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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

or

For the transition period from                          to                         

Commission File Number: 1-14925

STANCORP FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

1100 SW Sixth Avenue, Portland, Oregon, 97204

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (503) 321-7000

Securities registered pursuant to Section 12(b) of the Act:

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 the 10-K or any amendment to the Form 10-K. ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No ¨

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2003, was approximately $1.52 billion based upon the closing price of $52.22 on June 30, 2003.

As of February 27, 2004, there were 29,315,167 shares of the Registrant’s common stock, no par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement dated March 26, 2004 in connection with the 2004 Annual Meeting of Shareholders are incorporated by reference in Part III.

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As used in this Form 10-K, the terms “StanCorp,” “Company,” “we,” “us” and “our” refer to StanCorp Financial Group, Inc. and its subsidiaries, unless the context otherwise requires.

ITEM 1.   BUSINESS

Our filings with the Securities and Exchange Commission (“SEC”) include our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, registration statements, and amendments to those reports. All filed reports are available free of charge on our website at www.stancorpfinancial.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC also maintains an Internet site that contains report, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

General

StanCorp, through its subsidiaries, is a leading provider of selected insurance and retirement plan products. We conduct business in all 50 states through our subsidiaries, including Standard Insurance Company (“Standard”); The Standard Life Insurance Company of New York; StanCorp Mortgage Investors, LLC (“StanCorp Mortgage Investors”); and StanCorp Investment Advisers, Inc.

Our largest subsidiary, Standard, was founded in 1906 and is domiciled in Oregon and licensed in 49 states, the District of Columbia and the U.S. Territories of Guam and the Virgin Islands. Standard offers group life, income protection insurance, and investment products and services including the following primary products:

The Standard Life Insurance Company of New York was organized in 2000, and is licensed to provide long term and short term disability, life, AD&D, and dental insurance for groups in New York.

StanCorp Mortgage Investors originates and services small fixed-rate commercial mortgage loans for the investment portfolios of our insurance subsidiaries. It also generates additional fee income from the origination and servicing of commercial mortgage loans sold to institutional investors.

StanCorp Investment Advisers, Inc. is a SEC registered investment adviser providing performance analysis, fund selection support and model portfolios to our retirement plans clients and subsidiaries of StanCorp.

Strategy and Competition

Our mission is to meet and exceed customers’ needs for financial products and services in growing markets where the application of specialized expertise creates potential for superior shareholder returns. We operate in select financial product and services growth markets and seek to compete on expertise, differentiation, and customer service, while maintaining a strong financial position.

Pricing is also a competitive issue in the market. We do not seek to compete on pricing. One of the key components of our pricing decisions for our insurance products is the investment return available to us. In periods of decreasing interest rates the returns available to us from our primary investments, fixed maturity securities and commercial mortgage loans, decline. This requires us to increase the price of some of our products in order to maintain our targeted returns. If our competitors do not make similar adjustments to their product pricing or have a higher return on investments, our products may be more expensive than those offered by competitors. While we believe our products provide superior value to our customers, a significant price difference between our products and those of some of our competitors may result in periods of declining new sales, reduced customer retention, lower premium growth, and increased sales force attrition. Given the cyclical nature of interest rates and the negative financial consequences of under pricing, we believe that our practice of maintaining a disciplined approach to product pricing provides the best long term pricing stability, stable renewal pricing for our customers, higher levels of persistency, and therefore, the best long term financial success for our company.

Based on 2002 insurance industry in force premium statistics in the United States, provided by John Hewitt & Associates and LIMRA International, we have leading market positions and single digit market share in each of these product lines:

Competition for our products comes primarily from other insurers and financial services companies such as banks, broker-dealers, and mutual funds. Some competitors have greater financial resources, offer a broader array of prod - -

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ucts, and may have higher financial strength ratings. Standard’s financial strength ratings as of February 2004 were:

In January 2004, Standard & Poor’s reaffirmed our debt and financial strength ratings, and raised its outlook on our ratings from stable to positive.

Risk Management

We manage risk through diversification of products, industry, geography, and customers. Product diversification also yields risk-based capital synergies because of the varying capital requirements for different risks assumed. In addition, we manage risks through the use of reinsurance.

Diversification of Products

We achieve earnings diversification by offering insurance products such as group life, group long term disability, and individual disability products. These products have differing price, market and risk characteristics. We wish to further diversify our earnings so that income before income taxes from other products such as group dental, individual fixed-rate annuities, retirement plans, and commercial mortgage loan originations constitute approximately 25% of income before income taxes. We plan to accomplish this diversification in a disciplined fashion over the next few years through continued growth in these businesses and consideration of acquisitions in these businesses that fit our mission statement and return objectives.

Diversification of Industry, Geography and Customers

We seek to diversify risk by industry, geography and customer size measured by number of insured employees. In force premium distribution by industry, geography, and customer size for group long term disability and group life products was as follows as of December 31, 2003:

Reinsurance

To limit our exposure to large losses, we transfer insurance liability to others by entering into reinsurance agreements. Under these reinsurance agreements, the maximum liability retention limit per individual for group life and AD&D policies combined is $500,000. For group disability policies, the maximum retention limit is $10,000 gross monthly benefit per individual. Except for certain policies in the block of business we assumed from Minnesota Life Insurance Company (“Minnesota Life”) in 2000, the maximum retention for individual disability policies is generally $3,500 monthly benefit per individual. On certain policies in the Minnesota Life block, Standard has a maximum retention limit of $6,000 monthly benefit per individual.

Standard is involved in a reinsurance and third party administration arrangement with The Northwestern Mutual Life Insurance Company (“Northwestern Mutual”) under which group long term and short term disability products are sold using Northwestern Mutual’s agency distribution system. Generally, Standard assumes 60% of the risk, and receives 60% of the premiums for the policies issued. Premiums assumed by Standard for the Northwestern Mutual business accounted for 3.5%, 3.6%, and 3.9% of the Company’s total premiums in 2003, 2002, and 2001, respectively. In addition to assuming risk, Standard provides product design, pricing, underwriting, legal support, claims management, and other administrative services under the arrangement. If Standard were to become unable to meet its obligations, Northwestern Mutual would retain the reinsured liabilities. Therefore, in accordance with an agreement with Northwestern Mutual, Standard established a trust for the benefit of Northwestern Mutual with the market value of assets in the trust equal to Northwestern Mutual’s reinsurance receivable from Standard. The market value of assets required to be maintained in the trust at December 31, 2003 was $181.8 million.

During 2002, Standard formed a strategic marketing alliance with Ameritas Life Insurance Corp. (“Ameritas”) that offers Standard’s policyholders new and more flexible dental coverage options and access to Ameritas’ nationwide preferred provider organization panel of dentists. As part of this alliance, Standard and Ameritas entered into a reinsurance agreement that provides for approximately 15%

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of the net dental premiums written by Standard and the risk associated with this premium, to be ceded to Ameritas.

In addition to product-specific reinsurance arrangements, we have maintained reinsurance coverage in the past for certain catastrophe losses related to group life and AD&D. Subsequent to the terrorist events of September 11, 2001, the availability of reinsurance for catastrophe coverage became less certain and more expensive. Accordingly, we entered into a catastrophe reinsurance pool with other insurance companies. This pool spreads catastrophe losses on group life and AD&D over approximately 35 participating members. The reinsurance pool exposes us to potential losses experienced by other participating members. However, through this pool, our catastrophe reinsurance coverage is increased to approximately $265 million per event. If the Company had been in the pool on September 11, 2001, the estimated pre-tax charges related to the terrorist events would have been approximately $15 million compared to pre-tax charges of $5 million actually incurred. The annual fees paid by the Company to participate in the pool and claims to date have been immaterial. An occurrence of a significant catastrophic event or a change in the on-going nature and availability of reinsurance and catastrophe reinsurance could have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.

The Terrorism Risk Insurance Act of 2002 provides for federal government assistance to property and casualty insurers in the event of material losses due to terrorist acts on behalf of a foreign person or foreign interest. The legislation also provided for the United States Treasury Department (“Treasury Department”) to conduct an expedited study to determine if there should be federal assistance for group life insurers in the event of material losses due to terrorist acts. As a result of this study, the Treasury Department concluded that group life will not be covered by the Terrorism Risk Insurance Act of 2002. Group life insurance represents a significant portion of our revenues and income. Concentration of risk is inherent in the group life insurance products we offer and we have group life insurance exposure to certain customers in amounts in excess of our catastrophe reinsurance coverage. Without government assistance, terrorist acts or other catastrophic events could have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.

Segments

We operate through three segments: Employee Benefits, Individual Insurance, and Retirement Plans. Measured as a percentage of total premiums, premiums for each of our three segments were 93.2% for Employee Benefits, 5.3% for Individual Insurance and 1.5% for Retirement Plans for the year ended December 31, 2003. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Consolidated Results of Operations—Revenues—Premiums.”

Employee Benefits Segment

The Employee Benefits segment sells disability and life insurance products to employer groups ranging in size from two lives to over 180,000 lives, and has approximately 31,500 group insurance policies in force, covering about 6.5 million employees. This segment also sells AD&D insurance and group dental insurance.

Our group insurance products are sold by 151 sales representatives and managers through independent employee benefit brokers and consultants. The sales representatives, who are employees of the Company, are compensated through salary and incentive compensation programs and are located in 42 field offices in principal cities of the United States. The field offices also provide sales support, customer service and limited underwriting through a field administrative staff of 241 employees.

Group long term disability insurance contributed approximately 46% of 2003 premiums for the segment. Our long term disability products provide coverage for claims incurred during the policy period. Group long term disability insurance provides partial replacement of earnings to insured employees who become disabled for extended periods of time. The Company’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, which generally ranges from 30 to 180 days. The benefits usually are reduced by other income that the disabled employee receives from sources such as social security disability, workers compensation, and sick leave. The benefits also may be subject to certain maximum amounts and benefit periods. Historically, approximately 50% of all claims filed under our long term disability policies close within 24 months. However, claims caused by more severe disabling conditions may be paid over much longer periods, including up to normal retirement age or longer.

Generally, group long term disability policies offer rate guarantees for periods from one to three years. While we can prospectively re-price and re-underwrite coverages at the end of these guarantee periods, we must pay benefits with respect to claims incurred during these periods without being able to increase guaranteed premium rates.

Group life and AD&D insurance contributed approximately 40% of 2003 premiums for the segment. Group life insurance products provide coverage to insured employees

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for a specified period and have no cash value (amount of cash available to an insured employee on the surrender of, or withdrawal from, the life insurance policy). Coverage is offered to insured employees and their dependents. AD&D insurance is usually provided in conjunction with group life insurance, and is payable after the accidental death or dismemberment of the insured in an amount based on the face amount of the policy or dismemberment schedule.

Group short term disability insurance contributed approximately 11% of 2003 premiums for the segment. Group short term disability insurance provides partial replacement of earnings to insured employees who are temporarily disabled. Short term disability insurance generally requires a short waiting period, ranging from one to 30 days, before an insured employee may receive benefits. Maximum benefit periods generally do not exceed 26 weeks. Group short term disability benefits also may be reduced by other income, such as sick leave, that a disabled insured employee may receive. Our basic short term disability products generally cover only non-occupational disabilities.

Group dental insurance contributed approximately 3% of 2003 premiums for the segment. Group dental products provide coverage to insured employees for preventive, basic and major dental expenses, and an option to purchase orthodontia benefits. We offer three dental plans including a traditional plan, a reduced cost plan and a cost containment plan, which are differentiated by the levels of service and cost. Standard has a strategic marketing alliance with Ameritas, which offers Standard’s policyholders flexible dental coverage options and access to Ameritas’ nationwide preferred provider organization panel.

Individual Insurance Segment

The Individual Insurance segment sells disability insurance and fixed-rate annuities, including life contingent annuities, to individuals. Our disability income insurance products are sold nationally through master general agents and brokers, primarily to physicians, lawyers, executives, other professionals and small business owners. Non-cancelable policies, guaranteeing the customer a fixed premium rate for the life of the contract, represented 87% of sales based on annualized new premiums in 2003. This segment also sells business overhead expense coverage, which reimburses covered operating expenses when the insured is disabled, and business equity buy-out coverage, which provides funds for the purchase, by other owners or partners, of the insured’s ownership interest in a business in the event of total disability.

Fixed-rate annuities are distributed through master general agents, brokers, and financial institutions. The target market is any individual seeking conservative investments to meet their retirement or other financial goals. The fixed annuity product portfolio includes deferred annuities with initial interest rate guarantees ranging from one to six years and a full array of single premium immediate annuity income payment options.

Retirement Plans Segment

The Retirement Plans segment offers full-service 401(k), defined benefit, money purchase, profit sharing and deferred compensation plan products and services to small and medium sized employers. Our 401(k) plans, which are our primary retirement plan product, offer participants a stable value investment option, managed by Standard, and third-party brand name mutual funds. Mutual funds are offered from American Century, Brandywine, Columbia, Federated, Fidelity, Franklin Templeton, GE, Harbor, Hotchkis and Wiley, Morgan Stanley, Neuberger Berman, Pimco, Sterling, T. Rowe Price, TCW Galileo, Vanguard, and William Blair. Funds are added and deleted through the investment advisory service we provide to our customers as part of our due diligence process. Funds offered in our retirement plans are continuously evaluated for performance, expense ratio, risk statistics, style consistency, industry diversification and management.

The Retirement Plans segment sells products and services primarily through brokers, employee benefit consultants, and other distributors served by our sales representatives throughout the U.S. Most of our retirement plans customers receive both financial and record-keeping services, although either may be provided on a stand-alone basis. Approximately 73% of plan sponsors use StanCorp Investment Advisers, Inc. to provide fund performance analysis and selection support.

The primary sources of revenue for the Retirement Plans segment include plan administration fees, fees on separate account assets under management, and investment margin on general account assets under management (stable value investment option). The investment margin is the excess of net investment income over related interest credited to policyholders. In addition, premiums and benefits to policyholders reflect the conversion of retirement plan assets into life contingent annuities, which can be selected by plan participants at the time of retirement.

For 2003, Standard’s Retirement Plans segment was ranked the number one fund manager and number one plan administrator in the $1 million to $10 million asset range by 401kExchange.com. Rankings are based on interviews of more than 11,000 plan sponsors from January through December 2003. The 401kExchange.com survey also ranked Standard as the number two fund manager and number two plan administrator in the under $1 million as - -

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set range, based on interviews of more than 6,000 plan sponsors during the same time period.

Also in 2003, PLANSPONSOR Magazine released its annual DC Plan Sponsor survey, which showcased the country’s leading 401(k) plan providers. For plans with fewer than $50 million of assets, no other provider received more “Best in Class” awards than Standard.

Other

As of December 31, 2003, StanCorp Mortgage Investors was servicing $2.32 billion in commercial mortgage loans for subsidiaries of StanCorp and $677.1 million for other institutional investors. We believe we have demonstrated expertise and there are ample growth opportunities in this market.

Investments

Investment management is an integral part of our business. Investments are maintained to ensure that asset types and maturities are appropriate for the Company’s policy reserves and other liabilities so that we can meet our obligations to policyholders under a wide variety of economic conditions. A substantial portion of our insurance subsidiaries’ policy liabilities result from long term disability reserves that have proven to be very stable over time, and annuity products on which interest rates can be adjusted periodically, subject to minimum interest rate guarantees. Policyholders or claimants may not withdraw funds from the large block of disability reserves. Instead, claim payments are issued monthly over periods that may extend for many years. Holding these stable long term reserves makes it possible to allocate a significant portion of invested assets to long term fixed-rate investments, including commercial mortgage loans. The ability to allocate a significant portion of investments to commercial mortgage loans, combined with StanCorp Mortgage Investors’ unique expertise with respect to its market niche for small, fixed-rate commercial mortgage loans, provides the ability to increase the yield obtained on the overall investment portfolio. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Investing Cash Flows” and Item 8, “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements.”

Employees

At December 31, 2003, StanCorp and its subsidiaries had 2,630 full-time equivalent employees. Standard’s operations, which represent 74% of its workforce, are headquartered in Portland, Oregon.

I TEM 2.   PROPERTIES

Principal properties owned by Standard and used by the Company consist of two office buildings in downtown Portland, Oregon: the Standard Insurance Center, with approximately 458,000 square feet; and the Standard Plaza, with approximately 216,000 square feet. In addition, Standard leases 160,000 square feet of office space in a third office building, also located in downtown Portland, Oregon, and 60,000 square feet of offsite storage. The Company also leases offices under commitments of varying terms to support its sales and regional processing offices throughout the United States. Management believes that the capacity and types of facilities are suitable and adequate. Management may evaluate additional square footage in 2005 to accommodate its increasing workforce.

ITEM 3.   LEGAL PROCEEDINGS

In the normal course of business, the Company is involved in various legal actions and other state and federal proceedings. A number of actions or proceedings were pending as of December 31, 2003. In some instances, lawsuits include claims for punitive damages and similar types of relief in unspecified or substantial amounts, in addition to amounts for alleged contractual liability or other compensatory damages. In the opinion of management, the ultimate liability, if any, arising from the actions or proceedings is not expected to have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.

IT EM 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 2003.

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StanCorp’s common stock is listed on the New York Stock Exchange under the symbol “SFG.” As of February 27, 2004, there were 55,679 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 were as follows by calendar quarter:

The declaration and payment of dividends in the future is subject to the discretion of StanCorp’s board of directors and it is anticipated that annual dividends will be paid in December of each year depending on StanCorp’s financial condition, results of operations, cash requirements, future prospects, regulatory restrictions on the distributions from the insurance subsidiaries, the ability of the insurance subsidiaries to maintain adequate capital and other factors deemed relevant by StanCorp’s board of directors. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Management.”

From time to time, the board of directors has authorized share repurchase programs. Share repurchases are to be effected in the open market or in negotiated transactions in compliance with the safe harbor provisions of Rule 10b-18 under regulations of the Securities Exchange Act of 1934. Execution of the share repurchase program is based upon management’s assessment of market conditions for its common stock and other potential growth opportunities. During 2003, we repurchased 185,700 shares of common stock at a total cost of $9.3 million for a volume weighted-average price of $50.35 per common share. During 2002, we repurchased 852,999 shares of common stock at a total cost of $45.5 million for a volume weighted-average price of $53.34 per common share. Currently, 1.5 million shares are authorized under a share repurchase program approved by the board of directors on February 9, 2004. The program expires December 31, 2005.

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ITEM 6.   SELECTED FINANCIAL DATA

The following financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data.”

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The following management assessment of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto. See Item 8, “Financial Statements and Supplementary Data.” Our consolidated financial statements and certain disclosures made in this Form 10-K have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and require us to make estimates and assumptions that affect reported amounts of assets and liabilities and contingent assets and contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during each reporting period. The estimates most susceptible to material changes due to significant judgment are identified as critical accounting policies. The results of these estimates are critical because they affect our profitability and may affect key indicators used to measure the Company’s performance. Please refer to our discussion of such critical accounting policies under the heading “Critical Accounting Policies and Estimates.”

We have made in this Form 10-K, and from time to time may make in our public filings, news releases and oral presentations and discussions, certain statements which are not based on historical facts. These statements are “forward-looking” and, accordingly, involve risks and uncertainties that could cause actual results to differ materially from those discussed. Although such forward-looking statements have been made in good faith and are based on reasonable assumptions, there is no assurance that the expected results will be achieved. Please refer to our discussion of such forward-looking statements under the heading “Forward-Looking Statements.”

Executive Summary

Financial Results Overview

Our financial results for 2003 were strong despite challenging economic conditions. Net income for 2003 was $5.33 per diluted share, compared to $3.73 per diluted share for 2002. The strong results reflected growth in each of StanCorp’s business segments, favorable claims experience, inclusion of the block of group disability and group life business assumed from Teachers Insurance and Annuity Association of America (“TIAA”), as well as net capital gains in 2003 compared to net capital losses in 2002. Other factors contributing to the solid results included strong growth in assets under management in the Retirement Plans segment, higher fees earned in connection with commercial mortgage loan originations and an increased level of commercial mortgage loan prepayments.

Insurance Products for Employer Groups

Group employee benefits insurance (our Employee Benefits segment) is our largest business and represented 93.2%, 92.8% and 91.7% of total premiums for the years ended December 31, 2003, 2002 and 2001, respectively.

Two external factors can have a critical impact on our Employee Benefits operations: claims volatility and economic conditions, including the impact of interest rates on product pricing.

Claims volatility. We have a large and well diversified group insurance business. However, our claims results can be volatile when measured on a quarterly basis and can exceed or be below our expected benefit ratio (the ratio of policyholder benefits to premiums) for a given year. In recent years, our claims experience has been favorable compared to our expectations, but this favorable experience may not necessarily continue into the future.

Economic Conditions. We are sensitive to changing interest rates and their effect on product pricing because premiums collected today must be invested to provide a return sufficient to meet the future claims of policyholders. For that reason, we closely monitor changes in interest rates and make changes to our pricing, as appropriate. When interest rates fall, we must raise our premium rates to compensate for the reduced investment income. Raising prices during difficult economic conditions may affect our ability to grow premiums as our customers also may face economic challenges and may be less inclined to offer their employees new benefits and may even reduce benefit offerings. Alternatively, in periods when interest rates are increasing, we can reduce premium rates, and therefore take pricing pressure off customers, and we have done so in the last two consecutive quarters. Interest rates also affect the discount rates we use to establish reserves. See “Consolidated Results of Operations—Benefits and Expenses—Benefits to Policyholders.”

Technology

As part of our commitment to high standards of customer service, we need to continually improve our systems and processes. Investment in technology is important for us to enhance our market position and achieve operating efficiencies in future years. As a result, we plan to increase our technology expense approximately 25% during 2004, resulting in a projected increase in pre-tax expenses of $13 million. In 2005, we estimate that operating efficiencies will approximate the on-going expenses.

Capital Management

State insurance departments require insurance enterprises to maintain minimum levels of capital and surplus. Our target is generally to maintain capital at 265% to 275% of the company action level risk-based capital (“RBC”), the minimum required by regulators to avoid remedial action by

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our insurance subsidiaries (this equates to 530% to 550% of the authorized control level RBC by our states of domicile), plus an amount approximating 5% of consolidated equity excluding accumulated other comprehensive income. See “Statutory Financial Accounting” and “Capital Management—Risk-Based Capital.” The primary reason we maintain capital above targeted levels is to provide timing flexibility should we wish to access capital markets to finance growth or acquisitions. We will continue to maintain our three priorities, in the following order, for excess capital:

Recently, with premium growth at levels lower than our long-term objective, our excess capital has accumulated beyond the targeted excess level by approximately $50 million as of December 31, 2003 after funding interest payments, holding company operating expenses and our historical annual shareholder dividend. If not utilized, the excess of capital over our targeted level would reduce return on average equity for 2004, as the rate of return we would earn on the related investments would be less than we would expect to achieve if invested in businesses meeting our return objectives.

Outlook for 2004

Historically, it has been our objective to grow premiums in the range of 10% to 12% annually. For management purposes, we eliminate the effects of new assumed blocks of business and experience rated refunds (“ERRs”) (refunds on certain large group insurance contracts) from this calculation to determine our rate of premium growth. Economic conditions, including low interest rates and limited job growth, together with the rising cost of medical premiums faced by our customers, had an impact on our sales and premium growth in 2003. As a result, our premium growth for 2003 of 7.8%, as defined above, was below our target range of 10% to 12%. Our decline in premium growth is consistent with declines in the market growth rate. See discussion in “Consolidated Results of Operations—Revenues—Premiums” below. We believe continuing economic conditions will affect our results in 2004, and therefore have adjusted our expectation for 2004 premium growth to a range of 6.5% to 8%. We expect economic conditions for employers will improve, and therefore our premium growth will return to the 10% to 12% range in 2005 and beyond.

The lower premium growth anticipated for 2004 will reduce the growth in net income. In addition, growth in net income for 2004 will be reduced by increased technology expense discussed above. Net income for 2004 may be affected by favorable and sustained claim recovery patterns in our Employee Benefits segment. As a result, we are adjusting our expected benefit ratio for the Employee Benefits segment moving forward to a range of 81% to 83% (previously our expected range was 82% to 84%).

Consolidated Results of Operations

The following table sets forth consolidated results of operations for the years ended December 31:

Revenues

Total revenues increased $312.2 million, or 17.8%, in 2003 compared to 2002, and $165.2 million, or 10.4%, in 2002 compared to 2001. Revenues consist primarily of premiums, net investment income, and net capital gains and losses.

Premiums

Premium growth, excluding assumed blocks of business (unless in both comparable periods) and ERRs, for 2003 and 2002 was 7.8% and 8.7%, respectively. As discussed in the Executive Summary above, premium growth for 2003 (as defined above) was below our targeted level primarily due to the effects of economic conditions on our Employee Benefits segment, which are expected to continue into 2004.

The following table sets forth premiums by segment for the years ended December 31:

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ERRs were $18.6 million, $13.5 million, and $16.0 million for 2003, 2002, and 2001, respectively.

The following table sets forth premium growth as a percentage by segment, without ERRs and the block of business assumed from TIAA for the years ended December 31:

The following table sets forth premiums in our Employee Benefits segment for our existing business and the block of business assumed from TIAA for the years ended December 31:

The following table sets forth premium growth as a percentage for our Employee Benefits segment for the years ended December 31:

Premium growth in the Employee Benefits segment (excluding the TIAA block of business assumed and ERRs) was 7.6% for 2003 compared to 2002, and 9.7% for 2002 compared to 2001. Based on industry statistics, the employee benefits market had been growing 8% to 9% annually as measured by average annual premiums. However, these same statistics indicate a growth rate in early 2003 of 5% to 6%. Growth in the employee benefits market comes primarily from employment and wage growth (as premiums are based in part on salaries of covered employees) and businesses adding new coverages.

Also as a result of challenging economic conditions and competition for experienced employee benefits sales representatives, we ended 2003 with 151 sales representatives, six fewer than at the end of 2002. We are working to increase the number of sales representatives to 185 by the end of 2004 as was our original plan, yet achievement of this goal may be affected by economic and competitive conditions.

Premium growth in our Individual Insurance segment was $5.4 million, or 6.8%, for 2003 compared to 2002. Increases in both sales and premiums in 2003 resulted from an expansion of distribution channels in recent years and the continuation of a national marketing agreement.

Premium growth in our Retirement Plans segment was $4.3 million, or 22.6% for 2003 compared to 2002. Premiums for this segment include plan administration fees, fees based on average market values of assets under management, and premiums for life contingent annuities sold, which can vary significantly from year to year.

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Net Investment Income

Net investment income increased $56.7 million, or 14.7%, in 2003 compared to 2002, and $32.5 million, or 9.2%, in 2002 compared to 2001. Net investment income is primarily affected by changes in levels of invested assets and interest rates. In recent years, commercial mortgage loan prepayment fees also have increased net investment income.

Net Capital Gains (Losses)

Net capital gains and losses occur as a result of sale or impairment of the Company’s invested assets, neither of which is likely to occur in regular patterns. While impairments are generally not controllable, management does have significant discretion over the timing of sales of invested assets. Net capital gains and losses are reported in “Other.” Net capital gains were $9.3 million in 2003, compared to net capital losses of $19.7 million in 2002. Net capital gains for 2003 included gains on bond sales, which were driven in part by a higher than normal level of tender offers on bonds held in the Company’s portfolio. Net capital losses for 2002 were primarily related to impairments of our holdings of WorldCom, Lukens, Sprint, and AT&T bonds. Capital gains and losses in 2001 netted to zero.

Benefits and Expenses

Benefits to Policyholders

The following table sets forth benefits to policyholders, including interest credited, by segment for the years ended December 31:

Three primary factors drive benefits to policyholders: premium growth (reserves are established in part based on premium levels), claims experience, and the assumptions used to establish related reserves. The predominant factors affecting claims experience are incidence (number of claims) and duration (length of time a disability claim is paid). The assumptions used to establish the related reserves include these factors as well as new investment interest rates, which affect the discount rate used to establish reserves. Please refer to our discussion of how we establish reserves under the heading “Critical Accounting Policies and Estimates.”

Benefits to policyholders (including interest credited) increased $182.8 million, or 15.4% in 2003 compared to 2002, and $94.3 million, or 8.6% in 2002, compared to 2001. The increases in both comparative periods primarily related to increases in the size of our Employee Benefits segment. Benefits to policyholders in the Employee Benefits segment increased $185.8 million, or 18.0% in 2003 compared to 2002, and $102.2 million, or 11.0% in 2002, compared to

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Part II

2001. The factors causing net increases in the Employee Benefits segment were:

Operating Expenses

The following table sets forth operating expenses by segment for the years ended December 31:

Operating expenses increased $32.3 million, or 13.0% in 2003 compared to 2002, and $42.8 million, or 20.9% in 2002, compared to 2001. The increases for both comparative periods primarily were to support business growth as evidenced by premium growth. In addition:

Managing levels of operating expenses is important to maintaining competitive pricing. We measure expenses on a segment level against the most relevant operating measure. In the Employee Benefits segment, the measure is against premiums. In the Individual Insurance segment, the measure is against total revenues. In the Retirement Plans segment, the measure is against assets under management.

The following table sets forth relevant operating expense ratios by segment for the years ended December 31:

The operating expense ratios in 2003 and 2002 for the Employee Benefits segment were impacted by administrative fees paid to TIAA and integration costs discussed above. Looking ahead, we plan to increase our technology expense approximately 25% during 2004, resulting in a projected increase in pre-tax expense of $13 million. In 2005 and beyond, we estimate that operating efficiencies will approximate the on-going expenses.

The Individual Insurance segment operating expense ratio increased to 13.9% in 2003 from 12.8% and 12.6% in 2002 and 2001, respectively. The increase primarily resulted from two factors. First, annuity premiums (which are in the denominator of the ratio) decreased $2.9 million in 2003, compared to 2002. Annuity premiums consist of premiums on life contingent immediate annuities, which are a small part of our annuity sales and can vary significantly from year to year. Second, we incurred additional expense to support a 27.8% increase in sales of annuity deposits in 2003 compared to 2002. Sales of annuity deposits are not recorded as premiums. Annuity deposits are recorded as a liability. See “Business Segments—Individual Insurance Segment.”

In the Retirement Plans segment, the decrease in the operating expense ratio resulted from higher assets under

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management. Because our cost structure for this segment is heavily weighted toward fixed costs, we expect the operating expense ratio to decline as assets under management increase.

Commissions and Bonuses

The following table sets forth commissions and bonuses by segment for the years ended December 31:

Commissions and bonuses primarily represent sales-based compensation, which varies depending on the product, the structure of the commission program and factors such as persistency and profitability of business. Commissions and bonuses increased $11.5 million, or 8.7%, in 2003 compared to 2002, and $14.3 million, or 12.1% in 2002, compared to 2001. Increases for both comparative periods were primarily due to renewals and sales in each of our segments.

Interest Expense

Interest expense (recorded in “Other”) was $17.5 million, $5.0 million, and $0.1 million for 2003, 2002, and 2001, respectively. Increases for the comparative periods were primarily due to interest expense on senior notes. Late in the third quarter of 2002, we completed an initial public debt offering of $250.0 million of 6.875%, 10-year senior notes. Prior to that, our debt consisted mainly of periodic short term borrowings. See “Liquidity and Capital Resources—Financing Cash Flows.”

Net Increase in Deferred Acquisition Costs (“DAC”) and Value of Business Acquired (“VOBA”)

We defer certain policy acquisition-related commissions and incentive payments, certain costs of policy issuance and underwriting, and certain printing costs related to obtaining new business and acquiring business through reinsurance agreements. See “Critical Accounting Policies and Estimates.” VOBA represents the discounted future profits of business assumed through reinsurance agreements.

The following table sets forth the balances at December 31, 2003 of DAC, VOBA, and the intangible asset related to our national marketing agreement with Minnesota Life. See “Business Segments—Individual Insurance Segment.”

The following table sets forth income statement activity for DAC and VOBA for the years ended December 31:

Deferrals and amortization for all years presented have been affected by the businesses assumed from TIAA and Minnesota Life. See “Business Segments—Employee Benefits Segment” and “Business Segments—Individual Insurance Segment.”

Income Taxes

Total income taxes may differ from the amount computed by applying the federal corporate tax rate of 35% because of the net result of permanent differences and the inclusion of state and local income taxes, net of the federal benefit. Income taxes also include estimated amounts provided for potential adjustments related to Internal Revenue Service examinations of open years, generally when the tax law is unclear. Although estimated amounts are adjusted when appropriate, amounts required to be provided upon the settlement of an examination may differ from amounts previously estimated. Years currently open for audit by the Internal Revenue Service are 1996 through 2003. The combined federal and state effective tax rates were 34.8%, 35.5%, and 35.6% for 2003, 2002, and 2001, respectively.

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Part II

Business Segments

Employee Benefits Segment

Employee Benefits is our largest segment and substantially influences our consolidated financial results. See “Consolidated Results of Operations.”

The following table sets forth the financial results for the Employee Benefits segment for the years ended December 31:

Following are key indicators that management uses to manage and assess the performance of the Employee Benefits segment at or for the years ended December 31:

For a discussion of premiums, persistency, and sales see “Consolidated Results of Operations.”

We attribute the decline in long term disability persistency from 2001 to 2003 to our actions to shed unprofitable business combined with more price sensitivity in the market as employers sought lower cost products. Dental persistency decreased in 2003 compared to 2002 and 2001, primarily due to the loss of several large cases that were not meeting our return objectives.

Prior to 2002, it had been our practice to maintain a 50 to 75 basis point margin between our average new money investment rate for a quarter and the discount rate used to establish new long term disability reserves over a 12 month period. Given the current low interest rate environment, and correspondingly lower reinvestment risk, our targeted margin range for newly incurred claims is approximately 30 basis points over a 12 month period as long as the earned rate on new investments is less than 6%.

Should reinvestment rates ultimately prove to be lower than provided for in the margin between the new money investment rate and the reserve discount rate, the overall margin between the portfolio investment yield and the weighted average reserve discount rate would not be adequate, possibly resulting in required increases to reserves and therefore increases to benefits to policyholders.

The duration of our invested assets is well matched to the duration of our liabilities in total and on a product segregated portfolio basis. Our investments are generally not callable or have prepayment penalties. Based on these factors, we believe the current margin in our overall block of business between invested assets yield and weighted average reserve discount rate of approximately 0.40% is adequate to cover potential reinvestment risk. The margin is lower than the 0.50% reported in prior periods due to the inclusion of the TIAA block of business, the reserves for which were established during the recent low interest rate environment, where, due to the decreased reinvestment risk, a lower interest rate margin is appropriate. See “Liquidity and Capital Resources.”

Looking to 2004 for this segment, we have been experiencing favorable and sustained claims recovery patterns in our group disability insurance. If these recovery patterns continue at their current levels, we estimate that in 2004 a favorable impact on pre-tax income of up to $12 million may result. As a result, we are adjusting our expected benefit ratio for the Employee Benefits segment moving forward to a range of 81% to 83% (previously our expected range was 82% to 84%).

Individual Insurance Segment

The Individual Insurance segment sells disability insurance and fixed-rate annuities, including life contingent annuities, to individuals.

Most of the deposits on our annuity business are not recorded as premiums. Annuity premiums consist of premiums on life contingent annuities, which are a small portion of sales. Annuity deposits are recorded as a liability and therefore not reflected as premiums. Annuity deposits earn investment income, a portion of which is credited to the policyholders.

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The following table sets forth the financial results for the Individual Insurance segment for the years ended December 31: