Organic growth in our group insurance businesses, which is derived from existing policyholders’ employment and wage growth.
Changes in the fair value of the index-based interest guarantees. These changes may fluctuate from quarter to quarter due to changes in interest rates and equity market volatility. See “Business Segments-Asset Management Segment-Benefits and Expenses-Interest Credited” for information regarding the interest credited on our indexed annuity product.
The increase in operating expenses for 2011 compared to 2010 was primarily related to business growth as evidenced by premium growth, and approximately $11.0 million in project costs for information technology services. See “Business Segments.”
The group insurance benefit ratio for 2011 was outside of our 2011 estimated annual range of 74% to 78%. The benefit ratio is expected to remain elevated while the economy remains weak and until pricing actions are fully implemented. Group insurance claims experience and the corresponding benefit ratio can fluctuate widely from quarter to quarter, and therefore should be analyzed over a longer period.
The following table sets forth net investment income and associated key indicators for the Asset Management segment:
The decrease in Asset Management operating expenses for 2011 compared to 2010 was primarily due to continued operating expense containment. The decrease in Asset Management operating expenses for 2010 compared to 2009 was due to decreases in lease obligations and compensation related expenses resulting from our 2009 operating expense reduction initiatives and careful expense management during 2010.
Separate account liabilities are legally insulated from general account obligations, and it is generally expected these liabilities will be fully funded by separate account assets and their related cash flows. While historical withdrawal patterns indicate withdrawal primarily occurs in periods in excess of one year, separate account liabilities in the amount of $4.59 billion have been included in the less than one year column of the table as they may be withdrawn upon request.
Reserve discount rates for newly incurred claims are reviewed quarterly and, if necessary, are adjusted to reflect our current and expected new investment yields. The discount rate is based on the average rate we received on newly invested assets during the previous 12 months, less a margin. We also consider our average investment yield and average discount rate on our entire block of claims when deciding whether to increase or decrease the discount rate. The decrease in the average discount rate from 2011 to 2010 was primarily the result of a continued low interest rate environment. A 25 basis point increase or decrease in the discount rate for newly incurred claims results in a comparable increase or decrease in
quarterly pre-tax income of approximately $1.6 million. We do not adjust group insurance premium rates based on short-term fluctuations in investment yields. Any offsetting adjustments of group insurance premium rates due to sustained changes in investment yields can take from one to three years given that most new contracts have rate guarantees in place.
The weighted-average discount rate is an interest assumption used to convert the benefit payment stream to present value. The discount rate is selected based on the yield of a portfolio of high quality corporate bonds with durations that are similar to the expected distributions from the employee benefit plan.
The grouping of financial instruments for the purpose of determining fair value being prohibited.
The Company has two active share-based compensation plans: the 2002 Stock Incentive Plan (“2002 Plan”) and the 1999 Employee Share Purchase Plan (“ESPP”). The 2002 Plan authorizes the Board of Directors to grant incentive or non-statutory stock options and stock awards to eligible employees and certain related parties. Of the 4.8 million shares of common stock authorized for the 2002 Plan, 1.3 million shares or options for shares remain available for grant at December 31, 2011. The Company’s ESPP allows eligible employees to purchase StanCorp common stock at a discount. Of the 2.0 million shares authorized for the ESPP, 0.2 million shares remain available for issuance at December 31, 2011.
The following table sets forth the assumed health care cost trend rates for next year:
Assumption for rate of compensation increase was not applicable in determining benefit obligations for 2011 due to curtailment of group term life insurance benefit as of December 31, 2011.
The following table sets forth premiums, administrative fee revenues and net investment income by major product line or category within each of the Company’s segments:
The market approach, which uses prices or other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Indicative quarter-end pricing for a package of loans similar to those originated by the Company near quarter-end.
The Company calculates the fair value for its S&P 500 Index options using the Black-Scholes option pricing model and parameters derived from market sources. The Company’s valuations maximize the use of observable inputs, which include direct price quotes from the Chicago Board Options Exchange (“CBOE”) and values for on-the-run treasury securities and London Interbank Offered Rate (“LIBOR”) rates as reported by Bloomberg. Unobservable inputs are estimated from the best sources available to the Company and include estimates of future gross dividends to be paid on the stocks underlying the S&P 500 Index, estimates of bid-ask spreads, and estimates of implied volatilities on options. Valuation parameters are calibrated to replicate the actual end-of-day market quotes for options trading on the CBOE. The Company performs additional validation procedures such as the daily observation of market activity and conditions and the tracking and analyzing of actual quotes provided by banking counterparties each time the Company purchases options from them. Additionally, in order to help validate the values derived through the procedures noted above, the Company obtains indicators of value from representative investment banks.
The following table sets forth the assets measured at fair value on a nonrecurring basis during 2010 that the Company continued to hold:
The following tables set forth amortized costs, gross unrealized gains and losses and fair values of the Company’s fixed maturity securities:
In October 2010, the FASB issued ASU No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU No. 2010-26 amends the codification guidance for insurance entities to eliminate the diversity of accounting treatment related to deferred acquisition costs. The Company estimates implementing this ASU will increase pretax expenses approximately $3 to $4 million annually with a cumulative effect adjustment of approximately $20 to $25 million in the initial year of adoption. The Company will adopt this guidance on a retrospective basis in the first quarter of 2012. See “Note 1-Summary of Significant Accounting Policies-Accounting Pronouncements.”
Deferred tax assets, net of deferred tax liabilities, which will be realized within three years, are considered admitted assets and are included in the regulatory financial statements.
In the normal course of business, the Company is involved in various legal actions and other state and federal proceedings. A number of actions or proceedings were pending at December 31, 2011. 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 the actions or proceedings is not expected to have a material effect on the Company’s business, financial position, results of operations or cash flows.