.2 16.5
Policy loans......................................... 2.6 7.4 7.3
Collateral loans..................................... 1.8 7.4 7.5
Other................................................ 2.9 1.5 4.0
------ ------ ------
Gross investment income.......................... 323.1 338.0 318.7
Investment expenses.................................. (16.4) (14.9) (15.5)
------ ------ ------
Net investment income............................ $306.7 $323.1 $303.2
====== ====== ======
Realized investment gains (losses) were as follows for the years ended
December 31:
1999 1998 1997
----- ----- -----
(In millions)
Fixed maturity securities:
Available-for-sale..................................... $(4.2) $ 1.4 $ 1.0
Trading securities..................................... 1.4 2.1 --
Equity securities........................................ -- -- 1.6
Mortgage loans........................................... 0.1 2.1 2.9
Real estate.............................................. 3.2 6.0 6.3
----- ----- -----
Net realized investment gains........................ $ 0.5 $11.6 $11.8
===== ===== =====
Securities deposited for the benefit of policyholders in various states, in
accordance with various state regulations, amounted to $3.4 million and $3.0
million at December 31, 1999 and 1998, respectively.
37
5. MORTGAGE LOANS
The Company held mortgage loans, primarily commercial, that were
concentrated in the following states at December 31:
1999 1998
---------------- ----------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in millions)
California................................. $ 738.6 41.5% $ 747.8 43.8%
Oregon..................................... 152.4 8.6 147.8 8.6
Texas...................................... 135.8 7.6 147.0 8.6
Washington................................. 84.6 4.8 91.5 5.4
Other...................................... 667.7 37.5 574.0 33.6
-------- ----- -------- -----
Total mortgage loans..................... $1,779.1 100.0% $1,708.1 100.0%
======== ===== ======== =====
Although the Company underwrites commercial mortgages throughout the United
States, mortgage loans in California represent a concentration of credit risk.
The Company requires mortgage collateral and underwrites loans on either a
partial or full recourse basis. Mortgage loans foreclosed and transferred to
real estate totaled $2.2 million, $0.8 million and $1.3 million for 1999, 1998
and 1997, respectively. The following table sets forth mortgage loan valuation
and allowance provisions for the years ended December 31:
1999 1998 1997
----- ---- ----
(In millions)
Balance at beginning of the year........................... $ 4.3 $4.0 $3.8
Provision.................................................. 0.5 0.3 0.2
Net amount written off..................................... (0.7) -- --
----- ---- ----
Balance at end of the year................................. $ 4.1 $4.3 $4.0
===== ==== ====
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values for financial instruments were as
follows at December 31:
1999 1998
------------------ ------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
(In millions)
Assets:
Investment securities.............. $2,064.7 $2,064.7 $2,214.2 $2,214.2
Mortgage loans..................... 1,779.1 1,748.1 1,708.1 1,887.1
Policy loans....................... 20.5 20.5 111.0 111.0
Collateral loans................... -- -- 71.2 68.0
Liabilities:
Other policyholder funds,
investment type contracts......... $1,275.2 $1,265.0 $1,215.2 $1,209.5
Assets. The fair value of investment securities was based on quoted market
prices, where available, or on values obtained from independent pricing
services. The fair value of mortgage loans was estimated by discounting
expected cash flows at theoretical treasury spot rates in effect at December
31. The cash flows were discounted using an average of possible discount rates
to provide for the potential effects of interest rate volatility, and were
adjusted to reflect anticipated prepayment and foreclosure. The carrying value
of policy loans approximates fair value. While potentially financial
instruments, policy loans are an integral component of the insurance contract
and have no maturity date. The fair value of collateral loans was estimated
using discounted cash flows, at the then-prevailing interest rates offered for
similar loans with similar credit ratings.
38
Liabilities. The fair value of other policyholder funds that are investment-
type contracts was estimated using discounted cash flows at the then-
prevailing interest rates offered for similar contracts or as the amount
payable on demand less surrender charges at the balance sheet date.
7. FUTURE POLICY BENEFITS AND CLAIMS AND OTHER POLICYHOLDER FUNDS
Future policy benefits and claims. Future policy benefits and claims,
include accident and health insurance products offered by The Standard such as
group long term and short term disability, individual disability, group
dental, and group accidental death and dismemberment. The liability for unpaid
accident and health claims is included in future policy benefits and claims in
the consolidated balance sheets. The liability for claim adjustment expenses
is included in other liabilities in the consolidated balance sheets. The
change in the liability for unpaid claims and related claim adjustment
expenses was as follows for the years ended December 31:
1999 1998 1997
-------- -------- ------
(In millions)
Balance, beginning of year....................... $1,100.2 $ 975.6 $840.5
Less: reinsurance recoverable.................... (1.9) (2.2) (1.7)
-------- -------- ------
Net balance, beginning of year............... 1,098.3 973.4 838.8
-------- -------- ------
Incurred related to:
Current year................................... 516.7 450.4 399.7
Prior years.................................... 13.9 46.7 61.4
-------- -------- ------
Total incurred............................... 530.6 497.1 461.1
-------- -------- ------
Paid related to:
Current year................................... (152.9) (146.7) (126.9)
Prior years.................................... (245.0) (225.5) (199.6)
-------- -------- ------
Total paid................................... (397.9) (372.2) (326.5)
-------- -------- ------
Net balance, end of year......................... 1,231.0 1,098.3 973.4
Plus: reinsurance recoverable.................. 1.6 1.9 2.2
-------- -------- ------
Balance, end of year......................... $1,232.6 $1,100.2 $975.6
======== ======== ======
The 1999 change in incurred claims and expenses related to prior years was
primarily the result of interest on long term disability reserves and
favorable claim termination rates. Interest rate assumptions ranged from 5.50%
to 9.50% for all years presented. Variations between years also were caused by
differences in actual from expected incurred but not reported claims and by
differences in actual from expected claim terminations.
Other policyholder funds. Other policyholder funds at December 31, 1999 and
1998 included $585.4 million and $582.6 million, respectively, of employer-
sponsored defined contribution and benefit plans deposits and $546.6 million
and $517.7 million, respectively, of individual deferred annuity deposits.
39
8. FEDERAL INCOME TAXES
The provision (benefit) for income taxes was as follows for the years ended
December 31:
1999 1998 1997
----- ----- -----
(In millions)
Current................................................. $(2.0) $(1.3) $29.3
Deferred................................................ 41.0 34.3 2.1
----- ----- -----
Total Federal income taxes............................ $39.0 $33.0 $31.4
===== ===== =====
The provision for Federal income taxes differs from income taxes calculated
by applying the corporate Federal rate as follows for the years ended December
31:
1999 1998 1997
----- ----- -----
(In millions)
Tax at corporate Federal rate of 35%.................... $43.2 $38.0 $33.3
Tax exempt interest..................................... (1.1) (1.0) (1.0)
Dividend received deduction............................. (0.8) (0.5) (0.6)
Amounts provided for uncertainties and adjustments...... (2.6) (1.8) (0.6)
Other................................................... 0.3 (1.7) 0.3
----- ----- -----
Total Federal income taxes............................ $39.0 $33.0 $31.4
===== ===== =====
The amounts provided for uncertainties and adjustments primarily reflect
uncertainties related to the use of estimates and the subsequent resolution of
those uncertainties. Resolution occurs when amounts provided on an estimated
basis are known or when the tax year closes.
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability were as follows at December 31:
1999 1998
------ -------
(In millions)
Liabilities not currently deductible for tax................. $ 18.9 $ 30.1
Other........................................................ 4.8 3.1
------ -------
Total deferred tax assets.................................. 23.7 33.2
------ -------
Future policy benefits and claims............................ 9.4 14.4
Deferred policy acquisition costs............................ 3.8 25.9
Net unrealized investment gains.............................. 64.9 82.1
Due and uncollected premiums................................. 9.5 7.9
Other........................................................ 2.6 8.9
------ -------
Total deferred tax liabilities............................. 90.2 139.2
------ -------
Net deferred tax liability................................. $ 66.5 $ 106.0
====== =======
Federal income tax receivable was $3.0 million and $8.4 million at December
31, 1999 and 1998, respectively.
40
9. RETIREMENT BENEFITS
The Standard has two non-contributory defined benefit pension plans and a
postretirement benefit plan. The following table provides a reconciliation of
the changes in the plans' benefit obligations and fair value of assets for the
years ended December 31 and the funded status at December 31:
Pension Postretirement
Benefits Benefits
------------- ----------------
1999 1998 1999 1998
------ ----- ------- -------
(In millions)
Change in benefit obligation:
Benefit obligation at beginning of year of
year....................................... $ 97.1 $82.0 $ 12.2 $ 11.1
Service cost................................ 5.4 5.7 0.5 0.6
Interest cost............................... 6.3 6.0 0.7 0.8
Actuarial (gain) loss....................... (13.3) 5.9 (1.6) --
Benefits paid............................... (2.8) (2.5) (0.4) (0.3)
------ ----- ------- -------
Benefit obligation at end of year........... 92.7 97.1 11.4 12.2
------ ----- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of
year....................................... 89.1 78.2 8.7 7.4
Actual return on plan assets................ 6.9 5.8 (0.9) 0.7
Employer contributions...................... 8.8 7.6 0.8 0.9
Benefits paid............................... (2.8) (2.5) (0.4) (0.3)
------ ----- ------- -------
Fair value of plan assets at end of year.... 102.0 89.1 8.2 8.7
------ ----- ------- -------
Funded status................................. 9.3 (8.0) (3.2) (3.5)
Unrecognized net transition asset............. (1.4) (1.6) -- --
Unrecognized net actuarial (gain) loss........ (4.9) 8.7 (5.8) (6.0)
Unrecognized prior service cost............... 0.1 0.1 -- --
------ ----- ------- -------
Prepaid (accrued) benefit cost.............. $ 3.1 $(0.8) $ (9.0) $ (9.5)
====== ===== ======= =======
At December 31, 1998, both pension plans were underfunded. The benefit
obligation at December 31, 1998 consisted of $82.6 million and $14.5 million
for the two plans. The fair value of plan assets at December 31, 1998
consisted of $75.7 million and $13.4 million, respectively, for the two plans.
Net periodic benefit cost and assumptions used in the measurement of the
benefit obligations were as follows for the years ended December 31:
Postretirement
Pension Benefits Benefits
------------------- -------------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ----- ----- -----
(In millions)
Service cost..................... $ 5.4 $ 5.7 $ 4.7 $ 0.5 $ 0.6 $ 0.6
Interest cost.................... 6.3 6.0 5.5 0.7 0.8 0.7
Expected return on plan assets... (6.2) (5.7) (5.4) (0.4) (0.4) (0.3)
Amortization of unrecognized net
transition asset................ (0.2) (0.2) (0.2) -- -- --
Recognized net actuarial (gain)
loss............................ (0.4) 0.8 0.3 (0.4) (0.3) (0.4)
----- ----- ----- ----- ----- -----
Net periodic benefit cost...... $ 4.9 $ 6.6 $ 4.9 $ 0.4 $ 0.7 $ 0.6
===== ===== ===== ===== ===== =====
Discount rate.................... 7.25% 6.50% 7.00% 7.25% 6.50% 7.00%
Expected return on plan assets... 6.75 7.00 7.50 5.00 5.00 5.00
Rate of compensation increase.... 5.96 4.75 5.25 -- -- --
41
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 6.71% in the first year, 6.21% in the
second and third years, and ratably declined to 3.50% over the next nine
years. A one-percentage-point change in the assumed health care cost trend
rates would have the following effect:
1% Point 1% Point
Increase Decrease
-------- --------
(In millions)
Service and interest costs................................. $0.2 $(0.2)
Postretirement benefit obligation.......................... 1.5 (1.2)
The pension plans' assets are invested in The Standard's general account
invested assets. The postretirement benefit plan's assets are invested
primarily in long-term municipal bonds. The Standard sponsors deferred
compensation plans covering substantially all full-time employees under which
a portion of the employee contribution is matched.
The Standard sponsors deferred compensation plans covering substantially all
of its full-time employees under which The Standard matches a portion of the
employee contribution. Contributions by The Standard to the plans for 1999,
1998 and 1997 were $2.0 million, $1.8 million and $1.8 million, respectively.
The Standard has a non-qualified supplemental retirement plan for eligible
executive officers. The plan is currently unfunded. The accrued benefit cost
was $5.0 million and $3.7 million, respectively, at December 31, 1999 and
1998. Expenses related to the plan were $1.5 million, $0.6 million and $0.4
million in 1999, 1998 and 1997, respectively.
10. STOCK-BASED COMPENSATION
The 1999 Omnibus Stock Incentive Plan (the "Stock Plan") authorizes the
board of directors of StanCorp to grant eligible employees certain incentive
or non-statutory stock options, bonuses and performance stock options,
restricted and foreign stock awards, and stock appreciation and cash bonus
rights related to StanCorp's common stock. All options are granted at an
option price of not less than the market value at the date of grant and may be
exercised for a period not exceeding ten years from the date of the grant. The
maximum number of shares of common stock that may be issued under the Stock
Plan is 1.7 million.
Through December 31, 1999, 742,015 options to purchase common stock had been
granted at prices ranging from $22.125 to $25.188 per share. These options
were granted to members of StanCorp's board of directors, employee groups
consisting of non-officer employees, and officers. Members of StanCorp's board
of directors received grants totaling 21,000 options. Non-officer employees
received grants ranging from 100 to 250 options depending upon the employee's
compensation, totaling 310,515 options. Officers received grants on an
individual basis totaling 410,500 options. These grants are subject to a
three-year annual-step-vesting schedule from the date of the grant. The
Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock-based compensation plans. If compensation costs for awards under stock-
based compensation plans had been determined based on the fair value at the
grant dates using the method prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation," net income and net income per share would have been
reduced to the following pro forma amounts for 1999:
As Pro
Reported Forma
-------- -----
Net income (in millions)................................... $79.9 $78.2
Net income per common share:
Basic.................................................... 2.37 2.33
Diluted.................................................. 2.37 2.32
For purposes of determining the pro forma expense, the fair value of each
option is estimated on the grant date using the Black-Scholes option pricing
model with the following weighted-average assumptions: expected
42
dividend yield of 1.0%, risk-free interest rate of 6.6%, expected volatility
of 36.0%, and expected option lives of seven years. The weighted-average
grant-date fair value of options granted during the year ended December 31,
1999 was $10.43 per option.
The following table sets forth stock-based compensation plan activity for
the year ended December 31, 1999 (per share amounts are weighted-average):
Outstanding at January 1, 1999.................................... --
Granted at $22.80 per share....................................... 742,015
Forfeited at $23.75 per share..................................... (8,394)
-------
Outstanding at December 31, 1999.................................. 733,621
=======
Options outstanding at December 31, 1999 were as follows:
Options Outstanding
--------------------------------------------------------------------------------------
Weighted- Weighted-
Number Average Average
Exercise Outstanding Remaining Exercise
Price at 12/31/1999 Contractual Life Price
-------- ------------- ---------------- ---------
$25.188 1,500 10.00 years $25.19
23.750 296,321 9.29 years 23.75
22.125 435,800 9.80 years 22.13
------- ----------- ------
733,621 9.59 years $22.79
======= =========== ======
At December 31, 1999, there were no exercisable options.
Also in 1999, 67,704 shares of restricted stock were granted to key
management employees. The shares vest during 2001 dependent on the recipients'
continued employment with StanCorp or The Standard.
The Employee Share Purchase Plan allows eligible employees to purchase
common stock at 85.0% of the lesser of the fair market value of the stock on
either the purchase date or the effective date of the offering period. Each
eligible employee may purchase an amount of up to 10.0% of the employee's
annual cash compensation for a maximum fair market value of $25,000.
43
11. REINSURANCE
The Standard routinely assumes and cedes reinsurance with other companies.
The primary purpose of ceded reinsurance is to limit losses from large
exposures. However, if the reinsurer is unable to meet its obligations, the
originating issuer of the insurance contract retains the liability. The
following table sets forth reinsurance information for the years ended
December 31:
Percentage
Ceded to Assumed of Amount
Gross Other From Other Assumed to
Amount Companies Companies Net Amount Net
---------- --------- ---------- ---------- ----------
(Dollars in millions)
Year ended December 31,
1999:
Life insurance in force.. $101,796.2 $ 692.9 $123.9 $101,227.2 0.1%
========== ======== ====== ========== ===
Premiums
Life insurance and
annuities............. $ 345.6 $ 2.1 $ 0.4 $ 343.9 0.1%
Accident and health
insurance............. 540.2 8.4 38.7 570.5 6.8
---------- -------- ------ ---------- ---
Total premiums....... $ 885.8 $ 10.5 $ 39.1 $ 914.4 4.3%
========== ======== ====== ========== ===
Year ended December 31,
1998:
Life insurance in force.. $ 88,854.3 $2,411.6 $137.0 $ 86,579.7 0.2%
========== ======== ====== ========== ===
Premiums
Life insurance and
annuities............. $ 369.7 $ 10.4 $ 0.4 $ 359.7 0.1%
Accident and health
insurance............. 503.7 6.6 36.0 533.1 6.8
---------- -------- ------ ---------- ---
Total premiums....... $ 873.4 $ 17.0 $ 36.4 $ 892.8 4.1%
========== ======== ====== ========== ===
Year ended December 31,
1997:
Life insurance in force.. $ 82,354.6 $2,290.9 $176.6 $ 80,240.3 0.2%
========== ======== ====== ========== ===
Premiums
Life insurance and
annuities............. $ 355.2 $ 11.6 $ 0.6 $ 344.2 0.2%
Accident and health
insurance............. 462.3 11.8 32.8 483.3 6.8
---------- -------- ------ ---------- ---
Total premiums....... $ 817.5 $ 23.4 $ 33.4 $ 827.5 4.0%
========== ======== ====== ========== ===
Recoveries recognized under reinsurance agreements were $8.7 million, $13.5
million and $6.4 million for 1999, 1998 and 1997, respectively. Amounts
recoverable from reinsurers were $4.2 million and $4.1 million at December 31,
1999 and 1998, respectively.
44
12. INSURANCE INFORMATION:
The following table sets forth insurance information for the years ended
December 31, 1999, 1998 and 1997 (in millions):
Future Benefits, Amortization
Deferred Policy Other Claims, of Deferred
Policy Benefits Policy- Net and Policy Other
Acquisition and holder Premium Investment Interest Acquisition Operating
Segment Costs Claims Funds Revenue Income Expense Costs Expenses
- ------- ----------- -------- -------- ------- ---------- --------- ------------ ---------
1999:
Group Insurance......... $ 18.8 $1,473.8 $ 84.1 $855.6 $151.8 $706.6 $ 7.7 $193.1
Retirement Plans........ -- 69.9 585.4 16.6 50.6 43.0 -- 26.2
Individual Insurance.... 35.4 99.7 869.1 42.2 90.6 94.4 6.9 29.9
------ -------- -------- ------ ------ ------ ----- ------
Total................. $ 54.2 $1,643.4 $1,538.6 $914.4 $293.0 $844.0 $14.6 $249.2
====== ======== ======== ====== ====== ====== ===== ======
1998:
Group Insurance......... $ 15.8 $1,329.1 $ 69.3 $784.5 $143.7 $666.5 $ 6.7 $176.3
Retirement Plans........ -- 68.6 582.6 14.0 54.0 46.6 -- 22.1
Individual Insurance.... 99.1 667.5 827.3 94.3 124.0 162.2 6.9 32.8
------ -------- -------- ------ ------ ------ ----- ------
Total................. $114.9 $2,065.2 $1,479.2 $892.8 $321.7 $875.3 $13.6 $231.2
====== ======== ======== ====== ====== ====== ===== ======
1997:
Group Insurance......... $ 14.3 $1,180.8 $ 70.6 $717.1 $131.4 $625.5 $ 5.8 $156.1
Retirement Plans........ -- 66.2 571.6 11.2 54.3 47.0 -- 17.9
Individual Insurance.... 92.6 631.3 800.4 99.2 119.9 158.7 6.4 31.9
------ -------- -------- ------ ------ ------ ----- ------
Total................. $106.9 $1,878.3 $1,442.6 $827.5 $305.6 $831.2 $12.2 $205.9
====== ======== ======== ====== ====== ====== ===== ======
Other operating expenses include operating expenses, commissions and the
increase in deferred policy acquisition costs.
13. REGULATORY MATTERS
The Standard prepares its statutory financial statements in accordance with
accounting practices prescribed or permitted by the Department. Prescribed
statutory accounting practices include state laws, regulations, and general
administrative rules, as well as accounting practices set forth in
publications of the National Association of Insurance Commissioners ("NAIC").
Permitted statutory accounting practices encompass all accounting practices
not so prescribed; such accounting practices differ from state to state, may
differ from company to company within a state, and may change in the future.
The NAIC has issued a codification of statutory accounting practices, which
is expected to become effective January 1, 2001. The result is expected to
constitute the only source of prescribed statutory accounting practices and
will change the definition of what comprises current statutory accounting
practices. Management does not expect the adoption will have a material impact
on The Standard's statutory financial statements.
Statutory accounting practices differ in some respects from GAAP. The
principal statutory practices which differ from GAAP are: a) bonds and
mortgage loans are reported principally at amortized cost and preferred stocks
principally at cost; b) asset valuation and interest maintenance reserves are
provided as prescribed by the NAIC; c) certain assets designated as non-
admitted, principally furniture, equipment, and unsecured receivables, are not
recognized; d) premiums are recognized as income when due over the premium
paying period of the
45
policy, annuity and fund considerations are recognized as income when
received; e) reserves for life and disability policies and contracts are based
on statutory requirements; f) commissions, policy acquisition expenses, and
the expenses of originating or acquiring investments are charged to current
operations; g) software and software development costs are expensed as
incurred; and (h) Federal income tax expense is based on current taxable
income without recognition of deferred taxes resulting from temporary
differences in bases of accounting.
The Standard received written approval from the Department to include
collateral loan balances fully secured by policy cash values as admitted
assets, which differs from prescribed statutory accounting practices.
Prescribed accounting practices generally require amounts in excess of 80% of
the market value of the pledged collateral to be designated as non-admitted.
As of December 31, 1999 and 1998, this permitted practice increased statutory
surplus by $13.6 million and $14.3 million, respectively, over the amount that
would have been permitted under prescribed accounting practices.
The Standard is subject to statutory restrictions that limit the maximum
amount of dividends that it could declare and pay to StanCorp without prior
approval of the Department. The amount available for payment of dividends
without approval of the Department is $115.7 million in the year 2000.
State insurance departments require insurance enterprises to adhere to
minimum Risk-Based Capital ("RBC") requirements promulgated by the NAIC. At
December 31, 1999 and 1998 The Standard's RBC level was significantly in
excess of that which would require corrective action by The Standard or
regulatory agencies. The amount of statutory capital and surplus necessary to
satisfy the regulatory requirements was $200.1 million and $183.2 million at
December 31, 1999 and 1998, respectively.
The following table reconciles The Standard's statutory policyholder surplus
as reported to state insurance regulatory authorities with the Company's GAAP
equity at December 31:
1999 1998
------ ------
(In millions)
Statutory policyholder surplus............................. $506.7 $392.9
Adjustments to reconcile to GAAP equity:
Future policy benefits and policyholders' account
balances................................................ 199.9 224.6
Deferred policy acquisition costs........................ 54.2 114.9
Deferred tax liabilities................................. (66.5) (106.0)
Federal income taxes accrued............................. 38.1 15.8
Reinsurance receivable................................... 25.6 26.3
Premium receivable....................................... (22.2) (26.2)
Asset valuation reserve.................................. 41.1 39.9
Interest maintenance reserve............................. 8.5 10.0
Valuation of investments................................. (51.8) 114.2
Equity of StanCorp and its non-insurance subsidiaries.... 37.1 --
Non-admitted assets...................................... 22.8 21.5
Other, net............................................... 8.8 11.4
Closed block:
Future policy benefits and policyholders' account
balances................................................ 5.4 --
Deferred policy acquisition costs........................ 66.0 --
Deferred tax liabilities................................. (17.8) --
Federal income tax accrued............................... 0.3 --
Premium receivable....................................... (10.2) --
Valuation of investments................................. (6.1) --
------ ------
Equity, GAAP basis......................................... $839.9 $839.3
====== ======
46
The following table reconciles statutory gain from operations as reported to
insurance regulatory authorities with GAAP net income for the years ended
December 31:
1999 1998 1997
------ ------ -----
(In millions)
Statutory gain from operations...................... $116.8 $ 95.7 $40.9
Adjustments to reconcile to GAAP net income:
Future policy benefits and policyholders' account
balances......................................... (17.8) (17.6) 18.0
Deferred policy acquisition costs................. 6.4 8.0 6.6
Deferred income taxes............................. (41.4) (34.3) (2.1)
Current income taxes.............................. 22.6 14.2 (0.8)
Earnings of StanCorp and its non-insurance
subsidiaries..................................... 4.5 -- --
Other, net........................................ (8.6) 3.5 1.3
Closed block:
Future policy benefits and policyholders' account
balances......................................... (1.5) -- --
Deferred policy acquisition costs................. (1.1) -- --
------ ------ -----
Net income, GAAP basis.............................. $ 79.9 $ 69.5 $63.9
====== ====== =====
14. COMMITMENTS AND CONTINGENCIES
The Company has lines of credit totaling $110 million with two financial
institutions. Interest rates are based on current market rates. The Company is
not required to maintain compensating balances, but does pay commitment fees.
At December 31, 1999, there were no outstanding borrowings on the lines of
credit. These lines expire in the first half of 2000 and are expected to be
renewed.
On November 1, 1999, the board of directors of StanCorp authorized the
repurchase of up to 1.7 million shares of StanCorp's common stock to be
effected before November 1, 2000. As of December 31, 1999, 1.3 million shares
had been repurchased at a total cost of $34.2 million. On February 23, 2000
the board of directors of StanCorp authorized the repurchase of up to 1.6
million shares of StanCorp's common stock to be effected before February 23,
2001. Both repurchases are to be effected in the open market or in negotiated
transactions in compliance with the safeharbor provisions of Rule 10b-18 under
regulations of the Securities Exchange Act of 1934.
At December 31, 1999, the Company had outstanding commitments to fund or
acquire various assets, primarily mortgage loans with fixed-interest rates
ranging from 7.50% to 10.50%, totaling $101.2 million. These commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Company evaluates each customer's credit
worthiness individually and may terminate a commitment based on the financial
condition of the borrower. Additionally, a small percentage of borrowers allow
their commitments to expire without being drawn upon. The Standard also has
commitments to contribute equity capital to third party joint ventures
totaling $16.6 million. The contributions are payable upon demand. However, to
the extent amounts are not previously drawn upon, the future minimum capital
contributions are: 2000, $0.8 million; 2001, none; 2002, $1.9 million; 2003,
none; 2004, $4.0 million; and thereafter, $9.9 million.
StanCorp and its subsidiaries lease certain buildings and equipment under
non-cancelable operating leases that expire in various years through 2009,
with renewal options for periods ranging from three to five years. Future
minimum payments under these leases are: 2000, $7.6 million; 2001, $7.1
million; 2002, $6.8 million; 2003, $3.1 million; 2004, $2.5 million and
thereafter, $9.8 million. Total rent expense was $8.0 million, $6.5 million
and $5.6 million for the years ended December 31, 1999, 1998 and 1997,
respectively. At December 31, 1999, minimum future rental receivables on non-
cancelable leases with initial terms of one year or more were: 2000, $11.6
million; 2001, $11.6 million; 2002, $10.7 million; 2003, $9.2 million; and
2004, $7.5 million.
StanCorp and its subsidiaries are involved in various legal actions and
other state and Federal proceedings. A number of these actions or proceedings
were pending as of December 31, 1999. In some instances, lawsuits include
claims for punitive damages and similar types of relief in unspecified or
substantial amounts in addition
47
to amounts for alleged contractual liability or other compensatory damages. In
the opinion of management, the ultimate liability, if any, arising from these
actions or proceedings is not expected to have a material adverse effect on
the Company's business, financial condition or results of operations.
On April 26, 1999, The Standard received notice from the San Francisco
office of the U.S. Department of Labor ( the "DOL") that it was conducting an
investigation with respect to The Standard's employee benefit plan clients
pursuant to Section 504(a)(1) of the Employee Retirement Income Security Act
of 1974 ("ERISA"), to determine whether any person has violated or is about to
violate any provision of Title I of ERISA. The Standard and certain of its
employee benefit plan clients are subject to ERISA in connection with, among
other things, certain policies sold by the Group Insurance segment. The notice
included a subpoena that certain documents and records be provided to the DOL.
The Standard is fully cooperating with the DOL. To date, no claims or charges
have been asserted against The Standard as a result of the investigation and
the DOL states that its investigation should not be construed as an indication
that any violations of ERISA have occurred. Management believes that The
Standard's business practices comply in all material respects with ERISA and
that the results of the investigation will not have a material adverse effect
on the Company's business, financial condition or results of operations.
15. QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following table sets forth unaudited financial information for 1999 and
1998:
1999
-----------------------------
4th 3rd 2nd 1st
------ ------ ------ ------
(In millions--except per
share data)
Premiums..................................... $234.4 $223.6 $217.8 $238.6
Net investment income........................ 78.6 73.7 74.0 80.4
Net realized investment gains (losses)....... (1.7) (0.6) 1.7 1.1
Contribution from closed block............... 1.3 5.3 3.3 --
Policyholders benefits....................... 180.8 182.8 187.0 205.4
Income before extraordinary item............. 23.0 20.9 19.2 21.3
Net income................................... 23.0 20.0 17.9 19.0
Basic and diluted income before extraordinary
item per share (pro forma) (1).............. 0.69 0.62 0.57 --
Basic and diluted net income per share (pro
forma) (1).................................. 0.69 0.59 0.53 --
1998
-----------------------------
4th 3rd 2nd 1st
------ ------ ------ ------
Premiums..................................... $228.3 $222.0 $222.1 $220.4
Net investment income........................ 82.4 82.2 79.1 79.4
Net realized investment gains................ 2.7 3.3 5.4 0.2
Policyholder benefits........................ 201.3 191.2 192.9 198.4
Income before extraordinary item............. 20.9 23.2 16.9 14.6
Net income................................... 18.5 20.3 16.4 14.3
- --------
(1) On April 21, 1999, StanCorp completed the IPO, and therefore per share
amounts for the first quarter are not presented.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
Information with respect to Directors is reported under the caption
"Election of Directors" in the Company's 2000 Proxy Statement, herein
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reported under the caption "Compensation of Executive Officers" in the
Company's 2000 Proxy Statement, herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reported under the caption "Share Ownership of Directors, Executive Officers
and Certain Shareholders" in the Company's 2000 Proxy Statement, herein
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reported under the caption "Certain Relationships and Related Transactions"
in the Company's 2000 Proxy Statement, herein incorporated by reference.
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index of documents filed as part of this report:
1. The following Consolidated Financial Statements of StanCorp are included in
Item 8.
Independent Auditors' Report.............................................. 24
Consolidated Statements of Income and Comprehensive Income for the years
ended December 31, 1999, 1998 and 1997................................... 25
Consolidated Balance Sheets at December 31, 1999 and 1998................. 26
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997......................................... 27
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997...................................................... 28
Notes to Consolidated Financial Statements................................ 29
2. Financial Statement Schedules.
None.
3. Exhibits Index.
Number Name
------ ----
3.1 Articles of Incorporation as amended
3.2 Bylaws
4 Shareholder Rights Plan
10.1 Change of Control Agreement
10.2 1999 Omnibus Stock Incentive Plan
10.3 1999 Employee Stock Purchase Plan
10.4 Long Term Incentive Compensation Plan
10.5 Defined Benefit Plan for Home Office Employees
10.6 Amended and Restated Supplemental Retirement Plan for Executives
10.7 Home Office Employees' Deferred Compensation Plan, as Restated in 1998
10.8 Amended and Restated Deferred Contribution Plan for Executive Officers
10.9 $100 Million Revolving Credit Agreement
10.10 $10 Million Revolving Line of Credit Agreement
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
24 Powers of Attorney
27 Financial Schedule
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K for the quarter ended
December 31, 1999.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized in Portland,
Oregon on March 14, 2000.
STANCORP FINANCIAL GROUP, INC.
/s/ Ronald E. Timpe
By: _________________________________
Name:Ronald E. Timpe
Title: Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
following persons on behalf of the Registrant in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Ronald E. Timpe Chairman, President & Chief March 14, 2000
____________________________________ Executive Officer
Ronald E. Timpe
/s/ Eric E. Parsons Senior Vice President & March 14, 2000
____________________________________ Chief Financial Officer
Eric E. Parsons
/s/ Cindy J. McPike Assistant Vice President, March 14, 2000
____________________________________ Controller & Treasurer
Cindy J. McPike
* Director March 14, 2000
____________________________________
Virginia L. Anderson
* Director March 14, 2000
____________________________________
Frederick W. Buckman
* Director March 14, 2000
____________________________________
John E. Chapoton
* Director March 14, 2000
____________________________________
Barry J. Galt
* Director March 14, 2000
____________________________________
Richard Geary
* Director March 14, 2000
____________________________________
Peter T. Johnson
51
Signature Title Date
--------- ----- ----
* Director March 14, 2000
____________________________________
Peter O. Kohler, M.D.
* Director March 14, 2000
____________________________________
Jerome J. Meyer
* Director March 14, 2000
____________________________________
Ralph R. Peterson
* Director March 14, 2000
____________________________________
E. Kay Stepp
* Director March 14, 2000
____________________________________
William Swindells
* Director March 14, 2000
____________________________________
Mike Thorne
* Director March 14, 2000
____________________________________
Franklin E. Ulf
* Director March 14, 2000
____________________________________
Benjamin R. Whiteley
/s/ Dwight L. Cramer
*By: _______________________________
Dwight L. Cramer, as Attorney-in-
fact
(Vice President, General Counsel and
Corporate Secretary)
52
EXHIBITS INDEX
Number Name Method of Filing
------ ---- ----------------
3.1 Articles of Incorporation as amended Filed as Exhibit 4.1 on
Registrant's Form 8-K, dated May
7, 1999, and incorporated herein
by this reference
3.2 Bylaws Filed as Exhibit 3.1 on
Registrant's Form S-1A, dated
March 12, 1999, and incorporated
herein by this reference
4 Shareholder Rights Plan Filed as Exhibit 4.2 on the
Registrant's Form 8-K, dated May
7, 1999, and incorporated herein
by this reference
10.1 Change of Control Agreement Filed as Exhibit 10.2 on the
Registrant's Form S-1A, dated
March 12, 1999, and incorporated
herein by this reference
10.2 1999 Omnibus Stock Incentive Plan Filed herewith
10.3 1999 Employee Stock Purchase Plan Filed herewith
10.4 Long Term Incentive Compensation Filed as Exhibit 10.5 on the
Plan Registrant's Form S-1A, dated,
March 12, 1999, and incorporated
herein by this reference.
10.5 Defined Benefit Plan for Home Office Filed as Exhibit 10.6 on the
Employees Registrant's Form S-1A, dated
March 12, 1999, and incorporated
herein by this reference.
10.6 Amended and Restated Supplemental Filed as Exhibit 10.7 on the
Retirement Plan for Executives Registrant's Form S-1A, dated
March 12, 1999, and incorporated
herein by this reference
10.7 Home Office Employees' Deferred Filed herewith
Compensation Plan, as Restated in
1998
10.8 Amended and Restated Deferred Filed as Exhibit 10.8 on the
Contribution Plan for Executive Registrant's Form S-1A, dated
Officers March 12, 1999, and incorporated
herein by this reference
10.9 $100 Million Revolving Credit
Agreement Filed herewith
10.10 $10 Million Revolving Line of Credit Filed herewith
Agreement
21 Subsidiaries of the Registrant Filed herewith
23 Consent of Independent Accountants Filed herewith
24 Powers of Attorney Filed herewith
27 Financial Schedule Filed herewith
53