The carrying value of commercial mortgage loans represents the outstanding principal balance less a loan loss allowance for probable uncollectible amounts. The commercial mortgage loan loss allowance is estimated based on evaluating known and inherent risks in the loan portfolio and consists of a general loan loss allowance and a specific loan loss allowance. The general loan loss allowance is based on our analysis of factors including changes in the size and composition of the loan portfolio, debt coverage ratios, loan to value ratios, actual loan loss experience and individual loan analysis. An impaired commercial mortgage loan is a loan where we do not expect to receive contractual principal and interest in accordance with the terms of the original loan agreement. A specific allowance for losses is recorded when a loan is considered to be impaired. We also hold specific allowances for losses on certain performing loans that we continue to monitor and evaluate. Impaired commercial mortgage loans without specific allowances for losses are those for which we have determined that it remains probable that we will collect all amounts due. In addition, for impaired commercial mortgage loans, we evaluate the loss to dispose of the underlying collateral, any significant out of pocket expenses the loan may incur, the loan-to-value ratio and other quantitative information we have concerning the loan. Negotiated reductions of principal are generally written off against the allowance, and recoveries, if any, are credited to the allowance. See “Liquidity and Capital Resources-Investing Cash Flows-Commercial Mortgage Loans.”
As a result of studies of our long-term trends compared to reserving assumptions for our group long term disability insurance, we did not adjust our IBNR claim reserves in 2014 or 2013. We increased IBNR claim reserves by $3.7 million in 2012.
We defer certain acquisition costs that vary with and are directly related to the origination of new business and placing that business in-force. Certain costs related to obtaining new business and acquiring business through reinsurance agreements have been deferred and are amortized to match related future premiums or gross profits as appropriate. We normally defer certain acquisition-related commissions and incentive payments, certain costs of policy issuance and underwriting, and certain printing costs. Assumptions used in developing DAC and amortization amounts each period include the amount of business in-force, expected future persistency, withdrawals, interest rates and profitability. These assumptions are modified to reflect actual experience when appropriate. Additional amortization of DAC is charged to current earnings to the extent it is determined that future premiums or gross profits are not adequate to cover the remaining amounts deferred. Changes in actual persistency are reflected in the calculated DAC balance. Costs that are not directly associated with the acquisition of new business are not deferred as DAC and are charged to expense as incurred. Generally, annual commissions are considered expenses and are not deferred.
In accordance with the accounting principles related to our pension and other postretirement plans, we are required to make a significant number of assumptions to calculate the related liabilities and expenses each period. The major assumptions that affect net periodic benefit cost and the funded status of the plans include the weighted-average discount rate, the expected return on plan assets, changes in actuarial assumptions and the rate of compensation increase.
Administrative fees for Asset Management include asset-based and plan-based fees related to our retirement plans and private client wealth management businesses, and fees related to the origination and servicing of commercial mortgage loans. The primary driver for administrative fees is the level of assets under administration for retirement plans, which is driven by equity and debt market performance and net customer deposits. Assets under administration that produce administrative fees include retirement plan group annuity and separate account products, retirement plan trust products, private client wealth management and commercial mortgage loans under administration for other investors.
The decrease in net investment income for Insurance Services for 2014 compared to 2013 was primarily due to operating losses on tax-advantaged investments, which increased to $16.9 million for 2014, compared to $11.9 million for 2013. In addition, portfolio yields for both fixed maturity securities and commercial mortgage loans were lower for 2014 compared to 2013. See “Critical Accounting Policies and Estimates-Other Invested Assets-Tax-advantaged Investments” for more information.
Our pricing actions reflected our long-term expectations of claims experience, demographic changes, return objectives and interest rates. The targeted pricing actions implemented in 2011 on our group long term disability insurance business were, on average, in the high single digit range. These pricing increases were applied to both new sales and renewal business and were not focused on any specific sector. As a result of our pricing actions we were able to increase premiums for those customers where premium levels were not adequate to cover underlying experience for the group, or in some cases, poorly performing groups chose to move their coverage to another carrier offering lower rates.
Income before income taxes for Asset Management was $79.3 million for 2013, compared to $64.0 million for 2012. The increase in income before income taxes was primarily due to higher administrative fees as a result of the increase in assets under administration and lower benefits to policyholders as a result of favorable mortality experience in the individual annuity business. In addition, bond call premiums and commercial mortgage loan prepayment fees and their related effect on DAC amortization added $8.6 million of income before income taxes for 2013, compared to $6.6 million for 2012. Income before income taxes also increased $2.6 million for 2013 and $0.2 million for 2012 as a result of the change in fair values of the hedging assets and liabilities related to our equity-indexed annuity product.
The following table sets forth details of our commercial mortgage loans foreclosed or accepted as deeds in lieu of foreclosure:
We maintain a four-year, $250 million senior unsecured revolving credit facility (“Facility”). Upon our request and with consent of the lenders under the Facility, the Facility can be increased to $350 million. In June 2014, the termination date of the Facility was extended by one year to June 22, 2018. We expect to use any borrowings under the Facility for working capital, general corporate purposes and for issuance of letters of credit.
We have $252.9 million of Subordinated Debt, which matures on June 1, 2067, and is non-callable prior to June 1, 2017. In the first quarter of 2014, we repurchased $47.1 million in principal amount of Subordinated Debt. Interest is payable semi-annually on June 1 and December 1 until June 1, 2017, and quarterly thereafter at a floating rate equal to three-month LIBOR plus 2.51%. We have the option to defer interest payments for up to five years. The declaration and payment of dividends to shareholders would be restricted if we elected to defer interest payments on our Subordinated Debt. If elected, the restriction would be in place during the interest deferral period. We are not currently deferring interest on the Subordinated Debt.
Dividends paid from Standard to StanCorp will be based on levels of available capital and needs at the holding company, which are driven by the financial results of Standard and the Company as a whole. Standard paid extraordinary cash distributions to StanCorp of $310.0 million and ordinary cash dividends to StanCorp of $80.0 million for 2014. Standard paid ordinary cash dividends to StanCorp of $70.0 million and extraordinary cash distributions to StanCorp of $60.0 million for 2013. Standard paid extraordinary cash distributions to StanCorp of $310.0 million and ordinary cash dividends to StanCorp of $10.0 million for 2012.
The Standard Life Insurance Company of New York was organized in 2000 and is licensed to provide group and individual disability insurance, group life and AD&D insurance, group dental insurance and vision insurance in New York.
In particular, the Company’s group and individual long term disability insurance reserves are sensitive to assumptions and considerations regarding the following factors:
The estimated net loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive (income) loss into net periodic benefit cost in 2015 are $6.9 million and $0.4 million net of tax, respectively.
The following table sets forth the expected benefit payments for the Company’s pension plans:
In 2015, no estimated prior service credit or net loss (gain) for the postretirement benefit plan will be amortized from accumulated other comprehensive loss (income) into net periodic benefit cost. The projected discounted cash flow obligation for the postretirement benefit plan was $24.7 million and $17.6 million at December 31, 2014 and 2013, respectively.
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 (income) loss, and assumptions used in the measurement of the postretirement net periodic benefit (credit) cost and the postretirement benefit obligations:
The following table sets forth the amortized costs and fair values of the Company’s fixed maturity securities by contractual maturity:
The following tables set forth performing and nonperforming commercial mortgage loans by property type:
Changes in the carrying value of impaired commercial mortgage loans can result from a change in the number of commercial mortgage loans with a specific loan loss allowance. As of December 31, 2014 and December 31, 2013, the Company did not have any commercial mortgage loans greater than 90 days delinquent that were accruing interest. See “Note 1-Summary of Significant Accounting Policies-Investment Valuations-Commercial Mortgage Loans” for the policies regarding interest income for delinquent commercial mortgage loans.
As a result of the Company’s annual update of the key assumptions used to value index-based interest guarantees, a process known as “unlocking,” interest credited decreased $4.0 million and $4.1 million for 2014 and 2013, respectively.
State insurance departments require insurance enterprises to adhere to minimum Risk-based Capital (“RBC”) requirements promulgated by the NAIC. At December 31, 2014 and 2013, the insurance subsidiaries’ capital and surplus levels were significantly in excess of that which would require corrective action by the insurance subsidiaries or regulatory agencies. The Authorized Control Level RBC was $149.6 million and $186.6 million at December 31, 2014 and 2013, respectively. At December 31, 2014, the capital and surplus of the Company’s insurance subsidiaries was approximately 445% of the Company Action Level RBC required by regulators, which was approximately 890% of the Authorized Control Level RBC required by the Company’s states of domicile. At December 31, 2013, the capital of the Company’s insurance subsidiaries was approximately 398% of the Company Action Level RBC required by regulators, which was approximately 796% of the Authorized Control Level RBC required by the Company’s states of domicile.
Total rent expense was $13.3 million, $13.7 million and $15.2 million for the years ended December 31, 2014, 2013 and 2012, respectively.