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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
Amendment No. 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 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
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)
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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 May 7, 2001 there were 31,153,976 shares of the Registrant's common
stock, no par value, outstanding.
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INDEX
Page
----
PART I. FINANCIAL INFORMATION
Explanatory Note: This amendment No.1 on Form 10-Q/A is being filed to restate StanCorp Financial
Group, Inc.'s March 31, 2001 unaudited condensed consolidated balance sheet to reflect a due from
reinsurer asset and an equal amount of liabilities, both of which resulted from the previously disclosed
transaction with Protective Life Insurance Company that occurred in the first quarter of 2001. Previously,
the assets and liabilities had been presented on a net basis.
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for
the three months ended March 31, 2001 and 2000.............................................. 1
Unaudited Condensed Consolidated Balance Sheets at March 31, 2001 and December 31,
2000........................................................................................ 2
Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity for the year
ended December 31, 2000 and the three months ended March 31, 2001........................... 3
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and 2000..................................................................... 4
Notes to Unaudited Condensed Consolidated Financial Statements................................ 5
Independent Accountant's Report............................................................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS....................................................................... 9
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 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In millions--except share data)
Three Months Ended
March 31,
------------------------
2001 2000
----------- -----------
Revenues:
Premiums.................................................................. $ 298.2 $ 258.8
Net investment income..................................................... 84.8 87.1
Net realized investment gains............................................. 0.5 6.2
Other..................................................................... 1.3 0.7
----------- -----------
Total................................................................. 384.8 352.8
----------- -----------
Benefits and expenses:
Policyholder benefits..................................................... 240.8 217.4
Interest paid on policyholder funds....................................... 20.2 21.7
Operating expenses........................................................ 50.4 44.2
Commissions and bonuses................................................... 29.8 22.8
Premium taxes and other................................................... 5.7 3.9
Net (increase) decrease in deferred policy acquisition costs and value of
business acquired....................................................... (2.3) 2.0
----------- -----------
Total................................................................. 344.6 312.0
----------- -----------
Income before income taxes................................................... 40.2 40.8
Income taxes................................................................. 14.0 13.7
----------- -----------
Net income................................................................... 26.2 27.1
Other comprehensive income (loss), net of tax:
Unrealized gains on securities available-for-sale......................... 25.1 2.0
Adjustment for realized losses............................................ (0.3) (0.4)
----------- -----------
Total................................................................. 24.8 1.6
----------- -----------
Comprehensive income......................................................... $ 51.0 $ 28.7
=========== ===========
Net income per share:
Basic..................................................................... $ 0.84 $ 0.83
Diluted................................................................... 0.83 0.83
Weighted-average shares outstanding:
Basic..................................................................... 31,316,760 32,443,768
Diluted................................................................... 31,581,646 32,631,716
See Notes to Unaudited Condensed Consolidated Financial Statements.
1
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions--except share data)
March 31, December 31,
2001 2000
------------ ------------
(As restated
note 6)
ASSETS
------
Investments:
Investment securities............................................... $2,575.3 $2,539.3
Mortgage loans, net................................................. 1,929.7 2,061.1
Real estate, net.................................................... 60.8 65.9
Policy loans........................................................ 6.1 106.9
Collateral loans.................................................... -- 63.5
-------- --------
Total investments............................................... 4,571.9 4,836.7
Cash and cash equivalents.............................................. 22.0 473.7
Premiums and other receivables......................................... 104.1 109.3
Accrued investment income.............................................. 58.7 61.5
Due from reinsurer..................................................... 793.0 --
Deferred policy acquisition costs and value of business acquired, net.. 99.4 186.8
Property and equipment, net............................................ 72.4 71.7
Other assets........................................................... 34.4 27.2
Separate account assets................................................ 996.6 1,092.7
-------- --------
Total........................................................... $6,752.5 $6,859.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Future policy benefits and claims................................... $3,006.2 $2,969.5
Other policyholder funds............................................ 1,597.8 1,565.6
Deferred tax liabilities............................................ -- 34.0
Other liabilities................................................... 194.4 273.4
Separate account liabilities........................................ 996.6 1,092.7
-------- --------
Total liabilities............................................... 5,795.0 5,935.2
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, 100,000,000 shares authorized; none issued......... -- --
Common stock, no par, 300,000,000 shares authorized; 31,187,860 and
31,565,486 shares issued at March 31, 2001 and December 31, 2000,
respectively...................................................... 763.0 778.7
Accumulated other comprehensive income.............................. 26.7 1.9
Retained earnings................................................... 167.8 143.8
-------- --------
Total shareholders' equity...................................... 957.5 924.4
-------- --------
Total........................................................... $6,752.5 $6,859.6
======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONDENSED 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.................................... -- -- -- 26.2 26.2
Other comprehensive income, net of tax........ -- -- 24.8 -- 24.8
Common stock:
Repurchased................................ (418,100) (16.6) -- -- (16.6)
Issued to directors........................ 743 -- -- -- --
Issued under employee stock plans.......... 49,163 1.3 -- -- 1.3
Surrendered under various incentive plans,
net of issued............................ (9,432) (0.4) -- -- (0.4)
Dividends declared on common stock............ -- -- -- (2.2) (2.2)
---------- ------ ------ ------ ------
Balance, March 31, 2001....................... 31,187,860 $763.0 $ 26.7 $167.8 $957.5
========== ====== ====== ====== ======
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Three Months Ended
March 31,
-----------------
2001 2000
------- -------
Operating:
Net income.......................................................................... $ 26.2 $ 27.1
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains................................................... (0.5) (6.2)
Depreciation and amortization................................................... 8.6 8.2
Deferral of policy acquisition costs and value of business acquired, net........ (6.5) (4.8)
Deferred income taxes........................................................... (48.1) 17.3
Changes in other assets and liabilities:
Trading securities........................................................... 1.4 (4.2)
Receivables and accrued income............................................... 4.4 1.1
Future policy benefits and claims............................................ 200.2 41.6
Other, net................................................................... (34.3) 19.5
------- -------
Net cash provided by operating activities................................ 151.4 99.7
------- -------
Investing:
Proceeds of investments sold, matured, or repaid:
Fixed maturity securities--available-for-sale................................... 53.5 46.9
Mortgage loans.................................................................. 88.7 62.8
Real estate..................................................................... 6.1 8.3
Other investments............................................................... 2.4 11.1
Costs of investments acquired:
Fixed maturity securities--available-for-sale................................... (283.8) (52.7)
Mortgage loans.................................................................. (113.8) (109.0)
Real estate..................................................................... (1.0) (0.4)
Other investments............................................................... -- (0.3)
Property and equipment, net......................................................... (3.2) --
Disposition of product line......................................................... (137.2) --
------- -------
Net cash used in investing activities.................................... (388.3) (33.3)
------- -------
Financing:
Policyholder fund deposits.......................................................... 35.6 161.2
Policyholder fund withdrawals....................................................... (171.5) (190.7)
Line of credit, net................................................................. (61.0) 7.3
Issuance of common stock............................................................ 0.9 0.4
Repurchase of common stock.......................................................... (16.6) (24.5)
Dividends paid on common stock...................................................... (2.2) (2.0)
------- -------
Net cash used in financing activities.................................... (214.8) (48.3)
------- -------
Increase (decrease) in cash and cash equivalents....................................... (451.7) 18.1
Cash and cash equivalents, beginning of period......................................... 473.7 40.7
------- -------
Cash and cash equivalents, end of period............................................... $ 22.0 $ 58.8
======= =======
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest........................................................................ $ 33.0 $ 21.7
Income taxes.................................................................... 52.9 (3.8)
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
NOTES TO UNAUDITED CONDENSED 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; StanCorp Investment Advisers, Inc.;
and Standard Management, 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 short term
and long term disability insurance for 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 clients. StanCorp's other
subsidiaries provide complementary financial and management services.
The unaudited condensed 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 condensed 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 revenues and expenses
during the period. Actual results may differ from those estimates. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the Company's
financial condition at March 31, 2001 and December 31, 2000 and the results of
operations and cash flows for the three months ended March 31, 2001 and 2000.
Interim results for the three month period ended March 31, 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. DISPOSITION OF PRODUCT LINE
Effective January 1, 2001, Standard sold substantially all of its individual
life insurance product line to Protective Life Insurance Company through a
reinsurance transaction. Standard 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. The Employee Benefits--Insurance segment
5
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, and prior to 2001 sold individual life insurance.
Performance assessment and resource allocation are done at this level.
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
three months ended March 31:
Employee
Benefits- Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(In millions)
2001:
Revenues:
Premiums.............................................. $ 273.8 $ 4.6 $ 19.8 $ -- $ 298.2
Net investment income................................. 45.3 12.4 25.5 1.6 84.8
Net realized investment gains (losses)................ (0.6) -- -- 1.1 0.5
Other................................................. 1.2 -- 0.1 -- 1.3
-------- -------- -------- ------ --------
Total............................................. 319.7 17.0 45.4 2.7 384.8
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits................................. 221.9 1.7 17.2 -- 240.8
Interest paid on policyholder funds................... 2.9 8.6 8.6 0.1 20.2
Operating expenses.................................... 37.0 6.2 5.7 1.5 50.4
Commissions and bonuses............................... 23.4 1.4 5.0 -- 29.8
Premium taxes and other............................... 4.8 -- 0.8 0.1 5.7
Net increase in deferred policy acquisition costs and
value of business acquired.......................... (1.6) -- (0.7) -- (2.3)
-------- -------- -------- ------ --------
Total............................................. 288.4 17.9 36.6 1.7 344.6
-------- -------- -------- ------ --------
Income (loss) before income taxes........................ $ 31.3 $ (0.9) $ 8.8 $ 1.0 $ 40.2
======== ======== ======== ====== ========
Total assets............................................. $2,604.5 $1,726.4 $2,191.7 $229.9 $6,752.5
======== ======== ======== ====== ========
2000:
Revenues:
Premiums.............................................. $ 230.9 $ 6.2 $ 21.7 $ -- $ 258.8
Net investment income................................. 40.4 13.0 29.8 3.9 87.1
Net realized investment gains (losses)................ (0.5) (0.1) 0.4 6.4 6.2
Other................................................. 0.7 -- -- -- 0.7
-------- -------- -------- ------ --------
Total............................................. 271.5 19.1 51.9 10.3 352.8
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits................................. 190.3 3.4 23.7 -- 217.4
Interest paid on policyholder funds................... 1.6 8.3 11.8 -- 21.7
Operating expenses.................................... 31.6 5.6 6.0 1.0 44.2
Commissions and bonuses............................... 18.7 1.6 2.5 -- 22.8
Premium taxes and other............................... 3.6 -- 0.3 -- 3.9
Net (increase) decrease in deferred policy
acquisition costs................................... (0.2) -- 2.2 -- 2.0
-------- -------- -------- ------ --------
Total............................................. 245.6 18.9 46.5 1.0 312.0
-------- -------- -------- ------ --------
Income before income taxes............................... $ 25.9 $ 0.2 $ 5.4 $ 9.3 $ 40.8
======== ======== ======== ====== ========
Total assets............................................. $2,178.6 $1,839.4 $1,753.5 $304.9 $6,076.4
======== ======== ======== ====== ========
6
The accounting policies of the segments are the same as those described in
the notes to unaudited condensed consolidated financial statements.
5. COMMITMENTS AND CONTINGENCIES
The Company has a $100.0 million unsecured line of credit available through
June 30, 2001. 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 5.9% at March 31, 2001. Under the credit agreement, the Company is
subject to customary covenants, including limitations on indebtedness and
minimum retained earnings. At March 31, 2001, the Company was in compliance
with all such covenants. At March 31, 2001, $4.0 million was outstanding on the
line of credit.
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 March 31, 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. RESTATEMENT
This amendment No. 1 on Form 10-Q/A is being filed to restate StanCorp
Financial Group, Inc.'s March 31, 2001 unaudited condensed consolidated balance
sheet to reflect a due from reinsurer asset and an equal amount of liabilities,
both of which resulted from the previously disclosed transaction with
Protective Life Insurance Company that occurred in the first quarter of 2001
(see Note 3). Previously, the assets and liabilities had been presented on a
net basis.
The agreement with Protective Life Insurance Company requires that
Protective Life Insurance Company maintain a trust on behalf of Standard, which
maintains assets equal to Standard's receivable from Protective Life Insurance
Company resulting from the reinsurance transaction.
The restatement did not change net income or shareholders' equity. The
effect of the restatement on specific line items on the consolidated balance
sheet is as follows:
As Previously As
Reported Restated
------------- --------
March 31, 2001
----------------------
(In millions)
Assets:
Due from reinsurer.................. $ -- $ 793.0
Liabilities:
Future policy benefits and claims... 2,413.8 3,006.2
Other policyholder funds............ 1,397.2 1,597.8
7
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of
StanCorp Financial Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
StanCorp Financial Group, Inc. and subsidiaries (the "Company") as of March 31,
2001, and the related condensed consolidated statements of income and
comprehensive income for the three-month periods ended March 31, 2001 and 2000,
the condensed consolidated statement of changes in shareholders' equity for the
three-month period ended March 31, 2001, and the condensed consolidated
statements of cash flows for the three-month periods ended March 31, 2001 and
2000. 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 condensed consolidated financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 6, the accompanying condensed consolidated balance
sheet as of March 31, 2001 has been restated to reflect the presentation of
certain assets and liabilities related to a reinsurance transaction.
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, 2000, and
the related consolidated statements of income and comprehensive income, changes
in shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 5, 2001, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2000 and the condensed consolidated statement of changes in
shareholders' equity for the year ended December 31, 2000 is fairly stated, in
all material respects, in relation to the consolidated balance sheet and
statement of changes in shareholders' equity from which they have been derived.
DELOITTE & TOUCHE LLP
Portland, Oregon
April 20, 2001 (December 6, 2001 as to Note 6)
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Explanatory Note: This amendment No. 1 on Form 10-Q/A is being filed to
restate StanCorp Financial Group, Inc.'s March 31, 2001 unaudited condensed
consolidated balance sheet to reflect a due from reinsurer asset and an equal
amount of liabilities, both of which resulted from the previously disclosed
transaction with Protective Life Insurance Company that occurred in the first
quarter of 2001. Previously, the assets and liabilities had been presented on a
net basis.
The following analysis of the consolidated financial condition and results
of operations of StanCorp Financial Group, Inc. ("StanCorp") and its
subsidiaries (collectively, the "Company") should be read in conjunction with
the consolidated financial statements and related notes thereto.
Forward-looking Statements
The management of the Company has made in this Form 10Q, 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 or other growth objectives, (vi) delinquencies on 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.
Disposition of Product Line
Effective January 1, 2001, the individual life insurance product line was
sold to Protective Life Insurance Company through a reinsurance transaction.
(See "--Selected Segment Information--Individual Insurance Segment".)
Consolidated Results of Operations
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 diluted operating earnings per share 12% to 15% per year (operating
earnings exclude after tax realized capital gains and losses and certain
special items), and increase operating return on equity to 13% to 14% in 2003.
Except for expense growth, each of these strategic objectives was met or on
target in the first quarter of 2001. Measurement of expense growth against the
related financial objective was affected by certain strategic objectives for
accelerated expansion that were undertaken in the second half of 2000 (see
"--Selected Segment Information--Employee Benefits--Insurance Segment").
Net income per diluted share for both of the first quarters of 2001 and 2000
was $0.83, and net income was $26.2 million and $27.1 million, for the same
periods, respectively. Results for the first quarter of 2001 included minimal
after tax realized capital gains, while the first quarter of 2000 included
$0.11 per diluted share of after tax realized capital gains. Capital gains and
losses result from the disposition of invested assets, and may or may not
continue in the future. After adjusting for the realized capital gains, after
tax, net income grew $2.6 million, or 11.2%, primarily as a result of premium
growth and a decrease in the benefit ratio (policyholder benefits as a
percentage of premiums) in the Employee Benefits--Insurance segment (see
"--Selected Segment Information--Employee Benefits--Insurance Segment").
9
Premiums
Premiums increased $39.4 million, or 15.3%, for the first quarter of 2001
compared to the first quarter of 2000, 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 increased
to 6.97% at March 31, 2001, from 6.95% at March 31, 2000. The portfolio yield
for mortgage loans was approximately 8.3% at both March 31, 2001 and March 31,
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 $2.3 million, or 2.6%, for the first quarter
of 2001 compared to the first quarter of 2000. Average invested assets
decreased 1.8% to $4.43 billion for the first quarter of 2001, from $4.51
billion for the first quarter of 2000. The decrease in average invested assets
is a combination of asset growth, offset by the combined effects of two
transactions in the Individual Insurance segment (see "--Selected Segment
Information--Individual Insurance Segment"). The remaining decrease in net
investment income resulted primarily from unrealized losses in the convertible
securities trading portfolio (see "--Selected Segment Information--Other").
Net Realized Investment Gains
Net realized investment gains or losses occur primarily as a result of
disposition of the Company's invested assets in the regular course of
investment management. Net realized investment gains were $0.5 million for the
first quarter of 2001 compared to $6.2 million for the first quarter of 2000.
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 $21.9 million, or 9.2%, for the first quarter of 2001 compared to the
first quarter of 2000. 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 from business growth was offset in part by an
improvement in the benefit ratio for the Employee Benefits--Insurance segment
to 82.1% for the first quarter of 2001, compared to 83.1% for the first quarter
of 2000. The improvement in the benefit ratio reflects favorable claims
experience, which may or may not continue in the future. (See "Selected Segment
Information".)
Operating Expenses
Operating expenses increased $6.2 million, or 14.0%, for the first quarter
of 2001 compared to the first quarter of 2000. The increase was primarily from
the Employee Benefits--Insurance segment which had increased operating expenses
of $5.4 million for the same period to support business growth 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
10
tend to fluctuate with premiums, but not directly. Commissions and bonuses
increased $7.0 million, or 30.7%, for the first quarter of 2001 compared to the
first quarter of 2000. The increase was primarily due to growth in sales for
the Employee Benefits--Insurance segment and 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
Net deferred policy acquisition costs consist of the deferral of certain
selling costs and amortization of related costs previously deferred, as well as
the value of business acquired on reinsurance transactions. The net reduction
in expense for deferral and amortization of policy acquisition costs was $2.3
million for the first quarter of 2001, compared to a net increase in expense of
$2.0 million for the first quarter of 2000. The comparative decrease in expense
for these two periods of $4.3 million resulted primarily from deferrals of
costs supporting business growth in the Employee Benefits--Insurance segment
and the Individual Insurance segment (see "--Selected Segment Information").
Income Before Income Taxes
Income before income taxes was relatively stable for the first quarters of
2001 and 2000, at $40.2 million and $40.8 million, respectively, reflecting the
combination of increased premiums, the lower benefit ratio, and decreased net
realized investment gains previously discussed.
Income Taxes
Income taxes differ from the amount computed by applying the Federal
corporate tax rate of 35% because of the net result of permanent differences,
such as tax-exempt interest on municipal bonds, and the inclusion of state and
local income taxes, net of the Federal benefit. The combined Federal and state
effective tax rates were 34.8% and 33.6% for the first quarters of 2001 and
2000, respectively. The lower effective rate for the first quarter of 2000
resulted primarily from 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
three months ended March 31:
2001 2000
-------- --------
(In millions)
Revenues:................................................
Employee Benefits--Insurance segment................. $ 319.7 $ 271.5
Retirement Plans segment............................. 17.0 19.1
Individual Insurance segment......................... 45.4 51.9
Other................................................ 2.7 10.3
-------- --------
Total revenues.................................... $ 384.8 $ 352.8
======== ========
Income (loss) before income taxes:.......................
Employee Benefits--Insurance segment................. $ 31.3 $ 25.9
Retirement Plans segment............................. (0.9) 0.2
Individual Insurance segment......................... 8.8 5.4
Other................................................ 1.0 9.3
-------- --------
Total income before income taxes.................. $ 40.2 $ 40.8
======== ========
Reserves, other policyholder funds and separate account:.
Employee Benefits--Insurance segment................. $1,921.7 $1,722.8
Retirement Plans segment............................. 1,679.7 1,782.2
Individual Insurance segment......................... 1,999.2 1,489.9
-------- --------
Total ............................................ $5,600.6 $5,003.9
======== ========
11
Employee Benefits--Insurance Segment
The Employee Benefits--Insurance segment markets long 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 91.9% and 89.3% of the Company's
total premiums for the first quarters of 2001 and 2000, respectively.
Income before income taxes for this segment increased $5.4 million, or
20.9%, for the first quarter of 2001 compared to the first quarter of 2000. The
increase was primarily the result of business growth, as evidenced by premium
growth, and favorable claims experience, which experience may or may not
continue in future periods. The following table sets forth selected financial
data for this segment for the three months ended March 31:
2001 2000
------ ------
(Dollars in millions)
Revenues:
Premiums.......................................... $273.8 $230.9
Net investment income............................. 45.3 40.4
Net realized investment losses.................... (0.6) (0.5)
Other............................................. 1.2 0.7
------ ------
Total revenues............................. 319.7 271.5
------ ------
Benefits and expenses:
Policyholder benefits............................. 224.8 191.9
Operating expenses................................ 37.0 31.6
Commissions and bonuses........................... 23.4 18.7
Premium taxes and other........................... 4.8 3.6
Net increase in deferred policy acquisition costs. (1.6) (0.2)
------ ------
Total benefits and expenses................ 288.4 245.6
------ ------
Income before income taxes.......................... $ 31.3 $ 25.9
====== ======
Benefit ratio (% of premiums)....................... 82.1% 83.1%
Operating expense ratio (% of premiums)............. 13.5 13.7
Sales (annualized new premiums)..................... 74.6 78.9
Premiums increased $42.9 million, or 18.6% for the first quarter of 2001
compared to the first quarter of 2000. 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 $4.9 million, or 12.2%, for the first
quarter of 2001 compared to the first quarter of 2000. The increase was
primarily a result of an increase in average invested assets supporting this
segment of 15.9%. (See "--Consolidated Results of Operations--Net Investment
Income".)
Policyholder benefits increased $32.9 million, or 17.2%, for the first
quarter of 2001 compared to the first quarter of 2000. The increases were
primarily a result of business growth, as evidenced by premium growth, offset
in part by an improvement in the benefit ratio to 82.1% for the first quarter
of 2001 from 83.1% for the first quarter of 2000. The improvement in the
benefit ratio reflects favorable claims experience, which may or may not
continue in the future.
Operating expenses increased $5.4 million, or 17.1%, for the first quarter
of 2001 compared to the first quarter of 2000, primarily to support business
growth, as evidenced by premium growth. In addition, expenses continued to be
incurred 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
12
concentration of those functions in one geographic location. Management expects
continued premium growth as a result of these expansion activities.
Commissions and bonuses are sales-based compensation that vary depending on
the product, whether the sale is a new sale or renewal sale, which year of
renewal, and other factors. Therefore, commissions will tend to fluctuate with
premiums, but not directly. Commissions and bonuses increased $4.7 million to
8.7% of premiums for the first quarter of 2001 compared to 8.1% of premiums for
the first quarter of 2000.
The net increase in deferred policy acquisition costs of $1.6 million for
the first quarter of 2001 compared to $0.2 million for the first quarter of
2000, resulted from business growth as discussed above.
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 annuitization of 401(k) assets. Developing significant future
profitability from this segment is dependent upon continuing to increase assets
under management to improve economies of scale. Despite growth in new deposits
and low terminations, assets under management decreased 5.8% in the first
quarter of 2001, primarily due to declines in market values of equity
investments in the separate account, which occurred in late 2000 and the first
quarter of 2001. The loss before income taxes for the first quarter of 2001 was
$0.9 million compared to income of $0.2 million for the first quarter of 2000.
The following table sets forth selected financial data for the Retirement Plans
segment at or for the three months ended March 31:
2001 2000
-------- --------
(Dollars in millions)
Revenues:
Premiums................................................... $ 4.6 $ 6.2
Net investment income...................................... 12.4 13.0
Net realized investment losses............................. -- (0.1)
-------- --------
Total revenues......................................... 17.0 19.1
-------- --------
Benefits and expenses:
Policyholder benefits...................................... 10.3 11.7
Operating expenses......................................... 6.2 5.6
Commissions and bonuses.................................... 1.4 1.6
-------- --------
Total benefits and expenses............................ 17.9 18.9
-------- --------
Income (loss) before income taxes............................. $ (0.9) $ 0.2
======== ========
Operating expense ratio (% of average assets under management) 1.4% 1.3%
Assets under management:
General account............................................ $ 683.0 $ 630.4
Separate account........................................... 996.6 1,151.8
-------- --------
Total.................................................. $1,679.6 $1,782.2
======== ========
This segment's premiums consist primarily of fees for assets under
management and premiums on life contingent annuities, of which the latter can
vary widely from quarter to quarter. For the first quarter of 2001, premiums
decreased $1.6 million, or 25.8%, compared to the first quarter of 2000, due to
a $1.7 million decrease in premiums on life contingent annuities established
from the conversion of 401(k) assets. This decrease is reflected in a
corresponding decrease in policyholder benefits for the same periods.
The profitability of the Retirement Plans segment is, in part, dependent on
the maintenance of targeted interest rates spreads on assets under management.
Therefore, net investment income should generally fluctuate
13
with interest credited, which is a component of policyholder benefits. Net
investment income decreased $0.6 million, or 4.7%, for the first quarter of
2001 compared to the first quarter of 2000, while the decrease in policyholder
benefits resulted primarily from fluctuations in annuitized 401(k) assets
discussed above. For the first quarter of 2000, net investment income for this
segment included $0.5 million in unrealized gains on a trading portfolio of
convertible securities that supported this segment. Effective for the first
quarter of 2001, the convertible securities were replaced with assets that
provide a more stable return.
Annualized operating expenses, measured as a percentage of average assets
under management, increased to 1.4% for the first quarter of 2001 compared to
1.3% for the first quarter of 2000, reflecting the impact of decreased assets
under management as discussed above.
Thus far, profitability for this segment has not justified deferral of
policy acquisition costs. Management estimates that this segment will reach a
profitability level that justifies deferral of policy acquisition costs 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, and prior to 2001 sold life insurance. Two transactions were
recently completed for this segment. The transactions involved selling the
individual life insurance product line, for which Standard Insurance Company
("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.
The Company acquired a substantial block of individual disability insurance
business, through a reinsurance transaction, from Minnesota Life Insurance
Company which became effective October 1, 2000. Standard 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. Premiums relating to both the business acquired and the newly
established distribution system were $15.9 for the first quarter of 2001.
The sale of the individual life insurance product line to Protective Life
Insurance Company, also through a reinsurance transaction, was effective
January 1, 2001. Standard transferred to Protective Life Insurance Company
assets totaling approximately $790 million for the liabilities ceded to
Protective, and received a $90 million ceding commission. Because Standard
would retain the ceded liability if Protective Life Insurance Company were
unable to meet its obligations, the ceded liabilities remain on Standard's
books and an equal amount is recorded as due from reinsurer. The agreement with
Protective Life Insurance Company requires that Protective Life Insurance
Company maintain a trust on behalf of Standard with assets in the trust
required to be equal to Standard's reinsurance receivable from Protective Life
Insurance Company. Premiums, total revenues, and income before taxes for this
product line were $17.8 million, $32.6 million, and $2.2 million, respectively,
for the first quarter of 2000. The sale resulted in a minimal gain, which is
being deferred and amortized over the life of the underlying contracts.
14
The following table sets forth selected financial data for the Individual
Insurance segment for the three months ended March 31:
2001 2000
----- -----
(Dollars in millions)
Revenues:
Premiums.................................................................. $19.8 $21.7
Net investment income..................................................... 25.5 29.8
Net realized investment gains............................................. -- 0.4
Other..................................................................... 0.1 --
----- -----
Total revenues........................................................ 45.4 51.9
----- -----
Benefits and expenses:
Policyholder benefits..................................................... 25.8 35.5
Operating expenses........................................................ 5.7 6.0
Commissions and bonuses................................................... 5.0 2.5
Premium taxes and other................................................... 0.8 0.3
Net (increase) decrease in deferred policy acquisition costs and value of
business acquired....................................................... (0.7) 2.2
----- -----
Total benefits and expenses........................................... 36.6 46.5
----- -----
Income before income taxes................................................ $ 8.8 $ 5.4
===== =====
Operating expense ratio (% of premiums)................................... 28.8% 27.6%
Sales (annualized new premiums or deposits)............................... $ 5.3 $ 4.7
Premiums decreased $1.9 million, or 8.8%, for the first quarter of 2001
compared to the first quarter of 2000, reflecting a decrease in life premiums
of $17.8 million, a decrease in annuity premiums of $0.5 million, and an
increase of $16.5 million in disability premiums. Sales of individual
disability products for the first quarter of 2001 were strong in the previously
existing distribution channels as well as the new distribution channels
associated with the recently acquired individual disability insurance business.
Net investment income decreased $4.3 million, or 14.5%, for the first
quarter of 2001 compared to the first quarter of 2000, reflecting decreased
average invested assets supporting this segment as a result of the combination
of the transactions discussed above.
Policyholder benefits decreased $9.7 million, or 27.4%, for the first
quarter of 2001 compared to the first quarter of 2000, primarily reflecting
good claims experience on the newly acquired disability income block of
business. Actual claims experience can vary widely for this product line,
therefore the claims experience for the first quarter of 2001 may or may not
continue into the future.
Operating expenses decreased $0.3 million, or 5.0%, for the first quarter of
2001 compared to the first quarter of 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 $2.5 million, or 100.0%, for the first
quarter of 2001 compared to 2000, reflecting the higher commission schedule
related to a change in product mix on the individual disability products in the
first quarter of 2001 compared to the individual life products in the first
quarter of 2000.
The net reduction in expenses for deferred policy acquisition costs was $0.7
million for the first quarter of 2001 compared to an increase in expenses of
$2.2 million for the first quarter of 2000. The decrease in expense reflects
the results of the sale of the more mature individual life insurance product
line and the acquisition of the individual disability insurance business and
the related distribution channel.
15
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 owned
by Standard. Income before income taxes for other businesses was $1.0 million
and $9.3 million for the first quarters of 2001 and 2000, respectively,
primarily reflecting net realized capital gains associated with the other
businesses of $1.1 million and $6.4 million for the first quarters of 2001 and
2000, respectively. Net realized capital gains for both 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.
In addition, the first quarter of 2001 included unrealized losses in the
market value of convertible securities of $1.1 million. Management is currently
reviewing this investment class and depending on the results of that review,
may dispose of the convertible securities portfolio.
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.
During the first quarter of 2001, the Company reported net cash flows from
operating activities of $151.4 million compared to $99.7 million for the first
quarter of 2000. The increase primarily resulted from the change in future
policy benefits and claims and the deferral of acquisition costs 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.
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.
During the first quarter of 2001, the Company reported net cash outflows from
investing activities of $388.3 million, compared to $33.3 million for the first
quarter of 2000. The sale of the individual life insurance product line
contributed $137.2 million of this increase (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 56.3% of the Company's total general
account invested assets at March 31, 2001, such defaults could materially
adversely affect the Company's business, financial position, results of
operations, or cash flows.
At March 31, 2001, mortgage loans represented 42.2% of the total general
account invested assets and were collateralized by properties located in the
Western region representing 63.4% of the portfolio, the Central region
representing 22.5% of the portfolio, and the Eastern region representing 14.1%.
Of the total mortgage loan
16
portfolio, 40.2% 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 49.2% of the portfolio, industrial properties,
representing 25.0%, and office properties, representing 18.7%. 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 March 31, 2001. The Company's mortgage loans face both
delinquency and default risk. At March 31, 2001, there were two loans either
delinquent or in process of foreclosure. The delinquency 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. This 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 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 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 March 31, 2001, the Company had outstanding commitments to fund or
acquire various assets, primarily commercial mortgage loans with fixed-interest
rates ranging from 7.5% to 9.0%, totaling $136.0 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 lines 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 available through
June 30, 2001. The Company expects to renew this line or obtain a satisfactory
substitution prior to the expiration date. 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 5.9% at March 31, 2001. Under the
credit agreement, the Company is subject to
17
customary covenants, including limitations on indebtedness and minimum retained
earnings. At March 31, 2001, the Company was in compliance with all such
covenants. At March 31, 2001, $4.0 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 three months ended March 31, 2001, 0.4 million shares
were repurchased at a total cost of $16.6 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 May 7, 2001 the board of directors of StanCorp declared a quarterly
dividend of $0.07 per share of common stock. The dividend is payable on June 8,
2001 to shareholders of record at the close of business on May 18, 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
income of the non-insurance subsidiaries, before elimination of intercompany
amounts, was $1.7 million and $1.4 million for the first quarters of 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 of Consumer and Business Services. 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 of Consumer and Business Services, 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.
18
In March 2001, an executive summary that formulated revised RBC
recommendations was released by a task force of the American Academy of
Actuaries, at the direction of the NAIC, that proposed revisions that if
adopted will modify certain risk factors used in the determination of the RBC
level of a company. Management believes that adherence to these recommendations
would further enhance the Company's RBC level.
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 March 31, 2001 aggregated $0.7 million.
At March 31, 2001, Standard maintained a reserve of $1.0 million for future
assessments in respect of 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 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--Notes to Unaudited Condensed 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
At the Annual Meeting of Shareholders, held May 7, 2001, two matters were
submitted to a vote: the election of directors for three year terms expiring in
2004 as listed in the proxy statement and the ratification of the appointment
of Deloitte & Touche LLP as Independent Auditors for the current year. The
results of the voting on these matters follow:
1. Election of Class II Directors:
Votes
Votes For Withheld
---------- --------
Virginia L. Anderson................................... 20,529,120 157,202
Jerome J. Meyer........................................ 20,529,858 156,464
Ralph R. Peterson...................................... 20,530,112 156,210
E. Kay Stepp........................................... 20,523,695 162,627
Michael G. Thorne...................................... 20,528,483 157,839
2. Ratification of the Appointment of Independent Auditors 19,843,864 709,252
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
2 100% Coinsurance Agreement Between Protective Life Insurance
Company and Standard Insurance Company
15 Letter re: Unaudited interim financial statements
(b) No reports on Form 8-K were filed during the first 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: December 12, 2001
/s/ ERIC E. PARSONS
By:
----------------------------------
Eric E. Parsons
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: December 12, 2001
/s/ CINDY J. MCPIKE
By:
----------------------------------
Cindy J. McPike
Assistant Vice President
Controller and Treasurer
(Principal Accounting Officer)
21
EXHIBITS INDEX
Number Name Method of Filing
- ------ ---- ----------------
2 100% Coinsurance Agreement Between Protective Life Previously filed as Exhibit 2 on
Insurance Company and Standard Insurance Company Registrant's Form 10-Q, dated May
14, 2001.
15 Letter re: Unaudited interim financial statements Filed Herewith