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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 September 30, 2001
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number: 1-14925
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STANCORP FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-1253576
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1100 SW Sixth Avenue, Portland, Oregon, 97204
(Address of principal executive offices, including zip code)
(503) 321-7000
(Registrant's telephone number, including area code)
NONE
(Former name, former address, and former fiscal year, if changed since last
report)
-----------------
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 November 2, 2001 there were 29,918,380 shares of the Registrant's
common stock, no par value, outstanding.
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INDEX
PART I. FINANCIAL INFORMATION Page
----
Explanatory Note: This amendment No. 1 on Form 10-Q/A is being filed to restate StanCorp Financial
Group, Inc.'s September 30, 2001 unaudited 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 Consolidated Statements of Income and Comprehensive Income for the three and
nine months ended September 30, 2001 and 2000............................................. 1
Unaudited Consolidated Balance Sheets at September 30, 2001 and December 31, 2000........... 2
Unaudited Consolidated Statements of Changes in Shareholders' Equity for the year ended
December 31, 2000 and the nine months ended September 30, 2001............................ 3
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30,
2001 and 2000............................................................................. 4
Condensed Notes to Unaudited Consolidated Financial Statements.............................. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................................... 10
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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues:
Premiums.......................................... $ 310.9 $ 277.0 $ 915.0 $ 802.4
Net investment income............................. 87.1 88.2 258.5 262.5
Net realized investment gains (losses)............ 0.4 (1.0) 0.3 7.3
Other............................................. 1.5 1.4 3.7 3.4
----------- ----------- ----------- -----------
Total......................................... 399.9 365.6 1,177.5 1,075.6
----------- ----------- ----------- -----------
Benefits and expenses:
Policyholder benefits............................. 257.1 234.3 754.1 673.5
Interest paid on policyholder funds............... 19.6 23.5 59.0 67.2
Operating expenses................................ 49.8 46.9 148.4 135.9
Commissions and bonuses........................... 29.1 24.0 88.2 72.6
Premium taxes and other........................... 5.3 4.4 15.8 13.5
Net increase in deferred policy acquisition costs
and value of business acquired.................. (6.2) (2.9) (14.0) (2.8)
Terrorist events of September 11.................. 5.0 -- 5.0 --
----------- ----------- ----------- -----------
Total......................................... 359.7 330.2 1,056.5 959.9
----------- ----------- ----------- -----------
Income before income taxes........................... 40.2 35.4 121.0 115.7
Income taxes......................................... 14.4 11.5 43.0 38.6
----------- ----------- ----------- -----------
Net income........................................... 25.8 23.9 78.0 77.1
----------- ----------- ----------- -----------
Other comprehensive income, net of tax:
Unrealized gains on securities available-for-
sale............................................ 43.2 14.9 56.9 12.7
Adjustment for realized gains (losses)............ 0.9 0.4 0.5 (0.6)
----------- ----------- ----------- -----------
Total......................................... 44.1 15.3 57.4 12.1
----------- ----------- ----------- -----------
Comprehensive income................................. $ 69.9 $ 39.2 $ 135.4 $ 89.2
=========== =========== =========== ===========
Net income per share:
Basic............................................. $ 0.85 $ 0.75 $ 2.53 $ 2.41
Diluted........................................... 0.84 0.75 2.51 2.40
Weighted-average shares outstanding:
Basic............................................. 30,340,453 31,731,409 30,826,139 31,966,547
Diluted........................................... 30,609,752 32,032,568 31,089,670 32,187,184
See Condensed Notes to Unaudited Consolidated Financial Statements.
1
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In millions--except share data)
September 30, December 31,
2001 2000
------------- ------------
(As restated
note 9)
ASSETS
Investments:
Investment securities..................................................... $2,727.9 $2,539.3
Mortgage loans, net....................................................... 2,006.8 2,061.1
Real estate, net.......................................................... 56.9 65.9
Policy loans.............................................................. 5.7 106.9
Collateral loans.......................................................... -- 63.5
-------- --------
Total investments..................................................... 4,797.3 4,836.7
Cash and cash equivalents.................................................... 27.7 473.7
Premiums and other receivables............................................... 104.8 109.3
Accrued investment income.................................................... 61.3 61.5
Due from reinsurer........................................................... 809.1 --
Deferred policy acquisition costs and value of business acquired, net........ 92.5 167.0
Property and equipment, net.................................................. 75.5 71.7
Other assets................................................................. 54.2 47.0
Separate account assets...................................................... 953.7 1,092.7
-------- --------
Total................................................................. $6,976.1 $6,859.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits and claims......................................... $3,132.4 $2,969.5
Other policyholder funds.................................................. 1,672.1 1,565.6
Deferred tax liabilities.................................................. 53.6 34.0
Other liabilities......................................................... 177.3 273.4
Separate account liabilities.............................................. 953.7 1,092.7
-------- --------
Total liabilities..................................................... 5,989.1 5,935.2
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, 100,000,000 shares authorized; none issued............... -- --
Common stock, no par value, 300,000,000 shares authorized; 30,087,245 and
31,565,486 shares issued at September 30, 2001 and December 31, 2000,
respectively............................................................ 712.7 778.7
Accumulated other comprehensive income.................................... 59.3 1.9
Retained earnings......................................................... 215.0 143.8
-------- --------
Total shareholders' equity............................................ 987.0 924.4
-------- --------
Total................................................................. $6,976.1 $6,859.6
======== ========
See Condensed Notes to Unaudited Consolidated Financial Statements.
2
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
(In millions--except share data)
Accumulated
Common Stock Other Total
------------------ Comprehensive Retained Shareholders'
Shares Amount Income (Loss) Earnings Equity
---------- ------ ------------- -------- -------------
Balance, January 1, 2000................... 32,774,098 $819.7 $(37.6) $ 57.8 $839.9
Net income................................. -- -- -- 94.7 94.7
Other comprehensive income, net of tax..... -- -- 39.5 -- 39.5
Common stock:
Repurchased............................. (1,398,500) (42.6) -- -- (42.6)
Issued to directors..................... 4,280 0.3 -- -- 0.3
Issued under employee stock plans....... 13,232 (0.4) -- -- (0.4)
Issued under various incentive plans.... 172,376 1.7 -- -- 1.7
Dividends declared on common stock......... -- -- -- (8.7) (8.7)
---------- ------ ------ ------ ------
Balance, December 31, 2000................. 31,565,486 778.7 1.9 143.8 924.4
---------- ------ ------ ------ ------
Net income................................. -- -- -- 78.0 78.0
Other comprehensive income, net of tax..... -- -- 57.4 -- 57.4
Common stock:
Repurchased............................. (1,595,700) (69.3) -- -- (69.3)
Issued to directors..................... 2,256 0.1 -- -- 0.1
Issued under employee stock plans....... 120,992 3.6 -- -- 3.6
Net surrendered under various incentive
plans................................. (5,789) (0.4) -- -- (0.4)
Dividends declared on common stock......... -- -- -- (6.8) (6.8)
---------- ------ ------ ------ ------
Balance, September 30, 2001................ 30,087,245 $712.7 $ 59.3 $215.0 $987.0
========== ====== ====== ====== ======
See Condensed Notes to Unaudited Consolidated Financial Statements.
3
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Nine Months Ended
September 30,
----------------
2001 2000
------- -------
Operating:
Net income........................................................................ $ 78.0 $ 77.1
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains................................................. (0.3) (7.3)
Depreciation and amortization................................................. 20.8 26.4
Deferral of policy acquisition costs and value of business acquired, net...... (24.7) (16.2)
Deferred income taxes......................................................... (13.3) (7.2)
Changes in other assets and liabilities:
Receivables and accrued income............................................. 1.1 (15.3)
Future policy benefits and claims.......................................... 314.5 126.6
Other, net................................................................. (47.9) 24.0
------- -------
Net cash provided by operating activities.............................. 328.2 208.1
------- -------
Investing:
Proceeds of investments sold, matured, or repaid:
Fixed maturity securities--available-for-sale................................. 265.1 141.6
Mortgage loans................................................................ 256.7 173.2
Real estate................................................................... 22.1 19.4
Other investments............................................................. 22.5 8.3
Costs of investments acquired:
Fixed maturity securities--available-for-sale................................. (671.0) (193.7)
Mortgage loans................................................................ (366.2) (326.0)
Real estate................................................................... (6.0) (1.2)
Trading securities, net........................................................... 53.9 (2.0)
Property and equipment, net....................................................... (10.5) (7.5)
Disposition of product line....................................................... (137.2) --
------- -------
Net cash used in investing activities.................................. (570.6) (187.9)
------- -------
Financing:
Policyholder fund deposits........................................................ 385.2 545.9
Policyholder fund withdrawals..................................................... (451.0) (559.0)
Line of credit, net............................................................... (65.0) 21.1
Issuance of common stock.......................................................... 3.3 1.0
Repurchase of common stock........................................................ (69.3) (24.5)
Dividends paid on common stock.................................................... (6.8) (6.4)
------- -------
Net cash used in financing activities.................................. (203.6) (21.9)
------- -------
Decrease in cash and cash equivalents................................................ (446.0) (1.7)
Cash and cash equivalents, beginning of period....................................... 473.7 40.7
------- -------
Cash and cash equivalents, end of period............................................. $ 27.7 $ 39.0
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest...................................................................... $ 71.9 $ 66.9
Income taxes.................................................................. 85.5 55.7
See Condensed Notes to Unaudited Consolidated Financial Statements.
4
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
StanCorp Financial Group, Inc. ("StanCorp") was incorporated under the laws
of Oregon in 1998. StanCorp was specifically organized as a parent holding
company for its subsidiaries. Significant subsidiaries of StanCorp include
Standard Insurance Company ("Standard"); The Standard Life Insurance Company of
New York; StanCorp Mortgage Investors, LLC; and StanCorp Investment Advisers,
Inc. StanCorp is based in Portland, Oregon, and through its subsidiaries has
operations throughout the United States.
StanCorp's largest subsidiary, Standard, underwrites group and individual
disability and annuity products, and life and dental insurance for groups.
Standard is domiciled in Oregon and licensed in 49 states, the District of
Columbia and the U.S. Territory of Guam. Standard is an admitted reinsurer in
New York. The Standard Life Insurance Company of New York provides long term
and short term disability insurance for employer groups in New York. StanCorp
Mortgage Investors, LLC, originates and services mortgage loans for StanCorp's
insurance subsidiaries and generates fee income from the origination and
servicing of mortgage loans sold to institutional investors. StanCorp
Investment Advisers, Inc. is a Securities and Exchange Commission registered
investment adviser providing performance analysis, fund selection support and
model portfolios to Standard's retirement plan customers. StanCorp's other
subsidiaries provide complementary financial and management services.
The unaudited consolidated financial statements include StanCorp and its
subsidiaries (collectively, the "Company"). All significant intercompany
balances and transactions have been eliminated.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of StanCorp and
its subsidiaries have been prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP") for interim
financial information and in conformance with the requirements of Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
disclosures required by GAAP for complete financial statements. The preparation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
financial statement date, and the reported amounts of revenues and expenses
during the period. Actual results may differ from those estimates. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation of the Company's financial
condition at September 30, 2001 and December 31, 2000, the results of
operations for the three and nine months ended September 30, 2001 and 2000 and
cash flows for the nine months ended September 30, 2001 and 2000. Interim
results for the three and nine month periods ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. This report should be read in conjunction with the Company's
2000 Annual Report on Form 10-K. Certain prior period amounts have been
reclassified to conform to the current period's presentation.
5
3. NET INCOME PER SHARE
Basic net income per share was calculated based on the weighted-average
number of shares outstanding. Diluted net income per share reflects the
potential effects of restricted stock grants and exercises of outstanding
options. The weighted-average share and share equivalents outstanding were
computed using the treasury stock method. Diluted net income per share was
calculated as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income (in millions)................... $ 25.8 $ 23.9 $ 78.0 $ 77.1
=========== =========== =========== ===========
Basic weighted-average shares outstanding.. 30,340,453 31,731,409 30,826,139 31,966,547
Stock options.............................. 245,102 197,455 234,945 126,716
Restricted stock........................... 24,197 103,704 28,586 93,921
----------- ----------- ----------- -----------
Diluted weighted-average shares outstanding 30,609,752 32,032,568 31,089,670 32,187,184
=========== =========== =========== ===========
Diluted net income per share............... $ 0.84 $ 0.75 $ 2.51 $ 2.40
=========== =========== =========== ===========
4. ACQUISITION AND DISPOSITION OF PRODUCT LINES
Effective October 1, 2000, the Company acquired a substantial block of
individual disability insurance business, through a reinsurance transaction,
from Minnesota Life Insurance Company. The Company paid a ceding commission of
approximately $55 million and received approximately $500 million in statutory
reserves. Accompanying this transaction was an agreement that provides for
access to market Standard's individual disability insurance products through
Minnesota Life Insurance Company's career agency distribution system.
Effective January 1, 2001, the Company sold substantially all of its
individual life insurance product line to Protective Life Insurance Company,
also through a reinsurance transaction. The Company received a ceding
commission of approximately $90 million and transferred liabilities of
approximately $790 million. The sale resulted in a minimal gain, which is being
deferred and amortized over the life of the underlying contracts.
6
5. SEGMENTS
Three reportable segments comprise a substantial majority of the Company's
operations: Employee Benefits--Insurance, Individual Insurance and Retirement
Plans. Performance assessment and resource allocation are done at the segment
level. The Employee Benefits--Insurance segment markets long term and short
term disability, life, accidental death and dismemberment, and dental insurance
to employer groups. The Individual Insurance segment sells disability insurance
and annuities to individuals. The Retirement Plans segment sells full-service
401(k) and other pension plan products and services to employers.
Amounts reported as "Other" primarily include return on capital not
allocated to the product segments, other financial service businesses, holding
company expenses and adjustments made in consolidation. Other financial service
businesses are generally non-insurance related and include StanCorp's mortgage
lending and investment management subsidiaries.
The following tables set forth selected segment information at or for the
period indicated:
Employee
Benefits- Individual Retirement
Insurance Insurance Plans Other Total
--------- ---------- ---------- ----- ------
(In millions)
Three months ended September 30, 2001:
Revenues:
Premiums.............................................. $287.0 $19.7 $ 4.2 $ -- $310.9
Net investment income................................. 47.0 24.5 13.0 2.6 87.1
Net realized investment gains (losses)................ (0.8) 0.5 0.4 0.3 0.4
Other................................................. 1.5 (0.1) -- 0.1 1.5
------ ----- ----- ---- ------
Total............................................. 334.7 44.6 17.6 3.0 399.9
------ ----- ----- ---- ------
Benefits and expenses:
Policyholder benefits................................. 233.7 21.7 1.7 -- 257.1
Interest paid on policyholder funds................... 2.6 8.1 8.8 0.1 19.6
Operating expenses.................................... 37.8 5.1 5.5 1.4 49.8
Commissions and bonuses............................... 22.0 5.6 1.5 -- 29.1
Premium taxes and other............................... 5.0 0.3 -- -- 5.3
Net increase in deferred policy acquisition costs and
value of business acquired.......................... (0.4) (5.4) (0.4) -- (6.2)
Terrorist events of September 11...................... 4.3 0.7 -- -- 5.0
------ ----- ----- ---- ------
Total............................................. 305.0 36.1 17.1 1.5 359.7
------ ----- ----- ---- ------
Income before income taxes............................... $ 29.7 $ 8.5 $ 0.5 $1.5 $ 40.2
====== ===== ===== ==== ======
7
Employee
Benefits- Individual Retirement
Insurance Insurance Plans Other Total
--------- ---------- ---------- ------ --------
(In millions)
Nine months ended September 30, 2001:
Revenues:
Premiums.............................................. $ 841.6 $ 59.5 $ 13.9 $ -- $ 915.0
Net investment income................................. 138.3 73.9 38.5 7.8 258.5
Net realized investment gains (losses)................ (2.5) 0.2 0.6 2.0 0.3
Other................................................. 3.5 0.1 -- 0.1 3.7
-------- -------- -------- ------ --------
Total............................................. 980.9 133.7 53.0 9.9 1,177.5
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits................................. 682.7 65.7 5.7 -- 754.1
Interest paid on policyholder funds................... 8.5 24.1 26.1 0.3 59.0
Operating expenses.................................... 109.8 16.4 17.9 4.3 148.4
Commissions and bonuses............................... 67.9 16.0 4.3 -- 88.2
Premium taxes and other............................... 14.7 1.1 -- -- 15.8
Net increase in deferred policy acquisition costs and
value of business acquired.......................... (2.8) (10.8) (0.4) -- (14.0)
Terrorist events of September 11...................... 4.3 0.7 -- -- 5.0
-------- -------- -------- ------ --------
Total............................................. 885.1 113.2 53.6 4.6 1,056.5
-------- -------- -------- ------ --------
Income (loss) before income taxes........................ $ 95.8 $ 20.5 $ (0.6) $ 5.3 $ 121.0
======== ======== ======== ====== ========
Total assets............................................. $2,791.0 $2,298.1 $1,712.4 $174.6 $6,976.1
======== ======== ======== ====== ========
Employee
Benefits- Individual Retirement
Insurance Insurance Plans Other Total
--------- ---------- ---------- ------ --------
(In millions)
Three months ended September 30, 2000:
Revenues:
Premiums.............................................. $ 248.8 $ 21.8 $ 6.4 $ -- $ 277.0
Net investment income................................. 41.5 30.5 12.7 3.5 88.2
Net realized investment losses........................ (0.1) (0.2) -- (0.7) (1.0)
Other................................................. 1.4 0.1 -- (0.1) 1.4
-------- -------- -------- ------ --------
Total............................................. 291.6 52.2 19.1 2.7 365.6
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits................................. 203.6 27.0 3.7 -- 234.3
Interest paid on policyholder funds................... 1.9 12.8 8.8 -- 23.5
Operating expenses.................................... 33.7 6.4 5.8 1.0 46.9
Commissions and bonuses............................... 20.0 2.7 1.3 -- 24.0
Premium taxes and other............................... 4.1 0.3 -- -- 4.4
Net increase in deferred policy acquisition costs..... (1.8) (1.1) -- -- (2.9)
-------- -------- -------- ------ --------
Total............................................. 261.5 48.1 19.6 1.0 330.2
-------- -------- -------- ------ --------
Income (loss) before income taxes........................ $ 30.1 $ 4.1 $ (0.5) $ 1.7 $ 35.4
======== ======== ======== ====== ========
8
Employee
Benefits- Individual Retirement
Insurance Insurance Plans Other Total
--------- ---------- ---------- ------ --------
(In millions)
Nine months ended September 30, 2000:
Revenues:
Premiums............................................... $ 718.5 $ 65.5 $ 18.4 $ -- $ 802.4
Net investment income.................................. 121.3 90.6 38.7 11.9 262.5
Net realized investment gains (losses)................. (0.2) (0.3) -- 7.8 7.3
Other.................................................. 3.3 0.1 -- -- 3.4
-------- -------- -------- ------ --------
Total.............................................. 842.9 155.9 57.1 19.7 1,075.6
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits.................................. 586.8 77.0 9.7 -- 673.5
Interest paid on policyholder funds.................... 5.3 36.4 25.5 -- 67.2
Operating expenses..................................... 98.0 18.2 17.0 2.7 135.9
Commissions and bonuses................................ 59.0 9.4 4.2 -- 72.6
Premium taxes and other................................ 12.5 1.0 -- -- 13.5
Net (increase) decrease in deferred policy acquisition
costs................................................ (3.3) 0.5 -- -- (2.8)
-------- -------- -------- ------ --------
Total.............................................. 758.3 142.5 56.4 2.7 959.9
-------- -------- -------- ------ --------
Income before income taxes................................ $ 84.6 $ 13.4 $ 0.7 $ 17.0 $ 115.7
-------- -------- -------- ------ --------
Total assets.............................................. $2,430.1 $1,736.6 $1,878.8 $225.9 $6,271.4
======== ======== ======== ====== ========
The accounting policies of the segments are the same as those described in
the condensed notes to unaudited consolidated financial statements.
6. COMMITMENTS AND CONTINGENCIES
The Company has a $100.0 million unsecured line of credit available through
June 29, 2002. The Company is not required to maintain compensating balances,
but pays a commitment fee. The interest rate, which is based on current market
rates, was 3.94% at September 30, 2001. Under the credit agreement, the Company
is subject to customary covenants, including limitations on indebtedness and
maintenance of minimum equity, statutory surplus, and risk-based capital. At
September 30, 2001, the Company was in compliance with all such covenants. At
September 30, 2001, there were no outstanding borrowings 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 September 30, 2001. In some instances, lawsuits
include claims for punitive damages and similar types of relief in unspecified
or substantial amounts, in addition to amounts for alleged contractual
liability or other compensatory damages. In the opinion of management, the
ultimate liability, if any, arising from these actions or proceedings is not
expected to have a material adverse effect on the Company's business, financial
position, results of operations, or cash flows.
7. TERRORIST EVENTS OF SEPTEMBER 11
As a result of the terrorist events of September 11, 2001, the Company
recorded $5.0 million in pre-tax charges in the third quarter of 2001,
consisting primarily of claims paid or accrued for group and individual
insurance policies. The Company reported these charges as a separate component
of income from continuing operations in the Unaudited Consolidated Statements
of Income and Comprehensive Income for the three and nine months ended
September 30, 2001. The charges recorded contemplate no recoveries from
reinsurance or catastrophe reinsurance coverage. At September 30, 2001, the
$5.0 million in pre-tax charges associated with the events of September 11
included $2.5 million of accruals for claims incurred but not reported and
expenses.
9
8. ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". This pronouncement supersedes Accounting Principles
Board Opinion No. 17, "Intangible Assets". The provisions of SFAS No. 142 are
required to be applied starting with fiscal years beginning after December 15,
2001. The Company has no goodwill and does not expect SFAS No. 142 to have a
material impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". This pronouncement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" as well as reporting provisions of Accounting Principles
Board Opinion No. 30 and Accounting Research Bulletin No. 51. The provisions of
SFAS No. 144 are required to be applied starting with fiscal years beginning
after December 15, 2001. The Company does not expect SFAS No. 144 to have a
material impact on the Company's financial statements.
9. RESTATEMENT
This amendment No. 1 on Form 10-Q/A is being filed to restate StanCorp
Financial Group, Inc.'s September 30, 2001 unaudited 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 4).
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
- - ------------- --------
September 30, 2001
----------------------
(In millions)
Assets:
Due from reinsurer................ $ -- $ 809.1
Liabilities:
Future policy benefits and claims. 2,528.1 3,132.4
Other policyholder funds.......... 1,467.3 1,672.1
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 September 30, 2001 unaudited
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 unaudited consolidated financial statements and related condensed notes
thereto.
10
Forward-looking Statements
The management of the Company has made in this Form 10-Q, and from time to
time may make in its public filings, press releases and oral presentations and
discussions, certain statements related to projected growth and future events.
Such statements may relate to regulatory actions, the intent, belief, or
current expectations of the Company's management, the future operating
performance of the Company and other statements regarding matters that are not
historical facts. These statements are "forward-looking" statements as that
term is defined in the Private Securities Litigation Reform Act of 1995.
Because such statements are subject to risks and uncertainties, actual results
may differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements include, but are
not limited to: (i) deterioration in morbidity, mortality, and persistency,
(ii) changes in interest rates or the condition of the national economy, (iii)
changes in the regulatory environment at the state or Federal level, (iv)
competition from other insurers and financial institutions, (v) achievement of
financial objectives including premium growth, growth in assets under
management, or other growth objectives, (vi) delinquencies on bonds and
mortgage loans, (vii) successful entry into the New York insurance market,
(viii) achievement of expense management objectives, (ix) changes in claims
paying ability ratings, (x) adverse findings in litigation or other legal
proceedings, (xi) availability and adequacy of reinsurance and catastrophe
reinsurance coverage, (xii) adequacy of the diversification of geographic or
industry risk, (xiii) potential charges resulting from membership in a
catastrophe reinsurance pool, (xiv) ability to achieve financing objectives,
and (xv) on-going risks associated with dependence on information technology
systems.
Acquisition and Disposition of Product Lines
Effective October 1, 2000, the Company acquired a substantial block of
individual disability insurance business, through a reinsurance transaction,
from Minnesota Life Insurance Company. Effective January 1, 2001, the Company
sold substantially all of its individual life insurance product line to
Protective Life Insurance Company, also through a reinsurance transaction. (See
"--Selected Segment Information--Individual Insurance Segment".)
Financial Objectives
The Company reaffirms its previously stated financial objectives which are
to grow premiums at 10% to 12% per year, maintain operating expense growth at
2% to 3% less than premium growth, grow operating income (net income excluding
after tax realized capital gains or losses and certain special items) per
diluted share 12% to 15% per year, and increase operating return on equity to
13% to 14% by the end of 2003.
. Premiums, adjusted for experience rated refunds in the Employee
Benefits--Insurance segment, increased 13.2% for the nine months ended
September 30, 2001 compared to the same period in 2000.
. Operating expenses increased 9.3% for the nine months ended September 30,
2001 compared to the same period in 2000, a rate that is 3.9% less than
the rate of premium growth for the same period.
. Operating income was $2.50 per diluted share for nine months ended
September 30, 2001, an 11.1% increase over the same period in 2000.
Excluding $5.0 million in pre-tax charges from the terrorist events of
September 11, operating income was $2.66 per diluted share for the nine
months ended September 30, 2001, an 18.2% increase over the same period in
2000.
. Operating return on average equity for the nine months ended September 30,
2001 was 11.2%, compared to 10.8% at the end of 2000, reflecting progress
toward our goal. Excluding $5.0 million in pre-tax charges related to the
terrorist events of September 11, operating return on average equity for
the nine months ended September 30, 2001 was 11.7%.
11
Consolidated Results of Operations
Net Income
Net income for the third quarter of 2001 was $25.8 million, a 7.9% increase
over $23.9 million for the third quarter of 2000. The increase resulted
primarily from premium growth in the Employee Benefits--Insurance segment and
favorable claims experience in the Individual Insurance segment, offset in part
by $5.0 million in pre-tax charges from the terrorist events of September 11.
Net income for the nine months ended September 30, 2001 was $78.0 million
compared to $77.1 million for the same period in 2000. Capital gains for the
same periods were $0.3 million and $7.3 million respectively.
Net income per diluted share for the third quarter of 2001 was $0.84, an
increase of 12.0% over the third quarter of 2000. Net income per diluted share
for the nine months ended September 30, 2001 was $2.51, an increase of 4.6%
over the same period in 2000. The Company repurchased 698,700 shares of its
common stock during the third quarter of 2001 and almost 1.6 million shares
during the nine months ended September 30, 2001.
Premiums
Premiums, adjusted for experience rated refunds in the Employee
Benefits--Insurance segment, increased $33.6 million, or 12.0%, for the third
quarter of 2001 and $107.7 million, or 13.2%, for the nine months ended
September 30, 2001 compared to the same periods in 2000. The increases were
primarily from premium growth in the Employee Benefits--Insurance segment. (See
"--Selected Segment Information".)
Net Investment Income
Net investment income, which is affected primarily by changes in the overall
interest rate environment and levels of invested assets, decreased $1.1
million, or 1.2%, for the third quarter of 2001 compared to the third quarter
of 2000. For the nine months ended September 30, 2001, net investment income
decreased $4.0 million, or 1.5%, compared to the same period in 2000. Average
invested assets decreased 0.9% to $4.54 billion for the third quarter of 2001
from $4.59 billion for the third quarter of 2000. The decrease in average
invested assets for both comparative periods was due primarily to the combined
effects of two reinsurance transactions in the Individual Insurance segment,
which was largely offset during 2001 by asset growth, primarily in the Employee
Benefits--Insurance segment (see "--Selected Segment Information"). The
portfolio yield for fixed maturity securities increased slightly to 6.96% at
September 30, 2001, from 6.95% at September 30, 2000. The portfolio yield for
mortgage loans decreased to 8.24% at September 30, 2001, from 8.35% at
September 30, 2000. Portfolio yields may increase or decrease in the future
depending on changes in the overall interest rate environment and other factors.
Net Realized Investment Gains (Losses)
Net realized investment gains or losses occur primarily as a result of
disposition of invested assets in the regular course of investment management.
Net realized investment gains were $0.4 million and $0.3 million for the three
and nine months ended September 30, 2001, respectively, compared to losses of
$1.0 million and gains of $7.3 million for the three and nine months ended
September 30, 2000, respectively. Disposition of invested assets and associated
gains or losses may or may not continue in the future.
Policyholder Benefits
Policyholder benefits, including interest paid on policyholder funds,
increased $18.9 million, or 7.3%, for the third quarter of 2001 compared to the
third quarter of 2000, and $72.4 million, or 9.8%, for the nine months ended
September 30, 2001 compared to the same period in 2000. The increase primarily
resulted from business growth in the Employee Benefits--Insurance segment,
offset in part by a favorable benefit ratio for this same segment and favorable
claims experience in the Individual Insurance segment. (See "--Selected Segment
Information".) Shown separately are $5.0 million in pre-tax charges incurred as
a result of the terrorist events of September 11.
12
Operating Expenses
Operating expenses increased $2.9 million, or 6.2%, for the third quarter of
2001 compared to the third quarter of 2000, and increased $12.5 million, or
9.3%, for the nine months ended September 30, 2001 compared to the same period
in 2000. The increases were primarily from operating expense growth in the
Employee Benefits--Insurance segment of $4.1 million and $11.8 million for the
three and nine months ended September 30, 2001, respectively, primarily to
support business growth as evidenced by premium growth (see "--Selected Segment
Information").
Commissions and Bonuses
Commissions and bonuses are sales-based compensation that vary depending on
the product, whether the sale is a new sale or renewal, if a renewal the year
of renewal, and other factors. Therefore, commissions will tend to fluctuate
with premiums, but not directly. Commissions and bonuses increased $5.1
million, or 21.3%, for the third quarter of 2001 compared to the third quarter
of 2000, and increased $15.6 million, or 21.5%, for the nine months ended
September 30, 2001 compared to the same period in 2000. Both increases were
primarily due to a higher commission schedule related to a change in product
mix in the Individual Insurance segment (see "Selected Segment Information").
Net Increase in Deferred Policy Acquisition Costs and Value of Business
Acquired
The net reduction in expense for deferral and amortization of policy
acquisition costs was $6.2 million for the third quarter of 2001 compared to
$2.9 million for the third quarter of 2000, and $14.0 million for the nine
months ended September 30, 2001 compared to $2.8 million for the same period in
2000. The net reduction in expense for both comparative periods resulted
primarily from deferral of higher commissions in the Individual Insurance
segment (see "--Commissions and Bonuses" and "Selected Segment
Information--Individual Insurance Segment").
Income Before Income Taxes
Income before income taxes increased $4.8 million, or 13.6%, for the third
quarter of 2001 compared to the third quarter of 2000, and increased $5.3
million, or 4.6%, for the nine months ended September 30, 2001 compared to the
same period in 2000. These results reflect the combination of increased
premiums and a favorable benefit ratio, partially offset by decreased net
realized investment gains for the nine months ended September 30, 2001 compared
to the same period in 2000.
Income Taxes
Income taxes differ from the amount computed by applying the Federal
corporate income tax rate of 35% because of the net result of permanent
differences and the inclusion of state and local income taxes, net of the
Federal benefit. The combined Federal and state effective income tax rates were
35.8% and 32.5% for the third quarters of 2001 and 2000, respectively. For the
nine months ended September 30, 2001 and 2000, the combined effective income
tax rates were 35.5% and 33.4%, respectively. The lower effective rate for both
periods in 2000 resulted primarily from the resolution of tax uncertainties,
which had been provided for in prior years.
13
Selected Segment Information
The following table sets forth selected segment information at or for the
periods indicated:
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- ------------------
2001 2000 2001 2000
------ ------ -------- --------
(In millions)
Revenues:
Employee Benefits--Insurance segment................. $334.7 $291.6 $ 980.9 $ 842.9
Individual Insurance segment......................... 44.6 52.2 133.7 155.9
Retirement Plans segment............................. 17.6 19.1 53.0 57.1
Other................................................ 3.0 2.7 9.9 19.7
------ ------ -------- --------
Total revenues................................... $399.9 $365.6 $1,177.5 $1,075.6
====== ====== ======== ========
Income (loss) before income taxes:
Employee Benefits--Insurance segment................. $ 29.7 $ 30.1 $ 95.8 $ 84.6
Individual Insurance segment......................... 8.5 4.1 20.5 13.4
Retirement Plans segment............................. 0.5 (0.5) (0.6) 0.7
Other................................................ 1.5 1.7 5.3 17.0
------ ------ -------- --------
Total income before income taxes................. $ 40.2 $ 35.4 $ 121.0 $ 115.7
====== ====== ======== ========
Reserves, other policyholder funds and separate account:
Employee Benefits--Insurance segment................. $2,018.6 $1,818.7
Individual Insurance segment......................... 2,058.7 1,482.6
Retirement Plans segment............................. 1,680.9 1,837.8
-------- --------
Total............................................ $5,758.2 $5,139.7
======== ========
Employee Benefits--Insurance Segment
The Employee Benefits--Insurance segment markets long term and short term
disability, life, accidental death and dismemberment, and dental insurance to
employer groups. As the largest of the Company's three segments, Employee
Benefits--Insurance segment premiums accounted for 92.0% and 89.5% of the
Company's total premiums for the nine months ended September 30, 2001 and 2000,
respectively.
As a result of the terrorist events of September 11, this segment incurred
charges totaling $4.3 million. Income before income taxes for this segment,
including $4.3 million pre-tax charges from the terrorist events of September
11, decreased $0.4 million, or 1.3%, for the third quarter of 2001 compared to
the third quarter of 2000, and increased $11.2 million, or 13.2%, for the nine
months ended September 30, 2001 compared to the same period in 2000. Adjusted
to exclude the charges related to the terrorist events of September 11, the
increases in income before taxes of $3.9 million and $15.5 million for the
three and nine months ended September 30, 2001, respectively, were primarily
the result of business growth, as evidenced by premium growth, and a favorable
benefit ratio, which may or may not continue in future periods.
Methods used by the Company to manage risk include, but are not limited to,
sound underwriting, effective claims management, disciplined pricing, broad
distribution of risk by geography, industry, occupation and case size,
conservative reserving and maintaining a strong balance sheet. As a part of
risk management, the Company has maintained reinsurance and catastrophe
reinsurance in the past for protection from fluctuations. Subsequent to the
events of September 11, the Company entered into a catastrophe reinsurance
pool. The pool covers group life and accidental death and dismemberment for
about 40 participating members of the pool. The reinsurance pool brings
exposure to potential losses experienced by other participating members of the
pool but substantially increases the Company's catastrophe reinsurance coverage
to approximately $200.0 million. If the Company had been in this pool on
September 11, 2001, the estimated charges related to the terrorist events would
have been $15.0 million. An occurrence of a significant catastrophic event
similar to the events of September 11, or a change in the on-going nature and
availability of reinsurance and catastrophe reinsurance could have a material
adverse effect on the Company's business, financial position, results of
operations, or cash flows.
14
The following table sets forth selected financial data for the Employee
Benefits--Insurance segment for the periods indicated:
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- --------------
2001 2000 2001 2000
------ ------ ------ ------
(Dollars in millions)
Revenues:
Premiums.......................................... $287.0 $248.8 $841.6 $718.5
Net investment income............................. 47.0 41.5 138.3 121.3
Net realized investment losses.................... (0.8) (0.1) (2.5) (0.2)
Other............................................. 1.5 1.4 3.5 3.3
------ ------ ------ ------
Total revenues................................ 334.7 291.6 980.9 842.9
------ ------ ------ ------
Benefits and expenses:
Policyholder benefits............................. 236.3 205.5 691.2 592.1
Operating expenses................................ 37.8 33.7 109.8 98.0
Commissions and bonuses........................... 22.0 20.0 67.9 59.0
Premium taxes and other........................... 5.0 4.1 14.7 12.5
Net increase in deferred policy acquisition costs. (0.4) (1.8) (2.8) (3.3)
Terrorist events of September 11 (1).............. 4.3 -- 4.3 --
------ ------ ------ ------
Total benefits and expenses................... 305.0 261.5 885.1 758.3
------ ------ ------ ------
Income before income taxes........................... $ 29.7 $ 30.1 $ 95.8 $ 84.6
====== ====== ====== ======
Benefit ratio (% of premiums) (1).................... 82.3% 82.6% 82.1% 82.4%
Operating expense ratio (% of premiums).............. 13.2 13.5 13.0 13.6
Sales (annualized new premiums)...................... $ 53.3 $ 55.5 $174.7 $181.5
- --------
(1)Terrorist events of September 11 were excluded from the computation of the
benefit ratio.
Premium growth is measured after adjusting for experience rated refunds,
which are a return of premiums for certain large employee benefits insurance
contracts with favorable claims experience that can fluctuate from period to
period. When adjusted to exclude experience rated refunds of $2.9 million and
$3.2 million for the third quarters of 2001 and 2000, respectively, premiums
increased 15.1%. When adjusted to exclude experience rated refunds of $10.9
million and $15.8 million for the nine months ended September 30, 2001 and
2000, respectively, premiums increased 16.1%. 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 $5.5 million, or 13.3%, for the third
quarter of 2001 compared to the third quarter of 2000, and $17.0 million, or
14.0%, for the nine months ended September 30, 2001 compared to the same period
in 2000. The increases were primarily a result of increases in average invested
assets supporting this segment of 16.6% and 13.6% for the comparative periods,
respectively. (See "--Consolidated Results of Operations--Net Investment
Income".)
Excluding the $4.3 million in charges related to the terrorist events of
September 11, policyholder benefits increased $30.8 million, or 15.0%, for the
third quarter of 2001 compared to the third quarter of 2000, and $99.1 million,
or 16.7%, for the nine months ended September 30, 2001 compared to the same
period in 2000. The increases were primarily a result of business growth, as
evidenced by premium growth. The benefit ratio, again excluding the $4.3
million in charges related to the terrorist events of September 11, was 82.3%
and 82.1% for the three and nine months ended September 30, 2001, respectively,
and reflects favorable claims experience, which may or may not continue.
Partially offsetting the favorable claims experience was a decrease of the
discount rate used to establish long-term disability reserves in the third
quarter of 2001 from 6.50% to 6.25%. The interest rate used to discount
specific reserve liabilities is held constant once established. Should
available interest rates on new investments continue to decline, additional
reductions in the discount rate may be necessary with regard to claims incurred
in the future. Although the benefit ratio can vary widely depending on claims
experience, management believes that a benefit ratio of 83-85% continues to be
an appropriate target range.
15
Operating expenses increased $4.1 million, or 12.2%, for the third quarter
of 2001 compared to the third quarter of 2000. The increase was primarily due
to business growth, as evidenced by premium growth. Sales representatives
totaled 151 through the third quarter of 2001 compared to 142 at December 31,
2000.
Operating expenses increased $11.8 million, or 12.0%, for the nine months
ended September 30, 2001 compared to the same period in 2000. Expenses
continued to be incurred in early 2001 to support initiatives undertaken in the
second half of 2000 to accelerate expansion to take advantage of certain
strategic market opportunities then available in the Eastern region. Those
opportunities included, among others, the ability to rapidly establish Eastern
processing and claims adjudication functions, both improving customer service
satisfaction in the Eastern region and mitigating exposures to a previous
concentration of those functions in one geographic location.
Commissions and bonuses increased $2.0 million, or 10.0%, for the third
quarter of 2001 compared to the third quarter of 2000, and $8.9 million, or
15.1%, for the nine months ended September 30, 2001 compared to the same period
in 2000. The increases were due primarily to growth in earned premiums.
The net increase in deferred policy acquisition costs was $0.4 million for
the third quarter of 2001 compared to $1.8 million for the third quarter of
2000. The net increase in deferred policy acquisition costs was $2.8 million
for the nine months ended September 30, 2001 compared to $3.3 million for the
same period in 2000. Fluctuations primarily reflect fluctuations in field
bonuses for the comparative periods.
New sales have decreased 4.0% in the third quarter of 2001, compared to the
third quarter of 2000, and 3.7% for the nine months ended September 30, 2001
compared to the same period in 2000, primarily due to fewer sales of life
products where pricing is more competitive. Management believes its operations
are efficiently structured to support long term competitiveness in the market
place at its current rates for life products and therefore has maintained firm
rates on life sales. Subsequent to September 30, 2001 management increased
rates on new sales of short term disability products to maintain desired
profitability on these product lines.
Individual Insurance Segment
Two transactions were completed within the last year for this segment. The
transactions involved selling substantially all of 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.
Effective October 1, 2000, the Company acquired a substantial block of
individual disability insurance business, through a reinsurance transaction,
from Minnesota Life Insurance Company. The Company paid a ceding commission of
approximately $55 million and received approximately $500 million in statutory
reserves. Accompanying this transaction was an agreement that provides for
access to market Standard's individual disability insurance products through
Minnesota Life Insurance Company's career agency distribution system.
Effective January 1, 2001, the Company sold substantially all of its
individual life insurance product line to Protective Life Insurance Company,
also through a reinsurance transaction. 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 a 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. Income before taxes for this product line was $2.5
million for the third quarter of 2000, and $6.1 million for the nine months
ended September 30, 2000. The sale resulted in a minimal gain, which is being
deferred and amortized over the life of the underlying contracts.
The Individual Insurance segment now sells disability insurance and
annuities to individuals. Income before income taxes for the Individual
Insurance segment was $8.5 million, including $0.7 million in pre-tax charges
16
from the terrorist events of September 11. The following table sets forth
selected financial data for the Individual Insurance segment for the periods
indicated:
Three Months Nine Months
Ended Ended
September 30, September 30,
------------ --------------
2001 2000 2001 2000
----- ----- ------ ------
(Dollars in millions)
Revenues:
Premiums......................................................... $19.7 $21.8 $ 59.5 $ 65.5
Net investment income............................................ 24.5 30.5 73.9 90.6
Net realized investment gains (losses)........................... 0.5 (0.2) 0.2 (0.3)
Other............................................................ (0.1) 0.1 0.1 0.1
----- ----- ------ ------
Total revenues............................................... 44.6 52.2 133.7 155.9
----- ----- ------ ------
Benefits and expenses:
Policyholder benefits............................................ 29.8 39.8 89.8 113.4
Operating expenses............................................... 5.1 6.4 16.4 18.2
Commissions and bonuses.......................................... 5.6 2.7 16.0 9.4
Premium taxes and other.......................................... 0.3 0.3 1.1 1.0
Net (increase) decrease in deferred policy acquisition costs and
value of business acquired..................................... (5.4) (1.1) (10.8) 0.5
Terrorist events of September 11................................. 0.7 -- 0.7 --
----- ----- ------ ------
Total benefits and expenses.................................. 36.1 48.1 113.2 142.5
----- ----- ------ ------
Income before income taxes.......................................... $ 8.5 $ 4.1 $ 20.5 $ 13.4
===== ===== ====== ======
Operating expense ratio (% of premiums)............................. 25.9% 29.4% 27.6% 27.8%
Sales (annualized new premiums or deposits)......................... $20.9 $ 5.5 $ 46.6 $ 16.6
Premiums decreased $2.1 million, or 9.6%, for the third quarter of 2001
compared to the third quarter of 2000. The decrease related to a decrease in
individual life premiums of $16.6 million from the sale of the individual life
insurance product line and a decrease of $1.4 million in individual annuity
premiums, partially offset by an increase of $15.9 million in individual
disability premiums primarily due to the individual disability insurance
business acquired.
For the nine months ended September 30, 2001 premiums decreased $6.0
million, or 9.2%, compared to the same period in 2000. The decrease related to
a decrease in individual life premiums of $51.6 million from the sale of the
individual life insurance product line and a decrease in individual annuity
premiums of $2.5 million, partially offset by an increase of $48.1 million in
individual disability premiums. Sales of individual disability products for the
nine months ended September 30, 2001 were strong in the previously existing
distribution channels as well as the new distribution channel established under
the marketing agreement with Minnesota Life.
Net investment income decreased $6.0 million, or 19.7%, for the third
quarter of 2001 compared to the third quarter of 2000, and $16.7 million, or
18.4%, for the nine months ended September 30, 2001 compared to the same period
in 2000, primarily reflecting decreased average invested assets supporting this
segment as a result of the combination of the transactions discussed above.
Policyholder benefits decreased $10.0 million, or 25.1%, for the third
quarter of 2001 compared to the third quarter of 2000, and $23.6 million, or
20.8%, for the nine months ended September 30, 2001 compared to the same period
in 2000. The decrease primarily related to the change in product mix as a
result of the transactions. Actual claims experience can vary widely from
quarter to quarter for the individual disability product line.
Operating expenses decreased $1.3 million, or 20.3%, for the third quarter
of 2001 compared to the third quarter of 2000, and $1.8 million, or 9.9%, for
the nine months ended September 30, 2001 compared to the same period in 2000.
The decreases primarily resulted from diligent expense management, including
staff reductions in conjunction with the transactions discussed above.
17
Commissions and bonuses increased $2.9 million for the third quarter of 2001
compared to the third quarter of 2000, and $6.6 million for the nine months
ended September 30, 2001 compared to the same period in 2000, reflecting
increased sales for this segment and a higher commission schedule for
individual disability products compared to individual life products.
The net reduction in expenses for deferred policy acquisition costs was $5.4
million for the third quarter of 2001 compared to $1.1 million for the third
quarter of 2000, and the net reduction in expenses was $10.8 million for the
nine months ended September 30, 2001 compared to an increase of $0.5 million
for same period in 2000. Net reductions in expenses for both comparative
periods primarily reflect higher commissions and bonuses in 2001 as a result of
the combination of the transactions 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 the conversion of 401(k) plan assets into life contingent
annuities which can be chosen by plan participants at time of retirement.
Developing significant future profitability from this segment is dependent upon
continuing to increase assets under management to improve economies of scale.
During the nine months ended September 30, 2001, sales of new cases and
transfer deposits are higher than the same period in 2000. Strong sales matched
with a low rate of termination of cases were offset by declining prices in the
stock market. Assets under management decreased $157.0 million, or 8.5%, at
September 30, 2001 compared to September 30, 2000, primarily due to a $522.2
million decrease in the equity values of separate account assets under
management.
Income before income taxes for this segment was $0.5 million for the third
quarter of 2001 compared to a loss of $0.5 million for the third quarter of
2000.
The following table sets forth selected financial data for the Retirement
Plans segment at or for the periods indicated:
Three Months Nine Months
Ended Ended
September 30, September 30,
------------ ------------------
2001 2000 2001 2000
----- ----- -------- --------
(Dollars in millions)
Revenues:
Premiums.................................................. $ 4.2 $ 6.4 $ 13.9 $ 18.4
Net investment income..................................... 13.0 12.7 38.5 38.7
Net realized investment gains............................. 0.4 -- 0.6 --
----- ----- -------- --------
Total revenues........................................ 17.6 19.1 53.0 57.1
----- ----- -------- --------
Benefits and expenses:
Policyholder benefits..................................... 10.5 12.5 31.8 35.2
Operating expenses........................................ 5.5 5.8 17.9 17.0
Commissions and bonuses................................... 1.5 1.3 4.3 4.2
Net increase in deferred policy acquisition costs......... (0.4) -- (0.4) --
----- ----- -------- --------
Total benefits and expenses........................... 17.1 19.6 53.6 56.4
----- ----- -------- --------
Income (loss) before income taxes............................ $ 0.5 $(0.5) $ (0.6) $ 0.7
===== ===== ======== ========
Interest credited (% of investment income)................... 67.2% 69.1% 67.6% 65.8%
Annualized operating expense ratio (% of average assets under
management)................................................ 1.4 1.3
Assets under management:
General account........................................... $ 727.1 $ 652.3
Separate account.......................................... 953.7 1,185.5
-------- --------
Total................................................. $1,680.8 $1,837.8
======== ========
18
The Retirement Plans segment's premiums consist primarily of fees for assets
under management and premiums on life contingent annuities, the latter of which
can vary widely from quarter to quarter. Premiums decreased $2.2 million, or
34.4%, in the third quarter of 2001 and decreased $4.5 million, or 24.5%, for
the nine months ended September 30, 2001 compared to the same periods in 2000.
The declines were primarily the result of decreased fees from assets under
management and a decrease in premiums for life contingent annuities.
Beginning in the third quarter of 2001, the Company deferred $0.4 million in
acquisition costs. Costs deferred primarily included initial commissions and
incentive compensation payouts on newly established plans, and will be
amortized for a period of approximately ten years.
Annualized operating expenses, measured as a percentage of average assets
under management, were 1.4% and 1.3% for the nine months ended September 30,
2001 and 2000, respectively. Management estimates that this segment will reach
sustainable profitability when assets under management reach approximately $2.0
billion to $2.5 billion.
Other
Other businesses primarily include return on capital not allocated to the
product segments, income from StanCorp Mortgage Investors, LLC, net realized
investment gains and losses related to real estate investments and holding
company expenses. Income before income taxes for other businesses was $1.5
million and $1.7 million for the third quarters of 2001 and 2000, respectively,
and $5.3 million and $17.0 million for the nine months ended September 30, 2001
and 2000, respectively. The decrease for the comparative nine month periods
resulted primarily from a decrease in net capital gains of $5.8 million to $2.0
million for the nine months ended September 30, 2001 from $7.8 million for the
same period in 2000. Net realized capital gains for all periods primarily
related to sales of real estate. Disposition of invested assets and associated
gains and losses may or may not continue into the future.
Liquidity and Capital Resources
Operating Cash Flows
Operating cash inflows consist primarily of premiums, annuity deposits and
net investment income. Operating cash outflows consist primarily of benefits to
policyholders, operating expenses, commissions and taxes. The Company reported
net cash flows from operating activities of $328.2 million for the nine months
ended September 30, 2001 compared to $208.1 million for the same period in
2000. The increase primarily related to the recently acquired individual
disability insurance business.
Investing Cash Flows
Investing cash inflows consist primarily of the proceeds from sales or
maturities of investments. Investing cash outflows consist primarily of
payments for investments acquired. Since future benefit payments are
principally intermediate- and long-term obligations, the Company's investments
are predominantly intermediate-and long-term fixed-rate instruments, such as
fixed maturity securities and mortgage loans. Such investments are expected to
provide sufficient cash flows to cover the future benefit payment obligations
of the Company's insurance subsidiaries, Standard Insurance Company
("Standard") and The Standard Life Insurance Company of New York. The nature
and quality of various types of investments purchased by Standard must comply
with statutes and regulations imposed by Oregon and other states in which
Standard is licensed. The Company does not currently use derivatives, such as
interest rate swaps, currency swaps, futures or options, to manage interest
rate risk or for speculative purposes, but may use such instruments to manage
interest rate risk in the future. In the normal course of business, the Company
commits to fund mortgage loans generally up to 90 days in advance. The Company
reported net cash outflows from investing activities of $570.6 million for the
nine months ended September 30, 2001, compared to $187.9 million for the same
period in 2000. The increased outflows for 2001
19
primarily resulted from the acquisition of fixed maturities and mortgage loans
related to the acquisition of the block of individual disability insurance
business, and the sale of the individual life insurance product line which
contributed $137.2 million (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.
Investments in airline and leisure sectors were 0.4% and 0.3% of assets,
respectively. Below investment grade securities were 1.0% of assets. Management
plans to invest up to $50 million in BB rated securities in 2001 and through
September 30, had invested $35.5 million. Since fixed maturity securities were
56.9% of the Company's total general account invested assets at September 30,
2001, an increase in defaults could materially adversely affect the Company's
business, financial position, results of operations, or cash flows.
At September 30, 2001, mortgage loans represented 41.8% of the total general
account invested assets and were collateralized by properties located in the
Western region representing 59.7% of the portfolio, the Central region
representing 24.1% of the portfolio, and the Eastern region representing 16.2%.
Of the total mortgage loan portfolio, 37.1% of the collateralized properties
were located in the state of California. The Company generally does not require
earthquake insurance for properties on which it makes mortgage loans, but does
consider the potential for earthquake loss based upon seismic surveys and
structural information specific to each property when new loans are
underwritten. The most significant types of collateralized properties in the
mortgage loan portfolio include retail properties, representing 48.8% of the
portfolio, industrial properties, representing 24.7%, and office properties,
representing 19.6%. The remaining 4.5% balance of properties in the portfolio
include commercial, apartment, residential and agricultural properties. The
average loan to value ratio on the overall portfolio was 56.7% at September 30,
2001. The Company's mortgage loans face both delinquency and default risk. At
September 30, 2001, there were two loans either delinquent or in process of
foreclosure of which one has been reinstated in the fourth quarter of 2001. The
delinquency rate and loss performance of Standard's mortgage loan portfolio
have consistently outperformed the industry averages, as reported by the
American Council of Life Insurance. The performance of the Company's mortgage
loan portfolio, however, may fluctuate in the future. Should the delinquency
rate of the Company's mortgage loan portfolio increase, the increase could have
a material adverse effect on the Company's business, financial position,
results of operations, or cash flows.
It is management's objective to generally align the cash flow
characteristics of assets and liabilities to ensure that the Company's
financial obligations can be met under a wide variety of economic conditions.
In meeting these objectives, management may choose to liquidate certain
investments and reinvest in alternate investments to better match the cash flow
characteristics of assets to currently existing liabilities. Most of Standard's
policy liabilities result from long term disability reserves that have proven
to be very stable over time, annuity products on which interest rates can be
adjusted periodically, and products associated with the separate account.
Policyholders or claimants may not withdraw from Standard's large block of
disability reserves. Instead, claim payments are issued monthly over periods
that may extend for many years. The holding of stable long-term reserves makes
it possible for Standard to allocate a greater portion of its assets to
long-term commercial mortgage loans, a benefit many other insurance companies
do not experience.
Annual cash flow scenario testing is used to assess interest rate risk and
to permit Standard's investment policy to be modified whenever necessary to
address changing economic environments. The Company manages interest rate risk,
in part, through asset/liability duration analyses. As part of this strategy,
detailed actuarial models of the cash flows associated with each type of
insurance liability and the financial assets related to these liabilities are
generated under various interest rate scenarios. These actuarial models include
those used to support the statutory Statement of Actuarial Opinion required
annually by insurance regulators. According to presently accepted actuarial
standards of practice, Standard's statutory reserves and related items at
December 31, 2000, in light of the assets held, made adequate provision for the
anticipated cash flows required to meet Standard's contractual obligations and
related expenses. Management believes there have been no material changes since
that time in interest rate risks faced by the Company.
20
At September 30, 2001, the Company had outstanding commitments to fund or
acquire various assets, primarily commercial mortgage loans with fixed-interest
rates ranging from 7.3% to 8.8%, totaling $62.0 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 the line of credit, issuance and
repurchase of common stock, and dividends paid on common stock.
The Company has a $100.0 million unsecured line of credit available through
June 29, 2002. The Company is not required to maintain compensating balances,
but pays a commitment fee. The interest rate, which is based on current market
rates, was 3.94% at September 30, 2001. Under the credit agreement, the Company
is subject to customary covenants, including limitations on indebtedness and
maintenance of minimum equity, statutory surplus, and risk-based capital. At
September 30, 2001, the Company was in compliance with all such covenants. At
September 30, 2001, there were no outstanding borrowings on the line of credit.
Over time, the Company may pursue long-term debt to meet its on-going capital
requirements.
During the nine months ended September 30, 2001, almost 1.6 million shares
of the Company's common stock were repurchased at a total cost of $69.3
million, nearly completing the share repurchase plan approved by the board of
directors on February 5, 2001. On September 22, 2001, the board of directors of
StanCorp authorized a new share repurchase plan of an additional 1.6 million
shares which expires September 30, 2002 and is to be effected in the open
market or in negotiated transactions in compliance with the safe harbor
provisions of Rule 10b-18 under regulations of the Securities Exchange Act of
1934.
On November 5, 2001, the board of directors of StanCorp declared a quarterly
dividend of $0.08 per share of common stock. The dividend is payable on
December 7, 2001 to shareholders of record at the close of business on November
16, 2001. It is anticipated that beginning in 2002 dividends will be paid
annually in December of each year as approved by the Board of Directors. The
December 7, 2001 dividend is the last dividend for 2001 and no further
dividends are anticipated to be paid until December of 2002.
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 31 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 31 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 $5.5 million and $4.5 million for the nine months ended September
30, 2001 and 2000, respectively.
The amount available for payment of dividends by Standard without approval
of the Oregon Department is $50.8 million in 2001. On February 5, 2001,
Standard's board of directors declared an extraordinary cash
21
dividend of $90 million from Standard to StanCorp, subject to regulatory
approval from the Oregon Department. The extraordinary dividend included a
return of a voluntary temporary $65 million capital contribution made by
StanCorp to Standard in December 2000 due to the timing of two reinsurance
transactions (see "--Selected Segment Information--Individual Insurance
Segment"). The purchase transaction was effective October 1, 2001 and the sale
transaction was effective January 1, 2001. The $65 million capital contribution
provided additional capital during the time both blocks of business remained on
Standard's books. The extraordinary dividend was approved by the Oregon
Department, and was paid on March 21, 2001.
Risk-Based Capital
The National Association of Insurance Commissioners ("NAIC") has implemented
a tool to aid in the assessment of the statutory capital and surplus of life
and health insurers. This tool, known as Risk-Based Capital ("RBC"), augments
statutory minimum capital and surplus requirements. RBC employs a risk-based
formula that applies prescribed factors to the various risk elements inherent
in an insurer's business to arrive at minimum capital requirements in
proportion to the amount of risk assumed by the insurer. At December 31, 2000,
the RBC levels of the Company's insurance subsidiaries were significantly in
excess of that which would require corrective action by the insurance
subsidiaries or regulatory agencies.
In the third quarter of 2001, as a result of recommendations from a task
force of the American Academy of Actuaries, the NAIC approved revisions to
disability insurance RBC factors. The new factors will increase the Company's
RBC ratio.
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 September 30, 2001 aggregated $0.7
million. At September 30, 2001, Standard maintained a reserve of $1.0 million
for future assessments for currently impaired, insolvent or failed insurers.
Dependence on Information Technology Systems
The Company uses information technology systems to conduct business. These
systems may be vulnerable to reliability issues, compatibility concerns and
security threatening intrusions from external sources. Significant capital
investments for system development and maintenance, system security and
staffing, and staff development are continually made to safeguard the Company's
infrastructure and provide adequate resources. However, there is no assurance
that a future incident will not cause a disruption of service or have a
material adverse effect on the Company's business, financial position, results
of operations, or cash flows.
Commitments and Contingencies
See "Item 1--Condensed Notes to Unaudited Consolidated Financial
Statements--Note 5--Commitments and Contingencies".
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no changes in market risks faced by the Company since those
reported at December 31, 2000 in the Company's 2000 Annual Report on Form 10-K.
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
10.9 Third Amendment to Credit Agreement Among StanCorp Financial Group,
Inc. and U.S. Bank National Association Dated as of September 25,
2001, $100,000,000
(b) No reports on Form 8-K were filed during the third quarter of 2001.
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.
Date: December 12, 2001 By: /S/ ERIC E. PARSONS
------------------------------
Eric E. Parsons
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: December 12, 2001 By: /S/ CINDY J. MCPIKE
------------------------------
Cindy J. McPike
Vice President
Controller and Treasurer
(Principal Accounting Officer)
24
EXHIBITS INDEX
Number Name Method of Filing
- ------ ---- ----------------
10.9 Third Amendment to Credit Agreement Among Previously filed as Exhibit 10.9
StanCorp Financial Group, Inc. and U.S. Bank on Registrant's Form 10-Q, dated
National Association Dated as of September 25, 2001, November 13, 2001.
$100,000,000