(2) Statutory data represents Standard Insurance Company and The Standard Life Insurance Company of New York.
The following management assessment of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto contained in Item 8, “Financial Statements and Supplementary Data.” Our consolidated financial statements and certain disclosures made in this Form 10-K have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and require us to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent assets and contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during each reporting period. The estimates most susceptible to material changes due to significant judgment are identified as critical accounting policies. The results of these estimates are critical because they affect our profitability and may affect key indicators used to measure our performance. See “Critical Accounting Policies and Estimates.”
Financial measures that exclude after-tax merger related expenses, after-tax net capital gains and losses and accumulated other comprehensive income (“AOCI”) are non-GAAP measures. To provide investors with a broader understanding of earnings, we provide net income per diluted share excluding after-tax merger related expenses and after-tax net capital gains and losses, along with the GAAP measure of net income per diluted share, because merger related expenses and capital gains and losses are not likely to occur in a stable pattern.
Since the Merger Agreement was announced, four putative class action lawsuits were filed in the Circuit Court of the State of Oregon for the County of Multnomah seeking to, among other things, enjoining the Merger. These lawsuits were subsequently consolidated. On November 3, 2015, we entered into a Memorandum of Understanding (the “MOU”) with the plaintiffs in the Oregon Action, which sets forth the parties’ agreement in principle for a settlement of the consolidated actions. As set forth in the MOU, we have agreed to the settlement solely to eliminate the burden, expense, distraction and uncertainties inherent in further litigation, and without admitting any liability or wrongdoing. See Part I, Item 3, “Legal Proceedings.”
Net income excluding after-tax merger related expenses and after-tax net capital losses was $5.01 per diluted share for 2014, compared to $5.24 per diluted share for 2013. The decrease in net income per diluted share was primarily due to lower operating expenses for 2013, which included savings of $20.6 million or $0.30 per diluted share in 2013 due to an amendment of our postretirement medical plan, which did not recur in 2014.
Individual Disability reported income before income taxes of $73.0 million for 2015, compared to $53.9 million for 2014. The increase was primarily due to more favorable claims experience. Individual Disability premiums were $206.9 million for 2015, compared to $199.1 million for 2014. The increase was primarily due to higher annualized new sales for 2015 and favorable retention of existing customers. The annual benefit ratio for Individual Disability was 55.7% for 2015, compared to 65.3% for 2014.
We maintain an internally identified list of fixed maturity securities with characteristics that could indicate potential impairment (“watch list”). At December 31, 2015, our fixed maturity securities watch list totaled $164.3 million at fair value and $214.6 million at amortized cost after OTTI. We recorded $5.2 million of OTTI related to credit loss due to impairments for 2015, compared to $1.2 million for 2014. We recorded no OTTI related to noncredit loss for 2015 and 2014. See Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 1-Summary of Significant Accounting Policies-Investment Valuations-Fixed Maturity Securities-Available-for-Sale” for further disclosures.
In conjunction with determining the extent of credit losses associated with fixed maturity securities, we utilize certain information in order to determine the present value of expected cash flows discounted using pre-impairment yields. The information includes, but is not limited to, original scheduled contractual cash flows, current market spread information, risk-free rates, fundamentals of the industry and sector in which the issuer operates, and general market information.
Real estate investments are recorded at the lower of cost or net realizable value. We generally depreciate real estate investments using the straight-line depreciation method with property lives varying from 30 to 40 years.
We record impairments when it is determined that the decline in fair value of an investment below its carrying value is other than temporary. The impairment is recorded to net capital losses, and the carrying value of the investment is adjusted to reflect the impairment.
Total real estate was $25.4 million and $37.0 million at December 31, 2015 and 2014, respectively. The $11.6 million decrease in real estate in 2015 was primarily due to the sale of Real Estate Owned and the impairments on Real Estate Owned.
Our tax-advantaged investments are structured as limited partnerships. We have purchased tax-advantaged investments opportunistically due to the higher risk-adjusted returns. The primary sources of investment return are tax credits and the tax benefits from tax losses.
We have adopted Accounting Standards Update No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects as of January 1, 2015, which permits entities to account for investments in qualified affordable housing projects under the proportional amortization method (“PAM”). The majority of our tax-advantaged investments qualify as affordable housing project investments and are accounted for under PAM. Under PAM, the cost of the investment is amortized in each period in proportion to the tax credits and the tax benefits from tax losses received in that period to total benefits to be received over the life of the investment and allows the amortization of the investment and the tax benefits to be recorded in income taxes on the consolidated statements of income. For tax-advantaged investments with state premium tax credits, the state premium tax credits and the related investment losses are recorded in net investment income. We believe this presentation accurately matches the costs and benefits for these investments.
Tax-advantaged investments that do not qualify as affordable housing investments are accounted for under the equity method of accounting. Under the equity method of accounting, tax credits received from these investments are reported in the consolidated
We perform an impairment analysis at least quarterly for all tax-advantaged investments. If the net present value of expected future cash flows of a tax-advantaged investment is less than the current book value of the investment, we evaluate whether a decline in value is other than temporary. If it is determined an OTTI exists, the investment is written down to the net present value of expected future cash flows and the OTTI is recognized as a capital loss in the period in which it was determined to be impaired. We recorded no OTTI related to tax-advantaged investments that qualify as affordable housing investments for 2015, 2014 and 2013. We recorded OTTI of $11.5 million and $1.0 million related to tax-advantaged investments that did not qualify as affordable housing investments for 2015 and 2014, respectively. We did not record OTTI for 2013 related to tax-advantaged investments that did not qualify as affordable housing investments.
We use derivative financial instruments to mitigate business risks including interest rate risk exposure. We have the following derivatives: interest rate swaps, index-based interest guarantees embedded in indexed annuities (“index-based interest guarantees”) and Standard & Poor’s (“S&P”) 500 Index call spread options (“S&P 500 Index options”).
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 our business, financial position, results of operations, cash flows or existing funding agreements with the FHLB, and is not anticipated to impact our 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.
Policy reserves for our individual disability insurance 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. Assumptions used to calculate individual disability insurance policy reserves may vary by the age, gender and occupation class of the insured, the year of policy issue and specific contract provisions and limitations.
Because actual results and trends related to these assumptions may vary from those assumed, we periodically review and, if necessary, revise the assumptions to ensure ongoing reserve adequacy. We changed our assumptions for mortality and interest rates in 2015 for our individual immediate annuities, which resulted in an increase in reserves of $3.8 million for 2015.
Claim termination rates can vary widely from quarter to quarter. The claim termination assumptions used in determining our reserves represent our expectation for claim terminations over the life of our block of business and will vary from actual experience in any one quarter. While we have experienced some variation in our claim termination experience, we did not see any prolonged or systemic change in 2015 that would indicate a sustained underlying trend that would affect the claim termination rates used in the calculation of reserves.
We monitor the adequacy of our reserves relative to our key assumptions. In our estimation, scenarios based on reasonably possible variations in claim termination assumptions could produce a percentage change in reserves for our Employee Benefits lines of business of approximately +/-0.2% or $8 million. However, given that claims experience can fluctuate widely from quarter to quarter, significant unanticipated changes in claim termination rates over time could produce a change in reserves for our Employee Benefits lines outside of this range.
Our individual deferred annuities and group annuity products are classified as investment contracts. DAC related to these products is amortized over the life of related policies in proportion to expected gross profits. For our individual deferred annuities, DAC is generally amortized over 30 years with approximately 60% and 96% expected to be amortized by years 5 and 15, respectively. DAC for group annuity products is amortized over 10 years with approximately 73% expected to be amortized by year 5.
VOBA primarily represents the discounted future profits of business assumed through reinsurance agreements. We have established VOBA for a block of individual disability insurance business assumed from Minnesota Life and a block of group disability insurance and group life insurance business assumed from Teachers Insurance and Annuity Association of America (“TIAA”). VOBA is generally amortized in proportion to future premiums for group and individual disability insurance products and group life insurance products. However, the VOBA related to the TIAA transaction associated with an in-force block of group long term disability insurance claims for which no ongoing premium is received is amortized in proportion to expected gross profits. If actual premiums or future profitability are inconsistent with our assumptions, we could be required to make adjustments to VOBA and related amortization. The VOBA associated with the TIAA transaction is amortized in proportion to expected gross profits with an amortization period of up to 20 years. For the VOBA associated with the Minnesota Life block of business assumed, the amortization period is up to 30 years and is amortized in proportion to future premiums. The accumulated amortization of VOBA was $73.4 million and $71.0 million at December 31, 2015 and 2014, respectively.
These assumptions are modified to reflect actual experience when appropriate. Although a change in a single assumption may have an impact on the calculated amortization of DAC or VOBA for balances associated with investment contracts, it is the relationship of that change to the changes in other key assumptions that determines the ultimate impact on DAC or VOBA amortization. Because actual results and trends related to these assumptions vary from those assumed, we review, and if necessary, revise these assumptions annually to reflect our current best estimate of expected gross profits. As a result of this process, known as “unlocking,” the cumulative balances of DAC and VOBA are adjusted with an offsetting increase or decrease to income to reflect changes in the period of the revision. An unlocking event generally occurs as a result of actual experience or future expectations differing from previous estimates. We did not record an adjustment to VOBA as a result of unlocking in 2015 and 2014. We recorded a decrease to VOBA of $1.0 million in 2013 due to changes in expected gross profits related to a block of claims assumed. As a result of unlocking in prior periods, the amortization schedule for future periods is also adjusted.
The impact of unlocking in prior periods on DAC and VOBA balances was a decrease of $1.8 million and $3.2 million for 2015 and 2014, respectively.
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 adverse effect on our 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.
We have two non-contributory defined benefit pension plans: the employee pension plan and the agent pension plan. The employee pension plan is generally limited to eligible employees whose dates of employment began before 2003 and a participant is entitled to normal retirement benefits at age 65. The agent pension plan is for former field employees and agents. The defined benefit pension plans provide benefits based on years of service and final average pay. The employee pension plan is sponsored by StanCorp and the agent pension plan is sponsored by Standard. Both plans are administered by Standard Retirement Services and are closed for new participants. In addition, eligible executive officers are covered by a non-qualified supplemental retirement plan.
Administrative fees for Asset Management include asset-based and plan-based fees related to our retirement plans 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 and commercial mortgage loans under administration for other investors.
Benefits and expenses are amounts we pay to or on behalf of policyholders, interest credited to policyholders, commissions and bonuses, and other expenses.
Commissions and bonuses primarily represent sales-based compensation, which can vary depending on the product, the structure of the commission program and other factors such as customer retention, sales, in-force premium, growth in assets under administration and the profitability of business in each of our segments.
We normally defer certain acquisition-related commissions and incentive payments, certain costs of policy issuance and underwriting. These costs are then amortized into expenses over a period not to exceed the life of the related policies, which for Employee Benefits 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. See “Critical Accounting Policies and Estimates-DAC, VOBA and Other Intangible Assets.”
Income taxes may differ from the amount computed by applying the federal corporate tax rate of 35% to pre-tax income because of the net result of permanent differences between book and taxable income, tax credits, amortization of tax-advantaged investments that qualify as affordable housing investments and the inclusion of state and local income taxes, net of the federal tax benefit.
The following table sets forth our consolidated results of operations and key indicators:
The increase in revenues for 2015 compared to 2014 was primarily due to higher premiums in Employee Benefits and Individual Disability. See “Business Segments-Insurance Services.”
The increase in net investment income for 2015 compared to 2014 was primarily due to an increase in commercial mortgage loan prepayment fee revenues and bond call premiums. Commercial mortgage loan prepayment fee revenues and bond call premiums were $38.1 million for 2015, compared to $23.2 million for 2014. The increase was partially offset by the change in the fair value of our S&P 500 Index options related to our equity-indexed annuity product, which decreased net investment income by $0.8 million for 2015, compared to an increase in net investment income of $8.6 million for 2014. See “Business Segments-Asset Management.”
The increase in benefits to policyholders for 2015 compared to 2014 was primarily due to business growth as evidenced by an increase in premiums in Employee Benefits and Individual Disability, partially offset by more favorable claims experience in Employee Benefits and Individual Disability. See “Business Segments-Insurance Services.”
The increase in operating expenses for 2015 compared to 2014 was primarily due to expenses associated with business growth and an additional $7.8 million of merger related expenses related to the proposed merger with Meiji Yasuda and expenses related to business growth. See “Business Segments-Other.”
The increase in commissions and bonuses for 2015 compared to 2014 was primarily due to an increase in premiums and sales for Employee Benefits. See “Business Segments-Insurance Services.”
The decrease in the effective income tax rate for 2015 compared to 2014 was primarily due to higher utilization of tax credits during 2015 due to purchases of tax-advantaged investments. See Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 7-Income Taxes” for more information.
The decrease in net investment income for 2014 compared to 2013 was primarily due to lower average portfolio yields for both fixed maturity securities and commercial mortgage loans, in addition to the change in fair value of our S&P 500 Index options related to our equity-indexed annuity product. The change in fair value of our S&P 500 Index options increased net investment income by $8.6 million for 2014, compared to an increase of $14.4 million for 2013. See “Business Segments-Insurance Services” and “Business Segments-Asset Management.”
The decrease in interest credited for 2014 compared to 2013 was primarily due to a decrease in the average interest-crediting rate for our annuity products and the change in fair value of the index-based guarantees, which increased interest credited by $7.2 million for 2014, compared to an increase of $9.0 million for 2013. The decrease was partially offset by an increase in interest credited due to an increase in our retirement plan general account assets under administration. See “Business Segments-Asset Management.”
businesses that reflect the application of our specialized expertise in the development, underwriting and administration of insurance products and services. Within Insurance Services, Employee Benefits offers group disability insurance, group life and AD&D insurance, group dental and group vision insurance, and absence management services. Asset Management is a separate reportable segment. Asset Management provides investment and asset management products and services and offers full-service 401(k) plans, 403(b) plans, 457 plans, defined benefit plans, money purchase pension plans, profit sharing plans and non-qualified deferred compensation products and services. Asset Management also offers investment advisory and management services, origination and servicing of fixed-rate commercial mortgage loans, individual fixed and indexed annuity products, group annuity contracts and retirement plan trust products. The Other category includes return on capital not allocated to the product segments, holding company expenses, operations of certain unallocated subsidiaries, interest on debt, unallocated expenses, net capital gains and losses primarily related to the impairment or the disposition of our invested assets and adjustments made in consolidation. We allocate resources and measure performance at the segment level.
Income before income taxes for Insurance Services was $268.3 million for 2015, compared to $269.4 million for 2014. The decrease was primarily due to higher operating expenses and higher commissions and bonuses, partially offset by more favorable claims experience and higher premiums in Employee Benefits and Individual Disability.
The increase in premiums for Insurance Services for 2015 compared to 2014 was primarily due to higher annualized new sales and favorable retention of existing customers in Employee Benefits and Individual Disability. The increase in sales for 2015 reflected an increase in proposal activity. See “Basis of Presentation-Premiums.”
The average discount rate used for newly incurred long term disability insurance claim reserves and life waiver reserves was 3.94% for 2015 and 4.00% for 2014.
The increase in operating expenses for Insurance Services for 2015 compared to 2014 was primarily due to an increase in compensation related costs.
The increase in DAC, VOBA, and other intangible assets for Insurance Services for 2015 compared to 2014 was primarily due to an increase in deferrals for Employee Benefits, which was a result of higher sales.
Income before income taxes for Insurance Services was $269.4 million for 2014, compared to $284.0 million for 2013. The decrease was primarily due to lower Employee Benefits premiums and lower net investment income, partially offset by more favorable claims experience in Employee Benefits.
Income before income taxes for Asset Management was $86.8 million for 2015, compared to $77.9 million for 2014. The increase was primarily due to higher commercial mortgage loan prepayment fee revenues and bond call premiums.
The increase in administrative fees for Asset Management for 2015 compared to 2014 was primarily due to an increase in retirement plan assets under administration. Retirement Plan assets under administration were $19.19 billion at December 31, 2015, compared to $19.02 billion at December 31, 2014.
The increase in benefits to policyholders for Asset Management for 2015 compared to 2014 was primarily due to reserve increases of $3.8 million related to changes in mortality and interest rate assumptions in individual annuities.
The decrease in interest credited for Asset Management for 2015 compared to 2014 was primarily due to a decrease in the average interest-crediting rate for our annuity products and the change in fair value of the index-based interest guarantees. The change in fair value of the index-based interest guarantees increased interest credited by $4.0 million for 2015, compared to $7.2 million for 2014.
The lower net decrease in DAC, VOBA and other intangible assets for Asset Management for 2015 compared to 2014 was primarily due to an increase in deferrals for individual annuities, which was primarily due to higher individual annuity sales for 2015 compared to 2014. See “Critical Accounting Policies and Estimates-DAC, VOBA and Other Intangible Assets” for more information.
The increase in benefits to policyholders for Asset Management for 2014 compared to 2013 was primarily due to an increase in premiums for single-premium life-contingent annuity products. See “Basis of Presentation-Premiums.”
The decrease in interest credited for Asset Management for 2014 compared to 2013 was primarily due to a decrease in the average interest-crediting rate for our annuity products and the change in fair value of the index-based guarantees, which increased interest credited by $7.2 million for 2014, compared to an increase of $9.0 million for 2013. The decrease was partially offset by an increase in our retirement plan general account assets under administration.
The increase in commissions and bonuses for Asset Management for 2014 compared to 2013 was primarily due to an increase in individual annuity sales for 2014 compared to 2013.
The net decrease in DAC, VOBA and other intangible assets for Asset Management for 2014 compared to 2013 was primarily due to an increase in the margin between net investment income and interest credited for our fixed deferred annuity products and an increase in DAC amortization for individual annuities related to unlocking. This increase was partially offset by an increase in deferrals for individual annuities, which was primarily due to higher individual annuity sales. See “Critical Accounting Policies and Estimates-DAC, VOBA and Other Intangible Assets” for more information.
The Other category reported a loss before income taxes of $55.9 million for 2015, compared to a loss before income taxes of $42.2 million for 2014. Net capital losses were $20.4 million for 2015, compared to $12.1 million for 2014. The loss before income taxes excluding net capital losses was $35.5 million for 2015, compared to $30.1 million for 2014. The increase in the loss before income taxes excluding net capital losses was primarily due to an increase in operating expenses related to the proposed merger with Meiji Yasuda.
The increase in net investment income for the Other category for 2015 compared to 2014 was primarily due to an increase in invested assets allocated to the Other category.
The increase in net capital losses for the Other category for 2015 compared to 2014 was primarily due to impairments of certain tax-advantaged investments that did not qualify as affordable housing investments and other-than-temporary impairment losses of certain fixed maturity securities, partially offset by a decrease in the provision to our commercial mortgage loan loss allowance for 2015 compared to 2014.
Asset-liability management is a part of our risk management structure. The risks we assume related to asset-liability mismatches vary with economic conditions. The primary sources of economic risk are interest rate related and include changes in interest rate term risk, credit risk and liquidity risk. It is generally management’s objective to align the characteristics of assets and liabilities to meet our financial obligations under a wide variety of economic conditions. From time to time, management may choose to liquidate certain investments and reinvest in different investments to increase the likelihood of meeting our financial obligations. See “-Investing Cash Flows.”
was based upon our fixed maturity securities net of fair value hedges and commercial mortgage loans held at December 31, 2015 and 2014. Interest rate sensitivity of our financial assets was measured assuming a parallel shift in interest rates. All security yields were increased by 10% of the year-end 10-year U.S. Government Treasury bond yield, or 0.23% and 0.22% for the 2015 and 2014 analyses, respectively. The change in fair value of each security was estimated as the change in the option adjusted value of each security. Option adjusted values were computed using our payment models and provisions for the effects of possible future changes in interest rates. The analyses did not explicitly provide for the possibility of non-parallel shifts in the yield curve, which would involve discount rates for different maturities being increased by different amounts. The actual change in fair value of our financial assets can be significantly different from that estimated by the model. The hypothetical reduction in the fair value of our financial assets that resulted from the model was estimated to be $135 million and $124 million at December 31, 2015 and 2014, respectively.
Net cash provided by operating activities is net income adjusted for non-cash items and accruals, and was $364.9 million, $238.2 million and $279.6 million for 2015, 2014 and 2013, respectively. These changes in non-cash items and accruals were mainly due to fluctuations in other assets and other liabilities, mainly attributable to timing differences and future policy benefits and claims due to changes in reserve requirements in Employee Benefits. We typically generate positive cash flows from operating activities, as premiums collected from our insurance products and income received from our investments exceed policy acquisition costs, benefits paid, redemptions and operating expenses. These positive cash flows are then invested to support the obligations of our insurance products and required capital supporting these products. Our cash flows provided by operating activities are affected by the timing of premiums, administrative fees and investment income received and expenses paid.
Our fixed maturity securities portfolio generates unrealized gains or losses primarily resulting from market interest rates that are lower or higher relative to our book yield at the reporting date. In addition, changes in the spread between the risk-free rate and market rates for any given issuer can fluctuate based on the demand for the instrument, the near term prospects of the issuer and the overall economic climate.
We recorded OTTI of $5.2 million and $1.2 million for 2015 and 2014, respectively. See “Critical Accounting Policies and Estimates-Investment Valuations-Fixed Maturity Securities.” We did not have any direct exposure to sub-prime or Alt-A mortgages in our fixed maturity securities portfolio at December 31, 2015.
At December 31, 2015, we did not have any direct exposure to sub-prime or Alt-A mortgages in our commercial mortgage loan portfolio. When we undertake mortgage risk, we do so directly through loans that we originate ourselves rather than in packaged products such as commercial mortgage-backed securities. Given that we service the vast majority of loans in our portfolios, we are prepared to deal with them promptly and proactively. Should the delinquency rate or loss performance of our commercial mortgage loan portfolio increase significantly, the increase could have a material adverse effect on our business, financial position, results of operations or cash flows.
Due to the concentration of commercial mortgage loans in California, we could be exposed to potential losses as a result of an economic downturn in California as well as certain catastrophes. See Part I, Item 1A, “Risk Factors.”
The performance of our commercial mortgage loan portfolio may fluctuate in the future. However, based on our business approach of diligently underwriting high-quality loans, we believe our delinquency rate will remain low. The decrease in restructured commercial mortgage loans of $4.8 million during 2015 was primarily due to decrease in the number of restructured commercial mortgage loans, which was partially offset by commercial mortgage loans that became delinquent during the period.
A commercial mortgage loan is impaired when 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 and it is probable that all amounts due will not be collected based on the terms of the original note. We also hold specific loan loss allowances on certain performing commercial mortgage 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 all amounts due will be collected although the timing or nature may be outside the original contractual terms. The decrease to the net carrying value of impaired commercial mortgage loans at December 31, 2015 compared to 2014 was primarily due to a decrease in impaired commercial mortgage loans without a specific allowance in our retail and apartment segments for 2015 associated with a small number of borrowers.
See Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 1-Summary of Significant Accounting Policies-Investment Valuations-Commercial Mortgage Loans” for policies regarding interest income for delinquent commercial mortgage loans.
Financing cash flows primarily consist of policyholder fund deposits and withdrawals, borrowings and repayments on the line of credit, borrowings and repayments on long-term debt, issuances and repurchases of common stock and dividends paid on common stock. Net cash provided by financing activities was $474.5 million, $250.4 million and $443.3 million for 2015, 2014 and 2013, respectively. The increase in net cash provided by financing cash flows for 2015 compared to 2014 was primarily due to a $147.0 million decrease in share repurchases, a $47.1 million decrease in cash used to repurchase of debt, and a $29.3 million increase in policyholder fund deposits, net of withdrawals. See “Capital Management-Share Repurchases” for further discussion on share repurchases.
We maintain a $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. On October 27, 2015, we amended the Facility to change the definition of change in control to allow for the proposed merger with Meiji Yasuda. 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 elect 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.
Capital and surplus growth from our statutory insurance subsidiaries is generally a result of generated income, less a charge for business growth, measured by insurance premium growth, which includes individual annuity sales. The level of capital and surplus in excess of targeted RBC we generate generally varies inversely in relation to the level of our premium growth. As premium growth increases, capital and surplus is used to fund additional reserve requirements, meet increased regulatory capital requirements based on premium and cover certain acquisition costs associated with policy issuance, leaving less available capital beyond our target level. Higher levels of premium growth can result in increased utilization of capital and surplus beyond that which is generated by the business, and at very high levels of premium growth, we could generate the need for capital infusions. At lower levels of premium growth, additional capital and surplus produced by the business exceeds the capital and surplus utilized to meet these requirements,
which can result in additional capital and surplus above our targeted RBC level. In assessing our capital and surplus position, we also consider cash and capital at the holding company and non-insurance subsidiaries.
Our ability to pay dividends to shareholders, repurchase shares and meet obligations substantially depends upon the receipt of distributions from Standard. Standard’s ability to pay dividends to StanCorp is affected by factors deemed relevant by Standard’s Board of Directors and by Oregon law, which limits Standard’s dividend payments and other distributions to the earned surplus arising from its business. If the proposed dividend or other distribution exceeds certain statutory limitations, Standard must receive prior approval of the Director of the Oregon Department of Consumer and Business Services-Division of Financial Regulation (“Oregon Insurance Division”). The current statutory dividend limitations are the greater of (a) 10% of Standard’s combined capital and surplus as of December 31 of the preceding year, or (b) the net gain from operations after dividends to policyholders and federal income taxes and before realized capital gains or losses for the 12-month period ended on the preceding December 31. In each case, the limitation must be determined under statutory accounting practices. Oregon law gives the Oregon Insurance Division broad discretion to approve or decline requests for dividends and other distributions in excess of these limits. With the exception of StanCorp Equities, a limited business broker-dealer and member of the Financial Industry Regulatory Authority, there are no regulatory restrictions on dividends from our non-insurance subsidiaries.
As of December 31, 2015, Standard’s net gain from operations after dividends to policyholders and federal income taxes and before capital gains or losses for the 12-month period then ended was $179.9 million and capital and surplus was $1.09 billion. Based upon Standard’s results for 2015, the amount of ordinary dividends and other distributions available in 2016, without prior approval from the Oregon Insurance Division is $179.9 million. As of December 31, 2014, Standard’s net gain from operations after dividends to policyholders and federal income taxes and before capital gains or losses for the 12-month period then ended was $208.5 million and capital and surplus was $1.15 billion. Based upon Standard’s results for 2014, the amount of ordinary dividends and other distributions available in 2015, without prior approval from the Oregon Insurance Division was $208.5 million.
Dividends paid from Standard to StanCorp are 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 $150.0 million and an ordinary cash dividend to StanCorp of $50.0 million for 2015. 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.
Dividends received from our non-insurance subsidiaries were $20.0 million and $33.0 million for 2015 and 2014, respectively.
Our debt obligations consisted primarily of the $250 million of 5.00% Senior Notes and the $252.9 million of 6.90% Subordinated Debt. See Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 18-Long-Term Debt.”
At December 31, 2015, we had $273.0 million outstanding under funding agreements with the FHLB of Des Moines, with fixed interest rates ranging from 0.69% to 3.79% that mature in 1 to 15 years. The funding agreements with the FHLB of Des Moines are recorded as other policyholder funds on the consolidated balance sheets.
Other long-term obligations reflected in the consolidated balance sheets at December 31, 2015, included $227.8 million in expected benefit payments for supplemental, home office, and field office retirement plans, $12.6 million in expected benefit payments for the postretirement benefit plan, $103.8 million in commitments to fund tax-advantaged investment partnerships, a $12.0 million tax reimbursement liability related to the block of life insurance business sold to Protective Life in 2001, and a $13.3 million liability for our deferred compensation plan.
The fluctuations in the difference between the Statutory Results and Adjusted GAAP Results for 2015 compared to 2014 and 2014 compared to 2013 were primarily due to differences in the prescribed accounting treatments between GAAP and Statutory
The pendency of the Merger and operating restrictions contained in the Merger Agreement could adversely affect our business and operations.
Shareholder litigation against us, our directors and/or Meiji Yasuda could delay or prevent the Merger and cause us to incur significant costs and expenses.
Our ability to conduct business may be compromised if we are unable to maintain the availability of our systems and safeguard the security of our data in the event of a disaster or other unanticipated events.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of StanCorp Financial Group, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for investments in qualified affordable housing projects effective January 1, 2013 due to the adoption of Accounting Standards Update No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects.
(1) Net of tax benefit of $85.7 million, tax expense of $24.6 million and tax benefit of $111.1 million for 2015, 2014 and 2013, respectively.
(2) Net of tax expense of $2.3 million and tax benefits of $1.1 million and $3.1 million for 2015, 2014 and 2013, respectively.
(3) Net of tax expense of $2.9 million, tax benefit of $37.9 million and tax expense of $22.2 million for 2015, 2014 and 2013, respectively.
StanCorp has the following wholly-owned operating subsidiaries: Standard Insurance Company (“Standard”), The Standard Life Insurance Company of New York, Standard Retirement Services, Inc. (“Standard Retirement Services”), StanCorp Equities, Inc. (“StanCorp Equities”), StanCorp Mortgage Investors, LLC (“StanCorp Mortgage Investors”), StanCorp Investment Advisers, Inc. (“StanCorp Investment Advisers”), StanCorp Real Estate, LLC (“StanCorp Real Estate”), Standard Management, Inc. (“Standard Management”) and StanCap Insurance Company, Inc. (“StanCap Insurance Company”).
StanCorp Equities is a limited business broker-dealer and member of the Financial Industry Regulatory Authority. As a wholesaler, StanCorp Equities activities are limited to soliciting and supporting third-party broker-dealers and investment advisers that offer or advise their retirement plan clients on using an unregistered group annuity contract or a mutual fund trust platform.
Standard Management manages certain real estate properties held for sale from time to time in conjunction with the Company’s real estate business.
Standard holds interests in tax-advantaged investments. The carrying value of these interests was $310.3 million at December 31, 2015 and $277.0 million at December 31, 2014. The majority of the tax-advantaged investments qualify as affordable housing investments and are accounted for under the proportional amortization method (“PAM”). The carrying value of the investments accounted for under PAM was $303.8 million and $257.5 million at December 31, 2015 and December 31, 2014, respectively. For tax-advantaged investments with state premium tax credits, the state premium tax credits and the related investment losses are recorded in net investment income. The Company believes this presentation accurately matches the cost and benefits for these investments. Tax-advantaged investments that do not qualify as affordable housing investments are accounted for under the equity method of accounting.
The Company adopted Accounting Standards Update (“ASU”) No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects as of January 1, 2015, which permits entities to account for investments in qualified affordable housing projects
The following tables set forth the affected financial statement line items that were adjusted compared to the financial results as originally reported as of December 31, 2014 and 2013:
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) which require management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent assets and contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The estimates most susceptible to material changes due to significant judgment are those used in determining investment valuations, the reserves for future policy benefits and claims, DAC, VOBA and other intangible assets, pension and postretirement benefit plans and the provision for income taxes. The results of these estimates are critical because they affect the Company’s profitability and may affect key indicators used to measure the Company’s performance. These estimates have a material effect on the Company’s results of operations and financial condition.
If it is determined an other-than-temporary impairment (“OTTI”) exists and the Company does not have the intent to sell the security and determines that it is not more likely than not that it will be required to sell the security, the Company separates the OTTI of fixed maturity 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 (loss). The cost basis of the fixed maturity security is permanently adjusted to reflect the credit loss. Once an impairment has been recorded, the Company continues to review the OTTI securities for further potential impairment.
Commercial mortgage loans are stated at amortized cost 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 and a specific loan loss allowance.
The Company continuously monitors its commercial mortgage loan portfolio for potential impairment by evaluating the portfolio and individual loans. Key factors that are monitored are as follows:
Real estate is comprised of two components: real estate investments and real estate acquired in satisfaction of debt through foreclosure or acceptance of deeds in lieu of foreclosure on commercial mortgage loans (“Real Estate Owned”).
Real estate investments are recorded at the lower of cost or net realizable value. The Company generally depreciates real estate investments using the straight-line depreciation method with useful lives varying from 30 to 40 years.
Total real estate was $25.4 million and $37.0 million at December 31, 2015 and 2014, respectively. Accumulated depreciation for real estate totaled $13.6 million and $12.0 million at December 31, 2015 and 2014, respectively.
The Company performs an impairment analysis at least quarterly for all tax-advantaged investments. If the net present value of expected future cash flows of a tax-advantaged investment is less than the current book value of the investment, the Company evaluates whether a decline in value is other than temporary. If it is determined an OTTI exists, the investment is written down to the net present value of expected future cash flows and the OTTI is recognized as a capital loss in the period in which it was determined to be impaired.
The Company uses derivative financial instruments to mitigate business risks including interest rate risk exposure. The Company has the following derivatives: interest rate swaps, index-based interest guarantees embedded in indexed annuities (“index-based interest guarantees”) and Standard & Poor’s (“S&P”) 500 Index call spread options (“S&P 500 Index options”).
The Company uses interest rate swaps to reduce the risks from changes in interest rates, to manage interest rate exposures arising from asset and liability mismatches, to protect against variability in future cash flows, and to protect the value of investments held on the consolidated balance sheets. These interest rate swaps are designed to qualify for hedge accounting as cash flow and fair value hedges. Valuations for interest rate swaps are sensitive to changes in the interest rate environment. Interest rate swaps are recognized as either other invested assets or other liabilities and are reported at fair value. To qualify for hedge accounting, the Company documents the risk management objective and strategy for undertaking the hedging transaction and the designation of the hedge as either a cash flow hedge or a fair value hedge at the inception of the hedging transaction. Included in this documentation is a description of how the interest rate swap is expected to hedge the designated risk related to specific assets or liabilities and a description of the method that will be used to retrospectively and prospectively assess the hedge effectiveness, the method that will be used to measure ineffectiveness and how ineffectiveness will be recorded.
If the Company disposes of a hedged item, the Company will terminate the related interest rate swap and recognize a capital gain or loss on termination.
The Company purchases S&P 500 Index options for its interest crediting strategy used in its indexed annuity product. The S&P 500 Index options are purchased from investment banks and are selected in a manner that supports the amount of interest that is expected to be credited in the current year to annuity policyholder accounts that are dependent on the performance of the S&P 500 Index. The purchase of S&P 500 Index options is a pivotal part of the Company’s risk management strategy for indexed annuity products. The S&P 500 Index options are exclusively used for risk management. Changes in the fair value of S&P 500 Index options are recorded in net investment income.
Cash settlement activity of derivative contracts is reported in the consolidated statements of cash flows as a component of proceeds from or acquisition of other invested assets.
The Company’s individual deferred annuities and group annuity products are classified as investment contracts. DAC related to these products is amortized over the life of related policies in proportion to expected gross profits. For the Company’s individual deferred annuities, DAC is generally amortized over 30 years with approximately 53% and 93% expected to be amortized by years 5 and 15, respectively. DAC for group annuity products is amortized over 10 years with approximately 73% expected to be amortized by year 5.
These assumptions are modified to reflect actual experience when appropriate. Although a change in a single assumption may have an impact on the calculated amortization of DAC or VOBA for balances associated with investment contracts, it is the relationship of that change to the changes in other key assumptions that determines the ultimate impact on DAC or VOBA amortization. Because actual results and trends related to these assumptions vary from those assumed, the Company revises these assumptions annually to reflect its current best estimate of expected gross profits. As a result of this process, known as “unlocking,” the cumulative balances of DAC and VOBA are adjusted with an offsetting increase or decrease to income to reflect changes in the period of the revision. An unlocking event generally occurs as a result of actual experience or future expectations differing from previous estimates. As a result of unlocking, the amortization schedule for future periods is also adjusted.
The Company’s other intangible assets are subject to amortization and consist of certain customer lists from Asset Management businesses acquired and an individual disability marketing agreement. Customer lists have a combined estimated weighted-average remaining life of approximately 4.3 years and will be fully amortized by the end of 2022. The marketing agreement accompanied the Minnesota Life transaction and provides access to Minnesota Life agents, some of whom now market Standard’s individual disability insurance products. The Minnesota Life marketing agreement will be fully amortized by the end of 2023.
Benefits and expenses are matched with recognized premiums to result in recognition of profits over the life of the contracts. The match is accomplished by recording a provision for future policy benefits and unpaid claims and claim adjustment expenses. For most
of the Company’s product lines, management establishes and carries as a liability actuarially determined reserves that are calculated to meet the Company’s obligations for future policy benefits and claims. These reserves do not represent an exact calculation of the Company’s future benefit liabilities but are instead estimates based on assumptions and considerations concerning a number of factors, which include:
Other comprehensive income includes changes in unrealized capital gains and losses on fixed maturity securities, net of the related tax effects, changes in unrealized prior service costs and credits and net gains and losses associated with the Company’s employee benefit plans, net of the related tax effects and unrealized gains and losses on cash flow hedges, net of the related tax effects.
In May 2014, the Financial Accounting Standard Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers. The main objective of ASU No. 2014-09 is to provide a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This ASU does not apply to insurance contracts, financial instruments, and various other topics within the FASB Accounting Standards Codification. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.
ASU No. 2015-01 is effective for annual periods and interim reporting periods within those annual periods beginning after December 15, 2015. Early adoption is permitted if guidance is applied as of the beginning of the annual period of adoption. The Company does not expect this ASU to have a material effect on its financial position, results of operations or cash flows.
ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs
ASU No. 2015-03 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. As of December 31, 2015, the Company had $3.5 million in debt issuance costs. The Company does not expect this ASU to have a material effect on its financial position, results of operations or cash flows.
ASU No. 2015-09 is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating this ASU for applicability and additional disclosures. The Company does not expect this ASU to have a material effect on its financial position, results of operations or cash flows.
ASU No. 2016-01 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. Early adoption is only permitted if the entity presents separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The Company is currently evaluating this ASU for applicability and additional disclosures. The Company does not expect this ASU to have a material effect on its financial position, results of operations or cash flows.
ASU No. 2016-02 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018 and interim reporting periods within those annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating this ASU for applicability and additional disclosures. The Company does not expect this ASU to have a material effect on its financial position, results of operations or cash flows.
Net income per basic common share was calculated by dividing net income by the weighted-average common shares outstanding. Net income per diluted common share was calculated using the treasury stock method and reflects the dilutive effects of stock awards and potential exercises of dilutive outstanding stock options. Diluted weighted-average common shares outstanding does not include stock options with an option exercise price greater than the average market price because they are antidilutive and inclusion would increase net income per diluted common share.
The total intrinsic value of the options exercised was $17.9 million, $5.9 million and $14.4 million for 2015, 2014 and 2013, respectively. The amount that the Company received from the exercise of stock options was $15.4 million, $10.9 million and $50.2 million for 2015, 2014 and 2013, respectively. The related tax benefit derived from the tax deduction received by the Company for the difference between the market price of StanCorp common stock and the exercise price when the options were exercised was $3.3 million for 2015 and $3.6 million for both 2014 and 2013.
The Company issued 27,675 shares of StanCorp common stock awards for 2015 related to the vesting of the RSUs. The Company did not issue shares for 2014 and 2013.
The compensation cost of RSUs is recognized over the vesting period, which is the period over which the grantee must provide services to the Company. At December 31, 2015, the total compensation cost related to unvested RSUs that had not yet been recognized in the financial statements was $3.5 million. This cost will be recognized over a remaining weighted-average vesting period of 1.7 years.
The Company grants Performance Shares to designated senior officers as long-term incentive compensation. The payout for these awards is based on the Company’s financial performance over a three-year period. Performance Share grants represent the maximum number of shares of StanCorp common stock issuable to the designated senior officers if specified criteria are met. The actual number of shares issued at the end of the performance period is based on continued employment and satisfaction of the Company’s financial performance conditions, with a portion of the shares withheld to cover required tax withholding.
The Company issued 52,100 and 8,846 shares of StanCorp common stock awards for 2015 and 2014, respectively. Due to timing of when performance shares vested, the Company did not issue shares for 2013.
The fair value of Performance Shares is based on the closing market price of StanCorp common stock on the grant date.
Each non-employee director receives annual stock grants with fair value equal to $100,000 based on the closing market price of StanCorp common stock on the day of the annual shareholder meeting. The stock grants generally vest after one year.
The Company recognizes as a component of accumulated other comprehensive loss (income), net of tax, the actuarial gains or losses, prior service costs or credits, and transition assets that have not yet been recognized as components of net periodic benefit cost.
The following table sets forth the amounts recognized in accumulated other comprehensive loss:
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 2016 are $5.3 million and $0.6 million net of tax, respectively.
The Company made contributions to the employee pension plan of $15.0 million in 2014. The Company did not make any contributions to the employee pension plan in 2015 and 2013. The Company is not obligated to make any contributions to its pension plans for 2016. In addition, no plan assets are expected to be returned to the Company in 2016.
The investment goal of the employee pension plan is to produce long-run portfolio returns that are consistent with reasonable contribution rates and a well-funded plan. To manage the overall risk of the portfolio, the portfolio is reviewed quarterly and rebalanced as necessary to keep the allocation of debt and equity securities within target allocation tolerance levels. The equity securities include pooled separate account funds comprised of large cap growth, large cap blend, large cap value, mid cap blend and foreign mutual funds and are diversified across investment strategies. The employee pension plan held no StanCorp equity securities as plan assets at December 31, 2015 and 2014. The plan invests in a stable asset fund comprised of debt securities included in the
general account represented by a Deposit Administration Contract with Standard. Standard maintains the contributions in an unallocated fund, whose assets are invested with other assets in the general account of Standard. The account is credited with earnings on the underlying investments and charged for plan withdrawals and administrative expenses charged by Standard Retirement Services. The stable asset fund contract may subject the plan to concentrations of risk as its contract value is dependent on the ability of Standard to honor its contractual commitments. There are no reserves against the contract value for credit risk of Standard or otherwise.
There were no transfers into or from Level 1, 2 or 3 for 2015 and 2014.
As a result of inputs used during the current period to estimate the fair value of the stable asset fund, Plan management has categorized the stable asset fund as having Level 2 inputs at December 31, 2015. The valuation methods may produce fair value calculations that may not be indicative of net realizable values or reflective of future fair values. See “Note 9-Fair Value” for further disclosure on valuation methods. Furthermore, although the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Eligible executive officers, directors, agents and group producers may participate in one of several non-qualified deferred compensation plans under which a portion of the deferred compensation for participating executive officers, agents and group producers is matched. The liability for the plans was $13.3 million and $12.6 million at December 31, 2015 and 2014, respectively.
The Company recognizes the funded status of the postretirement benefit plan as an asset or liability on the consolidated balance sheets. The funded status is measured as the difference between the fair value of the plan assets and the accumulated postretirement benefit obligation.
The gains and losses, and prior service costs or credits excluded from the projected postretirement benefit obligation are recognized as a component of accumulated other comprehensive loss (income), net of tax.
* Year that the rate reaches the ultimate trend is 2028.
Postretirement benefit plan assets are recorded at fair value and are disclosed below using a three-level hierarchy. See “Note 9-Fair Value” for additional fair value information. As there was not an active market for the Company’s municipal and corporate bond holdings at December 31, 2015, the municipal and corporate bonds were valued using Level 2 measurements.
Eligible executive officers are covered by a non-qualified supplemental retirement plan (“non-qualified plan”). Under the non-qualified plan, a participant is entitled to a normal retirement benefit once the participant reaches age 65. A participant can also receive a normal, unreduced retirement benefit once the sum of his or her age plus years of service is at least 90. The Company recognizes the unfunded status of the non-qualified plan in other liabilities on the consolidated balance sheets. The unfunded status was $45.7 million and $42.8 million at December 31, 2015 and 2014, respectively. Expenses were $5.2 million, $3.9 million and $3.1 million for 2015, 2014 and 2013, respectively. The net loss and prior service cost, net of tax, excluded from the net periodic benefit cost and reported as a component of accumulated other comprehensive income were $11.0 million, $11.7 million and $5.7 million at December 31, 2015, 2014 and 2013, respectively.
The Company collectively views and operates its businesses as Insurance Services and Asset Management. Insurance Services contains two reportable product segments, Employee Benefits and Individual Disability. Insurance Services offers group and individual disability insurance, group life and AD&D insurance, group dental and group vision insurance, and absence management services. Asset Management is a separate reportable segment. Asset Management provides investment and asset management products and services. Asset Management offers full-service 401(k) plans, 403(b) plans, 457 plans, defined benefit plans, money
purchase pension plans, profit sharing plans and non-qualified deferred compensation products and services. Asset Management also offers investment advisory and management services, origination and servicing of fixed-rate commercial mortgage loans, individual fixed and indexed annuity products, group annuity contracts and retirement plan trust products. The Other category includes return on capital not allocated to the product segments, holding company expenses, operations of certain unallocated subsidiaries, interest on debt, unallocated expenses, net capital gains and losses primarily related to the impairment or the disposition of the Company’s invested assets and adjustments made in consolidation. Resources are allocated and performance is evaluated at the segment level. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. See “Note 1-Summary of Significant Accounting Policies.”
The following table sets forth premiums, administrative fees and net investment income by major product line or category within each of the Company’s segments:
The following table sets forth StanCorp’s condensed statements of income and comprehensive income:
The following table sets forth the amounts recorded in income taxes related to tax credits, the benefits from tax losses and the amortization of the tax-advantaged investments that qualify as affordable housing investments:
The Company is carrying forward a deferred tax asset of $11.4 million related to losses attributable to various states and municipalities. In some instances, state and local loss carryforwards are subject to a shorter expiration period than the 20-year federal period. Further, some losses originated in a subsidiary which has reduced its operations in the state where the loss was incurred. The Company believes that the benefit from certain state and local NOLs carryforwards will not be realized. As such, the Company has provided a valuation allowance of $2.3 million at December 31, 2015 on the deferred tax assets relating to these assets. If the Company’s assumptions change, the Company may be able to realize these NOLs. The state and local loss carryforwards expire at various dates through 2030.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels: Level 1 inputs are based upon quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date. Level 2 inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 inputs are generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use in pricing the asset or liability.
For disclosure purposes, the fair values of commercial mortgage loans were estimated using a discounted cash flow valuation. The valuation includes both observable market inputs and estimated model parameters.
Pricing for loans originated by the Company during the most recent quarter.
The fair value for long-term debt was based on inputs including quoted market prices in an active market and trade activity.
Fixed maturity securities, S&P 500 Index options, interest rate swaps and index-based interest guarantees embedded in indexed annuities (“index-based interest guarantees”) are recorded at fair value on a recurring basis. In the Company’s consolidated statements of comprehensive income, unrealized gains and losses are reported in other comprehensive income (loss) for fixed maturity securities. In the Company’s consolidated statements of income, the change in fair value for S&P 500 Index options is reported in net investment income. For interest rate swaps that are designated as a fair value hedge, the change in the fair values of the interest rate swap and the hedged item are reported in net capital gains and losses. The fair value of interest rate swaps is determined through Level 2 inputs using quoted prices from an independent pricing service. The change in fair value for index-based interest guarantees is reported in interest credited.
Separate account assets represent segregated funds held for the exclusive benefit of contract holders. The activities of the account primarily relate to participant-directed 401(k) contracts. Separate account assets are recorded at fair value on a recurring basis, with changes in fair value recorded to separate account liabilities. Separate account assets consist of mutual funds. The mutual funds’ fair value is determined through Level 1 and Level 2 inputs. The majority of the separate account assets are valued using quoted prices in an active market with the remainder of the assets valued using quoted prices from an independent pricing service. The Company reviews the values obtained from the pricing service for reasonableness through analytical procedures and performance reviews.
The Company uses independent pricing services to assist management in determining the fair value of these assets. The pricing services incorporate a variety of information observable in the market in their valuation techniques, including:
The Company performs control procedures over the external valuations at least quarterly through a combination of procedures that include an evaluation of methodologies used by the pricing services, analytical reviews and performance analysis of the prices against statistics, trends and other pricing sources, back testing of sales activity and maintenance of a list of fixed maturity securities with characteristics that could indicate potential impairment. As necessary, the Company compares prices received from the pricing services to prices independently estimated by the Company utilizing discounted cash flow models or through performing independent valuations of inputs and assumptions similar to those used by the pricing service in order to ensure prices represent a reasonable estimate of fair value. Although the Company does identify differences from time to time as a result of these validation procedures, the Company did not make any significant adjustments as of December 31, 2015 or December 31, 2014.
Valuations for the index-based interest guarantees are sensitive to a number of variables, but are most sensitive to the S&P 500 Index value, the implied volatilities of this index and the interest rate environment. Generally, a significant increase or decrease used in the assumption for the implied volatilities and in the S&P 500 Index value would result in a directionally similar change, while an increase or decrease in interest rate environment would result in a directionally opposite change in the fair value of the liability.
Valuations for real estate acquired in satisfaction of debt through foreclosure or acceptance of deeds in lieu of foreclosure on commercial mortgage loans (“Real Estate Owned”) measured at fair value on a nonrecurring basis using significant unobservable Level 3 inputs are sensitive to a number of variables. They are most sensitive to the reductions taken on appraisals obtained, which may result in a fair value and carrying value below the appraised value. Generally, an increase in the reductions taken on appraisals obtained would result in a reduction in the fair value of the asset.
(b) Represents various actuarial assumptions which include combined lapse, mortality and withdrawal decrement rates which generally have a range of inputs from 5% - 36% for both December 31, 2015 and December 31, 2014.
For all periods disclosed above, fixed maturity securities transferred into Level 3 from Level 2 are the result of the Company being unable to obtain observable inputs for these investments in the market. Fixed maturity securities transferred out of Level 3 into Level 2 are the result of the Company being able to obtain observable inputs for these investments in the market. There were no transfers between Level 1 and Level 2 for 2015 and 2014.
The following table sets forth the changes in unrealized gains (losses) included in net income relating to Level 3 assets and liabilities that the Company continued to hold:
Certain assets and liabilities are measured at fair value on a nonrecurring basis such as impaired commercial mortgage loans with specific allowances for losses and Real Estate Owned. The impaired commercial mortgage loans and Real Estate Owned are valued using Level 3 measurements. These Level 3 inputs are reviewed for reasonableness by management and evaluated on a quarterly basis. The commercial mortgage loan measurements include valuation of the market value of the underlying collateral asset using general underwriting procedures and appraisals. Real Estate Owned is initially recorded at net realizable value, which includes an estimate for disposal costs. These amounts may be adjusted in a subsequent period as additional information is received.
The Company monitors its commercial mortgage loan portfolio for potential impairment by evaluating the portfolio and individual loans. See “Note 1-Summary of Significant Accounting Policies-Investment Valuations-Commercial Mortgage Loans” for the Company’s commercial mortgage loan impairment evaluation.
The general loan loss allowance is based on the Company’s 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.
A modification is considered to be a troubled debt restructuring when the debtor is experiencing financial difficulties and the restructured terms constitute a concession. Granting payment forbearance is not a modification of the loan if the payment forbearance is considered to be an insignificant timing difference associated with the borrowing. The Company evaluates all restructured commercial mortgage loans for indications of troubled debt restructurings and the potential losses related to these restructurings. If a loan is considered a troubled debt restructuring, the Company impairs the loan and records a specific allowance for estimated losses. In some cases, the recorded investment in the loan may increase post-restructuring. The Company assessed all restructurings that occurred during the period to determine if they were troubled debt restructurings. The Company did not identify any troubled debt restructurings that were not already considered impaired.
The following table sets forth the average recorded investment in impaired commercial mortgage loans before specific loan loss allowances:
The Company closely monitors all past due commercial mortgage loans. Additional attention is given to those loans at least 60 days past due. Commercial mortgage loans that have been granted payment forbearance are not considered to be past due and totaled $6.3 million and $5.2 million at December 31, 2015 and 2014, respectively. Commercial mortgage loans that were at least 60 days past due totaled $10.0 million and $8.6 million at December 31, 2015 and 2014, respectively. Commercial mortgage loans that were at least 60 days past due were 0.18% of the commercial mortgage loan portfolio at December 31, 2015, compared to 0.16% at December 31, 2014.
Tax-advantaged investments that do not qualify as affordable housing investments are accounted for under the equity method of accounting as a component of net investment income. For tax-advantaged investments with state premium tax credits, the state
premium tax credits and the related investment losses are recorded as a component of net investment income. See “Note 1-Summary of Significant Accounting Policies-Investment Valuations-Tax-advantaged Investments.”
The Company uses derivative financial instruments to mitigate business risks including interest rate exposure. The Company has the following derivatives on its consolidated balance sheets: interest rate swaps, index-based interest guarantees and S&P 500 Index options.
The Company uses interest rate swaps to reduce risks from changes in interest rates, to manage interest rate exposures arising from asset and liability mismatches, to protect against variability in future cash flows, and to protect the value of the Company’s investments. These interest rate swaps are designed to qualify for hedge accounting as cash flow and fair value hedges.
In the second quarter of 2015, the Company completed the purchase of $115.0 million of par value of fixed maturity securities that were part of an anticipated bond purchase cash flow hedge strategy. The unwinding of the cash flow hedge resulted in $9.6 million of deferred losses that were recorded to AOCI as unrealized capital losses on fixed maturity securities, net of tax. This amount will be amortized over a weighted-average period of 26 years with an estimated $0.4 million to be reclassified to net investment income over the next 12 months.
The Company uses interest rate swaps to effectively convert certain of its fixed maturity securities into floating rate securities to reduce market risks from changes in interest rates and to mitigate interest rate exposure arising from asset and liability mismatches. Under these interest rate swap agreements, the Company receives a variable rate of interest and pays a fixed rate of interest. Changes in the fair value of the interest rate swaps used in fair value hedges and the changes in the fair value of hedged items attributable to the hedged risk are recorded to net capital gains and losses. Any ineffectiveness of fair value hedges is recorded to net capital gains or losses. Interest income, interest expense and fees related to interest rate swaps used in the Company’s fair value hedges are recorded as a component of net investment income.
The Company sells indexed annuities, which permit the holder to allocate their deposit between a fixed interest rate return and 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. The index-based interest guarantees do not qualify for hedge accounting. 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 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 to interest credited. The liability represents an estimate of the cost of the options to be purchased in the future to manage the risk related to the index-based interest guarantees. The liability for index-based interest guarantees is the present value of future cash flows attributable to the projected index growth that is in excess of cash flows attributable to fixed interest rates guarantees. The excess cash flows are discounted back to the date of the balance sheet using current market indicators for future interest rates and option costs. Cash flows depend on actuarial estimates for policyholder lapse behavior and management’s discretion in setting renewal index-based interest guarantees.
(3) The notional amount is not determinable due to the underlying factors for index-based interest guarantees vary by contract and other criteria, such as floors and ceilings on rates and future payouts.
The following table sets forth the amount of gains or losses recognized in the consolidated statements of income from the changes in fair value of the Company’s derivative assets and liabilities:
Fluctuations in the fair value of the interest rate swaps are driven by changes in the interest rate environment. Fluctuations in the fair value of the S&P 500 Index options are related to the volatility of the S&P 500 Index. Changes in fair value of the index-based interest guarantees are sensitive to a number of variables, but are most sensitive to the volatility of the S&P 500 Index and to changes in the interest rate environment.
As the Company uses a central counterparty (“CCP”) to clear all of its interest rate swaps, the Company is only exposed to the default of the CCP. Transactions with the CCP require the Company to pledge initial and variation margin collateral on a daily basis. The Company pledged $15.4 million and $12.2 million of cash and cash equivalents at December 31, 2015 and 2014, respectively, and $7.9 million of fixed maturity securities at December 31, 2015 as collateral to the CCP. No fixed maturity securities were pledged at December 31, 2014.
The Company is exposed to the credit worthiness of the institutions from which it purchases its S&P 500 Index options and these institutions’ continued abilities to perform according to the terms of the contracts. The current values for the credit exposure have been affected by fluctuations in the S&P 500 Index. The Company’s maximum credit risk exposure would require an increase of 8.3% in the value of the S&P 500 Index. The maximum credit risk is calculated using the cap strike price of the Company’s S&P 500 Index options less the floor price, multiplied by the notional amount of the S&P 500 Index options.
The following table sets forth activity for DAC, VOBA and other intangible assets:
The liability for unpaid claims, claim adjustment expenses and other policyholder funds includes liabilities for insurance offered on products such as group long term and short term disability, individual disability, group dental and group vision, and group AD&D. The liability for unpaid claims and claim adjustment expenses is established when a claim is incurred or is estimated to have been incurred but not yet reported to the Company, and is the Company’s best estimate of the present value of the liability of future unpaid claims and claim adjustment expenses. This liability is included in future policy benefits and claims on the consolidated balance sheets.
The primary components of other policyholder funds are retirement plan stable asset funds for which the Company provides recordkeeping services, individual fixed-rate annuity funds, investment only stable asset funds and indexed annuity funds. The remaining balance is comprised primarily of premiums on deposits, advanced premiums and experience-related liabilities.
Standard maintains a strategic marketing alliance with Ameritas Life Insurance Corp. (“Ameritas”) that offers Standard’s policyholders flexible dental coverage options and access to Ameritas’ nationwide preferred provider organization panel of dentists. As part of this alliance, Standard and Ameritas entered into a reinsurance agreement. In 2015, the agreement provided for 26.5% of the net dental premiums written by Standard and the risk associated with this premium to be ceded to Ameritas.
Standard participates in a reinsurance and third-party administration arrangement with Northwestern Mutual Life Insurance Company (“Northwestern Mutual”) under which Northwestern Mutual group long term and short term disability products are sold using Northwestern Mutual’s agency distribution system. Generally, Standard assumes 60% of the risk and receives 60% of the premiums for the policies issued. If Standard were to become unable to meet its obligations, Northwestern Mutual would retain the reinsured liabilities. Therefore, in accordance with an agreement with Northwestern Mutual, Standard established a trust for the benefit of Northwestern Mutual with the market value of assets in the trust equal to Northwestern Mutual’s reinsurance receivable from Standard. The market value of assets required to be maintained in the trust at December 31, 2015, was $231.8 million. Premiums assumed by Standard for the Northwestern Mutual business accounted for approximately 3% of Standard’s total premiums for each of the three years 2015, 2014 and 2013. In addition to assuming risk, Standard provides product design, pricing, underwriting, legal support, claims management and other administrative services under the arrangement.
The Company also maintains reinsurance coverage for certain catastrophe losses related to group life and AD&D. In February 2015, the Company was notified of the termination of the catastrophe reinsurance pool, in which we previously participated with other insurance companies, effective June 2015. The Company has replaced the membership in the catastrophe reinsurance pool with traditional catastrophe reinsurance.
Effective October 1, 2000, Standard assumed, through a reinsurance agreement, the individual disability insurance business of Minnesota Life. Standard paid a ceding commission of approximately $55 million and received approximately $500 million in assets and corresponding statutory liabilities. If Standard were to become unable to meet its obligations, Minnesota Life would retain the reinsured liabilities. Therefore, in accordance with the agreement with Minnesota Life, Standard established a trust for the benefit of Minnesota Life with the market value of assets in the trust equal to Minnesota Life’s reinsurance receivable from Standard. The market value of assets required to be maintained in the trust is determined quarterly. The market value of assets required to be maintained in the trust at December 31, 2015, was $530.4 million. Accompanying the transaction was a national marketing agreement that provides access to Minnesota Life agents, some of whom now market Standard’s individual disability insurance products. The national marketing agreement is renewed annually.
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 Standard. The market value of assets required to be maintained in the trust is determined quarterly. The market value of assets required to be maintained in the trust at December 31, 2015, was $180.7 million. Approximately $60 million in VOBA was recorded related to the reinsurance agreement.
Standard and The Standard Life Insurance Company of New York prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by their states of domicile. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as the Statements of Statutory Accounting Principles set forth in publications of the National Association of Insurance Commissioners (“NAIC”). Standard and the Standard Life Insurance Company of New York did not use any prescribed or permitted statutory accounting practices that are different than the statutory accounting practices promulgated by the NAIC for the years ended 2015, 2014 or 2013.
Standard and The Standard Life Insurance Company of New York are subject to statutory restrictions that limit the maximum amount of dividends and distributions that they could declare and pay to StanCorp without prior approval of the states in which the subsidiaries are domiciled. Standard’s ability to pay dividends to StanCorp is affected by factors deemed relevant by Standard’s Board of Directors and by Oregon law, which limits Standard’s dividend payments and other distributions to the earned surplus arising from its business. If the proposed dividend or other distribution exceeds certain statutory limitations, Standard must receive prior approval of the Director of the Oregon Department of Consumer and Business Services-Division of Financial Regulation (“Oregon Insurance Division”). The current statutory dividend limitations are the greater of (a) 10% of Standard’s combined capital and surplus as of December 31 of the preceding year, or (b) the net gain from operations after dividends to policyholders and federal income taxes and before realized capital gains or losses for the 12-month period ended on the preceding December 31. In each case, the limitation must be determined under statutory accounting practices. Oregon law gives the Oregon Insurance Division broad discretion to approve or decline requests for dividends and other distributions in excess of these limits. As of December 31, 2015, Standard’s net gain from operations after dividends to policyholders and federal income taxes and before capital gains or losses for the 12-month period then ended was $179.9 million and capital and surplus was $1.09 billion. Based upon Standard’s results for 2015, the amount of ordinary dividends and other distributions available in 2016, without additional approval from the Oregon Insurance Division is $179.9 million. As of December 31, 2014, Standard’s net gain from operations after dividends to policyholders and federal income taxes and before capital gains or losses for the 12-month period then ended was $208.5 million and capital and surplus was $1.15 billion. Based upon Standard’s results for 2014, the amount of ordinary dividends and other distributions available in 2015, without additional approval from the Oregon Insurance Division was $208.5 million.
State insurance departments require insurance enterprises to adhere to minimum Risk-Based Capital (“RBC”) requirements promulgated by the NAIC. At December 31, 2015 and 2014, 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 $154.2 million and $149.6 million at December 31, 2015 and 2014, respectively. At December 31, 2015, the capital and surplus of the Company’s insurance subsidiaries was approximately 410% of the Company Action Level RBC required by regulators, which was approximately 820% of the Authorized Control Level RBC required by the Company’s states of domicile. 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.
The Company has $252.9 million of 6.90%, Subordinated Debt, which matures on June 1, 2067 and is non-callable prior to June 1, 2017. In 2014, the Company repurchased $47.1 million in principal amount of Subordinated Debt. Interest is payable semi-annually on June 1 and December 1 for the first 10 years up to June 1, 2017, and quarterly thereafter at a floating rate equal to three-month LIBOR plus 2.51%. StanCorp has the option to defer interest payments for up to five years. The declaration and payment of dividends to shareholders would be restricted if the Company elected to defer interest payments on its Subordinated Debt. If elected, the restriction would be in place during the interest deferral period. StanCorp is currently not deferring interest on the Subordinated Debt. In the second quarter of 2015, the Company entered into $252.9 million of interest rate swaps to convert the floating rate of the Company’s Subordinated Debt to a weighted-average fixed rate of 5.13%, beginning June 1, 2017 until June 1, 2042. See “Note 11-Derivative Financial Instruments.”
The four lawsuits were filed in the Circuit Court of the State of Oregon for the County of Multnomah under the following captions: Shiva Stein, et al. v. StanCorp Financial Group, Inc., et al., Case No. 15CV20372, filed July 31, 2015, Bud and Sue Frashier Family Trust, et al. v. J. Greg Ness, et al., Case No. 15CV20832, filed August 7, 2015, Grant Causton, et al. v. StanCorp Financial Group, Inc., et al., Case No. 15CV22197, filed August 20, 2015, and Janet Shock v. StanCorp Financial Group, Inc., et al., Case No. 15CV23748 (later amended to substitute Hillery Scott as plaintiff), filed September 8, 2015. On January 14, 2016, the Multnomah County Circuit Court granted an order of consolidation and appointment of co-lead counsel, consolidating the four lawsuits for purposes of hearing and trial (the “Oregon Action”).
Based on these allegations, the complaints seek certain injunctive relief, including enjoining the merger, and, to the extent already implemented, rescission of the merger. The complaints also seek other damages, including recovery of all damages suffered by the plaintiffs as a result of the individual defendants’ alleged wrongdoing, including rescissory damages, and costs of the actions, including attorneys’ fees.
On November 3, 2015, the Company, each of the members of the Company’s Board, Meiji Yasuda, and Merger Sub entered into a Memorandum of Understanding (the “MOU”) with the plaintiffs in the Oregon Action, which sets forth the parties’ agreement in principle for a settlement of the Oregon Action in which the Company would make certain supplemental disclosures regarding the Merger in exchange for a release. As set forth in the MOU, the Company, the members of the Company’s Board, Meiji Yasuda, and Merger Sub agreed to the settlement solely to eliminate the burden, expense, distraction, and uncertainties inherent in further litigation, and without admitting any liability or wrongdoing. The settlement is subject to court approval.
The Company made the agreed-upon additional disclosures related to the Merger in a Current Report on Form 8-K filed with the SEC on November 3, 2015. As contemplated by the MOU, nothing in the Form 8-K or any stipulation of settlement is an admission of the legal necessity or materiality of any of the disclosures set forth in the Form 8-K.
The Company leases certain buildings and equipment under non-cancelable operating leases that expire in various years through 2023. Some of these leases have renewal options for periods ranging from one to ten years.
Total rent expense was $13.0 million, $13.3 million and $13.7 million for the years ended December 31, 2015, 2014 and 2013, respectively.
(1) Net of tax expense of $24.6 million for net unrealized gains on fixed maturity securities and net of tax benefit of $37.9 million for employee benefits.
(3) Net of tax benefit of $85.7 million for net unrealized losses on fixed maturity securities and net of tax expenses of $2.9 million for employee benefits and $3.1 million for net unrealized gains on derivative instruments.
(4) Net of tax expenses of $2.3 million for net unrealized gains on fixed maturity securities and $4.7 million for employee benefits.
During 2015, the Company incurred $7.8 million of expenses for the proposed merger with Meiji Yasuda. See “Note 22-Proposed Merger with Meiji Yasuda” for more information.
During 2013, the Company implemented expense management initiatives to offset the negative effects of the continued low interest rate environment and lower Employee Benefits premiums compared to prior periods.
If the proposed Merger is completed, each share of the Company’s common stock, no par value, issued and outstanding immediately prior to the Effective Time, other than certain excluded shares, will be converted into the right to receive $115.00 in cash, without interest (the “Per Share Merger Consideration”). Options, awards of restricted stock units and awards of performance-based restricted stock units granted or issued under various benefit plans will be paid out as described below under “Treatment of Equity Incentive Awards.”
Pursuant to the Merger Agreement, at or immediately prior to the Effective Time, each award of performance shares granted under any Company stock plan as to which the performance period has not lapsed, but which is still outstanding, will be canceled and converted into the right to receive an amount in cash, without interest, less any applicable withholding taxes, determined by
Pursuant to the Merger Agreement, at or immediately prior to the effective time of the merger, each annual stock grant awarded to each non-employee director that is outstanding at the effective time of the merger, whether or not vested, will be canceled and converted into the right to receive an amount in cash, without interest, less any applicable withholding taxes, determined by multiplying (i) the Per Share Merger Consideration and (ii) the total number of shares subject to the grant.