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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2001
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
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STANCORP FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-1253576
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1100 SW Sixth Avenue, Portland, Oregon, 97204
(Address of principal executive offices, including zip code)
(503) 321-7000
(Registrant's telephone number, including area code)
NONE
(Former name, former address, and former fiscal year, if changed since last
report)
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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 [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 3, 2001 there were 30,581,856 shares of the Registrant's common
stock, no par value, outstanding.
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INDEX
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Income and Comprehensive Income for the three and
six months ended June 30, 2001 and 2000................................................. 1
Unaudited Consolidated Balance Sheets at June 30, 2001 and December 31, 2000.............. 2
Unaudited Consolidated Statements of Changes in Shareholders' Equity for the year ended
December 31, 2000 and the six months ended June 30, 2001................................ 3
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and
2000.................................................................................... 4
Condensed Notes to Unaudited Consolidated Financial Statements............................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................................... 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS......................................................................... 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................................................. 20
ITEM 3. DEFAULTS UPON SENIOR DEBT................................................................. 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 20
ITEM 5. OTHER INFORMATION......................................................................... 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................................... 20
SIGNATURES........................................................................................ 21
i
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(In millions--except share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues:
Premiums............................................... $ 305.9 $ 266.6 $ 604.1 $ 525.4
Net investment income.................................. 86.6 87.2 171.4 174.4
Net realized investment gains (losses)................. (0.6) 2.1 (0.1) 8.3
Other.................................................. 0.9 1.3 2.2 2.0
----------- ----------- ----------- -----------
Total.............................................. 392.8 357.2 777.6 710.1
----------- ----------- ----------- -----------
Benefits and expenses:
Policyholder benefits.................................. 256.2 221.8 497.0 439.2
Interest paid on policyholder funds.................... 19.2 22.0 39.4 43.7
Operating expenses..................................... 48.2 44.8 98.6 89.0
Commissions and bonuses................................ 29.3 25.8 59.1 48.6
Premium taxes and other................................ 4.8 5.2 10.5 9.1
Net (increase) decrease in deferred policy acquisition
costs and value of business acquired................. (5.5) (1.9) (7.8) 0.1
----------- ----------- ----------- -----------
Total.............................................. 352.2 317.7 696.8 629.7
----------- ----------- ----------- -----------
Income before income taxes................................ 40.6 39.5 80.8 80.4
Income taxes.............................................. 14.6 13.4 28.6 27.2
----------- ----------- ----------- -----------
Net income................................................ 26.0 26.1 52.2 53.2
----------- ----------- ----------- -----------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities available-for-
sale................................................. (11.4) (4.2) 13.7 (2.2)
Adjustment for realized losses......................... (0.1) (0.6) (0.4) (1.0)
----------- ----------- ----------- -----------
Total.............................................. (11.5) (4.8) 13.3 (3.2)
----------- ----------- ----------- -----------
Comprehensive income...................................... $ 14.5 $ 21.3 $ 65.5 $ 50.0
=========== =========== =========== ===========
Net income per share:.....................................
Basic.................................................. $ 0.84 $ 0.82 $ 1.68 $ 1.66
Diluted................................................ 0.84 0.81 1.67 1.64
Weighted-average shares outstanding:......................
Basic.................................................. 30,831,934 31,727,052 31,073,005 32,085,410
Diluted................................................ 31,101,868 32,124,385 31,337,857 32,383,121
See Condensed Notes to Unaudited Consolidated Financial Statements.
1
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In millions--except share data)
June 30, December 31,
2001 2000
-------- ------------
ASSETS
------
Investments:
Investment securities...................................................... $2,605.7 $2,539.3
Mortgage loans, net........................................................ 1,995.6 2,061.1
Real estate, net........................................................... 57.2 65.9
Policy loans............................................................... 5.9 106.9
Collateral loans........................................................... -- 63.5
-------- --------
Total investments..................................................... 4,664.4 4,836.7
Cash and cash equivalents........................................................ 19.6 473.7
Premiums and other receivables................................................... 95.2 109.3
Accrued investment income........................................................ 59.8 61.5
Deferred policy acquisition costs and value of business acquired, net............ 85.4 167.0
Property and equipment, net...................................................... 74.2 71.7
Other assets..................................................................... 54.4 47.0
Separate account assets.......................................................... 1,107.1 1,092.7
-------- --------
Total................................................................. $6,160.1 $6,859.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Future policy benefits and claims.......................................... $2,467.5 $2,969.5
Other policyholder funds................................................... 1,435.9 1,565.6
Deferred tax liabilities................................................... 39.2 34.0
Other liabilities.......................................................... 161.7 273.4
Separate account liabilities............................................... 1,107.1 1,092.7
-------- --------
Total liabilities..................................................... 5,211.4 5,935.2
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, 100,000,000 shares authorized; none issued................ -- --
Common stock, no par value, 300,000,000 shares authorized; 30,729,315 and
31,565,486 shares issued at June 30, 2001 and December 31, 2000,
respectively............................................................. 741.8 778.7
Accumulated other comprehensive income........................................ 15.2 1.9
Retained earnings............................................................. 191.7 143.8
-------- --------
Total shareholders' equity................................................ 948.7 924.4
-------- --------
Total..................................................................... $6,160.1 $6,859.6
======== ========
See Condensed Notes to Unaudited Consolidated Financial Statements.
2
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
(In millions--except share data)
Accumulated
Common Stock Other Total
------------------ Comprehensive Retained Shareholders'
Shares Amount Income (Loss) Earnings Equity
---------- ------ ------------- -------- -------------
Balance, January 1, 2000...................... 32,774,098 $819.7 $(37.6) $ 57.8 $839.9
Net income.................................... -- -- -- 94.7 94.7
Other comprehensive income, net of tax........ -- -- 39.5 -- 39.5
Common stock:
Repurchased................................ (1,398,500) (42.6) -- -- (42.6)
Issued to directors........................ 4,280 0.3 -- -- 0.3
Issued under employee stock plans.......... 13,232 (0.4) -- -- (0.4)
Issued under various incentive plans....... 172,376 1.7 -- -- 1.7
Dividends declared on common stock............ -- -- -- (8.7) (8.7)
---------- ------ ------ ------ ------
Balance, December 31, 2000.................... 31,565,486 778.7 1.9 143.8 924.4
---------- ------ ------ ------ ------
Net income.................................... -- -- -- 52.2 52.2
Other comprehensive income, net of tax........ -- -- 13.3 -- 13.3
Common stock:
Repurchased................................ (897,000) (38.2) -- -- (38.2)
Issued to directors........................ 1,576 -- -- -- --
Issued under employee stock plans.......... 68,685 1.9 -- -- 1.9
Surrendered under various incentive plans,
net of issued............................ (9,432) (0.6) -- -- (0.6)
Dividends declared on common stock............ -- -- -- (4.3) (4.3)
---------- ------ ------ ------ ------
Balance, June 30, 2001........................ 30,729,315 $741.8 $ 15.2 $191.7 $948.7
========== ====== ====== ====== ======
See Condensed Notes to Unaudited Consolidated Financial Statements.
3
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Six Months Ended
June 30,
----------------
2001 2000
------- -------
Operating:
Net income........................................................................ $ 52.2 $ 53.2
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment (gains) losses........................................ 0.1 (8.3)
Depreciation and amortization................................................. 14.0 10.6
Deferral of policy acquisition costs and value of business acquired, net...... (14.1) (2.4)
Deferred income taxes......................................................... (19.1) (5.8)
Changes in other assets and liabilities:
Receivables and accrued income............................................. 12.2 (3.6)
Future policy benefits and claims.......................................... 253.9 78.3
Other, net................................................................. (84.0) 13.2
------- -------
Net cash provided by operating activities.............................. 215.2 135.2
------- -------
Investing:
Proceeds of investments sold, matured, or repaid:
Fixed maturity securities--available-for-sale................................. 145.6 108.9
Mortgage loans................................................................ 168.3 101.3
Real estate................................................................... 17.7 13.7
Other investments............................................................. 10.3 11.6
Costs of investments acquired:
Fixed maturity securities--available-for-sale................................. (470.2) (123.6)
Mortgage loans................................................................ (264.1) (197.9)
Real estate................................................................... (4.0) (0.5)
Trading securities, net........................................................... 53.9 (3.1)
Property and equipment, net....................................................... (7.2) (4.1)
Disposition of product line....................................................... (137.2) --
------- -------
Net cash used in investing activities.................................. (486.9) (93.7)
------- -------
Financing:
Policyholder fund deposits........................................................ 228.1 370.5
Policyholder fund withdrawals..................................................... (325.3) (395.8)
Line of credit, net............................................................... (44.0) 11.6
Issuance of common stock.......................................................... 1.3 1.1
Repurchase of common stock........................................................ (38.2) (24.5)
Dividends paid on common stock.................................................... (4.3) (4.2)
------- -------
Net cash used in financing activities.................................. (182.4) (41.3)
------- -------
Increase (decrease) in cash and cash equivalents..................................... (454.1) 0.2
Cash and cash equivalents, beginning of period....................................... 473.7 40.7
------- -------
Cash and cash equivalents, end of period............................................. $ 19.6 $ 40.9
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest...................................................................... $ 52.0 $ 43.5
Income taxes.................................................................. 84.7 26.9
See Condensed Notes to Unaudited Consolidated Financial Statements.
4
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
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. Significant subsidiaries of StanCorp include
Standard Insurance Company ("Standard"); The Standard Life Insurance Company of
New York; StanCorp Mortgage Investors, LLC; and StanCorp Investment Advisers,
Inc. StanCorp is based in Portland, Oregon, and through its subsidiaries has
operations throughout the United States.
StanCorp's largest subsidiary, Standard, underwrites group and individual
disability and annuity products, and life and dental insurance for groups.
Standard is domiciled in Oregon and licensed in 49 states, the District of
Columbia and the U.S. Territory of Guam. Standard is an admitted reinsurer in
New York. The Standard Life Insurance Company of New York provides long term
and short term disability insurance for employer groups in New York. StanCorp
Mortgage Investors, LLC, originates and services mortgage loans for Standard's
investment portfolio and generates fee income from the origination and
servicing of mortgage loans sold to institutional investors. StanCorp
Investment Advisers, Inc. is a Securities and Exchange Commission registered
investment adviser providing performance analysis, fund selection support and
model portfolios to Standard's retirement plan customers. StanCorp's other
subsidiaries provide complementary financial and management services.
The unaudited consolidated financial statements include StanCorp and its
subsidiaries (collectively, the "Company"). All significant intercompany
balances and transactions have been eliminated.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of StanCorp and
its subsidiaries have been prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP") for interim
financial information and in conformance with the requirements of Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
disclosures required by GAAP for complete financial statements. The preparation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
financial statement date, and the reported amounts of revenues and expenses
during the period. Actual results may differ from those estimates. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation of the Company's financial
condition at June 30, 2001 and December 31, 2000, the results of operations for
the three and six months ended June 30, 2001 and 2000 and cash flows for the
six months ended June 30, 2001 and 2000. Interim results for the three and six
month periods ended June 30, 2001 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2001. This report should
be read in conjunction with the Company's 2000 Annual Report on Form 10-K.
Certain prior period amounts have been reclassified to conform to the current
period's presentation.
3. ACQUISITION AND DISPOSITION OF PRODUCT LINES
Effective October 1, 2000, the Company acquired a substantial block of
individual disability insurance business, through a reinsurance transaction,
from Minnesota Life Insurance Company. The Company paid a ceding commission of
approximately $55 million and received approximately $500 million in statutory
reserves. Accompanying this transaction was an agreement that provides for
access to market Standard's individual disability insurance products through
Minnesota Life Insurance Company's career agency distribution system.
Effective January 1, 2001, the Company sold substantially all of its
individual life insurance product line to Protective Life Insurance Company,
also through a reinsurance transaction. The Company received a ceding
commission of approximately $90 million and transferred liabilities of
approximately $790 million. The sale resulted in a minimal gain, which is being
deferred and amortized over the life of the underlying contracts.
4. SEGMENTS
Three reportable segments comprise a substantial majority of the Company's
operations: Employee Benefits--Insurance, Retirement Plans and Individual
Insurance. Performance assessment and resource
5
allocation are done at the segment level. The Employee Benefits--Insurance
segment markets long term and short term disability, life, accidental death and
dismemberment, and dental insurance to employer groups. The Retirement Plans
segment sells full-service 401(k) and other pension plan products and services
to employers. The Individual Insurance segment sells disability insurance and
annuities to individuals.
Amounts reported as "Other" include invested assets and 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 investment management subsidiaries.
The following tables set forth selected segment information at or for the
period indicated:
Employee
Benefits- Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(In millions)
Three months ended June 30, 2001:
Revenues:
Premiums.............................................. $ 280.8 $ 5.1 $ 20.0 $ -- $ 305.9
Net investment income................................. 46.0 13.2 23.9 3.5 86.6
Net realized investment gains (losses)................ (1.1) 0.2 (0.3) 0.6 (0.6)
Other................................................. 0.8 -- 0.1 -- 0.9
-------- -------- -------- ------ --------
Total............................................. 326.5 18.5 43.7 4.1 392.8
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits................................. 227.1 2.3 26.8 -- 256.2
Interest paid on policyholder funds................... 3.0 8.7 7.4 0.1 19.2
Operating expenses.................................... 35.0 6.2 5.6 1.4 48.2
Commissions and bonuses............................... 22.5 1.4 5.4 -- 29.3
Premium taxes and other............................... 4.9 -- -- (0.1) 4.8
Net increase in deferred policy acquisition costs and
value of business acquired.......................... (0.8) -- (4.7) -- (5.5)
-------- -------- -------- ------ --------
Total............................................. 291.7 18.6 40.5 1.4 352.2
-------- -------- -------- ------ --------
Income (loss) before income taxes........................ $ 34.8 $ (0.1) $ 3.2 $ 2.7 $ 40.6
======== ======== ======== ====== ========
Employee
Benefits- Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(In millions)
Six months ended June 30, 2001:
Revenues:
Premiums.............................................. $ 554.6 $ 9.7 $ 39.8 $ -- $ 604.1
Net investment income................................. 91.3 25.5 49.4 5.2 171.4
Net realized investment gains (losses)................ (1.7) 0.2 (0.3) 1.7 (0.1)
Other................................................. 2.0 -- 0.2 -- 2.2
-------- -------- -------- ------ --------
Total............................................. 646.2 35.4 89.1 6.9 777.6
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits................................. 449.0 4.0 44.0 -- 497.0
Interest paid on policyholder funds................... 5.9 17.3 16.0 0.2 39.4
Operating expenses.................................... 72.0 12.4 11.3 2.9 98.6
Commissions and bonuses............................... 45.9 2.8 10.4 -- 59.1
Premium taxes and other............................... 9.7 -- 0.8 -- 10.5
Net increase in deferred policy acquisition costs and
value of business acquired.......................... (2.4) -- (5.4) -- (7.8)
-------- -------- -------- ------ --------
Total............................................. 580.1 36.5 77.1 3.1 696.8
-------- -------- -------- ------ --------
Income (loss) before income taxes........................ $ 66.1 $ (1.1) $ 12.0 $ 3.8 $ 80.8
-------- -------- -------- ------ --------
Total assets............................................. $2,697.1 $1,845.2 $1,432.1 $185.7 $6,160.1
======== ======== ======== ====== ========
6
Employee
Benefits- Retirement Individual
Insurance Plans Insurance Other Total
---------- ----------- ----------- ------ ------
(In millions)
Three months ended June 30, 2000:
Revenues:
Premiums.......................................... $ 238.8 $ 5.7 $ 22.1 $ -- $266.6
Net investment income............................. 39.4 13.1 30.2 4.5 87.2
Net realized investment gains (losses)............ 0.4 0.2 (0.6) 2.1 2.1
Other............................................. 1.2 -- 0.1 -- 1.3
---------- ----------- ----------- ------ ------
Total......................................... 279.8 19.0 51.8 6.6 357.2
---------- ----------- ----------- ------ ------
Benefits and expenses:
Policyholder benefits............................. 192.9 2.6 26.3 -- 221.8
Interest paid on policyholder funds............... 1.8 8.4 11.8 -- 22.0
Operating expenses................................ 32.7 5.5 5.9 0.7 44.8
Commissions and bonuses........................... 20.3 1.4 4.1 -- 25.8
Premium taxes and other........................... 4.8 -- 0.4 -- 5.2
Net increase in deferred policy acquisition costs. (1.3) -- (0.6) -- (1.9)
---------- ----------- ----------- ------ ------
Total......................................... 251.2 17.9 47.9 0.7 317.7
---------- ----------- ----------- ------ ------
Income before income taxes........................... $ 28.6 $ 1.1 $ 3.9 $ 5.9 $ 39.5
========== =========== =========== ====== ======
Employee
Benefits- Retirement Individual
Insurance Plans Insurance Other Total
---------- ----------- ----------- ------ --------
(In millions)
Six months ended June 30, 2000:
Revenues:
Premiums................................... $ 469.7 $ 11.9 $ 43.8 $ -- $ 525.4
Net investment income...................... 79.8 26.1 60.0 8.5 174.4
Net realized investment gains (losses)..... (0.1) -- (0.1) 8.5 8.3
Other...................................... 1.9 -- -- 0.1 2.0
---------- ----------- ----------- ------ --------
Total.................................. 551.3 38.0 103.7 17.1 710.1
---------- ----------- ----------- ------ --------
Benefits and expenses:
Policyholder benefits...................... 383.2 6.0 50.0 -- 439.2
Interest paid on policyholder funds........ 3.4 16.7 23.6 -- 43.7
Operating expenses......................... 64.3 11.2 11.8 1.7 89.0
Commissions and bonuses.................... 39.0 2.9 6.7 -- 48.6
Premium taxes and other.................... 8.4 -- 0.7 -- 9.1
Net (increase) decrease in deferred policy
acquisition costs........................ (1.5) -- 1.6 -- 0.1
---------- ----------- ----------- ------ --------
Total.................................. 496.8 36.8 94.4 1.7 629.7
---------- ----------- ----------- ------ --------
Income before income taxes.................... $ 54.5 $ 1.2 $ 9.3 $ 15.4 $ 80.4
========== =========== =========== ====== ========
Total assets.................................. $ 2,277.3 $ 1,862.0 $ 1,747.8 $224.3 $6,111.4
========== =========== =========== ====== ========
The accounting policies of the segments are the same as those described in
the condensed notes to unaudited consolidated financial statements.
5. COMMITMENTS AND CONTINGENCIES
The Company has a $100.0 million unsecured line of credit through June 29,
2002. The Company is not required to maintain compensating balances, but pays a
commitment fee. The interest rate, which is based on current market rates, was
4.63% at June 30, 2001. Under the credit agreement, the Company is subject to
customary covenants, including limitations on indebtedness and maintenance of
minimum equity, statutory surplus, and risk-based capital. At June 30, 2001,
the Company was in compliance with all such covenants. At June 30, 2001, $21.0
million was outstanding on the line of credit.
7
In the normal course of business, the Company is involved in various legal
actions and other state and Federal proceedings. A number of these actions or
proceedings were pending as of June 30, 2001. 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 these 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.
6. ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets". This pronouncement supersedes Accounting Principles Board Opinion No.
17, "Intangible Assets". The provisions of SFAS No. 142 are required to be
applied starting with fiscal years beginning after December 15, 2001. The
Company has no goodwill and does not expect SFAS No. 142 to have a material
impact on the Company's financial statements.
ITEM 2. 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 unaudited consolidated financial statements and related condensed notes
thereto.
Forward-looking Statements
The management of the Company has made in this Form 10-Q, and from time to
time may make in its public filings, press releases and oral presentations and
discussions, certain statements related to projected growth and future events.
Such statements may relate to 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 at the state or Federal level, (iv)
competition from other insurers and financial institutions, (v) achievement of
sales, growth in assets under management or other growth objectives, (vi)
delinquencies on bonds and mortgage loans, (vii) successful entry into the New
York insurance market, (viii) achievement of expense management objectives,
(ix) changes in claims paying ability ratings, (x) adverse findings in
litigation or other legal proceedings, (xi) ability to achieve financing
objectives, and (xii) on-going risks associated with dependence on information
technology systems.
Acquisition and Disposition of Product Lines
Effective October 1, 2000, the Company acquired a substantial block of
individual disability insurance business, through a reinsurance transaction,
from Minnesota Life Insurance Company. Effective January 1, 2001, the Company
sold substantially all of its individual life insurance product line to
Protective Life Insurance Company, also through a reinsurance transaction. (See
"--Selected Segment Information--Individual Insurance Segment".)
Consolidated Results of Operations
Net income decreased $0.1 million, or 0.4%, for the second quarter of 2001
compared to the second quarter of 2000, and $1.0 million, or 1.9%, for the six
months ended June 30, 2001 compared to the same period in 2000. After tax
realized capital losses were $0.4 million and $0.1 million for the three and
six months ended June 30,
8
2001, respectively, compared to gains of $1.6 million and $5.3 million for the
three and six months ended June 30, 2000, respectively. Capital gains and
losses result from the disposition of invested assets, and may or may not
continue in the future.
Net income excluding after tax realized capital gains or losses ("operating
income") increased $1.9 million, or 7.8% for the second quarter of 2001
compared to the second quarter of 2000, and $4.4 million, or 9.2%, for the six
months ended June 30, 2001 compared to the same period in 2000. The increase
for both periods was primarily due to strong premium growth and a stable
benefit ratio from the Employee Benefits--Insurance segment. Operating income
per diluted weighted average share outstanding increased 11.8% and 12.8% for
the three and six months ended June 30, 2001, respectively, compared to the
same periods in 2000, primarily due to operating income growth in the Employee
Benefits--Insurance segment as well as fewer shares outstanding as a result of
the Company repurchasing 478,900 shares of its common stock during the second
quarter of 2001 and 897,000 shares during the first six months of 2001. Net
income per diluted weighted average share outstanding increased 3.7% and 1.8%
for the three and six months ended June 30, 2001, respectively, compared to the
same periods in 2000. (See "--Selected Segment Information--Employee
Benefits--Insurance Segment".)
The Company's financial objectives are to grow premiums at 10% to 12% per
year, maintain operating expense growth at 2% to 3% less than premium growth,
grow operating income per diluted share 12% to 15% per year and increase
operating return on equity to 13% to 14% by the end of 2003. Based on the
results for the first six months of 2001, the strategic objectives are on
target to be met.
Premiums
Premiums, adjusted for experience rated refunds in the Employee
Benefits--Insurance segment, increased $34.0 million, or 12.4%, for the second
quarter of 2001 and $74.2 million, or 13.8%, for the six months ended June 30,
2001 compared to the same periods in 2000. The increases were primarily from
growth in the Employee Benefits--Insurance segment. (See "--Selected Segment
Information".)
Net Investment Income
Net investment income is affected primarily by changes in the overall
interest rate environment and levels of invested assets. Over time, the impact
of acquiring new investments at higher or lower interest rates is offset, in
part, by policyholder benefits expense due to the practice of using current
interest rate assumptions in discounting newly established reserve liabilities.
The interest rates used in discounting reserve liabilities are held constant
once established. The portfolio yield for fixed maturity securities decreased
to 6.92% at June 30, 2001, from 6.95% at June 30, 2000. The portfolio yield for
mortgage loans decreased to 8.27% at June 30, 2001, from 8.35% at June 30,
2000. Portfolio yields may increase or decrease in the future depending on
changes in the overall interest rate environment and other factors.
Net investment income decreased $0.6 million, or 0.7%, for the second
quarter of 2001 compared to the second quarter of 2000. For the six months
ended June 30, 2001, net investment income decreased $3.0 million, or 1.7%,
compared to the same period in 2000. Average invested assets decreased 1.2% to
$4.48 billion for the second quarter of 2001 from $4.53 billion for the second
quarter of 2000. The decrease in average invested assets was due primarily to
the combined effects of two reinsurance transactions in the Individual
Insurance segment, offset in part by asset growth in the Employee
Benefits--Insurance segment (see "--Selected Segment Information").
Net Realized Investment Gains (Losses)
Net realized investment gains or losses occur primarily as a result of
disposition of invested assets in the regular course of investment management.
Net realized investment losses were $0.6 million and $0.1 million for the three
and six months ended June 30, 2001, respectively, compared to gains of $2.1
million and $8.3 million
9
for the three and six months ended June 30, 2000, respectively. Disposition of
invested assets and associated gains or losses may or may not continue in the
future.
Policyholder Benefits
Policyholder benefits, including interest paid on policyholder funds,
increased $31.6 million, or 13.0%, for the second quarter of 2001 compared to
the second quarter of 2000, and $53.5 million, or 11.1%, for the six months
ended June 30, 2001 compared to the same period in 2000. The increase primarily
resulted from business growth in the Employee Benefits--Insurance segment, as
evidenced by the growth in premiums. The increase was offset in part by stable
claims experience for this segment. (See "--Selected Segment
Information--Employee Benefits--Insurance Segment".)
Operating Expenses
Operating expenses increased $3.4 million, or 7.6%, for the second quarter
of 2001 compared to the second quarter of 2000, and increased $9.6 million, or
10.8%, for the six months ended June 30, 2001 compared to the same period in
2000. The increase was primarily from the Employee Benefits--Insurance segment
which had increased operating expenses of $2.3 million and $7.7 million for the
three and six months ended June 30, 2001, respectively, primarily from business
growth as evidenced by premium growth (see "--Selected Segment Information").
Commissions and Bonuses
Commissions and bonuses are sales-based compensation that vary depending on
the product, whether the sale is a new sale or renewal, if a renewal the year
of renewal, and other factors. Therefore, commissions will tend to fluctuate
with premiums, but not directly. Commissions and bonuses increased $3.5
million, or 13.6%, for the second quarter of 2001 compared to the second
quarter of 2000, and increased $10.5 million, or 21.6%, for the six months
ended June 30, 2001 compared to the same period in 2000. The increases were
primarily due to growth in sales for the Employee Benefits--Insurance and
Individual Insurance segments, combined with a higher commission schedule
related to a change in product mix in the Individual Insurance segment (see
"--Selected Segment Information").
Net (Increase) Decrease in Deferred Policy Acquisition Costs and Value of
Business Acquired
The net reduction in expense for deferral and amortization of policy
acquisition costs was $5.5 million for the second quarter of 2001 compared to
$1.9 million for the second quarter of 2000, and $7.8 million for the six
months ended June 30, 2001 compared to an increase in expense of $0.1 million
for the same period in 2000. The net reduction in expense for both comparative
periods resulted primarily from higher commissions (see "--Selected Segment
Information--Individual Insurance Segment").
Income Before Income Taxes
Income before income taxes increased $1.1 million, or 2.8%, for the second
quarter of 2001 compared to the second quarter of 2000, and increased $0.4
million, or 0.5%, for the six months ended June 30, 2001 compared to the same
period in 2000. These results reflect the combination of increased premiums, a
stable benefit ratio, and decreased net realized investment gains previously
discussed.
Income Taxes
Income taxes differ from the amount computed by applying the Federal
corporate income 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. The combined Federal and state effective income tax rates were
36.0% and 33.9% for the second
10
quarters of 2001 and 2000, respectively. For the six months ended June 30, 2001
and 2000, the combined effective income tax rates were 35.4% and 33.8%,
respectively. The lower effective rate for both periods in 2000 resulted
primarily from the resolution of tax uncertainties, which had been provided for
in prior years.
Selected Segment Information
The following table sets forth selected segment information at or for the
periods indicated:
At or for the
Three Months Six Months
Ended June 30, Ended June 30,
-------------- ------------------
2001 2000 2001 2000
------ ------ -------- --------
(In millions)
Revenues:
Employee Benefits--Insurance segment.................. $326.5 $279.8 $ 646.2 $ 551.3
Retirement Plans segment.............................. 18.5 19.0 35.4 38.0
Individual Insurance segment.......................... 43.7 51.8 89.1 103.7
Other................................................. 4.1 6.6 6.9 17.1
------ ------ -------- --------
Total revenues................................... $392.8 $357.2 $ 777.6 $ 710.1
====== ====== ======== ========
Income (loss) before income taxes:
Employee Benefits--Insurance segment.................. $ 34.8 $ 28.6 $ 66.1 $ 54.5
Retirement Plans segment.............................. (0.1) 1.1 (1.1) 1.2
Individual Insurance segment.......................... 3.2 3.9 12.0 9.3
Other.................................................... 2.7 5.9 3.8 15.4
------ ------ -------- --------
Total income before income taxes..................... $ 40.6 $ 39.5 $ 80.8 $ 80.4
====== ====== ======== ========
Reserves, other policyholder funds and separate account:
Employee Benefits--Insurance segment..................... $1,971.1 $1,768.4
Retirement Plans segment................................. 1,807.8 1,794.7
Individual Insurance segment............................. 1,231.6 1,489.2
-------- --------
Total ............................................... $5,010.5 $5,052.3
======== ========
Employee Benefits--Insurance Segment
The Employee Benefits--Insurance segment markets long term and short term
disability, life, accidental death and dismemberment, and dental insurance to
employer groups. As the largest of the Company's three segments, Employee
Benefits--Insurance premiums accounted for 91.8% and 89.4% of the Company's
total premiums for the six months ended June 30, 2001 and 2000, respectively.
Income before income taxes for this segment increased $6.2 million, or
21.7%, for the second quarter of 2001 compared to the second quarter of 2000,
and $11.6 million, or 21.3%, for the six months ended June 30, 2001 compared to
the same period in 2000. The increase was primarily the result of business
growth, as evidenced by premium growth, and stable benefit ratio, which may or
may not continue in future periods.
11
The following table sets forth selected financial data for the Employee
Benefits--Insurance segment for the periods indicated:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2001 2000 2001 2000
------ ------ ------ ------
(Dollars in millions)
Revenues:
Premiums.......................................... $280.8 $238.8 $554.6 $469.7
Net investment income............................. 46.0 39.4 91.3 79.8
Net realized investment gains (losses)............ (1.1) 0.4 (1.7) (0.1)
Other............................................. 0.8 1.2 2.0 1.9
------ ------ ------ ------
Total revenues................................ 326.5 279.8 646.2 551.3
------ ------ ------ ------
Benefits and expenses:
Policyholder benefits............................. 230.1 194.7 454.9 386.6
Operating expenses................................ 35.0 32.7 72.0 64.3
Commissions and bonuses........................... 22.5 20.3 45.9 39.0
Premium taxes and other........................... 4.9 4.8 9.7 8.4
Net increase in deferred policy acquisition costs. (0.8) (1.3) (2.4) (1.5)
------ ------ ------ ------
Total benefits and expenses................... 291.7 251.2 580.1 496.8
------ ------ ------ ------
Income before income taxes........................... $ 34.8 $ 28.6 $ 66.1 $ 54.5
====== ====== ====== ======
Benefit ratio (% of premiums)........................ 82.0% 81.5% 82.0% 82.3%
Operating expense ratio (% of premiums).............. 12.5 13.7 13.0 13.7
Sales (annualized new premiums)...................... $ 46.7 $ 47.0 $121.4 $125.9
Premium growth is measured after adjusting for experience rated refunds,
which are a return of premiums for certain large employee benefits insurance
contracts with favorable claims experience that can fluctuate from period to
period. When adjusted to exclude experience rated refunds of $2.8 million and
$8.0 million for the second quarters of 2001 and 2000, respectively, premiums
increased $36.8 million, or 14.9%. When adjusted to exclude experience rated
refunds of $8.0 million and $12.6 million for the six months ended June 30,
2001 and 2000, respectively, premiums increased $80.3 million, or 16.6%. The
increase in premiums reflects a combination of strong business retention and
realization of the benefits of distribution expansion efforts during the past
two to three years.
Net investment income increased $6.6 million, or 16.8%, for the second
quarter of 2001 compared to the second quarter of 2000, and $11.5 million, or
14.4%, for the six months ended June 30, 2001 compared to the same period in
2000. The increases were primarily a result of an increase in average invested
assets supporting this segment of 15.3%. (See "--Consolidated Results of
Operations--Net Investment Income".)
Policyholder benefits increased $35.4 million, or 18.2%, for the second
quarter of 2001 compared to the second quarter of 2000, and $68.3 million, or
17.7%, for the six months ended June 30, 2001 compared to the same period in
2000. The increases were primarily a result of business growth, as evidenced by
premium growth. The benefit ratio remained relatively stable at 82.0% for the
three and six months ended June 30, 2001 and reflects favorable claims
experience, which may or may not continue. The benefit ratio can vary widely
depending on claims experience. Management believes that a benefit ratio of
83-85% continues to be an appropriate target range.
Operating expenses increased $2.3 million, or 7.0%, for the second quarter
of 2001 compared to the second quarter of 2000. The increase was primarily due
to business growth, as evidenced by continued premium growth. This segment's
sales force grew to 151 sales representatives through the second quarter of
2001 compared to 142 at December 31, 2000.
12
Operating expenses increased $7.7 million, or 12.0%, for the six months
ended June 30, 2001 compared to the same period in 2000. Expenses continued to
be incurred in the first quarter of 2001 to support initiatives undertaken in
the second half of 2000 to accelerate expansion to take advantage of certain
strategic market opportunities then available in the Eastern region. Those
opportunities included, among others, the ability to rapidly establish Eastern
processing and claims adjudication functions, both improving customer service
satisfaction in the Eastern region and mitigating exposures to a previous
concentration of those functions in one geographic location.
Commissions and bonuses increased $2.2 million, or 10.8%, for the second
quarter of 2001 compared to the second quarter of 2000, and $6.9 million, or
17.7%, for the six months ended June 30, 2001 compared to the same period in
2000. The increase was due primarily to sales growth.
The net increase in deferred policy acquisition costs was $0.8 million for
the second quarter of 2001 compared to an increase of $1.3 million for the
second quarter of 2000. The net increase in deferred policy acquisition costs
was $2.4 million for the six months ended June 30, 2001 compared to $1.5
million for the six months ended June 30, 2000. Both increases primarily
reflect increased field bonuses for the comparative periods.
Retirement Plans Segment
The Retirement Plans segment offers full-service 401(k) and other pension
plan products and services. The segment's primary sources of revenues include
fees on assets under management and investment return on general account assets
under management. In addition, this segment's premiums and policyholder
benefits reflect the conversion of 401(k) plan assets into life contingent
annuities which can be chosen by plan participants at time of retirement.
Developing significant future profitability from this segment is dependent upon
continuing to increase assets under management to improve economies of scale.
During the first six months of 2001, sales of new cases and transfer deposits
are higher than the comparable period in 2000. Strong sales are also being
matched with a low rate of termination of cases. Assets under management
increased $13.1 million, or 0.7%, at June 30, 2001 compared to June 30, 2000.
The loss before income taxes for the three and six months ended June 30,
2001 was $0.1 million and $1.1 million, respectively, compared to income of
$1.1 million and $1.2 million for the three and six months ended June 30, 2000,
respectively.
13
The following table sets forth selected financial data for the Retirement
Plans segment at or for the periods indicated:
At or for the Six
Three Months Months Ended
Ended June 30, June 30,
------------- ------------------
2001 2000 2001 2000
----- ----- -------- --------
(Dollars in millions)
Revenues:
Premiums.................................................. $ 5.1 $ 5.7 $ 9.7 $ 11.9
Net investment income..................................... 13.2 13.1 25.5 26.1
Net realized investment gains............................. 0.2 0.2 0.2 --
----- ----- -------- --------
Total revenues........................................ 18.5 19.0 35.4 38.0
----- ----- -------- --------
Benefits and expenses:
Policyholder benefits..................................... 11.0 11.0 21.3 22.7
Operating expenses........................................ 6.2 5.5 12.4 11.2
Commissions and bonuses................................... 1.4 1.4 2.8 2.9
----- ----- -------- --------
Total benefits and expenses........................... 18.6 17.9 36.5 36.8
----- ----- -------- --------
Income (loss) before income taxes............................ $(0.1) $ 1.1 $ (1.1) $ 1.2
===== ===== ======== ========
Interest credited (% of investment income)................... 66.8% 64.7% 67.9% 64.3%
Annualized operating expense ratio (% of average assets under
management)................................................ 1.4 1.2 1.4 1.3
Assets under management:
General account........................................... $ 700.7 $ 635.5
Separate account.......................................... 1,107.1 1,159.2
-------- --------
Total................................................. $1,807.8 $1,794.7
======== ========
The Retirement Plans segment's premiums consist primarily of fees for assets
under management and premiums on life contingent annuities, the latter of which
can vary widely from quarter to quarter. Premiums decreased $0.6 million, or
10.5%, in the second quarter of 2001 and decreased $2.2 million, or 18.5%, for
the six months ended June 30, 2001 compared to the same periods in 2000. The
declines were primarily the result of decreased fees from average asset
balances under management due to declines in the equity markets since June 30,
2000.
Annualized operating expenses, measured as a percentage of average assets
under management, were 1.4% and 1.2% for the second quarters of 2001 and 2000,
respectively, and 1.4% and 1.3% for the six months ended June 30, 2001 and
2000, respectively. Management estimates that this segment will reach
profitability when assets under management reach approximately $2.0 billion to
$2.5 billion.
Individual Insurance Segment
The Individual Insurance segment sells disability insurance and annuities to
individuals. Two transactions were recently completed for this segment. The
transactions involved selling substantially all of the individual life
insurance product line, for which Standard did not possess economies of scale,
and investing the proceeds in the acquisition of a substantial block of
individual disability business, which management believes has higher growth
potential and for which the Company possesses economies of scale, market
differentiation and expertise.
Effective October 1, 2000, the Company acquired a substantial block of
individual disability insurance business, through a reinsurance transaction,
from Minnesota Life Insurance Company. The Company paid a ceding commission of
approximately $55 million and received approximately $500 million in statutory
reserves. Accompanying this transaction was an agreement that provides for
access to market Standard's individual disability insurance products through
Minnesota Life Insurance Company's career agency distribution system.
14
Effective January 1, 2001, the Company sold substantially all of its
individual life insurance product line to Protective Life Insurance Company,
also through a reinsurance transaction. The Company received a ceding
commission of approximately $90 million and transferred liabilities of
approximately $790 million. Income before taxes for this product line was $1.3
million for the second quarter of 2000, and $3.5 million for the six months
ended June 30, 2000. The sale resulted in a minimal gain, which is being
deferred and amortized over the life of the underlying contracts.
The following table sets forth selected financial data for the Individual
Insurance segment for the periods indicated:
Three Months Six Months
Ended June 30, Ended June 30,
------------- -------------
2001 2000 2001 2000
----- ----- ----- ------
(Dollars in millions)
Revenues:
Premiums.................................................................. $20.0 $22.1 $39.8 $ 43.8
Net investment income..................................................... 23.9 30.2 49.4 60.0
Net realized investment losses............................................ (0.3) (0.6) (0.3) (0.1)
Other..................................................................... 0.1 0.1 0.2 --
----- ----- ----- ------
Total revenues........................................................ 43.7 51.8 89.1 103.7
----- ----- ----- ------
Benefits and expenses:
Policyholder benefits..................................................... 34.2 38.1 60.0 73.6
Operating expenses........................................................ 5.6 5.9 11.3 11.8
Commissions and bonuses................................................... 5.4 4.1 10.4 6.7
Premium taxes and other................................................... -- 0.4 0.8 0.7
Net (increase) decrease in deferred policy acquisition costs and value of
business acquired....................................................... (4.7) (0.6) (5.4) 1.6
----- ----- ----- ------
Total benefits and expenses........................................... 40.5 47.9 77.1 94.4
----- ----- ----- ------
Income before income taxes................................................... $ 3.2 $ 3.9 $12.0 $ 9.3
===== ===== ===== ======
Operating expense ratio (% of premiums)...................................... 28.0% 26.7% 28.4% 26.9%
Sales (annualized new premiums or deposits).................................. $20.4 $ 6.4 $25.7 $ 11.1
Premiums decreased $2.1 million, or 9.5%, for the second quarter of 2001
compared to the second quarter of 2000 primarily related to a decrease in
individual life premiums of $17.2 million from the sale of the individual life
insurance product line, offset by an increase of $15.7 million in individual
disability premiums primarily due to the individual disability insurance
business acquired.
For the six months ended June 30, 2001 premiums decreased $4.0 million, or
9.1%, compared to the six months ended June 30, 2000 primarily related to a
decrease in individual life premiums of $35.0 million from the sale of the
individual life insurance product line, offset by an increase of $32.2 million
in individual disability premiums. Sales of individual disability products for
the first six months of 2001 were strong in the previously existing
distribution channels as well as the new distribution channel established under
the marketing agreement with Minnesota Life.
Net investment income decreased $6.3 million, or 20.9%, for the second
quarter of 2001 compared to the second quarter of 2000, and $10.6 million, or
17.7%, for the six months ended June 30, 2001 compared to the same period in
2000, reflecting decreased average invested assets supporting this segment as a
result of the combination of the transactions discussed above.
Policyholder benefits decreased $3.9 million, or 10.2%, for the second
quarter of 2001 compared to the second quarter of 2000, and $13.6 million, or
18.5%, for the six months ended June 30, 2001 compared to the
15
same period in 2000. Management believes the unusually good claims experience
in the first quarter of 2001 on the newly acquired individual disability
insurance business combined with the less favorable claims experience in the
second quarter of 2001 reflects performance expectations for the six months
ended June 30, 2001 and anticipated activity for the remainder of 2001. Actual
claims experience can vary widely for this product line, therefore the claims
experience for the three and six months ended June 30, 2001 may or may not
continue into the future.
Operating expenses decreased $0.3 million, or 5.1%, for the second quarter
of 2001 compared to the second quarter of 2000, and $0.5 million, or 4.2%, for
the six months ended June 30, 2001 compared to the same period in 2000.
Management anticipates a moderate increase in operating expenses for this
segment beginning in the third quarter of 2001, which is when the transition of
administration for the recently acquired individual disability insurance
business is expected to be complete.
Commissions and bonuses increased $1.3 million, or 31.7%, for the second
quarter of 2001 compared to the second quarter of 2000, and $3.7 million, or
55.2%, for the six months ended June 30, 2001 compared to the same period in
2000, reflecting increased sales for this segment and a higher commission
schedule on the individual disability products during the first six months of
2001 compared to the individual life products during the first six months of
2000.
The net reduction in expenses for deferred policy acquisition costs was $4.7
million for the second quarter of 2001 compared to $0.6 million for the second
quarter of 2000, and the net reduction in expenses was $5.4 million for the six
months ended June 30, 2001 compared to an increase of $1.6 million for the six
months ended June 30, 2000. Net reductions in expenses for both comparative
periods reflect higher commissions.
Other
Other businesses primarily include return on capital not allocated to the
business segments, income from StanCorp Mortgage Investors, LLC and net
realized investment gains and losses related to real estate investments. Income
before income taxes for other businesses was $2.7 million and $5.9 million for
the second quarters of 2001 and 2000, respectively, and $3.8 million and $15.4
million for the six months ended June 30, 2001 and 2000, respectively,
primarily reflecting net realized capital gains of $0.6 million and $2.1
million for the second quarters of 2001 and 2000, respectively, and $1.7
million and $8.5 million for the six months ended June 30, 2001 and 2000,
respectively. Net realized capital gains for all periods primarily related to
sales of real estate. Disposition of invested assets and 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, operating expenses, commissions and taxes. The Company reported
net cash flows from operating activities of $215.2 million for the six months
ended June 30, 2001 compared to $135.2 million for the same period in 2000. The
increase primarily resulted from the change in future policy benefits and
claims related to the recently acquired individual disability insurance
business.
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. Such investments are expected to
provide sufficient cash flows to cover the future benefit payment obligations
of the Company's insurance subsidiaries, Standard Insurance Company
("Standard") and The Standard Life Insurance Company of
16
New York. The nature and quality of various types of investments purchased by
Standard must comply with statutes and regulations imposed by Oregon and other
states in which Standard is licensed. 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 90 days in
advance. The Company reported net cash outflows from investing activities of
$486.9 million for the six months ended June 30, 2001, compared to $93.7
million for the six months ended June 30, 2000. The increased outflows for 2001
primarily resulted from the acquisition of fixed maturities and mortgage loans
related to the acquisition of the individual disability insurance business, and
the sale of the individual life insurance product line which contributed $137.2
million during the six months ended June 30, 2001 (see "--Selected Segment
Information--Individual Insurance Segment").
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 55.9% of the Company's total general
account invested assets at June 30, 2001, such defaults could materially
adversely affect the Company's business, financial position, results of
operations, or cash flows.
At June 30, 2001, mortgage loans represented 42.8% of the total general
account invested assets and were collateralized by properties located in the
Western region representing 62.9% of the portfolio, the Central region
representing 22.6% of the portfolio, and the Eastern region representing 14.5%.
Of the total mortgage loan portfolio, 41.0% of the collateralized properties
were located in the state of California. The Company generally does not require
earthquake insurance for properties on which it makes mortgage loans, but does
consider the potential for earthquake loss based upon seismic surveys and
structural information specific to each property when new loans are
underwritten. The most significant types of collateralized properties in the
mortgage loan portfolio include retail properties, representing 48.5% of the
portfolio, industrial properties, representing 24.9%, and office properties,
representing 19.5%. The remaining 7.1% balance of properties in the portfolio
include commercial, apartment, residential and agricultural properties. The
loan to value ratio on the overall portfolio was 67.0% at June 30, 2001. The
Company's mortgage loans face both delinquency and default risk. At June 30,
2001, there were two loans either delinquent or in process of foreclosure. The
delinquency rate and loss performance of Standard's mortgage loan portfolio
have consistently outperformed the industry averages, as reported by the
American Council of Life Insurance. 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 position,
results of operations, or cash flows.
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.
In meeting these objectives, management may choose to liquidate certain
investments and reinvest in alternate investments to better match the cash flow
characteristics of assets to currently existing liabilities. Most of Standard's
policy liabilities result from long term disability reserves that have proven
to be very stable over time, annuity products on which interest rates can be
adjusted periodically, and products associated with the separate account.
Policyholders or claimants may not withdraw from Standard's large block of
disability reserves. Instead, claim payments are issued monthly over periods
that may extend for many years. The holding of stable long-term reserves makes
it possible for Standard to allocate a greater portion of its assets to
long-term commercial mortgage loans, a benefit many other insurance companies
do not experience.
Annual cash flow scenario testing is used to assess interest rate risk and
to permit Standard's investment policy to be modified whenever necessary to
address changing economic environments. 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
17
support the statutory Statement of Actuarial Opinion required annually by
insurance regulators. According to presently accepted actuarial standards of
practice, Standard's statutory reserves and related items at December 31, 2000,
in light of the assets held, made adequate provision for the anticipated cash
flows required to meet Standard's contractual obligations and related expenses.
Management believes there have been no material changes since that time in
interest rate risks faced by the Company.
At June 30, 2001, the Company had outstanding commitments to fund or acquire
various assets, primarily commercial mortgage loans with fixed-interest rates
ranging from 7.6% to 8.8%, totaling $100.2 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.
Financing Cash Flows
Financing cash flows consist primarily of policyholder fund deposits and
withdrawals, borrowings and repayments on the line of credit, issuance and
repurchase of common stock, and dividends paid on common stock.
The Company has a $100.0 million unsecured line of credit through June 29,
2002. The Company is not required to maintain compensating balances, but pays a
commitment fee. The interest rate, which is based on current market rates, was
4.63% at June 30, 2001. Under the credit agreement, the Company is subject to
customary covenants, including limitations on indebtedness and maintenance of
minimum equity, statutory surplus, and risk-based capital. At June 30, 2001,
the Company was in compliance with all such covenants. At June 30, 2001, $21.0
million was outstanding on the line of credit. Over time, the Company may
pursue long-term debt to meet its on-going capital requirements.
On February 5, 2001, the board of directors of StanCorp authorized a share
repurchase plan of up to 1.6 million shares, which expires on March 1, 2002.
This plan supplants all other outstanding share repurchase plans. Execution of
the share repurchase program will be based upon management's assessment of
market conditions for its common stock and other potential growth
opportunities. During the six months ended June 30, 2001, 897,000 shares were
repurchased at a total cost of $38.2 million. All share repurchases have been
and 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.
On August 6, 2001, the board of directors of StanCorp declared a quarterly
dividend of $0.08 per share of common stock. The dividend is payable on
September 7, 2001 to shareholders of record at the close of business on August
17, 2001.
StanCorp's ability to pay dividends to its shareholders, repurchase its
shares, and meet its obligations substantially depends upon the receipt of
dividends from Standard. Standard's ability to pay dividends to StanCorp is
regulated under Oregon law. Under Oregon law, 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 "Oregon Department") to pay a dividend, if such dividend
would exceed certain statutory limitations. The current statutory limitation is
the greater of (a) 10% of Standard's combined capital and surplus as of
December 31st of the preceding year or (b) the net gain from operations after
dividends to 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 Oregon Department broad discretion to
disapprove requests for dividends in excess of these limits. Based on its
statutory results, Standard paid a $50.6 million dividend to StanCorp during
the year ended December 31, 2000, and could have paid an additional $65.1
million in dividends to StanCorp in 2000 without obtaining the Oregon
Department's approval. The foregoing limitations on dividends would not apply
to any dividends to StanCorp from the non-insurance subsidiaries. Combined net
18
income of the non-insurance subsidiaries, before elimination of intercompany
amounts, was $3.8 million and $3.3 million for the six months ended June 30,
2001 and 2000, respectively.
The amount available for payment of dividends by Standard without approval
of the Oregon Department is $50.8 million in 2001. On February 5, 2001,
Standard's board of directors declared an extraordinary cash dividend of $90
million from Standard to StanCorp, subject to regulatory approval from the
Oregon Department. The extraordinary dividend included a return of a voluntary
temporary $65 million capital contribution made by StanCorp to Standard in
December 2000 due to the timing of two reinsurance transactions (see
"--Selected Segment Information--Individual Insurance Segment"). The purchase
transaction closed in December 2000 and the sale transaction closed in January
2001. The $65 million capital contribution provided additional capital during
the time both blocks of business remained on Standard's books. The
extraordinary dividend was approved by the Oregon Department, and was paid on
March 21, 2001.
Risk-Based Capital
The National Association of Insurance Commissioners ("NAIC") 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. RBC 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, 2000,
the RBC levels of the Company's insurance subsidiaries were significantly in
excess of that which would require corrective action by the insurance
subsidiaries or regulatory agencies.
In March 2001, an executive summary of revised RBC recommendations was
released by a task force of the American Academy of Actuaries, at the direction
of the NAIC, that proposed revisions which if adopted will modify certain risk
factors used in the determination of the RBC level of a company. Management
believes that the new recommendations would reduce the RBC requirements for its
insurance subsidiaries.
Insolvency Assessments
Insolvency regulations exist in many of the jurisdictions in which
subsidiaries of the Company do business. Such regulations may require life
insurance companies operating 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
Standard from January 1, 1999 through June 30, 2001 aggregated $0.7 million. At
June 30, 2001, Standard maintained a reserve of $1.0 million for future
assessments for currently impaired, insolvent or failed insurers.
Dependence on Information Technology Systems
The Company uses information technology systems to conduct business. These
systems may be vulnerable to reliability issues, compatibility concerns and
security threatening intrusions from external sources. Significant capital
investments for system development and maintenance, system security and
staffing, and staff development are continually made to safeguard the Company's
infrastructure and provide adequate resources. However, there is no assurance
that a future incident will not cause a disruption of service or have a
material adverse effect on the Company's business, financial position, results
of operations, or cash flows.
Commitments and Contingencies
See "Item 1--Condensed Notes to Unaudited Consolidated Financial
Statements--Note 5--Commitments and Contingencies".
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no changes in market risks faced by the Company since those
reported at December 31, 2000 in the Company's 2000 Annual Report on Form 10-K.
19
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3: DEFAULTS UPON SENIOR DEBT
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
10.9 Amendment to Credit Agreement Among StanCorp Financial Group, Inc.
and U.S. Bank National Association Dated as of June 30, 2000,
$100,000,000
(b) No reports on Form 8-K were filed during the second quarter of 2001.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 2001 By: /S/ ERIC E. PARSONS
------------------------------
Eric E. Parsons
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 2001 By: /S/ CINDY J. MCPIKE
------------------------------
Cindy J. McPike
Vice President
Controller and Treasurer
(Principal Accounting Officer)
21
EXHIBITS INDEX
Number Name Method of Filing
- ------ ---- ----------------
10.9 Amendment to Credit Agreement Among StanCorp Financial Group, Inc. and Filed Herewith
U.S. Bank National Association Dated as of June 30, 2000, $100,000,000