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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2000
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-14925
----------------
STANCORP FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-1253576
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1100 SW Sixth Avenue, Portland, Oregon, 97204
(Address of principal executive offices, 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)
----------------
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 10, 2000 there were 31,978,467 shares of the Registrant's
common stock, no par value, outstanding.
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INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Income and Comprehensive
Income for the three and six months ended June 30, 2000 and
1999 ......................................................... 1
Unaudited Consolidated Balance Sheets at June 30, 2000 and
December 31, 1999 ............................................ 2
Unaudited Consolidated Statements of Changes in Shareholders'
Equity for the year ended December 31, 1999 and the six months
ended June 30, 2000........................................... 3
Unaudited Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999........................... 4
Notes to Unaudited Consolidated Financial Statements........... 5
Independent Accountants' Report................................ 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................. 23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...................... 23
ITEM 3. DEFAULTS UPON SENIOR DEBT...................................... 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 23
ITEM 5. OTHER INFORMATION.............................................. 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 23
SIGNATURES.............................................................. 24
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,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenues:
Premiums........................ $ 252.0 $ 217.8 $ 495.8 $ 456.4
Net investment income........... 77.5 74.0 155.8 154.4
Net realized investment gains... 2.0 1.7 8.3 2.8
Contribution from closed block.. 0.7 3.3 2.9 3.3
Other........................... 1.3 0.9 2.0 1.7
---------- ---------- ---------- ---------
Total......................... 333.5 297.7 664.8 618.6
---------- ---------- ---------- ---------
Benefits and expenses:
Policyholder benefits........... 200.0 188.5 398.9 395.1
Interest paid on policyholder
funds.......................... 21.8 21.8 43.2 43.1
Operating expenses.............. 53.9 44.9 106.1 89.5
Commissions..................... 21.3 15.8 39.7 32.1
Net increase in deferred policy
acquisition costs.............. (2.9) (0.5) (3.5) (0.6)
---------- ---------- ---------- ---------
Total......................... 294.1 270.5 584.4 559.2
---------- ---------- ---------- ---------
Income before income taxes and
extraordinary item............... 39.4 27.2 80.4 59.4
Income taxes...................... 13.3 8.0 27.2 18.9
---------- ---------- ---------- ---------
Income before extraordinary item.. 26.1 19.2 53.2 40.5
Extraordinary item, net of tax.... -- 1.3 -- 3.6
---------- ---------- ---------- ---------
Net income........................ 26.1 17.9 53.2 36.9
---------- ---------- ---------- ---------
Other comprehensive loss, net of
tax:
Unrealized losses on securities
available-for-sale............. (4.2) (40.3) (2.2) (71.4)
Adjustment for realized losses.. (0.6) (0.7) (1.0) (2.7)
---------- ---------- ---------- ---------
Total......................... (4.8) (41.0) (3.2) (74.1)
---------- ---------- ---------- ---------
Comprehensive income (loss)....... $ 21.3 $ (23.1) $ 50.0 $ (37.2)
========== ========== ========== =========
Net income per share (pro forma
for the three months ended
June 30, 1999):
Basic........................... $ 0.82 $ 0.53 $ 1.66
Diluted......................... 0.81 0.53 1.64
Weighted-average shares
outstanding (pro forma for the
three months ended June 30, 1999):
Basic........................... 31,727,052 33,520,236 32,085,410
Diluted......................... 32,124,385 33,529,295 32,383,121
See Notes to Unaudited Consolidated Financial Statements.
1
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In millions--except share data)
June 30, December 31,
2000 1999
-------- ------------
ASSETS
------
Investments:
Investment securities................................. $2,061.5 $2,064.7
Mortgage loans........................................ 1,870.4 1,779.1
Real estate, net...................................... 92.3 98.5
Policy loans.......................................... 20.5 20.5
-------- --------
Total investments................................... 4,044.7 3,962.8
Cash and cash equivalents............................... 35.6 38.9
Deferred policy acquisition costs....................... 57.9 54.2
Premiums and other receivables.......................... 78.3 75.3
Accrued investment income............................... 55.4 53.3
Property and equipment, net............................. 68.7 69.0
Other assets............................................ 10.1 11.5
Separate account assets................................. 1,159.2 992.3
Closed block assets..................................... 601.5 599.8
-------- --------
Total............................................... $6,111.4 $5,857.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Future policy benefits and claims..................... $1,758.8 $1,683.4
Other policyholder funds.............................. 1,513.1 1,538.6
Deferred tax liabilities.............................. 63.9 66.5
Other liabilities..................................... 117.9 96.9
Separate account liabilities.......................... 1,159.2 992.3
Closed block liabilities.............................. 636.2 639.5
-------- --------
Total liabilities................................... 5,249.1 5,017.2
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, 100,000,000 shares authorized; none
issued .............................................. -- --
Common stock, no par, 300,000,000 shares authorized;
31,977,111 shares issued at June 30, 2000;
32,774,098 shares issued at December 31, 1999....... 796.3 819.7
Accumulated other comprehensive loss.................. (40.8) (37.6)
Retained earnings..................................... 106.8 57.8
-------- --------
Total shareholders' equity.......................... 862.3 839.9
-------- --------
Total............................................... $6,111.4 $5,857.1
======== ========
See 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,
1999................... -- $ -- $ 74.2 $ 765.1 $ 839.3
Net income.............. -- -- -- 79.9 79.9
Other comprehensive
loss, net of tax....... -- -- (111.8) -- (111.8)
Common stock:
Reorganization........ 18,718,015 515.3 -- (783.2) (267.9)
Initial public
offering............. 15,209,400 336.5 -- -- 336.5
Repurchased........... (1,277,931) (34.2) -- -- (34.2)
Issued under employee
stock plans.......... 56,910 1.1 -- -- 1.1
Issued under various
incentive plans...... 67,704 1.0 -- -- 1.0
Dividends declared on
common stock........... -- -- -- (4.0) (4.0)
---------- ------ ------- ------- -------
Balance, December 31,
1999................... 32,774,098 $819.7 $ (37.6) $ 57.8 $ 839.9
---------- ------ ------- ------- -------
Net income.............. -- -- -- 53.2 53.2
Other comprehensive
loss, net of tax....... -- -- (3.2) -- (3.2)
Common stock:
Repurchased........... (981,700) (24.5) -- -- (24.5)
Issued to directors... 2,648 0.2 -- -- 0.2
Issued under various
incentive plans...... 180,000 0.8 -- -- 0.8
Exercise of stock
options.............. 2,065 0.1 -- -- 0.1
Dividends declared on
common stock........... -- -- -- (4.2) (4.2)
---------- ------ ------- ------- -------
Balance, June 30, 2000.. 31,977,111 $796.3 $ (40.8) $ 106.8 $ 862.3
========== ====== ======= ======= =======
See Notes to Unaudited Consolidated Financial Statements.
3
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Six Months Ended
June 30,
------------------
2000 1999
-------- --------
Operating:
Net income............................................... $ 53.2 $ 36.9
Adjustments to reconcile net income to net cash provided
by operating activities:
Net realized investment gains.......................... (8.3) (2.8)
Depreciation and amortization.......................... 10.6 14.6
Deferral of policy acquisition costs................... (5.9) (6.9)
Deferred income taxes.................................. (0.8) 19.7
Changes in other assets and liabilities:
Trading securities.................................... (3.1) (11.7)
Receivables and accrued income........................ (5.1) (5.6)
Future policy benefits and claims..................... 75.4 95.4
Closed block, net..................................... (5.0) (22.2)
Other, net............................................ 10.9 (0.3)
-------- --------
Net cash provided by operating activities............ 121.9 117.1
-------- --------
Investing:
Proceeds of investments sold, matured, or repaid:
Fixed maturity securities--available-for-sale.......... 123.9 135.4
Mortgage loans......................................... 111.5 156.3
Real estate............................................ 13.7 2.0
Other investments...................................... 11.6 --
Costs of investments acquired:
Fixed maturity securities--available-for-sale.......... (137.0) (294.7)
Mortgage loans......................................... (202.8) (243.6)
Real estate............................................ (0.5) --
Property and equipment, net.............................. (4.1) (2.7)
-------- --------
Net cash used in investing activities................ (83.7) (247.3)
-------- --------
Financing:
Policyholder fund deposits............................... 370.3 266.0
Policyholder fund withdrawals............................ (395.8) (257.6)
Borrowings on line of credit............................. 104.6 --
Repayments on line of credit............................. (93.0) --
Issuance of common stock................................. 1.1 337.1
Repurchase of common stock............................... (24.5) --
Dividends paid on common stock........................... (4.2) --
Payments to eligible policyholders upon reorganization... -- (176.7)
-------- --------
Net cash provided by (used in) financing activities.. (41.5) 168.8
-------- --------
Increase (decrease) in cash and cash equivalents........... (3.3) 38.6
Cash and cash equivalents, beginning of period............. 38.9 60.4
-------- --------
Cash and cash equivalents, end of period................... $ 35.6 $ 99.0
======== ========
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest............................................... $ 43.5 $ 43.9
Income taxes........................................... 26.9 (7.3)
See Notes to Unaudited Consolidated Financial Statements.
4
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 Standard Insurance Company ("The Standard"),
StanCorp Mortgage Investors, LLC, StanCorp Real Estate, LLC, and Standard
Management, Inc. StanCorp is based in Portland, Oregon, and through its
subsidiaries has operations throughout the United States of America.
StanCorp's principal subsidiary, The Standard, underwrites group and
individual disability, life and annuity products, and dental insurance for
groups. The Standard is domiciled in Oregon and licensed in 49 states, the
District of Columbia and the U.S. Territory of Guam. In New York, The Standard
is accredited for reinsurance only.
StanCorp's other subsidiaries are complementary financial and management
service businesses. The largest of StanCorp's other subsidiaries is StanCorp
Mortgage Investors, LLC, which originates and services mortgage loans for
StanCorp's investment portfolio as well as generating fee income from the
origination and servicing of mortgage loans sold to institutional investors.
The consolidated financial statements include StanCorp and its subsidiaries
(collectively with StanCorp, 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.
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 revenue 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, 2000 and December 31, 1999 and the results of operations
and cash flows for the three and six months ended June 30, 2000 and 1999.
Interim results for the three and six month periods ended June 30, 2000 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. This report should be read in conjunction with the
Company's 1999 Annual Report on Form 10-K. Certain prior period amounts have
been reclassified to conform to the current period's presentation.
3. ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities". This pronouncement adds to and
amends certain reporting standards from the guidance in Statement 133,
"Accounting for Derivative Instruments and Hedging Activities", previously
issued in June 1998 and adopted by the Company effective July 1, 1998.
Statement 138 is effective for all fiscal quarters beginning after June 15,
2000 for entities that adopted Statement 133 prior to June 15, 2000. The
Company does not have any derivative instruments that meet the scope of this
statement.
5
4. CLOSED BLOCK
The Standard established a closed block for the payment of future benefits,
policyholder dividends and certain expenses and taxes related to certain
classes of policies in conjunction with its reorganization in April 1999. The
Standard allocated to the closed block an amount of assets expected to produce
cash flows which, together with future revenues from the policies included in
the closed block, will be sufficient to support these policies. Such support
includes payment of claims, certain expenses and taxes and continuation of
policyholder dividend scales in effect for 1998 (the period used to determine
the closed block funding) if the experience underlying such dividend scales
including the portfolio interest rate continues.
The contribution to income before income taxes and extraordinary item from
the closed block is reported as a single line item in the consolidated
statements of income and comprehensive income. Accordingly, all components of
revenues, benefits and expenses for the closed block are shown as a net amount
under the caption "Contribution from closed block". Income tax expense
applicable to the closed block is reflected as a component of total tax
expense. Reporting of the contribution from the closed block as a single line
item results in material reductions in the respective line items in the
consolidated statements of income and comprehensive income while having no
effect on net income. All assets allocated to the closed block are combined
and shown as a separate line item in the consolidated balance sheets under the
caption "Closed block assets". All liabilities attributable to the closed
block are treated similarly and disclosed as a separate line item under the
caption "Closed block liabilities".
Summarized balance sheet information for the closed block was as follows:
June 30, December 31,
2000 1999
-------- ------------
(In millions)
ASSETS
------
Investments:
Investment securities................................... $221.9 $220.3
Mortgage loans.......................................... 152.4 147.1
Policy loans............................................ 154.7 158.4
------ ------
Total investments..................................... 529.0 525.8
Cash and cash equivalents................................. 5.3 1.8
Deferred policy acquisition costs......................... 62.5 66.0
Premiums and other receivables............................ 1.8 3.3
Accrued investment income................................. 2.9 2.9
------ ------
Closed block assets................................... $601.5 $599.8
====== ======
LIABILITIES
-----------
Future policy benefits and claims......................... $587.9 $585.0
Other policyholder funds.................................. 33.3 33.1
Deferred tax liabilities.................................. 12.8 17.8
Other liabilities......................................... 2.2 3.6
------ ------
Closed block liabilities.............................. $636.2 $639.5
====== ======
The excess of closed block liabilities over closed block assets represents
estimated future contribution from the closed block, which will be recognized
in the Company's consolidated statements of income and comprehensive income
over the period the underlying policies and contracts remain in force.
6
Summarized financial results for the closed block were as follows:
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
--------- --------- -------- --------
(In millions)
Revenues:
Premiums........................... $ 14.7 $ 15.7 $ 29.7 $ 15.7
Net investment income.............. 10.4 10.7 20.2 10.7
--------- --------- -------- --------
Total revenues................... 25.1 26.4 49.9 26.4
--------- --------- -------- --------
Benefits and expenses:
Policyholder benefits.............. 21.8 17.9 40.3 17.9
Interest paid on policyholder
funds............................. 0.2 0.3 0.5 0.3
Operating expenses................. 1.1 1.3 1.7 1.3
Commissions........................ 0.3 2.2 0.9 2.2
Net decrease in deferred policy
acquisition costs................. 1.0 1.4 3.6 1.4
--------- --------- -------- --------
Total benefits and expenses...... 24.4 23.1 47.0 23.1
--------- --------- -------- --------
Contribution from closed
block......................... $ 0.7 $ 3.3 $ 2.9 $ 3.3
========= ========= ======== ========
Financial results presented for the closed block for the three and six
months ended June 30, 1999 include results from the completion of the
reorganization on April 21, 1999 through June 30, 1999.
If, over the period the closed block remains in existence, the actual
cumulative contribution is greater than expected, only such expected
contribution will be recognized in the Company's consolidated statements of
income and comprehensive income. The excess will be paid to closed block
policyholders as additional policyholder dividends. Alternatively, if the
actual cumulative contribution is less than expected, only such actual
contribution will be recognized in the Company's consolidated statements of
income and comprehensive income. If such circumstances arise, future
policyholder dividends will be changed to increase actual contributions until
the actual cumulative contributions equal expected cumulative contributions.
5. SEGMENTS
Three reportable segments comprise a substantial majority of the Company's
operations: Employee Benefits--Insurance, Retirement Plans and Individual
Insurance. The Employee Benefits--Insurance segment, previously named the
Group Insurance segment, markets long term and short term disability, life,
accidental death and dismemberment, and dental insurance. The Retirement Plans
segment sells full-service 401(k) and other pension plan products and services
to employers. The Individual Insurance segment sells life insurance,
disability insurance and annuities to individuals. Performance assessment and
resource allocation are done at this level.
Amounts reported as "Other" include net investment income not associated
with product segments, other financial service businesses, and adjustments
made in consolidation. Other financial service businesses are generally non-
insurance related and include StanCorp's mortgage lending and real estate
management subsidiaries.
7
The following table sets forth selected segment information:
Employee
Benefits- Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(In millions)
Three months ended June 30,
2000:
Revenues:
Premiums.................... $ 238.8 $ 5.8 $ 7.4 $ -- $ 252.0
Net investment income....... 39.4 13.0 19.8 5.3 77.5
Net realized investment
gains (losses)............. 0.4 0.1 (0.6) 2.1 2.0
Contribution from closed
block...................... -- -- 0.7 -- 0.7
Other....................... 1.2 -- 0.1 -- 1.3
-------- -------- -------- ------ --------
Total..................... 279.8 18.9 27.4 7.4 333.5
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits ...... 192.9 2.6 4.5 -- 200.0
Interest paid on
policyholder funds ........ 1.8 8.4 11.6 -- 21.8
Operating expenses.......... 41.0 6.1 5.3 1.5 53.9
Commissions ................ 16.8 0.8 3.7 -- 21.3
Net increase in deferred
policy acquisition costs... (1.3) -- (1.6) -- (2.9)
-------- -------- -------- ------ --------
Total..................... 251.2 17.9 23.5 1.5 294.1
-------- -------- -------- ------ --------
Income before income taxes and
extraordinary item........... $ 28.6 $ 1.0 $ 3.9 $ 5.9 $ 39.4
======== ======== ======== ====== ========
Employee
Benefits- Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(In millions)
Six months ended June 30,
2000:
Revenues:
Premiums.................... $ 469.7 $ 12.0 $ 14.1 $ -- $ 495.8
Net investment income....... 79.8 26.0 39.8 10.2 155.8
Net realized investment
gains (losses)............. (0.1) -- (0.1) 8.5 8.3
Contribution from closed
block...................... -- -- 2.9 -- 2.9
Other....................... 1.9 -- -- 0.1 2.0
-------- -------- -------- ------ --------
Total..................... 551.3 38.0 56.7 18.8 664.8
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits ...... 383.2 6.0 9.7 -- 398.9
Interest paid on
policyholder funds ........ 3.4 16.7 23.1 -- 43.2
Operating expenses.......... 79.2 12.5 11.0 3.4 106.1
Commissions ................ 32.5 1.6 5.6 -- 39.7
Net increase in deferred
policy acquisition costs... (1.5) -- (2.0) -- (3.5)
-------- -------- -------- ------ --------
Total..................... 496.8 36.8 47.4 3.4 584.4
-------- -------- -------- ------ --------
Income before income taxes and
extraordinary item........... $ 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
======== ======== ======== ====== ========
8
Employee
Benefits- Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(In millions)
Three months ended June 30,
1999:
Revenues:
Premiums................... $ 207.4 $ 3.8 $ 6.6 $ -- $ 217.8
Net investment income...... 38.5 12.9 19.3 3.3 74.0
Net realized investment
gains (losses)............ 0.8 (0.1) 1.2 (0.2) 1.7
Contribution from closed
block..................... -- -- 3.3 -- 3.3
Other...................... 0.9 -- -- -- 0.9
-------- -------- -------- ------ --------
Total.................... 247.6 16.6 30.4 3.1 297.7
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits...... 176.4 2.9 9.2 -- 188.5
Interest paid on
policyholder funds........ 1.7 8.2 11.9 -- 21.8
Operating expenses......... 34.1 5.3 5.2 0.3 44.9
Commissions................ 14.3 0.5 1.0 -- 15.8
Net increase in deferred
policy acquisition costs.. (0.3) -- (0.2) -- (0.5)
-------- -------- -------- ------ --------
Total.................... 226.2 16.9 27.1 0.3 270.5
-------- -------- -------- ------ --------
Income before income taxes
and extraordinary item...... $ 21.4 $ (0.3) $ 3.3 $ 2.8 $ 27.2
======== ======== ======== ====== ========
Employee
Benefits- Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(In millions)
Six months ended June 30,
1999:
Revenues:
Premiums................... $ 418.9 $ 8.6 $ 28.9 $ -- $ 456.4
Net investment income...... 74.5 25.2 49.1 5.6 154.4
Net realized investment
gains..................... 1.3 -- 1.5 -- 2.8
Contribution from closed
block..................... -- -- 3.3 -- 3.3
Other...................... 1.6 -- 0.1 -- 1.7
-------- -------- -------- ------ --------
Total.................... 496.3 33.8 82.9 5.6 618.6
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits...... 353.6 5.1 36.4 -- 395.1
Interest paid on
policyholder funds........ 3.1 16.5 23.5 -- 43.1
Operating expenses......... 66.2 10.9 11.7 0.7 89.5
Commissions................ 27.4 1.0 3.7 -- 32.1
Net increase in deferred
policy acquisition costs.. (0.6) -- -- -- (0.6)
-------- -------- -------- ------ --------
Total.................... 449.7 33.5 75.3 0.7 559.2
-------- -------- -------- ------ --------
Income before income taxes
and extraordinary item...... $ 46.6 $ 0.3 $ 7.6 $ 4.9 $ 59.4
======== ======== ======== ====== ========
Total assets................. $2,003.9 $1,432.3 $1,627.3 $521.1 $5,584.6
======== ======== ======== ====== ========
9
6. COMMITMENTS AND CONTINGENCIES
The Company has available lines of credit totaling $110.0 million, including
a $100.0 million unsecured revolving line of credit available through June 30,
2001. The Company is not required to maintain compensating balances, but pays
a commitment fee. The interest rates are based on current market rates. Under
the credit agreements, the Company is subject to customary covenants,
including limitations on indebtedness, minimum retained earnings and minimum
claims paying ability ratings. On June 30, 2000, the Company was in compliance
with all such covenants. At June 30, 2000, $11.6 million was outstanding on
the lines of credit.
In the normal course of its business, the Company is involved in various
legal actions and other state and Federal proceedings. A number of these
actions or proceedings were pending at June 30, 2000. 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 cashflows.
10
INDEPENDENT ACCOUNTANTS' REPORT
StanCorp Financial Group, Inc.:
We have reviewed the accompanying consolidated balance sheet of StanCorp
Financial Group, Inc. and subsidiaries (the "Company") as of June 30, 2000,
and the related consolidated statements of income and comprehensive income for
the three- and six-month periods ended June 30, 2000 and 1999, the
consolidated statement of changes in shareholders' equity for the six month
period ended June 30, 2000 and the consolidated statements of cash flows for
the six-month periods ended June 30, 2000 and 1999. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States of America, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States
of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
StanCorp Financial Group, Inc. and subsidiaries as of December 31, 1999, and
the related consolidated statements of income and comprehensive income,
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 2, 2000 (February 23, 2000 as to
Note 14), we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1999 and the consolidated
statement of shareholders' equity for the year ended December 31, 1999 is
fairly stated, in all material respects, in relation to the consolidated
balance sheet and the consolidated statement of shareholders' equity from
which it has been derived.
DELOITTE & TOUCHE LLP
Portland, Oregon
July 21, 2000
11
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 with StanCorp, the "Company") should be read in
conjunction with the unaudited consolidated financial statements and related
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 including statements regarding anticipated
development and expansion of the Company's business. Such statements may
include the effects of regulatory actions, the intent, belief, or current
expectations of the Company's management, the future operating performance of
the Company and other statements regarding matters that are not historical
facts. These statements are "forward-looking" statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. Because such
statements are subject to risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements include, but are not
limited to (i) deterioration in morbidity, mortality, and persistency, (ii)
changes in interest rates or the condition of the national economy, (iii)
changes in the regulatory environment on the state or Federal level, (iv)
competition from other insurers and financial institutions, (v) achievement of
sales or other growth objectives, (vi) achievement of expense management
objectives, (vii) changes in claims paying ability ratings, (viii) adverse
findings in litigation or other legal proceedings, (ix) deterioration in the
experience of the closed block, and (x) on-going risks associated with
dependence on information technology systems.
Reorganization Plan
In December 1997, the board of directors of Standard Insurance Company ("The
Standard") authorized management to proceed with the development of a plan of
reorganization to convert from a mutual life insurance company to a stock life
insurance company, a process known as demutualization. Prior to the
reorganization, StanCorp was a wholly owned subsidiary of The Standard and was
formed for the purpose of becoming an insurance holding company upon
completion of The Standard's reorganization. On April 21, 1999, pursuant to an
order by the Director of the Oregon Department of Consumer and Business
Services approving the Plan of Reorganization, dated September 28, 1998, as
amended on December 14, 1998 (the "Plan"), The Standard converted from a
mutual life insurance company to a stock life insurance company and became a
wholly owned subsidiary of StanCorp. Also, on April 21, 1999, StanCorp
completed an initial public offering of 15.2 million shares of its common
stock in addition to 18.7 million shares of common stock distributed to The
Standard's policyholders, pursuant to the Plan, in exchange for their
membership interests in The Standard. The costs incurred and expensed related
to the reorganization for the three and six months ended June 30, 1999 were
$1.3 million and $3.6 million, respectively. There were no reorganization
costs incurred for the first six months of 2000 and no further reorganization
costs are anticipated.
On the completion of its reorganization, The Standard established a closed
block for the payment of future benefits, policyholder dividends and certain
expenses and taxes related to certain classes of policies. The Standard
allocated to the closed block an amount of assets expected to produce cash
flows which, together with future revenues from the policies included in the
closed block, will be sufficient to support these policies. Such support
includes payment of claims, certain expenses and taxes and continuation of
policyholder dividend scales in effect for 1998 (the period used to determine
the closed block funding) if the experience underlying such dividend scales
including the portfolio interest rate continues. These assets totaled $601.5
million at June 30, 2000, and are for the benefit of the policies in the
closed block.
The contribution to income before income taxes and extraordinary item from
the closed block is reported as a single line item in the consolidated
statements of income and comprehensive income. Accordingly, all
12
components of revenues, benefits and expenses for the closed block are shown
as a net amount under the caption "Contribution from closed block". Income tax
expense applicable to the closed block is reflected as a component of total
tax expense. Reporting of the contribution from the closed block as a single
line item results in material reductions in the respective line items in the
consolidated statements of income and comprehensive income while having no
effect on net income. All assets allocated to the closed block are combined
and shown as a separate line item in the consolidated balance sheets under the
caption "Closed block assets". All liabilities attributable to the closed
block are treated similarly and disclosed as a separate line item under the
caption "Closed block liabilities". Management believes that a better
understanding of the business results when closed block amounts are presented
on a combined basis as if the closed block had not been established. Such
presentation does not affect the Company's reported net income. Accordingly,
the combined presentation set forth below includes revenues and expenses
associated with policies included in the closed block:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -----------------
2000 1999 2000 1999
--------- --------- -------- --------
(In millions)
Revenues:
Premiums.......................... $ 266.7 $ 233.5 $ 525.5 $ 472.1
Net investment income............. 87.9 84.7 176.0 165.1
Net realized investment gains..... 2.0 1.7 8.3 2.8
Other............................. 1.3 0.9 2.0 1.7
--------- --------- -------- --------
Total revenues.................. 357.9 320.8 711.8 641.7
--------- --------- -------- --------
Benefits and expenses:
Policyholder benefits............. 243.8 228.5 482.9 456.4
Operating expenses................ 55.0 46.2 107.8 90.8
Commissions....................... 21.6 18.0 40.6 34.3
Net decrease (increase) in
deferred policy acquisition
costs............................ (1.9) 0.9 0.1 0.8
--------- --------- -------- --------
Total benefits and expenses..... 318.5 293.6 631.4 582.3
--------- --------- -------- --------
Income before income taxes and
extraordinary item............... $ 39.4 $ 27.2 $ 80.4 $ 59.4
========= ========= ======== ========
Consolidated Results of Operations
Premiums
Premiums increased $33.2 million, or 14.2%, for the second quarter of 2000
compared to the second quarter of 1999, and $53.4 million, or 11.3%, for the
six months ended June 30, 2000 compared to the six months ended June 30, 1999.
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. However, these
fluctuations are offset, in part, by inverse fluctuations in newly established
reserve liabilities due to the use of current interest rate assumptions in
discounting those reserve liabilities. Net investment income increased $3.2
million, or 3.8%, for the second quarter of 2000 compared to the second
quarter of 1999. Average invested assets increased 5.5% as compared to the
second quarter of 1999.
For the six months ended June 30, 2000 net investment income increased $10.9
million, or 6.6%, compared to the same period in 1999. The increase was the
result of an increase in average invested assets of 5.9%. Also
13
contributing to this increase was an increase in income from market value
increases in fixed maturities trading portfolio of $2.0 million in the first
six months of 2000, primarily occurring in the first quarter.
Net Realized Investment Gains
Net realized gains occur primarily as a result of gains on dispositions of
the Company's invested assets in the regular course of investment management.
Gains on the sale of real estate were $2.2 million for the second quarter of
2000 and $8.5 million for the six month ended June 30, 2000. No real estate
gains were incurred for the first six months of 1999. Dispositions of invested
assets and associated gains or losses may or may not continue into the future.
Policyholder Benefits
Policyholder benefits, including interest paid on policyholder funds,
increased $15.3 million, or 6.7%, for the second quarter of 2000 compared to
the same period of 1999, and $26.5 million, or 5.8%, for the first six months
of 2000 compared to the same period in 1999. The increase primarily resulted
from business growth in the Employee Benefits--Insurance segment, as evidenced
by the growth in premiums for that segment. The increase was offset in part by
improvements in the benefit ratio (policyholder benefits as a percentage of
premiums) for the Employee Benefits--Insurance segment. Because benefit ratios
are heavily affected by actual claims experience, improvements in the benefit
ratio may or may not continue in the future. (See "Selected Segment
Information".)
Operating Expenses
Operating expenses increased $8.8 million, or 19.0%, for the second quarter
of 2000 compared to the second quarter of 1999, and $17.0 million, or 18.7%,
for the six months ended June 30, 2000 compared to the same period in 1999.
The majority of the increases related to the Employee Benefits--Insurance
segment which had increased operating expenses of $6.9 million and $13.0
million for the same periods, respectively, primarily due to business growth
as evidenced by premium growth and accelerated expansion activities. (See
"Selected Segment Information".)
Commissions
Commissions generally fluctuate with premiums, however not directly as new
sales in some business lines tend to have higher commission rates than renewal
sales. Commissions increased $3.6 million, or 20.0%, for the second quarter of
2000 compared to the second quarter of 1999, and increased $6.3 million, or
18.4%, for the six months ended June 30, 2000 compared to the same period in
1999. The increases were primarily due to growth in sales for the Employee
Benefits--Insurance segment. In addition, $1.2 million of the increase in the
second quarter of 2000 resulted from an annuity conversion program in the
Individual Insurance segment. (See "Selected Segment Information".)
Net (Increase) Decrease in Deferred Policy Acquisition Costs
The net expense for deferred policy acquisition costs decreased $2.8 million
for the second quarter of 2000 compared to the second quarter of 1999, and
decreased $0.7 million for the six months ended June 30, 2000 compared to the
same period in 1999. The changes for both periods primarily related to the
Individual Insurance segment (see "Selected Segment Information, Individual
Insurance Segment").
Income Taxes
Total income taxes differ from the amount computed by applying the Federal
corporate tax rate of 35% because of the net result of permanent differences
and state and local income taxes, net of the Federal benefit. The combined
Federal and state effective tax rate was 33.8% and 29.4% for the second
quarters of 2000 and
14
1999, respectively. For the six months ended June 30, 2000 and 1999, the
combined effective tax rate was 33.8% and 31.8%, respectively. The lower
effective rates for both periods in 1999 resulted primarily from adjustments
related to the resolution of uncertainties provided for in prior years.
Income Before Extraordinary Item
Income before extraordinary item increased $6.9 million, or 35.9%, for the
second quarter of 2000 compared to the second quarter of 1999, and $12.7
million, or 31.4%, for the six months ended June 30, 2000 compared to the same
period in 1999. The increase resulted primarily from premium growth and
favorable claims experience in the Employee Benefits--Insurance segment.
Selected Segment Information
The following table sets forth selected segment information for the periods
indicated:
Three Months At or for the
Ended Six Months
June 30, Ended June 30,
------------- -----------------
2000 1999 2000 1999
------ ------ -------- --------
(In millions)
Revenues:
Employee Benefits--Insurance segment.... $279.8 $247.6 $ 551.3 $ 496.3
Retirement Plans segment................ 18.9 16.6 38.0 33.8
Individual Insurance segment............ 51.8 53.4 103.7 106.0
Other................................... 7.4 3.1 18.8 5.6
------ ------ -------- --------
Total revenues........................ $357.9 $320.7 $ 711.8 $ 641.7
====== ====== ======== ========
Income (loss) before income taxes and
extraordinary item:
Employee Benefits--Insurance segment.... $ 28.6 $ 21.4 $ 54.5 $ 46.6
Retirement Plans segment................ 1.0 (0.3) 1.2 0.3
Individual Insurance segment............ 3.9 3.3 9.3 7.6
Other................................... 5.9 2.8 15.4 4.9
------ ------ -------- --------
Total income before income taxes and
extraordinary item................... $ 39.4 $ 27.2 $ 80.4 $ 59.4
====== ====== ======== ========
Reserves(1):
Employee Benefits--Insurance segment.... $1,698.8 $1,570.3
Retirement Plans segment................ 635.6 634.2
Individual Insurance segment............ 1,558.7 1,535.7
-------- --------
Total reserves........................ $3,893.1 $3,740.2
======== ========
- --------
(1) Reserves consist of future policy benefits and claims and other
policyholder funds included on the Company's consolidated balance sheets.
Employee Benefits--Insurance Segment
The Employee Benefits--Insurance segment, previously named the Group
Insurance segment, markets long and short term disability, life, accidental
death and dismemberment, and dental insurance. As the largest of the Company's
three segments, Employee Benefits--Insurance premiums accounted for 89.4% and
88.7% of the Company's total premiums for the six months ended June 30, 2000
and 1999, respectively.
Income before income taxes and extraordinary item for this segment increased
$7.2 million, or 33.6%, for the second quarter of 2000 compared to the second
quarter of 1999, and $7.9 million, or 17.0%, for the six
15
months ended June 30, 2000 compared to the same period in 1999. The increases
were primarily the result of business growth and favorable claims experience.
The following table sets forth selected financial data for this segment:
Three Six
Months Ended Months Ended
June 30, June 30,
-------------- --------------
2000 1999 2000 1999
------ ------ ------ ------
(Dollars in millions)
Revenues:
Premiums................................. $238.8 $207.4 $469.7 $418.9
Net investment income.................... 39.4 38.5 79.8 74.5
Net realized investment gains (losses)... 0.4 0.8 (0.1) 1.3
Other.................................... 1.2 0.9 1.9 1.6
------ ------ ------ ------
Total revenues......................... 279.8 247.6 551.3 496.3
------ ------ ------ ------
Benefits and expenses:
Policyholder benefits.................... 194.7 178.1 386.6 356.7
Operating expenses....................... 41.0 34.1 79.2 66.2
Commissions.............................. 16.8 14.3 32.5 27.4
Net increase in deferred policy
acquisition costs....................... (1.3) (0.3) (1.5) (0.6)
------ ------ ------ ------
Total benefits and expenses............ 251.2 226.2 496.8 449.7
------ ------ ------ ------
Income before income taxes and
extraordinary item........................ $ 28.6 $ 21.4 $ 54.5 $ 46.6
====== ====== ====== ======
Benefit ratio (% of premiums).............. 81.5% 85.9% 82.3% 85.2%
Operating expense ratio (% of premiums).... 17.2 16.4 16.9 15.8
When adjusted to exclude experience rated refunds of $8.0 million for the
second quarter of 2000 and $3.4 million for the second quarter of 1999,
premiums increased $36.0 million, or 17.1%. When adjusted to exclude
experience rated refunds of $12.6 million and $3.7 million for the six months
ended June 30, 2000 and 1999 respectively, premiums increased $59.7 million,
or 14.1%. Experience rated refunds are a return of premium for certain large
employee benefits insurance contracts with favorable claims experience and can
fluctuate from period to period. The increases in premiums were primarily the
result of expansion of the segment's distribution system.
Net investment income increased $0.9 million, or 2.3%, for the second
quarter of 2000 compared to the second quarter of 1999, and $5.3 million, or
7.1%, for the six months ended June 30, 2000 compared to the same period in
1999. The increases for both comparative periods were consistent with
consolidated results (see "Consolidated Results of Operations, Net Investment
Income").
Policyholder benefits increased $16.6 million, or 9.3%, for the second
quarter of 2000 compared to the second quarter of 1999 and $29.9 million, or
8.4%, for the six months ended June 30, 2000 compared to the same period for
1999. The increase was primarily a result of business growth, as evidenced by
premium growth, offset in part by improvement in the benefit ratio to 81.5%
for the second quarter of 2000 from 85.9% for the second quarter of 1999. The
benefit ratio improved to 82.3% for the six months ended June 30, 2000 from
85.2% for the same period in 1999. The improvements in the benefit ratio for
both comparative periods reflect favorable claims experience. Because the
benefit ratio is heavily affected by actual claims experience, the
improvements in the benefit ratio may or may not continue in the future.
Operating expenses increased $6.9 million, or 20.2%, for the second quarter
of 2000 compared to the second quarter of 1999, and increased $13.0 million,
or 19.6%, for the six months ended June 30, 2000 compared to the same period
in 1999. The increase was due in part to business growth, as evidenced by
premium growth, and the acceleration of growth plans for new offices and sales
representatives in the central and eastern regions of the United States. For
the six months ended June 30, 2000, approximately $0.7 million is directly
attributable to
16
expansion efforts, including the development of a life insurance subsidiary in
the state of New York. Additional expenditures for accelerated expansion are
estimated at $3.7 million for the remainder of 2000. Management anticipates
new sales from these growth areas to begin in early 2001.
Commissions increased $2.5 million, or 17.5%, for the second quarter of 2000
over the second quarter of 1999 and $5.1 million, or 18.6%, for the six months
ended June 30, 2000 compared to the same period in 1999. Increases for both
periods resulted from related premium growth.
Retirement Plans Segment
The Retirement Plans segment offers full service 401(k) and other pension
plan products and services. Income before income taxes and extraordinary item
for the second quarter of 2000 increased $1.3 million compared to the second
quarter of 1999, and increased $0.9 million for the six months ended June 30,
2000 compared to the same period in 1999. Management believes that
profitability in this segment depends upon significant increases in assets
under management in future years to achieve economies of scale. Total assets
under management grew 25.9% since June 30, 1999. The following table sets
forth selected financial data for the Retirement Plans segment for the periods
indicated:
At or for the
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ------------------
2000 1999 2000 1999
------- ------- -------- --------
(Dollars in millions)
Revenues:
Premiums............................ $ 5.8 $ 3.8 $ 12.0 $ 8.6
Net investment income............... 13.0 12.9 26.0 25.2
Net realized investment gains
(losses)........................... 0.1 (0.1) -- --
------- ------- -------- --------
Total revenues.................... 18.9 16.6 38.0 33.8
------- ------- -------- --------
Benefits and expenses:
Policyholder benefits............... 11.0 11.1 22.7 21.6
Operating expenses.................. 6.1 5.3 12.5 10.9
Commissions......................... 0.8 0.5 1.6 1.0
------- ------- -------- --------
Total benefits and expenses....... 17.9 16.9 36.8 33.5
------- ------- -------- --------
Income (loss) before income taxes and
extraordinary item................... $ 1.0 $ (0.3) $ 1.2 $ 0.3
======= ======= ======== ========
Annualized operating expense ratio (%
of average assets under management).. 1.5% 1.6%
Assets under management:
General account..................... $ 635.5 $ 634.2
Separate accounts................... 1,159.2 791.5
-------- --------
Total............................. $1,794.7 $1,425.7
======== ========
Premiums increased almost $2 million, or 52.6%, for the second quarter of
2000 compared to the second quarter of 1999, and $3.4 million, or 39.5%, for
the six months ended June 30, 2000 compared to the same period in 1999. The
increases for both periods were due to fees for increased assets under
management.
Net investment income increased $0.1 million, or 0.8% for the second quarter
of 2000 compared to the second quarter of 1999, and increased $0.8 million, or
3.2%, for the six months ended June 30, 2000 compared to the same period in
1999. The profitability of the retirement plans segment is, in part, dependent
on the maintenance of targeted interest rate spreads on general account assets
under management. Therefore, policyholder benefits (which include interest
credited to policyholders) should generally trend with net investment income.
Policyholder benefits were relatively stable for the second quarter of 2000
compared to the
17
second quarter of 1999, and increased $1.1 million, or 5.1%, for the six
months ended June 30, 2000 compared to the same period in 1999.
Operating expenses increased $0.8 million, or 15.1%, for the second quarter
of 2000 compared to the second quarter of 1999, and $1.6 million, or 14.7%,
for the six months ended June 30, 2000 compared to the same period in 1999.
Annualized operating expenses as a percentage of average assets under
management declined to 1.5% for the six months ended June 30, 2000 from 1.6%
for the same period in 1999. Expenses are expected to increase during the
remainder of the year due to on-going growth in field operations.
Individual Insurance Segment
Income before income taxes and extraordinary item for this segment increased
$0.6 million, or 18.2%, for the second quarter of 2000 compared to the second
quarter of 1999, and increased $1.7 million, or 22.4%, for the six months
ended June 30, 2000 compared to the same period in 1999. Careful expense
management and favorable claims experience contributed to the increases. The
following table sets forth selected financial data for the Individual
Insurance segment for the periods indicated:
At or for the
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Dollars in millions)
Revenues:
Premiums......................... $ 22.1 $ 22.3 $ 43.8 $ 44.7
Net investment income............ 30.2 30.0 60.0 59.8
Net realized investment gains
(losses)........................ (0.6) 1.1 (0.1) 1.5
Other............................ 0.1 -- -- --
-------- -------- -------- --------
Total revenues................. 51.8 53.4 103.7 106.0
-------- -------- -------- --------
Benefits and expenses:
Policyholder benefits............ 38.1 39.2 73.6 78.1
Operating expenses............... 6.4 6.5 12.7 13.0
Commissions...................... 4.0 3.2 6.5 5.9
Net (increase) decrease in
deferred policy acquisition
costs........................... (0.6) 1.2 1.6 1.4
-------- -------- -------- --------
Total benefits and expenses.... 47.9 50.1 94.4 98.4
-------- -------- -------- --------
Income before income taxes and
extraordinary item................ $ 3.9 $ 3.3 $ 9.3 $ 7.6
======== ======== ======== ========
Operating expense ratio (% of
premiums)......................... 29.0% 29.2% 29.0% 29.1%
Life insurance in force............ $7,395.4 $7,872.7
Premiums were relatively stable for the second quarter of 2000 compared to
the second quarter of 1999, and decreased $0.9 million, or 2.0%, for the six
months ended June 30, 2000 compared to the same period in 1999. Policyholder
benefits decreased $1.1 million, or 2.8%, for the second quarter of 2000
compared to the second quarter of 1999, and decreased $4.5 million, or 5.8%,
for the six months ended June 30, 2000 compared to the same period in 1999.
Decreases in premium resulted primarily from declining demand for life
insurance due to a maturing individual insurance market. Consistent with
decreases in premium, policyholder benefits declined as well. Management
believes the market for the fixed life products offered by The Standard's
Individual Insurance segment has matured and provides limited growth
opportunities. However, management believes potential growth opportunities
exist in other products within this segment.
Operating expenses were relatively stable for the second quarter of 2000
compared to the second quarter of 1999, and decreased $0.3 million, or 2.3%,
for the six months ended June 30, 2000 compared to the same period
18
in 1999. When taken as a percentage of premiums operating expenses were 29.0%
and 29.2% for the second quarters of 2000 and 1999, respectively.
Net expense related to deferred acquisition costs decreased $1.8 million for
the second quarter of 2000 compared to the second quarter of 1999, primarily
due to an annual evaluation of assumptions made in determining the rate of
amortization of deferred acquisition costs. The increase in net expense of
$0.2 million for the six months ended June 30, 2000 compared to the same
period in 1999 reflected the annual evaluation of assumptions described above,
offset by the effect of decreases in new sales and a slight decrease in
persistency experienced in the first quarter of 2000.
Other
Other businesses primarily include return on capital not allocated to the
business segments, income from StanCorp Mortgage Investors, LLC and gains and
losses related to real estate investments owned by The Standard. Income before
income taxes and extraordinary item for the second quarter ended June 30, 2000
and 1999 was $5.9 million and $2.8 million, respectively, and $15.4 million
and $4.9 million for the first six months of 2000 and 1999, respectively. Net
realized investment gains for other businesses, primarily from real estate
sales, were $2.1 million for the first quarter of 2000, and $8.5 million for
the six months ended June 30, 2000. There were no realized investment gains or
losses during the first six months of 1999. 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 and beneficiaries, operating expenses, commissions and taxes.
Investing Cash Flows
Investing cash inflows consist primarily of the proceeds from sales or
maturities of investments. Investing cash outflows consist primarily of
payments for investments acquired. Since future benefit payments are
principally intermediate- and long-term obligations, the Company's investments
are predominantly intermediate- and long-term fixed-rate instruments, such as
fixed maturity securities and mortgage loans. Such investments are expected to
provide sufficient cash flow to cover the future benefit payment obligations.
The nature and quality of various types of investments purchased by The
Standard must comply with statutes and regulations imposed by Oregon and other
states in which The Standard is licensed. 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 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, including those maintained within
the closed block, represent 49.9% of the Company's total general account
invested assets at June 30, 2000, such defaults could materially adversely
affect the Company's business, financial position, results of operations, or
cashflows.
At June 30, 2000, mortgage loans, including those maintained within the
closed block, represented 44.2% of the total general account invested assets
and were collateralized by properties located in the Central region
representing 22.2% of the portfolio, the Eastern region representing 12.1%,
and the Western region representing
19
65.7%. Of the total mortgage loan portfolio, 41.6% 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. The most significant types of collateralized properties in the mortgage
loan portfolio include retail properties, representing 48.4% of the portfolio,
industrial properties, representing 26.5%, and office properties, representing
17.8%. The remaining 7.3% of properties in the portfolio include commercial,
apartment, residential, and agricultural properties. The Company's mortgage
loans face both delinquency and default risk. The delinquency and loss
performance of The Standard's mortgage loan portfolio have consistently
outperformed the industry averages, as reported by the American Council of
Life Insurance, by wide margins. At June 30, 2000, there were five loans
delinquent or in process of foreclosure. The performance of the Company's
mortgage loan portfolio, however, may fluctuate in the future. Should the
delinquency rate of the Company's mortgage loan portfolio increase, the
increase could have a material adverse effect on the Company's business,
financial position, results of operations, or cashflows.
It is management's objective to generally align the cash flow
characteristics of assets and liabilities to ensure that the Company's
financial obligations can be met under a wide variety of economic conditions.
Most of The Standard's policy liabilities result from long term disability
reserves that have proven to be very stable over time, participating
individual life insurance products and other life insurance and annuity
products on which interest rates can be adjusted periodically, and products
associated with the separate accounts. Policyholders or claimants may not
withdraw from The Standard's large block of disability reserves. Instead,
claim payments are issued monthly over periods that may extend for many years.
This holding of stable long-term reserves makes it possible for The Standard
to allocate a greater portion of its assets to long-term commercial mortgage
loans, a benefit many other insurance companies do not experience. Annual cash
flow scenario testing is used to assess interest rate risk and to permit The
Standard's investment policy to be modified whenever necessary to address
changing economic environments. The Company manages interest rate risk, in
part, through asset/liability duration analyses. As part of this strategy,
detailed actuarial models of the cash flows associated with each type of
insurance liability and the financial assets related to these liabilities are
generated under various interest rate scenarios. These actuarial models
include those used to support the statutory Statement of Actuarial Opinion
required annually by insurance regulators. According to presently accepted
actuarial standards of practice, The Standard's reserves and related items at
December 31, 1999 made adequate provision for the anticipated cash flows
required to meet The Standard's contractual obligations and related expenses.
There have been no material changes since that time in interest rate risks
faced by the Company.
At June 30, 2000, the Company had outstanding commitments to fund or acquire
various assets totaling $114.9 million. Such commitments were principally
mortgage loans with interest rates ranging from 7.9% to 9.1%. The Company's
capital expenditures are estimated to be $8.4 million for 2000.
Financing Cash Flows
Financing cash flows consist primarily of policyholder fund deposits and
withdrawals, borrowings and repayments on lines of credit, issuance and
repurchase of common stock, and dividends paid on common stock.
The Company has available lines of credit totaling $110.0 million, including
a $100.0 million unsecured revolving line of credit available through June 30,
2001. The Company is not required to maintain compensating balances, but pays
a commitment fee. The interest rates are based on current market rates. Under
the credit agreements, the Company is subject to customary covenants,
including limitations on indebtedness, minimum retained earnings and minimum
claims paying ability ratings. At June 30, 2000, the Company was in compliance
with all such covenants. At June 30, 2000, $11.6 million was outstanding on
the lines of credit.
There were no shares of common stock repurchased during the second quarter
of 2000. Total shares repurchased during the six months ended June 30, 2000
were 1.0 million at a total cost of $24.5 million. At June 30, 2000,
1.0 million shares continue to be available under the remaining repurchase
program authorized by StanCorp's board of directors. All repurchases are to be
effected in the open market or in negotiated
20
transactions in compliance with safeharbor provisions of Rule 10b-18 under
regulations of the Securities Exchange Act of 1934.
On August 7, 2000, the board of directors of StanCorp declared a quarterly
dividend of $0.07 per share of common stock. The dividend is payable on
September 8, 2000 to shareholders of record at the close of business on August
18, 2000.
StanCorp's ability to pay dividends to its shareholders and meet its
obligations substantially depends upon the receipt of dividends from The
Standard. The Standard's ability to pay dividends to StanCorp is regulated
under Oregon law. Under Oregon law, The Standard may pay dividends only from
the earned surplus arising from its business. It also must receive the prior
approval of the Director of the Oregon Department of Consumer and Business
Services (the "Department") to pay a dividend, if such dividend would exceed
certain statutory limitations. The current statutory limitation is the greater
of (a) 10% of The Standard's combined capital and surplus as of December 31st
of the preceding year or (b) the net gain from operations after dividends to
policyholders and Federal income taxes and before capital gains or losses for
the twelve-month period ending on the December 31st last preceding. In each
case the limitation must be determined under statutory accounting practices.
Oregon law gives the Department broad discretion to disapprove requests for
dividends in excess of these limits. Based on its statutory results, The
Standard paid dividends totaling $50.6 million to StanCorp during the first
six months of 2000, and will be permitted to pay an additional $65.1 million
in dividends to StanCorp in 2000 without obtaining the Department's approval.
The foregoing limitations on dividends would not apply to any dividends to
StanCorp from the non-insurance subsidiaries. Combined net income of the non-
insurance subsidiaries, before elimination of intercompany amounts, was $3.3
million and $2.9 million for the six months ended June 30, 2000 and 1999,
respectively.
Risk-Based Capital
The National Association of Insurance Commissioners has implemented a tool
to aid in the assessment of the statutory capital and surplus of life and
health insurers. This tool, known as Risk-Based Capital ("RBC"), augments
statutory minimum capital and surplus requirements. The RBC system employs a
risk-based formula that applies prescribed factors to the various risk
elements inherent in an insurer's business to arrive at minimum capital
requirements in proportion to the amount of risk assumed by the insurer. At
December 31, 1999, The Standard's RBC level was significantly in excess of
that which would require corrective action by The Standard or regulatory
agencies.
Insolvency Assessments
Insolvency regulations exist in many of the jurisdictions in which The
Standard is doing business. Such regulations may require life insurance
companies within the jurisdiction to participate in guaranty associations.
These associations levy assessments against their members for the purpose of
paying benefits due to policyholders of impaired or insolvent life insurance
companies. Association assessments levied against The Standard from January 1,
1998 through June 30, 2000 aggregated $1.0 million. At June 30, 2000, The
Standard maintained a reserve of $1.1 million for future assessments in
respect of currently impaired, insolvent or failed insurers.
Dependence on Information Technology Systems
The Company is dependent on information technology systems to support its
ability to conduct business. All of these systems are vulnerable to
reliability issues, integration and compatibility concerns, and security-
threatening intrusions. The Company has not yet been subject to a denial of
service or serious interruption from a viral internet incident.
Management believes that its information technology and systems are adequate
to meet the requirements of its business and operations. It continues to make
significant investments of capital for infrastructure, system
21
development and maintenance, system security and staffing, and staff
development. However, there can be no assurance that future incidents, whether
of an external, malicious nature, or arising from the functioning and
relationships among the Company's information systems, will not result in a
disruption of operations or material adverse effect on the Company's business,
financial condition, results of operations, or cash flows.
Litigation
In the normal course of its 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, 2000. 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 condition, results of operations, or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Investing Cash Flows".
22
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
10.2 1999 Omnibus Stock Incentive Plan, As Amended
10.9 $100 Million Credit Agreement, US Bank
10.10 $10 Million Line of Credit Agreement Extension, Wells Fargo
15 Letter re: Unaudited interim financial statements
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the second quarter of 2000.
23
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.
/s/ Eric E. Parsons
Date: August 14, 2000 By: _________________________________
Eric E. Parsons
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 2000 /s/ Cindy J. McPike
By: _________________________________
Cindy J. McPike
Assistant Vice President
Controller and Treasurer
(Principal Accounting Officer)
24
EXHIBITS INDEX
Method of
Number Name Filing
------ ---- --------------
10.2 1999 Omnibus Stock Incentive Plan, As Amended Filed herewith
10.9 $100 Million Credit Agreement, US Bank Filed herewith
$10 Million Line of Credit Agreement Extension, Wells
10.10 Fargo Filed herewith
15 Letter re: Unaudited interim financial statements Filed herewith
27 Financial Data Schedule Filed herewith