The primary driver for administrative fee revenues is the level of assets under administration in our Asset Management segment, which is driven by equity market performance and asset growth from new net customer deposits. Administrative fee revenues for our Asset Management segment decreased 3.6% to $114.1 million for 2009 compared to 2008 and decreased 0.3% to $118.3 million for 2008 compared to 2007. The decrease in administrative fee revenues for 2009 was due to lower levels of assets managed for retirement accounts during 2009, which was a result of a decline in equity markets. The recovery of equity markets during 2009 and new net deposits moderated the decrease in administrative fee revenues. The slight administrative fee revenues decline for 2008 was due to lower levels of assets managed for retirement accounts, which was the result of declining equity markets for the fourth quarter of 2008. Partially offsetting the decline in administrative fee revenues was continued new net deposits and increased assets under administration for annuities and fees related to commercial mortgage loan origination and servicing. Administrative fee revenues from our Insurance Services segment are primarily from insurance products for which we provide only administrative services. Administrative fee revenues from our Insurance Services segment decreased 9.8% to $8.3 million for 2009 compared to 2008, and increased 9.5% to $9.2 million for 2008 compared to 2007.
The increase in net investment income for 2009 compared to 2008 was primarily due to an increase of 10.1% to $9.97 billion in average invested assets resulting from additional individual annuity assets under administration. Also contributing to the increase were higher average yields in our commercial mortgage loan portfolio. The portfolio yield for commercial mortgage
Consolidated benefits to policyholders are affected by four primary factors: reserves that are established in part based on premium levels, claims experience, assumptions used to establish related reserves and current estimates for future benefits on life-contingent annuities. The predominant factors affecting claims experience are incidence, measured by the number of claims, and severity, measured by the magnitude of the claim and the length of time a disability claim is paid. The assumptions used to establish the related reserves reflect expected incidence and severity, as well as new investment interest rates and overall portfolio yield, both of which affect the discount rate used to establish reserves. See “Critical Accounting Policies and Estimates-Reserves.”
In 2006, we adjusted the claim termination rate assumptions for the reserves on a small block of individual disability claims based on an industry table. These assumptions were further refined in 2009, 2008 and 2007 and resulted in increases in reserves of $11.5 million, $2.5 million and $7.4 million, respectively. Our block of business is relatively small, and, as a result, we view a blend
Operating expenses in the Insurance Services segment decreased 1.3% to $333.9 million for 2009 compared to 2008, and increased 8.0% to $338.4 million for 2008 compared to 2007. Operating expenses as a percentage of premiums were 16.2%, 16.0% and 15.2% for 2009, 2008 and 2007, respectively. The decrease in operating expenses for 2009 was primarily due to a decline in compensation
Income before income taxes for the Asset Management segment increased 6.9% to $37.3 million for 2009 compared to 2008, and decreased 18.6% to $34.9 million for 2008 compared to 2007. The increase for 2009 compared to 2008 reflected an increase in net investment income and lower operating expenses. The decrease for 2008 compared to 2007 reflected the effect of declining equity markets on revenues in our retirement plans business and an increase in operating expenses. Expense levels for the segment were higher for 2008 due to integration and infrastructure work in the retirement plans business.
revenues from commercial mortgage loan servicing and increased fee revenues from our investment advisory business.
Operating expenses for the Asset Management segment increased 9.3% to $131.4 million for 2008 compared to 2007. The increase in operating expenses for 2008 was primarily due to planned technology infrastructure costs related to completing the integration of our group annuity and trust product administrative platforms used to administer our retirement plans business. In addition, we acquired DPA, Inc. (“DPA”), a retirement plans business based in Portland, Oregon in the third quarter of 2007. Operating expenses for 2008 included $3.6 million in expenses related to the operations of DPA.
Our largest concentration of commercial mortgage loan property type was retail properties and primarily consisted of convenience related properties in strip malls, convenience stores and restaurants. At December 31, 2009, our commercial mortgage loan portfolio was collateralized by properties with the following characteristics:
We did not have any direct exposure to sub-prime or Alt-A mortgages in our fixed maturity securities portfolio at December 31, 2009. Fixed maturity securities are classified as available-for-sale and are carried at fair value on the consolidated balance sheet. See Item 8 “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 4-Fair Value of Financial Instruments,” for a detailed explanation of the valuation methods we use to calculate the fair value of our financial instruments. Valuation adjustments for fixed maturity securities not accounted for as OTTI are reported as net increases or decreases to other comprehensive income (loss), net of tax, on the consolidated statements of income and comprehensive income.
The following table sets forth the amount of DAC and VOBA balances amortized in proportion to expected gross profits and the percentage of the total balance of DAC and VOBA amortized in proportion to expected gross profits at December 31:
Policy reserves for our individual disability block of business are established at the time of policy issuance using the net level premium method as prescribed by GAAP and represent the current value of projected future benefits including expenses less projected future premium. These reserves, related specifically to our individual disability block of business, totaled $190.9 million, $177.2 million and $164.4 million at December 31, 2009, 2008 and 2007, respectively.
Policy reserves are calculated using our best estimates of assumptions and considerations at the time the policy was issued, adjusted to allow for the effect of adverse deviations in actual experience. These assumptions are not subsequently modified unless policy reserves become inadequate, at which time we may need to change assumptions to increase reserves.
Constituent concerns about the application of certain key provisions of FIN 46(R), including those in which the accounting and disclosures under FIN 46 do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity.
There are three types of valuation techniques used to measure assets and liabilities recorded at fair value: (1) the market approach, which uses prices or other relevant information generated by market transactions involving identical or comparable assets or liabilities; (2) the income approach, which uses the present value of cash flows or earnings; and (3) the cost approach, which uses replacement costs more readily adaptable for valuing physical assets.
The Company markets indexed annuities, which permit the holder to elect an interest rate return or an indexed return, where interest credited to the contracts is based on the performance of the S&P 500 index, subject to an upper limit or cap and minimum guarantees. Policyholders may elect to rebalance between interest crediting options at renewal dates annually. At each renewal date, the Company has the opportunity to re-price the indexed component by changing the cap, subject to minimum guarantees. The Company estimates the fair value of the index-based interest rate guarantees for the current period and for all future reset periods until contract maturity. Changes in the fair value of the index-based interest guarantees are recorded as interest credited and represent an estimate of the cost of the options to be purchased in the future to manage the risk related to the guarantees. The index-based
The expense of stock options is recognized over the vesting period, which is also the period over which the grantee must provide services to the Company. At December 31, 2009, the total compensation cost related to unvested option awards that had not yet been recognized in the financial statements was $5.6 million. This cost will be recognized over the next four years. During 2009, certain executive officers of the Company retired, upon which the vesting of some of their options was accelerated in accordance with their option agreements. The accelerated vesting resulted in recognition of $1.8 million of additional compensation cost for 2009.
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.
Life agents, some of whom now market Standard’s individual disability insurance products. The national marketing agreement remains in effect through 2012.
The following table sets forth StanCorp’s condensed balance sheets at December 31:
The Company’s long-term debt obligations consisted primarily of the $250 million 6.875%, Senior Notes and the
$300 million 6.90% Subordinated Debt. See “Note 9-Long-Term Debt” for additional information.
During 2008, the Company identified opportunities and developed strategies to centralize key functions, streamline its processes and improve efficiencies. In January 2009, the Company adopted a restructuring plan to implement these strategies resulting in one-time costs of $18.6 million for 2009. Specifically, we began the process of closing 12 offices with the intention of centralizing these offices to identified locations. One-time costs include severance costs included as part of a one-time benefit arrangement, lease terminations, relocations and other restructuring costs. Liabilities for costs associated with exit or disposal activities are recognized and measured at fair value in the period the liability is incurred. These one-time costs were included as operating expenses for 2009. These costs were included in the Other category as discussed in “Note 3-Segments.” One-time costs are excluded from the earnings metrics reviewed by the chief operating decision maker for purposes of managing the Insurance Services and Asset Management segments and are not related to the regular operations of the Insurance Services and Asset Management segments. The Company completed these projects during the fourth quarter of 2009. Of the $18.6 million one-time costs expensed in 2009, $15.4 million resulted in cash expenditures during 2009. The actual 2009 one-time costs of $18.6 million were close to the estimated total cost of the restructuring plan of up to $20.0 million. These costs have been associated with initiatives designed to enhance our operating efficiencies and reduce our annualized operating expense run rate by approximately $25 million per year.