Net income per diluted share, excluding after-tax net capital gains and losses, to be in the range of $4.80 to $5.10.
The decrease in benefits to policyholders for 2009 compared to 2008 was primarily due to a decline in business growth in our group insurance business, as evidenced by comparatively lower premiums, and comparatively favorable claims experience in our individual disability insurance businesses. The decrease in benefits to policyholders was partially offset by increased benefits to policyholders on life-contingent annuities in the Asset Management segment. See “Business Segments-Insurance Services Segment-Benefits and Expenses-Benefits to Policyholders (including interest credited)” and “Business Segments-Asset Management Segment-Benefits and Expenses-Benefits to Policyholders.”
We normally defer certain acquisition-related commissions and incentive payments, certain costs of policy issuance and underwriting, and certain printing costs. These costs are then amortized into expenses over a period not to exceed the life of the related policies, which for group insurance contracts is the initial premium rate guarantee period and averages 2.5 years. VOBA primarily represents the discounted future profits of business assumed through reinsurance agreements. A portion of VOBA is amortized each year to achieve matching against expected gross profits. Our other intangible assets, consisting of customer lists and marketing agreements, are also subject to amortization. Customer lists were obtained through acquisitions of Asset Management businesses and have a combined estimated weighted-average remaining life of approximately 9.3 years. The amortization for the individual disability marketing agreement with the Minnesota Life Insurance Company (“Minnesota Life”) is up to 25 years. See “Critical Accounting Policies and Estimates-DAC, VOBA and Other Intangible Assets.”
Organic Growth. A portion of premium growth in our group insurance in force business is affected by employment and wage growth, changes in price per insured and the average age of employees. Unfavorable economic conditions have resulted in high unemployment levels, and have negatively affected both wage rate and job growth since the second half of 2008. Premiums for 2010 continued to reflect these negative effects on organic growth from negative employment growth and lower wage growth in our existing customer base.
Net investment income is primarily affected by changes in levels of invested assets and interest rates. See “Consolidated Results of Operations-Revenues-Net Investment Income.”
Assumptions used to establish related reserves - the assumptions used to establish the related reserves reflect claims incidence and severity, and the discount rate. The discount rate is affected by new money investment interest rates and the overall portfolio yield. See “Critical Accounting Policies and Estimates-Reserves for Future Policy Benefits and Claims.”
The group insurance benefit ratio of 77.2% for 2010 was in line with our estimated annual range for 2010 of 73.6% to 78.3%. Group insurance claims experience and the corresponding benefit ratio can fluctuate widely from quarter to quarter, but tends to be more stable when measured on an annual basis.
Benefits to policyholders for the Asset Management segment primarily represent current and future benefits on life-contingent annuities. Changes in the level of benefits to policyholders will generally correlate to changes in premium levels because these annuities primarily are single-premium life-contingent annuity products with a significant portion of all premium payments established as reserves.
Standard paid ordinary cash dividends to StanCorp of $244.0 million and $170.0 million, in 2010 and 2009, respectively.
The decrease in Statutory Results for 2010 compared to 2009 was primarily due to an increase in group long term disability reserves. The increase in Statutory Results for 2009 was primarily due to an increase in net investment income as a result of high individual annuity deposit volume for the fourth quarter of 2008, which increased invested assets for 2009, and favorable changes in reserves.
For any real estate expected to be sold, an impairment charge is recorded if we do not expect the investment to recover its amortized cost prior to the expected date of sale. Once an impairment charge has been recorded, we continue to review the investment for further potential impairment. If the fair value of the investment later recovers, we are not permitted to write the asset back up to its historical cost.
Developing the estimates for reserves, and thus the resulting impact on earnings, requires varying degrees of subjectivity and judgment, depending upon the nature of the reserve. For most of our reserves, the reserve calculation methodology is prescribed by various accounting and actuarial standards, although judgment is required in the determination of assumptions used in the calculation. We also hold reserves that lack a prescribed methodology but instead are determined by a formula that we have developed based on our own experience. Because this type of reserve requires a higher level of subjective judgment, we closely monitor its adequacy. These reserves are primarily incurred but not reported (“IBNR”) claim reserves associated with our disability products. Finally, a small amount of reserves is held based entirely upon subjective judgment. These reserves are generally set up as a result of unique circumstances that are not expected to continue far into the future and are released according to pre-established conditions and timelines.
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2010, 2009
If it is determined an other-than-temporary impairment (“OTTI”) exists, the Company separates the OTTI of debt securities into an OTTI related to credit loss and an OTTI related to noncredit loss. The OTTI related to credit loss represents the portion of losses equal to the difference between the present value of expected cash flows, discounted using the pre-impairment yields, and the amortized cost basis. All other changes in value represent the OTTI related to noncredit loss. The OTTI related to credit loss is recognized in earnings in the current period, while the OTTI related to noncredit loss is deemed recoverable and is recognized in other comprehensive income. The cost basis of the fixed maturity security is adjusted to reflect the impairment. Once an impairment charge has been recorded, the Company continues to review the OTTI securities for further potential impairment.
Property and equipment are stated at cost less accumulated depreciation. The Company depreciates property and equipment using the straight-line method over the estimated useful lives with a half-year convention. The estimated useful lives are generally 40 years for properties, range from three to ten years for equipment and range from three to five years for capitalized software. Leasehold improvements are depreciated over the lesser of the estimated useful life of the asset or the life of the lease. Depreciation expense for 2010, 2009 and 2008 was $31.7 million, $31.4 million and $27.9 million, respectively. The Company reviews property and equipment for impairment when circumstances or events indicate the carrying amount of the asset may not be recoverable and recognizes a charge to earnings if an asset is impaired.
The Company records income tax interest and penalties in the income tax provision according to the Company’s accounting policy.
In 2008, the Organization & Compensation Committee of the Board of Directors of StanCorp approved an amendment to the employee pension plan and non-qualified supplemental retirement plan (“non-qualified plan”), which covers eligible executive officers. The amendment became effective January 1, 2009. Under the employee pension plan and the non-qualified plan, a participant is entitled to a normal retirement benefit once the participant reaches age 65. Prior to the amendment, a participant could also receive a normal, unreduced retirement benefit once the participant reached age 60 and the sum of his or her age plus years of service was at least 90. The amendment eliminates the requirement that a participant reach age 60 in order to receive an unreduced early retirement benefit, thereby making a participant eligible for this unreduced benefit once the sum of his or her age plus years of service is at least 90.
The Company recognizes the funded or underfunded status of the pension plans as an asset or liability on the balance sheet. The funded or unfunded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation as of the year-end balance sheet date.
The following table sets forth the assets measured at fair value on a nonrecurring basis during 2009 that the Company continued to hold:
An impaired commercial mortgage loan is one that is not performing to the contractual terms of the loan agreement. A specific allowance for losses is recorded when a loan is considered to be impaired and it is probable that all amounts due will not be collected. The Company also holds specific loan loss allowances on certain performing loans that it continues to monitor and evaluate. Impaired commercial mortgage loans without specific allowances for losses are those for which the Company has determined that it remains probable that all amounts due will be collected. See “Note 1-Summary of Significant Accounting Policies-Investment Valuations-Commercial Mortgage Loans” for the commercial mortgage loan loss allowance valuation policy. At December 31, 2010, the Company did not have any direct exposure to sub-prime or Alt-A mortgages in its commercial mortgage loan portfolio.
The Terrorism Risk Insurance Act of 2002 (“TRIA”), which has been extended through 2014, provides for federal government assistance to property and casualty insurers in the event of material losses due to terrorist acts on behalf of a foreign person or foreign interest. Due to the concentration of risk present in group life insurance and the fact that group life insurance is not covered under TRIA, an occurrence of a significant catastrophe or a change in the on-going nature and availability of reinsurance and catastrophe reinsurance could have a material adverse effect on the Company.
Effective October 1, 2002, Standard entered into a reinsurance agreement with TIAA to assume TIAA’s group disability and group life insurance business. This business included approximately 1,800 group insurance contracts, representing 650,000 insured individuals. Standard paid a ceding commission of approximately $75 million and received approximately $705 million in assets and corresponding statutory liabilities. If Standard were to become unable to meet its obligations, TIAA would retain the reinsured liabilities. Therefore, in accordance with the agreement with TIAA, Standard established a trust for the benefit of TIAA with the market value of assets in the trust equal to TIAA’s reinsurance receivable from