income before income taxes for 2015, compared to $9.9 million for 2014. Assets under administration, which include assets related to retirement plans, individual fixed annuities and commercial mortgage loans managed for third-party investors, decreased 1.8% to $26.05 billion at December 31, 2015 from $26.53 billion at December 31, 2014, primarily reflecting the sale of our private client wealth management business, which included assets under administration of approximately $850 million.
In our quarterly impairment analysis, we evaluate whether a decline in fair value of the fixed maturity security is other than temporary by considering the following factors:
In the fourth quarter of 2014, we adopted an updated mortality table which was a significant driver of the increase in the projected benefit obligation at December 31, 2014 and related increase in operating expenses for 2015 compared to 2014.
The benefit ratio for Employee Benefits is calculated as benefits to policyholders and interest credited as a percentage of premiums and is used to provide a measurement of claims normalized for growth in our in-force block. The benefit ratio for Employee Benefits can fluctuate widely from quarter to quarter. The benefit ratio for Individual Disability is calculated as benefits to policyholders as a percentage of premiums. Due to the relatively small size of the Individual Disability business, the benefit ratio for Individual Disability generally fluctuates more than Employee Benefits. See “Critical Accounting Policies and Estimates-Reserves for Future Policy Benefits and Claims” for more information.
The decrease in net capital losses for 2014 compared to 2013 was primarily due to a decrease in the provision for our commercial mortgage loan losses and lower capital losses on real estate. These net capital losses were partially offset by net capital gains related to the sale of certain fixed maturity securities. See “Business Segments-Other.”
The increase in operating expenses for Insurance Services for 2014 compared to 2013 was primarily due to an increase in compensation related costs.
The increase in operating expenses for the Other category for 2015 compared to 2014 was primarily due to $7.8 million in merger related expenses related to the proposed merger with Meiji Yasuda. For more information, see Item 8, “Financial Statements and Supplementary Data-Notes to the Consolidated Financial Statements-Note 22-Proposed Merger with Meiji Yasuda.”
The decrease in interest expense for the Other category for 2014 compared to 2013 was primarily due to the $47.1 million repurchase of junior subordinated debentures (“Subordinated Debt”) in the first quarter of 2014. We had $252.9 million of Subordinated Debt outstanding at December 31, 2014, compared to $300.0 million outstanding at December 31, 2013. See “Liquidity and Capital Resources-Financing Cash Flows.”
Our interest rate risk analysis reflects the influence of call and prepayment rights present in our fixed maturity securities and commercial mortgage loans. The majority of these investments have contractual provisions that require the borrower to compensate us in part or in full for reinvestment losses if the security or loan is retired before maturity. Callable bonds, excluding bonds with make-whole provisions and bonds with provisions that allow the borrower to prepay near maturity, represented 3.6%, or $282.3 million, of our fixed maturity securities portfolio at December 31, 2015. We also originate commercial mortgage loans containing a make-whole prepayment provision requiring the borrower to pay a prepayment fee. As interest rates decrease, potential prepayment fees increase. These larger prepayment fees deter borrowers from refinancing during a low interest rate environment. Approximately 96% of the commercial mortgage loan portfolio contains this type of prepayment provision. In addition, approximately 2% of the commercial mortgage loan portfolio contains fixed percentage prepayment fees that mitigate prepayments but may not fully protect our expected cash flows in the event of prepayment.
Net cash used in investing activities was $638.2 million, $616.8 million and $504.3 million for 2015, 2014 and 2013, respectively. The increase in net cash used in investing activities for 2015 compared to 2014 was primarily due to higher commercial mortgage loan acquisitions, net of proceeds from the sale or repayment of commercial mortgage loans. The increase in net cash used in investing activities for 2014 compared to 2013 was primarily due to lower proceeds from the sale, maturity or repayment of fixed maturity securities and higher acquisitions of fixed maturity securities and other invested assets.
See discussion of loan commitments, “Liquidity and Capital Resources-Investing Cash Flows-Commercial Mortgage Loans.”
The following table sets forth the difference between the statutory net gains from insurance operations before federal income taxes and net capital gains and losses (“Statutory Results”) and GAAP income before income taxes excluding net capital gains and losses (“Adjusted GAAP Results”):
accounting practices for net investment income, reserves for our individual annuity products, net income or loss from the holding company and noninsurance subsidiaries and lower operating expenses as a result of expense management actions. The expense management actions taken in 2013 included an amendment to our postretirement medical plan, which reduced operating expenses by $20.6 million for 2013. The reduced operating expenses were included in the Adjusted GAAP Results but were not included in the Statutory Results.
From time to time StanCorp or its representatives make written or oral statements, including some of the statements contained or incorporated by reference in this Annual Report on Form 10-K and in other reports, filings with the Securities and Exchange Commission, press releases, conferences or otherwise, that are other than purely historical information. These statements, including statements about the Merger of StanCorp with Meiji Yasuda and estimates, projections, expected operating results, statements related to business plans, strategies, objectives and the assumptions upon which those statements are based, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Exchange Act. Forward-looking statements also include, without limitation, any statement that includes words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “seeks,” “will be,” “will continue,” “will likely result” and similar expressions that are predictive in nature or that depend on or refer to future events or conditions. Our forward-looking statements are not guarantees of future performance and involve uncertainties that are difficult to predict. They involve risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements and include, but are not limited to, the following:
Standard Retirement Services administers and services StanCorp’s retirement plans group annuity contracts and trust products. Retirement plan products are offered in all 50 states through Standard or Standard Retirement Services.
Capital gains and losses for fixed maturity securities are recognized using the specific identification method. If the fair value of a fixed maturity security declines below its amortized cost, the Company assesses whether the decline is other than temporary.
The Company recognizes interest income and prepayment fess when earned in investment income. Interest income is recognized using an effective yield method giving effect to amortization of premiums and accretion of discounts.
In the second quarter of 2015, the Federal Home Loan Bank (“FHLB”) of Seattle completed its merger with the FHLB of Des Moines. The merger has not had a material effect on the Company’s business, financial position, results of operations, cash flows or existing funding agreements with the FHLB, and is not anticipated to impact the Company’s utilization of the FHLB program or its products in the future. At December 31, 2015, Standard owned $20.9 million of FHLB of Des Moines common stock related to its membership and activity in the FHLB of Des Moines. The FHLB of Des Moines common stock is carried at par value and accounted for under the cost method. The Company periodically evaluates FHLB of Des Moines common stock for OTTI. The Company’s determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The Company did not record OTTI related to the FHLB of Des Moines common stock for 2015. The Company did not record OTTI related to the FHLB of Seattle common stock for 2014.
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 2015, 2014 and 2013 was $15.6 million, $17.8 million and $19.9 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.
Premiums from group life and group and individual disability contracts are recognized as revenue when due. Investment-type contract fee revenues consist of charges for policy administration and surrender charges assessed during the period. Charges related to services to be performed are deferred until earned. The amounts received in excess of premiums and fees are unearned and included in other policyholder funds on the consolidated balance sheets. Experience rated refunds are computed in accordance with the terms of the contracts with certain group policyholders and are accounted for as an adjustment to premiums.
In June 2015, the FASB issued ASU No. 2015-09, Disclosures about Short-Duration Contracts. The main objective of ASU No. 2015-09 is to develop targeted improvements to disclosures about short-duration insurance contracts. Under this guidance, insurance entities are required to disclose aggregated or disaggregated information on frequency and severity of claims, discounting, and include incurred and paid claims development tables.
The compensation cost for the ESPP is measured as the sum of the value of the discount and the value of the embedded six-month option. The value of the discount is equal to the available discount multiplied by of the fair market value of the common stock at the offering date. The value of the embedded option is calculated using the Black-Scholes option pricing model and the assumptions noted in the following table. Expected stock price volatility was based on the volatility of the price of StanCorp common stock during the six months preceding the offering period. The risk-free rate was based on the six-month U.S. Treasury yield curve in effect at the time of the grant.
The following table sets forth the components of net periodic benefit cost (credit), other changes in plan assets and benefit obligations recognized in other comprehensive loss (income), and assumptions used in the measurement of the postretirement net periodic benefit (credit) cost and the postretirement benefit obligations:
For the postretirement benefit plan, the expected long-term rate of return on assets was developed by considering the historical returns and the future expectations for returns, as well as the target asset allocation. Assumptions for rate of compensation increase were not applicable in determining benefit obligations or net periodic benefit costs for 2015, 2014 and 2013 due to the curtailment of group term life insurance benefit as of December 31, 2011.
The investment goal of the postretirement plan is to produce a steady return on plan assets to maintain its funded status. To achieve this goal, the Company’s postretirement benefit plan assets are comprised primarily of municipal bonds and cash and cash equivalents.
The Company underwrites mortgage loans on commercial property throughout the United States. In addition to real estate collateral, the Company requires either partial or full recourse on most loans. At December 31, 2015, the Company did not have any direct exposure to sub-prime or Alt-A mortgages in its commercial mortgage loan portfolio.
There were no troubled debt restructurings identified in the previous 12 months that subsequently defaulted during 2015.
Significant, unanticipated changes in key assumptions, which affect the determination of expected gross profits, may result in a large unlocking event that could have a material effect on the Company’s financial position or results of operations. However, future changes in DAC and VOBA due to changes in underlying assumptions are not expected to be material.
(1) See “Note 1-Summary of Significant Accounting Policies-DAC, VOBA and Other Intangible Assets” and “Note 12-DAC, VOBA and Other Intangible Assets.”
(2) Net of tax benefit of $1.1 million for net unrealized gains on fixed maturity securities and net of tax expense of $0.9 million for employee benefits.