to negative employment growth, low wage growth and reduced persistency caused in part by competitive pressure on pricing as our customers continued to navigate a challenging economy that began in the second half of 2008.
Net income per diluted share for 2008 was affected by after-tax net capital losses, primarily due to credit market declines in our bond portfolio. The decrease in net income per diluted share was partially offset by premium growth, especially in the first half of 2008, comparatively favorable claims experience for the group insurance businesses and a 3.1 million reduction in diluted weighted-average shares outstanding resulting from share repurchases.
While current economic pressures persist, we will continue to focus on our long-term objectives and address challenges that arise with financial discipline and from a position of financial strength. We manage for profitability, focusing on good business diversification, disciplined product pricing, sound underwriting, effective claims management and high-quality customer service.
Over the past year, delinquency rates in our commercial mortgage loan portfolio have risen, and we have experienced a corresponding increase in foreclosure activity. While such an increase in delinquencies is expected given current economic challenges, we have not experienced the high delinquency rates or foreclosures experienced by other financial institutions. Unlike many other financial institutions, we do not participate in the commercial mortgage-backed securities market. Instead, we underwrite and service mortgages that we originate, leveraging our long history in commercial mortgage loans and diligence in risk selection. We believe our experience and disciplined underwriting will continue to serve us well in the current economic environment, and our track record of solid performance in this asset class during previous recessions points to the likelihood of our future success.
Despite the economic headwinds, we intend to preserve the value of our business by continuing to provide excellent value to our customers, by continuing to preserve and enhance our financial strength and by continuing to build value for our shareholders despite a troubled economy. We will continue to focus on optimizing shareholder value through investment in new product and service capabilities, which are valued in the group insurance marketplace, and the execution of strategies to streamline processes and capture efficiencies. We believe these actions position us well for growth as the economy recovers.
Flat to low single digit premium growth as a percentage of our 2009 premiums due to a continued challenging economic environment.
The annual benefit ratio for our group insurance business to be consistent with the experience of the previous five years, during which it has ranged from 73.6% to 78.3%.
Premiums from our Insurance Services segment are the primary driver of consolidated premium levels. The three primary factors that influence premium levels for our Insurance Services segment are sales, customer retention, and organic growth that is derived from wage and employment levels. Premiums for the Insurance Services segment decreased 2.0% to $2.07 billion for 2009 compared to 2008 and increased 2.2% to $2.11 billion for 2008 compared to 2007. The decrease in premiums for 2009 was attributable to our group insurance business, which was affected by a lack of organic growth due to negative employment growth, low wage growth and reduced persistency caused in part by competitive pressure on pricing as our customers continued to navigate a challenging economy that began in the second half of 2008. An increase in premiums in the individual disability business partially offset the decrease in premiums in the group insurance business. The increase in premiums in 2008 was due to strong sales in 2007 in our group insurance businesses, partially offset by three large case terminations.
Premiums from our Asset Management segment are generated from sales of life-contingent annuities, which are a single-premium product. Premiums for the Asset Management segment increased 11.6% to $34.7 million for
loans increased to 6.46% at the end of 2009 from 6.39% at the end of 2008. The portfolio yield for fixed maturity securities declined to 5.46% at the end of 2009 from 5.63% at the end of 2008. The increase in net investment income was supplemented by an increase in the fair value of derivative assets. The fair value adjustment to derivative assets resulted in an increase of $4.7 million to net investment income for 2009 compared to a decrease of $11.1 million for 2008. Commercial mortgage loan prepayment fees decreased $4.5 million for 2009 compared to 2008.
Over the past year, we experienced a period of significant widening of credit spreads followed by a period of equally significant tightening of credit spreads, which we are currently experiencing. Given the uncertainty surrounding credit spreads and the direction of interest rates, we may experience lower new money interest rates in the future if credit spreads remain tight and interest rates remain low, or higher new money rates if credit spreads widen or overall interest rates increase. New money interest rates are also affected by the volume and mix of commercial mortgage loan originations and purchases of fixed maturity securities.
The increase in net investment income for 2008 compared to 2007 was primarily due to an increase of 6.9% to $9.05 billion in average invested assets, primarily resulting from business growth in the first three quarters of 2008, as evidenced by premium growth in our insurance businesses, and growth in average assets under administration for the individual fixed-rate annuities. The increase in net investment income was partially offset by decreases in the fair value of derivative assets and in commercial mortgage loan prepayment fees. The fair value adjustment to derivative assets resulted in a decrease in net investment income of $11.1 million and $1.0 million for 2008 and 2007, respectively. Commercial mortgage loan prepayment fees decreased $2.4 million for 2008 compared to 2007. The portfolio yield for our fixed maturity securities increased to 5.63% at the end of 2008 from 5.57% at the end of 2007. The portfolio yield for our commercial mortgage loan portfolio increased to 6.39% at the end of 2008, compared to 6.36% at the end of 2007.
Approximately 91% of our commercial mortgage loans contain a provision that requires the borrower to pay a prepayment fee. These prepayment fees assure us that expected cash flows from commercial mortgage loan investments would be protected in the event of prepayment. As interest rates decrease, potential
prepayment fees correspondingly increase. These potentially larger prepayment fees deter borrowers from refinancing during a low interest rate environment. Since 2001, all new commercial mortgage loans originated by us contain this prepayment provision. Almost all of the remaining commercial mortgage loans contain fixed percentage prepayment fees that mitigate prepayments but may not fully protect our expected cash flow in the event of prepayment. Commercial mortgage loan prepayment fees were $2.8 million, $7.3 million and $9.7 million for 2009, 2008 and 2007, respectively. The lower prepayment fees in 2009 and 2008 reflect fewer customer prepayments due to increases in fees charged for prepayment in a low interest rate environment.
Management segment. See “Business Segments-Insurance Services Segment-Benefits and Expenses-Benefits to Policyholders” and “Business Segments-Asset Management Segment-Benefits and Expenses-Benefits to Policyholders.”
Interest credited represents interest paid to policyholders on retirement plan general account assets and individual fixed-rate annuity deposits in the Asset Management segment and interest paid on life insurance proceeds on deposit in the Insurance Services segment. The primary factors that affect interest credited are growth in general account assets under management, growth in individual fixed-rate annuity liabilities, changes in new investment interest rates and overall portfolio yield, which influence our interest crediting rate for our customers, and changes in customer retention. In addition, the change in the fair value of the embedded derivative associated with our indexed annuity product that is reported as interest credited may fluctuate from quarter to quarter due to changes in interest rates and equity market volatility. See “Business Segments-Asset Management Segment-Benefits and Expenses-Interest Credited” for information regarding the interest credited on our indexed annuity product.
Consolidated interest credited increased by $34.9 million to $145.6 million for 2009, compared to $110.7 million for 2008. The increase in consolidated interest credited was primarily due to favorable market conditions and individual annuity sales leading to growth in average individual annuity assets under administration. Average individual annuity assets under administration increased 32.7% to $2.22 billion for 2009 compared to 2008.
Consolidated interest credited increased by $1.9 million to $110.7 million for 2008, compared to $108.8 million for 2007. The increase reflected significant growth in individual fixed-rate annuity deposits of $760.7 million, or a 58.7% increase over balances at December 31, 2007.
Growth in general account assets for our retirement plans and individual fixed-rate annuities businesses was 11.2% for 2009 compared to 2008, and 28.0% for 2008 compared to 2007. See “Business Segments-Asset Management Segment-Benefits and Expenses-Interest Credited.”
$469.2 million for 2008 compared to 2007. The increase in operating expense for 2009 compared to 2008 was primarily due to one-time costs of $18.6 million related to severance costs and lease terminations, partially offset by a decrease in compensation expense due to a reduction in employee headcount related to cost reduction initiatives. These cost reduction initiatives are expected to enhance our operating efficiencies and to reduce our annualized operating expenses by approximately $25 million. The benefits from these enhanced efficiencies began in the second half of 2009. The run rate savings will be partially offset by continuing product and capability enhancement expenses and the expected effects of employee medical cost inflation. We expect consolidated 2010 operating expense levels to be similar to levels in 2008. See Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 20-Severance, Lease Terminations, Relocation and Restructuring.”
The increased operating expenses for 2008 compared to 2007 were due to business growth in the first three quarters of the year, technology infrastructure costs related to the integration of group annuity and trust product platforms used to administer our retirement plans business, and additional incentive compensation accruals reflecting strong results in our Insurance Services segment. See “Business Segments-Insurance Services Segment-Operating Expenses” and “Business Segments-Asset Management Segment-Operating 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, growth in assets under administration and the profitability of business in each of our segments. Commissions and bonuses decreased 11.2% to $202.0 million for 2009 compared to 2008, and increased 14.9% to $227.6 million for 2008 compared to 2007.
The decrease for 2009 compared to 2008 was primarily due to lower maintenance commissions as a result of lower assets under administration in our retirement plans business for the first three quarters of 2009 and lower premium levels in our group insurance businesses. The increase for 2008 compared to 2007 was primarily due to premium growth in our insurance businesses and strong individual annuity sales in 2008.
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 and because of the inclusion of state and local income taxes, net of the federal tax benefit. The combined federal and state effective tax rates were 33.8%, 32.4% and 33.4% for 2009, 2008 and 2007, respectively. The lower effective income tax rate for 2008 was primarily the result of the favorable resolution of prior year tax matters during that year. At December 31, 2009, the years open for audit by the Internal Revenue Service (“IRS”) were 2006 through 2009. The federal statute of limitations for the 2005 tax year expired at the end of December 2009. See Item 8, “Financial Statements
and Supplementary Data-Notes to Consolidated Financial Statements-Note 10-Income Taxes” for more information on the change in the effective tax rate.
We operate through two reportable segments: Insurance Services and Asset Management, as well as an Other category. Resources are allocated and performance is evaluated at the segment level. The Insurance Services segment offers group and individual disability insurance, group life and accidental death and dismemberment (“AD&D”) insurance, group dental and group vision insurance and absence management services. The Asset Management segment 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 through an affiliated broker-dealer. This segment offers investment advisory and management services, financial planning services, commercial mortgage loan origination and servicing, individual fixed-rate 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, interest on debt, unallocated expenses including one-time costs, net capital gains and losses related to the impairment or the disposition of our invested assets and adjustments made in consolidation.
The Insurance Services segment is our largest segment and substantially influences our consolidated financial results. Income before income taxes for the Insurance Services segment was $356.3 million, $366.4 million and $322.6 million for 2009, 2008 and 2007, respectively. Results for 2009 reflected lower premiums in our group insurance business, partially offset by higher premiums and favorable claims experience in our individual disability business compared to 2008. Results for 2008 reflected favorable claims experience in our group insurance business, partially offset by unfavorable claims experience in our individual disability business compared to 2007. Results for 2008 also reflected premium growth due in part
to premiums from large case sales generated in 2007, partially offset by three large case terminations in 2008. Income before income taxes for this segment for 2007 was affected by premium growth and comparatively favorable claims experience in our group insurance and individual disability businesses.
The following table sets forth key indicators that management uses to manage and assess the performance of the Insurance Services segment:
Revenues for the Insurance Services segment decreased 1.8% to $2.41 billion for 2009 compared to 2008, primarily due to decreased premiums in our group insurance business, partially offset by increased premiums in our individual disability business. Revenues for the Insurance Services segment increased 2.4% to $2.46 billion for 2008 compared to 2007, primarily due to premium growth of 2.2% and increased net investment income in our group insurance business.
Premiums for the Insurance Services segment decreased 2.0% for 2009 compared to 2008, and increased 2.2% for 2008 compared to 2007. The decrease in premiums for 2009 was attributable to our group insurance business, which was affected by a lack of organic growth due to negative employment growth, low wage growth and
Premiums were offset by ERRs of $40.2 million, $44.6 million and $37.2 million for 2009, 2008 and 2007, respectively. ERRs, which are refunds to certain group contract holders based on claims experience, can fluctuate widely from quarter to quarter depending on the underlying experience of specific contracts.
Sales. Sales of our group insurance products reported as annualized new premiums were $287.8 million, $292.5 million and $408.8 million for 2009, 2008 and 2007, respectively. The group insurance market for 2009 continued to reflect a price-competitive sales environment. Sales in 2007 included a few large accounts and a single premium sale of $19.3 million related to a reserve buyout. Excluding the single premium sale of $19.3 million in 2007, sales declined 24.9% for 2008 compared to 2007.
Organic Growth. A portion of premium growth in our group insurance in force business is affected by employment and wage rate growth. Organic growth is also affected by changes in price per insured and the average age of employees. Unfavorable economic conditions resulted in rapidly rising unemployment and negatively
affected both wage and job growth since the second half of 2008, adversely affecting the organic growth in our group insurance businesses. The decline in premiums in our group insurance business was mitigated by the concentration of our group insurance business in sectors that stay relatively stable during various economic cycles.
Net investment income for the Insurance Services segment remained relatively flat with a decrease of 0.7% to $335.1 million for 2009 compared to 2008. Net investment income for the Insurance Services segment increased 3.6% to $337.5 million for 2008 compared to 2007 primarily due to growth in average invested assets due to business growth, as evidenced by premium growth. See “Consolidated Results of Operations-Revenues-Net Investment Income.”
Benefits to policyholders, including interest credited, for the Insurance Services segment decreased 1.6% to $1.54 billion for 2009 compared to 2008, and decreased 1.6% to $1.56 billion for 2008 compared to 2007. The decrease for 2009 compared to 2008 was primarily due to comparatively lower premiums in our group insurance business, favorable claims experience in our individual disability insurance business and the release of group long term disability reserves of $16.6 million as a result of favorable incidence and recovery patterns compared to reserving assumptions. These factors were offset by an increase in reserves of approximately $18 million in 2009 related to the termination of reinsurance on a small block of reinsured policies and claims and an increase in individual disability claims reserves of $11.5 million reflecting unfavorable claim termination patterns compared to reserve assumptions on a small block of individual disability claims.
There was also a termination of reinsurance in 2008 that resulted in an increase in reserves of $3.9 million. The decrease in benefits to policyholders, including interest credited, for the Insurance Services segment for 2008 primarily resulted from favorable claims experience, offset by business growth in the first three quarters of the year as evidenced by premium growth. Premiums for the Insurance Services segment decreased 2.0% for 2009 compared to 2008, and increased 2.2% for 2008 compared to 2007.
Growth in our in force block, as evidenced by premium growth, is one of the primary factors that drive benefits to policyholders. The benefit ratio, calculated as benefits to policyholders and interest credited as a percentage of premiums, is utilized to provide a measurement of claims normalized for premium growth. The benefit ratio for our group insurance product lines for 2009 was 74.7%, compared to 73.6% for 2008 and 77.4% for 2007. The benefit ratio for 2009 was in line with our estimated annual range for 2009 of 73.6% to 78.3%. Claims experience and the corresponding benefit ratio can fluctuate widely from quarter to quarter, but will be more stable when measured on an annual basis.
of the released industry table and our own experience as a more appropriate method for establishing reserve levels compared solely to our own experience. We will continue to monitor the credibility of our developing experience and, if necessary, will adjust reserves accordingly.
We generally expect the individual disability benefit ratio to trend down over the long-term to reflect the growth in the business outside of the large block of disability business assumed in 2000 from Minnesota Life, and we expect there to be a corresponding shift in revenues from net investment income to premiums. The anticipated general decrease in the expected benefit ratio does not necessarily indicate an increase in profitability; rather it reflects a change in the mix of revenues from the business.
The discount rate used for the fourth quarter of 2009 for newly incurred long term disability claim reserves and life waiver reserves decreased 125 basis points to 4.50% from 5.75% for the fourth quarter of 2008. The discount rate is based on the rate we received on newly invested assets during the previous 12 months, less a margin. We also consider expected investment yields and our overall average discount rate on our entire block of claims when deciding whether to increase or decrease the discount rate. Based on our current size, every 25 basis point decrease in the discount rate would result in an increase of approximately $2 million per quarter of benefits to policyholders. The discount rate used in the fourth quarter of 2007 for newly established long term disability claim reserves was 5.35%.
expenses as a result of cost reduction initiatives implemented in 2009 and a decline in consulting expenses. One-time costs related to these initiatives are included in the Other category. See “Other.” The increase in operating expenses for 2008 compared to 2007 was primarily due to increased variable compensation accruals and the administrative costs on new group insurance business resulting from a few large case sales that occurred in 2007.
The following tables set forth key indicators that management uses to manage and assess the performance of the Asset Management segment:
Administrative fee revenues for the Asset Management segment include both asset-based and plan-based fees related to our retirement plans and investment advisory businesses and fees related to the origination and servicing of commercial mortgage loans. The primary driver for administrative fee revenues is the level of average assets under administration for retirement plans, which is driven by equity market performance and asset growth due to new net customer deposits.
The following table sets forth key indicators to assess administrative fee revenues:
The decline in administrative fee revenues for 2009 was due to lower average retirement plans assets under administration, which was a result of declining equity markets during the last half of 2008 and the first half of 2009. The lower administrative fee revenues in 2008 compared to 2007 resulted from a decline in retirement plans assets under administration due to declining equity markets, partially offset by increased administrative fee
StanCorp Mortgage Investors, LLC (“StanCorp Mortgage Investors”) originated $718.5 million, $1.37 billion and $1.45 billion of commercial mortgage loans for 2009, 2008 and 2007, respectively. The decrease in originations for 2009 was primarily due to a reduction in demand from quality borrowers in the current credit environment and lower purchase and sale activity in the commercial real estate market. The decrease in originations for 2008 was due to reduced demand in the fourth quarter of 2008 from borrowers because of higher interest rates. While originations decreased from 2007, originations for 2008 were still strong due to overall favorable interest rate conditions accompanied by increased demand for fixed-rate commercial mortgage loans. The strong originations also reflected a less competitive origination market, partially due to decreased competition from securitized lenders. Commercial mortgage loans managed for other investors increased 2.5% from December 31, 2008 to December 31, 2009, and 33.0% from December 31, 2007 to December 31, 2008.
Net investment income for the Asset Management segment increased 27.3% to $234.0 million for 2009 compared to 2008, and increased 8.0% to $183.8 million for 2008 compared to 2007. The increase in net investment income for 2009 compared to 2008 was primarily due to an increase in average individual annuity assets under administration, higher average yields in our commercial mortgage loan portfolios and derivative gains on indexed annuities. The portfolio yield for commercial mortgage loans increased to 6.46% at the end of 2009 from 6.39% at the end of 2008. The portfolio yield for fixed maturity securities declined to 5.46% at the end of 2009 from 5.63% at the end of 2008. The increase in net investment income was supplemented by an increase in the fair value of derivative assets. The fair value adjustment to derivative assets resulted in an increase of $4.7 million to net investment income for 2009, compared to a decrease of $11.1 million for 2008. See Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 7-Derivative Financial Instruments.”
Benefits to policyholders for the Asset Management segment represents current and future benefits on life-contingent annuities, which vary with life-contingent annuity sales. Benefits to policyholders for the Asset Management segment increased $5.7 million to $45.4 million for 2009 compared to 2008, and increased $17.3 million to $39.7 million for 2008 compared to 2007. Changes in the level of benefits to policyholders will correlate to changes in premium levels because these annuities are primarily single-premium life-contingent annuity products with a significant portion of all premium payments established as reserves. Asset Management segment premiums increased $3.6 million to $34.7 million for 2009 compared to 2008, and increased $16.4 million to $31.1 million for 2008 compared to 2007.
The increase in interest credited for 2008 compared to 2007 primarily reflected significant growth in individual fixed-rate annuity assets under administration of $760.7 million, or a 58.7% increase over the balance at December 31, 2007. The increase in interest credited was partially offset by a decline in the S&P 500 Index, which is used in valuing our indexed annuities. Interest credited on indexed annuities was reduced by $9.2 million for 2008, compared to an increase in interest credited of $1.6 million for 2007 primarily due to the fluctuations in S&P 500 Index. See Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 7-Derivative Financial Instruments.”
The Other category reported a loss before income taxes of $77.9 million, $160.2 million and $23.8 million for 2009, 2008 and 2007, respectively. The loss before income taxes for these same periods included net capital losses of $26.9 million, $128.8 million and $0.6 million, respectively. Net capital losses for 2009 were primarily due to a $21.1 million additional provision to our commercial mortgage loan loss allowance, $29.1 million from the sales of fixed maturity securities that included losses on holdings in financial institutions, including holdings of certain insurance companies that were downgraded by rating agencies during the current year and $5.9 million in OTTI on fixed maturity securities. The capital losses for 2009 were partially offset by $29.6 million of capital gains from the sale of certain fixed maturity securities. During 2009, we charged off $8.3 million from the commercial mortgage loan loss allowance due to foreclosed loans. The net change to the loan loss allowance for 2009 was $12.8 million. The loss before income taxes for 2009 also included one-time costs of $18.6 million, primarily related to severance costs and lease terminations associated with cost reduction initiatives. These cost reduction initiatives are expected to enhance our operating efficiencies and reduce our annualized operating expenses by approximately $25 million. The benefits from these enhanced efficiencies began in the second half of 2009. See “Liquidity and Capital Resources-Financing Cash Flows,” and Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 20-Severance, Lease Terminations, Relocation and Restructuring.”
We manage interest rate risk, in part, through asset-liability analyses. In accordance with presently accepted actuarial standards, we have made adequate provisions for the anticipated cash flows required to meet contractual obligations and related expenses through the use of statutory reserves and related items at December 31, 2009.
Our financial instruments are exposed to financial market volatility and potential disruptions in the market that may result in certain financial instruments becoming less valuable. Financial market volatility includes interest rate risk. We have analyzed the estimated loss in fair value of certain market sensitive financial assets held at December 31, 2009 and 2008, using a hypothetical 10% increase in interest rates and related qualitative
Net cash provided by operating activities is net income adjusted for non-cash items and accruals and was $441.4 million, $361.8 million and $485.7 million for 2009, 2008 and 2007, respectively. The increase in other, net for 2009 was primarily due to the receipt of a tax refund from a 2008 favorable resolution of prior year tax matters and fluctuations in other liabilities.
Our target investment portfolio allocation is approximately 60% fixed maturity securities and 40% commercial mortgage loans. At December 31, 2009, our portfolio consisted of 58.3% fixed maturity securities, 40.5% commercial mortgage loans, and 1.2% real estate.
Commercial mortgage loan originations for our portfolios and for external investors were $718.5 million, $1.37 billion and $1.45 billion for 2009, 2008 and 2007, respectively. The comparative decreases in originations were primarily due to a reduction in demand from quality borrowers in the current credit environment. The level of commercial mortgage loan originations in any year is influenced by market conditions as we respond to changes in interest rates, available spreads and borrower demand.
At December 31, 2009, StanCorp Mortgage Investors serviced $4.28 billion in commercial mortgage loans for subsidiaries of StanCorp and $2.59 billion for other institutional investors, compared to $4.08 billion serviced for subsidiaries of StanCorp and $2.53 billion for other institutional investors at December 31, 2008.
loans in our portfolios ourselves, 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.
At December 31, 2009, our commercial mortgage loan portfolio was diversified regionally as follows:
Commercial mortgage loans in California accounted for 26.9% of our commercial mortgage loan portfolio at December 31, 2009. The next largest concentration by state is 10.4%. Through this concentration in California, we are exposed to potential losses from an economic downturn in California as well as to certain catastrophes, such as earthquakes and fires that may affect certain areas of the western region. We require borrowers to maintain fire insurance coverage to provide reimbursement for any losses due to fire. We diversify our commercial mortgage loan portfolio within California by both location and type of property in an effort to reduce certain catastrophe and economic exposure. However, diversification may not always eliminate the risk of such losses. Historically, the delinquency rate of our California-based commercial mortgage loans has been substantially below the industry average and consistent with our experience in other states. In addition, when we underwrite new loans, we do not require earthquake insurance for properties on which we make commercial mortgage loans. However, we do consider the potential for earthquake loss based upon seismic surveys and structural information specific to each property. We do not expect a catastrophe or earthquake damage in the western region to have a material adverse effect on our business, financial position, results of operations or cash
flows. Currently, our California exposure is primarily in Los Angeles County, San Diego County and the Bay Area Counties. We have a smaller concentration of commercial mortgage loans in the Inland Empire and the San Joaquin Valley where there has been greater economic decline. Due to the concentration of commercial mortgage loans in California, a continued economic decline in California could have a material adverse effect on our business, financial position, results of operations or cash flows.
In the normal course of business, we commit to fund commercial mortgage loans generally up to 90 days in advance. At December 31, 2009, we had outstanding commitments to fund commercial mortgage loans totaling $52.2 million, with fixed interest rates ranging from 6.00% to 7.75%. These commitments generally have fixed expiration dates. A small percentage of commitments expire due to the borrower’s failure to deliver the requirements of the commitment by the expiration date. In these cases, we will retain the commitment fee and good faith deposit. Alternatively, if we terminate a commitment due to the disapproval of a commitment requirement, the commitment fee and good faith deposit may be refunded to the borrower, less an administrative fee.
Under the agreement, we are subject to customary covenants that take into consideration the impact of material transactions, changes to the business, compliance with legal requirements and financial performance. The two financial covenants are based on our total debt to total capitalization ratio and consolidated net worth. Under the two financial covenants, we are required to maintain a debt to capitalization ratio that does not exceed 35% and a consolidated net worth that is equal to at least $1.04 billion. The financial covenants exclude the unrealized gains and losses related to fixed maturity securities that are held in accumulated other comprehensive income (loss). At December 31, 2009, we had a debt to total capitalization ratio of 25.7% and consolidated net worth of $1.61 billion as defined by the financial covenants. We believe we will continue to meet the financial covenants in the future. The Facility is subject to performance pricing based upon our total debt to total capitalization ratio and includes interest based on a Eurodollar margin, plus facility and utilization
fees. At December 31, 2009, we were in compliance with all covenants under the Facility and had no outstanding balance on the Facility.
We have $250 million of 6.875%, 10-year senior notes (“Senior Notes”) that mature on September 25, 2012. The principal amount of the Senior Notes is payable at maturity and interest is payable semi-annually in April and October.
The levels of capital in excess of targeted RBC we generate vary inversely in relation to the level of our premium growth. As premium growth increases, capital is utilized 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 levels. Higher levels of premium growth can
During 2009, our available capital increased approximately $160 million to over $290 million. Approximately $40 million of the increase was related to the adoption of Statements of Statutory Accounting Practices (“SSAP”) No. 10R-Income Taxes-Revised, A Temporary Replacement of SSAP No. 10, and approximately $36 million of the increase was related to an improvement in the Mortgage Experience Adjustment Factor in the RBC calculation.
Our ability to pay dividends to our shareholders, repurchase our shares and meet our obligations substantially depends upon the receipt of distributions from its subsidiaries, including Standard. Standard’s ability to pay dividends to StanCorp is affected by factors deemed relevant by Standard’s board of directors. One factor considered by the board is the ability to maintain adequate capital according to Oregon statute. Under Oregon law, Standard may pay dividends only from the earned surplus arising from its business. If the proposed dividend exceeds certain statutory limitations, Standard must receive the prior approval of the Director of the Oregon Department of Consumer and Business Services-Insurance Division (“Oregon Insurance Division”). The current statutory 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 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 decline requests for dividends in excess of these limits. There are no regulatory restrictions on dividends from our non-insurance subsidiaries.
In February 2010, the board of directors approved dividends from Standard of up to $200 million during 2010. The approved dividend amount for 2010 is not in excess of the current statutory limitations under the Oregon Insurance Division and we therefore do not have to seek approval from the Oregon Insurance Division for the approved 2010 dividend amount.
Standard paid ordinary cash dividends to StanCorp totaling $170.0 million and $60.0 million, in 2009 and 2008, respectively. The decreased dividends paid to StanCorp from Standard in 2008 compared to 2009 reflected a decision in 2008 to maintain capital in Standard in excess of 300% of the Company Action Level RBC. Prior to 2008, capital for Standard was maintained at a level in excess of 275% of the Company Action Level RBC. At December 31, 2009, capital in the insurance subsidiaries was 355% of the Company Action Level RBC.
On November 9, 2009, our board of directors declared an annual cash dividend of $0.80 per share, calculated and payable on a per share basis. The dividend was paid on December 4, 2009 to shareholders of record on November 20, 2009. In 2008 and 2007, we paid an annual cash dividend of $0.75 and $0.72 per share, respectively. The declaration and payment of dividends in the future is subject to the discretion of our board of directors. It is anticipated that annual dividends will be paid in December of each year depending on our financial condition, results of operations, cash requirements, future prospects, regulatory restrictions on distributions from the insurance subsidiaries, the ability of the insurance subsidiaries to maintain adequate capital and other factors deemed relevant by the board of directors. In addition, the declaration and payment of dividends would be restricted if we elect to defer interest payments on our Subordinated Debt issued May 7, 2007. If elected, the restriction would be in place during the interest deferral period, which cannot exceed five years. We have not deferred interest on the Subordinated Debt, and have paid dividends each year since our initial public offering in 1999.
From time to time, the board of directors has authorized share repurchase programs. Share repurchases are made in the open market or in negotiated transactions in compliance with the safe harbor provisions of Rule 10b-18 under regulations of the Securities Exchange Act of 1934 (“Exchange Act”). Execution of the share repurchase
program is based upon management’s assessment of market conditions for its common stock, other potential growth opportunities, or priorities for capital use. On November 9, 2009, the board of directors authorized a share repurchase program of up to 2.0 million shares of StanCorp common stock, which expires December 31, 2011. The November 2009 repurchase program took effect upon the completion of the previous share repurchase program. On February 8, 2010, the board of directors authorized an additional share repurchase program of up to 3.0 million shares of StanCorp common stock. The February 2010 repurchase program will take effect upon the completion of the November 2009 repurchase program and also expires on December 31, 2011.
During 2009, we repurchased 1.6 million shares of common stock at a total cost of $59.3 million for a volume weighted-average price of $38.20 per common share. At December 31, 2009, there were 1.3 million shares remaining under our November 2009 share repurchase program. During 2009, we acquired 5,584 shares of common stock from executive officers and directors to cover tax liabilities of these officers and directors resulting from the release of performance-based shares and retention-based shares at a total cost of $0.2 million for a volume weighted-average price of $31.34 per common share. Repurchases are made at market prices on the transaction date.
While historical withdrawal patterns indicate withdrawal primarily occurs in periods in excess of one year, policyholder fund obligations in the amount of $3.21 billion have been included in the less than one year column of the table as they may be withdrawn upon request. These net cash payments are undiscounted with respect to interest but reflect an offsetting effect due to reinsurance receivables and, as a result, the sum of the net cash payments shown for all years in the table of $4.05 billion differs from the corresponding
Separate account liabilities are legally insulated from general account obligations, and it is generally expected these liabilities will be fully funded by separate account assets and their related cash flows. While historical withdrawal patterns indicate withdrawal primarily occurs in periods in excess of one year, separate account liabilities in the amount of $4.17 billion have been included in the less than one year column of the table as they may be withdrawn upon request.
Our long-term debt obligations consisted primarily of the $250 million 6.875% Senior Notes and the $300 million 6.90% Subordinated Debt. See “Note 9-Long-Term Debt” for additional information.
Other long-term obligations reflected in our balance sheet at December 31, 2009, consisted of a $14.8 million tax reimbursement liability related to the block of life insurance business sold to Protective Life Insurance Company (“Protective Life”) in 2001, $8.4 million in capital commitments related to our low-income housing investments, $318.4 million in expected benefit payments for supplemental, home office, and field office retirement plans, $205.9 million in expected benefit payments for the postretirement benefit plan, a $9.9 million liability for our deferred compensation plan and $1.8 million of contract payments for acquisitions.
Insolvency regulations exist in many of the jurisdictions in which our subsidiaries do business. Such regulations may require insurance companies operating within the jurisdiction to participate in guaranty associations. The associations levy assessments against their members for the purpose of paying benefits due to policyholders of impaired or insolvent insurance companies. Association assessments levied against us from January 1, 2007, through December 31, 2009, aggregated $1.2 million. At December 31, 2009, we maintained a reserve of $0.8 million for future assessments with respect to currently impaired, insolvent or failed insurers.
quarter of 2008, which increased invested assets for 2009, and a favorable change in reserves. The increase in Statutory Results for 2008 was primarily due to premium growth and comparatively favorable claims experience.
Our consolidated financial statements and certain disclosures made in this Form 10-K have been prepared in accordance with GAAP and require us to make estimates and assumptions that affect reported amounts of assets and liabilities and 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 (identified as the “critical accounting policies”) are those used in determining investment valuations, DAC, VOBA and other intangibles, goodwill, the reserves for future policy benefits and claims, pension and postretirement benefit plans and the provision for income taxes. The results of these estimates are critical because they affect our profitability and may affect key indicators used to measure our performance. These estimates have a material effect on our results of operations and financial condition.
The duration and the extent the fair value has been below amortized cost.
If it is determined an OTTI exists, we separate the OTTI of debt 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. The cost basis of the fixed maturity security is adjusted to reflect the impairment. Once an impairment charge has been recorded, we continue to review the OTTI securities for further potential impairment.
At December 31, 2009, our fixed maturity securities watch list totaled $19.6 million in fair value and $26.0 million at amortized cost after OTTI had been taken. We recorded OTTI related to credit loss of $5.9 million for 2009. There was no OTTI related to noncredit loss for 2009. 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” for a complete disclosure. We will continue to evaluate our holdings. However, we currently expect the fair values of our investments to recover either prior to their maturity dates or upon maturity. Should the credit quality of our fixed maturity securities significantly decline, there could be a material adverse effect on our business, financial position, results of operations or cash flows.
We recorded a cumulative effect adjustment of $2.3 million, net of tax, for the portion of OTTI related to debt security noncredit loss for the period prior to April 1, 2009. We met the following criteria in order to record the cumulative effect adjustment:
The debt security had a previously recognized OTTI in earnings related to noncredit loss,
Commercial mortgage loans are stated at amortized cost less a loan loss allowance for potentially uncollectible
amounts. The commercial mortgage loan loss allowance is estimated based on evaluating known and inherent risks in the loan portfolio and consists of a general loan loss allowance and a specific loan loss allowance. The general loan loss allowance is based on our analysis of factors including changes in the size and composition of the loan portfolio, actual loan loss experience and individual loan analysis. A specific loan loss allowance is set up when a loan is considered to be non-performing. We define a non-performing loan as a loan that is not performing to the contractual terms of the loan agreement and for which we believe there is a probability of loss on the loan. In addition, we evaluate the loss to dispose of the property, any significant out of pocket expenses the loan may incur, the loan-to-value ratio, and other quantitative information we have concerning the loan. Loans that are deemed uncollectible are generally written off against the allowance, and recoveries, if any, are credited to the allowance. Our loan loss allowance for commercial mortgage loans was $19.6 million and $6.8 million for December 31, 2009 and 2008, respectively. We did not have any direct exposure to sub-prime or Alt-A mortgages in our commercial mortgage loan portfolio at December 31, 2009.
All Other Investments, Excluding Fixed Maturity Securities and Commercial Mortgage Loans
For these types of investments expected to be sold, an OTTI charge is recorded if we do not expect the realizable fair value of the investment to recover to its amortized cost prior to the expected date of sale. Once an impairment charge has been recorded, we continue to review the investment for further potential impairment on an on-going basis. If the fair value of the investment later recovers, we are not permitted to write the asset back up to its historical cost (i.e. the write-down is permanent).
Real estate held for investment is stated at cost less accumulated depreciation. Depreciation generally is provided on the straight-line method with property lives
Derivative instruments are carried at fair value, and valuation adjustments for derivatives are reported as a component of net investment income. See Item 8 “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 7-Derivative Financial Instruments.”
We adopted the fair value measurements accounting pronouncement beginning January 1, 2008. See Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 4-Fair Value of Financial Instruments.”
Acquisition costs that we have deferred as DAC are those costs that vary with and are primarily related to the acquisition and, in some instances, the renewal of insurance products. These costs are typically one-time expenses that represent the cost of originating new business and placing that business in force. Certain costs related to obtaining new business and acquiring business through reinsurance agreements have been deferred and will be amortized to accomplish matching against related future premiums or gross profits as appropriate. We normally defer certain acquisition-related commissions and incentive payments, certain costs of policy issuance and underwriting, and certain printing costs. Assumptions used in developing DAC and amortization amounts each period include the amount of business in force, expected future persistency, withdrawals, interest rates and profitability.
DAC for group and individual disability insurance products and group life insurance products is amortized over the life of related policies in proportion to future premiums. Upon the adoption of new accounting guidance in 2007, we began amortizing DAC for group disability and life insurance products over the initial premium rate guarantee period, which averages 2.5 years. This adoption also resulted in a $29.4 million after-tax cumulative effect adjustment as a reduction to retained earnings in 2007 related to DAC. DAC for individual disability insurance products is amortized in proportion to future premiums over the life of the contract, averaging 20 to 25 years with approximately 50% and 75% expected to be amortized by years 10 and 15, respectively.
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 55% and 95% expected to be amortized by years 5 and 15, respectively. DAC for group annuity products is amortized over 10 years with approximately 65% expected to be amortized by year five.
VOBA primarily represents the discounted future profits of business assumed through reinsurance agreements. We have established VOBA for a block of individual disability business assumed from Minnesota Life and a block of group disability and group life 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 products. However, a portion of the VOBA related to the TIAA transaction associated with an in force block of group long term disability claims for which no ongoing premium is received is amortized in proportion to expected gross profits. If actual premiums or future
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 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 benefit or charge to income to reflect changes in the period of the revision. An unlocking event
Our other intangible assets are subject to amortization and consist of certain customer lists and a marketing agreement. Customer lists were obtained in connection with acquisitions and have a combined estimated weighted-average remaining life of approximately 9.3 years. A 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 amortization period for the Minnesota Life marketing agreement is up to 25 years. Other intangible assets totaled $55.8 million and $54.2 million at December 31, 2009 and 2008, respectively.
Goodwill is related to the Asset Management segment and totaled $36.0 million at both December 31, 2009 and 2008. Goodwill is not amortized and is tested at least annually for impairment. If indicators of impairment appear, or in the event of material changes in circumstances, the test will be more frequent. We performed a step one test, as of December 31, 2009, in which the carrying value of tested assets was compared to the assets’ fair value. Fair value is measured using a combination of the income approach and the market approach. The income approach consists of utilizing the discounted cash flow method that incorporates our estimates of future revenues and costs, discounted using a market participant weighted-average cost of capital. The estimates we used in the income approach were consistent with the plans and estimates that we use to manage our operations. The market approach utilizes multiples of profit measures in order to estimate the fair value of the assets. As the income
approach more closely aligns with how we internally evaluate and manage our business, we weighted the income approach more heavily than the market approach in determining the fair value of the assets. However, we did perform testing to ensure that both models were providing reasonably consistent results. Additionally, we performed sensitivity analysis on the key input factors in these models to determine whether any input factor or combination of factors moving moderately in either direction would change the results of these tests. Through the performance of these tests, we concluded that goodwill was not impaired as of December 31, 2009.
Policy reserves totaled $993.2 million, $945.4 million and $908.3 million at December 31, 2009, 2008 and 2007, respectively. Policy reserves include reserves established for individual life, individual disability, and group and individual annuity businesses.
Assumptions used to calculate individual disability policy reserves may vary by the age, gender and occupation class of the claimant, the year of policy issue and specific contract provisions and limitations.
Policy reserves for our individual and group immediate annuity blocks of business totaled $201.5 million, $162.1 million and $141.8 million at December 31, 2009, 2008 and 2007, respectively. These reserves are established at the time of policy issue and represent the present value of future payments due under the annuity contracts. The contracts are single premium contracts, and therefore, there is no projected future premium.
Assumptions used to calculate immediate annuity policy reserves may vary by the age and gender of the annuitant and year of policy issue.
Policy reserves for our individual life block of business totaled $600.8 million, $606.1 million and $602.1 million at December 31, 2009, 2008 and 2007, respectively. Effective January 1, 2001, substantially all of our individual life policies and the associated reserves were ceded to Protective Life under a reinsurance agreement.
Claim reserves are established when a claim is incurred or is estimated to have been incurred but not yet reported to us and, as prescribed by GAAP, equal our best estimate of the present value of the liability of future unpaid claims and claim adjustment expenses. Reserves for IBNR claims are determined using our experience and consider actual historical incidence rates, claim-reporting patterns, and the average cost of claims. The IBNR reserves are calculated using a company derived formula based primarily upon premium, which is validated through a close examination of reserve run-out experience.
Claim reserves are subject to revision as our current claim experience and expectations regarding future factors, which may influence claim experience, change. During each quarter, we monitor our emerging claim experience to ensure that the claim reserves remain appropriate and make adjustments to our assumptions based on actual experience and our expectations regarding future events as appropriate.
Assumptions used to calculate claim reserves may vary by the age, gender and occupation class of the claimant, the year the claim was incurred, time elapsed since disablement, and specific contract provisions and limitations.
Claim reserves for our group life and AD&D products are established for death claims reported but not yet paid, IBNR for death and waiver claims and waiver of premium benefits. The death claim reserve is based on the actual amount to be paid. The IBNR reserve is calculated using historical information, and the waiver of premium benefit is calculated using a tabular reserve method that takes into account our experience and published industry tables.
Key assumptions affecting our reserve calculations are (1) the discount rate, (2) claim termination rate and (3) the claim incidence rate for policy reserves and IBNR claim reserves.
Reserve discount rates for newly incurred claims are reviewed quarterly and, if necessary, are adjusted to reflect our current and expected new investment yields. The discount rate used to calculate GAAP reserves for newly incurred long term disability claims and life waiver reserves decreased 125 basis points to 4.50% for the fourth quarter of 2009 from 5.75% for the fourth quarter of 2008. The discount rate increased 40 basis points in 2008 and declined 15 basis points in 2007 as a result of changes in the interest rate environment. Based on our current size, every 25 basis point decrease in the discount rate would result in an increase of approximately $2 million per quarter of benefits to policyholders, and a corresponding decrease to pre-tax earnings. Offsetting adjustments to group insurance premium rates can take from one to three years given that most new contracts have rate guarantees in place.
As a result of favorable incidence and recovery patterns compared to reserving assumptions for our group long term disability insurance, we released IBNR reserves totaling $16.6 million in 2009 and $13.5 million in 2007. There were no similar reserve changes in 2008.
We adjusted the calculation of IBNR reserves related to pending group life waiver claims in 2007 as a result of continued redundancy in the reserve. This resulted in a decrease in reserve of $6.0 million. There were no similar reserve changes in 2009 or 2008.
We adjusted the termination assumptions associated with a small block of group long term disability reported reserves in 2007 due to prolonged unfavorable reserve run-out experience for the block. This resulted in an increase in reserves of $16.8 million. There were no similar reserve increases in 2009 or 2008.
In 2006, we adjusted the claim termination rate assumptions for the reserves on a small block of individual disability claims based on the released industry table. These assumptions were further refined in 2009, 2008 and 2007 and resulted in an increase in reserves of $11.5 million, $2.5 million and $7.4 million, respectively. Our block of business is relatively small, and, as a result, we view a blend of the released industry table and our own experience as a more appropriate method for establishing reserve levels compared solely to our own experience. We will continue to monitor the credibility of our developing experience and, if necessary, will adjust reserves accordingly.
We have two non-contributory defined benefit pension plans: the employee pension plan and the agent pension plan. The employee pension plan is for all eligible employees of StanCorp and its subsidiaries and the agent pension plan is for former field employees and agents. Both plans are sponsored and administered by Standard and are frozen for new participants. The defined benefit pension plans provide benefits based on years of service and final average pay.
Standard also sponsors and administers a postretirement benefit plan that includes medical, prescription drug benefits and group term life insurance. Eligible retirees are required to contribute specified amounts for medical and prescription drug benefits that are determined periodically and are based on retirees’ length of service and age at retirement. Effective January 1, 2006, participation in the postretirement benefit plan is limited to employees who had reached the age of 40 as of January 1, 2006, or whose combined age and length of service were equal to or greater than 45 years as of January 1, 2006.
In addition, eligible executive officers are covered by a non-qualified supplemental retirement plan.
We are required to recognize the funded or underfunded status of our pension and postretirement benefit plans as an asset or liability on the balance sheet. For pension plans, this is measured as the difference between the plan assets at fair value and the projected benefit obligation as of the year-end balance sheet date. For our postretirement plan, this is measured as the difference between the plan assets at fair value and the accumulated benefit obligation as of the year-end balance sheet date. We are also required to recognize as a component of accumulated other comprehensive income or loss, 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 weighted-average discount rate is an interest assumption used to convert the benefit payment stream to present value. The discount rate is selected based on the
We file a U.S. consolidated income tax return that includes all subsidiaries. Our U.S. income tax is calculated using regular corporate income tax rates on a tax base determined by laws and regulations administered by the IRS. We also file corporate income tax returns in various states. The provision for income taxes includes amounts currently payable and deferred amounts that result from temporary differences between financial reporting and tax bases of
Currently, years 2006 through 2009 are open for audit by the IRS. See Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 10-Income Taxes.”
Consolidated Statements of Income and Comprehensive Income (Loss) for the years ended December 31, 2009, 2008 and 2007
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, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.
The Standard Life Insurance Company of New York was organized in 2000 and is licensed to provide group long term and short term disability, life, AD&D and dental insurance in New York. The Standard is a service mark of StanCorp and its subsidiaries and is used as a brand mark and marketing name by Standard and The Standard Life Insurance Company of New York.
StanCorp Investment Advisers, Inc. is a Securities and Exchange Commission registered investment adviser providing performance analysis, fund selection support, model portfolios and other investment advisory, financial planning, and investment management services to its retirement plan clients, individual investors and subsidiaries of StanCorp.
In 2008, the Company identified opportunities and developed strategies to centralize key functions, streamline its processes and improve efficiencies. In January 2009, the Company adopted a restructuring plan to implement these strategies resulting in one-time costs of $18.6 million during 2009. See “Note 20-Severance, Lease Terminations, Relocation and Restructuring.”
In the Company’s quarterly fixed maturity security impairment analysis, the Company evaluates whether a decline in value of the fixed maturity security is other than temporary by considering the following factors:
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. The cost basis of the fixed maturity security is adjusted to reflect the impairment. Once an impairment charge has been recorded, the Company continues to review the OTTI securities for further potential impairment.
The Company did not intend to sell the debt security, and
It was not more likely than not that the Company would be required to sell the debt security before recovery of its amortized cost basis.
at fair value on the consolidated balance sheet. See “Note 4-Fair Value of Financial Instruments,” for a detailed explanation of the valuation methods we use to calculate the fair value of our financial instruments. Valuation adjustments for fixed maturity securities not accounted for as OTTI are reported as net increases or decreases to other comprehensive income (loss), net of tax, on the consolidated statements of income and comprehensive income.
For these types of investments expected to be sold, an OTTI charge is recorded if we do not expect the realizable fair value of the investment to recover to its amortized cost prior to the expected date of sale. Once an impairment charge has been recorded, the Company continues to review the investment for further potential impairment on an on-going basis. If the fair value of the investment later recovers, we are not permitted to write the asset back up to its historical cost (i.e. the write-down is permanent).
Real estate held for investment is stated at cost less accumulated depreciation. Depreciation generally is provided on the straight-line method with property lives varying from 30 to 40 years. Accumulated depreciation for real estate totaled $32.7 million and $30.1 million at December 31, 2009 and 2008, respectively. Real estate acquired in satisfaction of debt is recorded at the lower of cost or fair value, less estimated costs to sell. Real estate acquired in satisfaction of debt totaled $29.9 million and $6.2 million at December 31, 2009 and 2008, respectively.
DAC, VOBA and other acquisition related intangible assets are generally originated through the issuance of new business or the purchase of existing business, either by purchasing blocks of insurance policies from other insurers or by the outright purchase of other companies. The Company’s intangible assets are subject to impairment tests on an annual basis or more frequently if circumstances indicate that carrying values may not be recoverable.
Acquisition costs that the Company has deferred as DAC are those costs that vary with and are primarily related to the acquisition and, in some instances, the renewal of insurance products. These costs are typically one-time expenses that represent the cost of originating new business and placing that business in force. Certain costs related to obtaining new business and acquiring business through reinsurance agreements have been deferred and will be amortized to accomplish matching against related future premiums or gross profits as appropriate. The Company normally defers certain acquisition-related commissions and incentive payments, certain costs of policy issuance and underwriting, and certain printing costs. Assumptions used in developing DAC and amortization amounts each period include the amount of business in force, expected future persistency, withdrawals, interest rates and profitability. These assumptions are modified to reflect actual experience when appropriate. Additional amortization of DAC is charged to current earnings to the extent it is determined that future premiums or gross profits are not adequate to cover the remaining amounts deferred. DAC totaled $252.6 million and $249.2 million at December 31, 2009 and 2008, respectively. Changes in actual persistency are reflected in the calculated DAC balance. Costs that do not vary with the production of new business are not deferred as DAC and are charged to expense as incurred. Generally, annual commissions are considered expenses and are not deferred.
DAC for group and individual disability insurance products and group life insurance products is amortized over the life of related policies in proportion to future premiums. Upon the adoption of new accounting guidance in 2007, the Company began amortizing DAC for group disability and life insurance products over the initial premium rate guarantee period, which averages 2.5 years. This adoption also resulted in a $29.4 million after-tax cumulative effect adjustment as a reduction to retained earnings in 2007 related to DAC. DAC for individual disability insurance products is amortized in proportion to future premiums over the life of the contract, averaging 20 to 25 years with approximately 50% and 75% expected to be amortized by years 10 and 15, 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, 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 benefit or charge to income to reflect changes in the period of the revision. An unlocking event that results in an after-tax benefit generally occurs as a result of actual experience or future expectations being favorable compared to previous estimates. An unlocking event that results in an after-tax charge generally occurs as a result of actual experience or future expectations being unfavorable compared to previous estimates. As a result of unlocking, the amortization schedule for future periods is also adjusted. Due to unlocking, DAC and VOBA balances decreased $1.0 million and $0.4 million for 2009 and 2008, respectively. Based on past experience, future changes in DAC and VOBA balances due to changes in underlying assumptions are not expected to be material. However, 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 the Company’s financial position or results of operations.
The accumulated amortization of VOBA was $58.4 million and $57.7 million at December 31, 2009 and 2008, respectively. The accumulated amortization of other intangibles, excluding DAC, was $17.2 million and $12.5 million at December 31, 2009 and 2008, respectively.
The following table sets forth the estimated net amortization of VOBA and other intangible assets, excluding DAC, for each of the next five years:
Goodwill is related to the Asset Management segment and totaled $36.0 million at both December 31, 2009 and 2008. Goodwill is not amortized and is tested at least annually for impairment. If indicators of impairment appear, or in the event of material changes in circumstances, the test will be more frequent. The Company
Property and equipment are stated at cost less accumulated depreciation. The Company provides for depreciation of property and equipment using the straight-line method over the estimated useful lives with a half-year convention. The estimated useful lives are generally 40 years for properties and range from three to ten years for equipment. Leasehold improvements are amortized over the estimated useful life of the asset, with amortization not to exceed the life of the lease. Depreciation expense for 2009, 2008 and 2007 was $31.4 million, $27.9 million and
$22.2 million, respectively. The Company reviews property and equipment for impairment when circumstances or events indicate the carrying amount of the asset may not be recoverable and recognizes a charge to earnings if an asset is impaired.
Non-affiliated tenants leased 35.7%, 36.5% and 38.5% of the corporate headquarters in Portland, Oregon at December 31, 2009, 2008 and 2007, respectively. Income from the leases is included in net investment income.
liabilities are measured using enacted tax rates expected to apply when the temporary differences are expected to reverse.
Currently, years 2006 through 2009 are open for audit by the IRS. See “Note 10-Income Taxes.”
In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU No. 17 was issued to codify Statement of Financial Accounting Standards (“SFAS”) No. 167, which was issued in June 2009 to improve financial reporting for enterprises with variable interest entities. ASU No. 17 was designed to address:
Basic net income per common share was calculated by dividing net income by the weighted-average number of common shares outstanding. Net income per diluted common share, as calculated using the treasury stock method, reflects the potential dilutive effects of stock award grants and exercises of dilutive outstanding stock options. The computation of diluted weighted-average earnings per share does not include stock options with an option exercise price greater than the average market price because they are antidilutive and inclusion would increase earnings per share.
Net income per basic and diluted weighted-average common shares outstanding was calculated as follows for the years ended December 31:
Intersegment revenue is comprised of administrative fee revenues charged by the Asset Management segment to manage the fixed maturity securities and commercial mortgage loan portfolios for the Company’s insurance subsidiaries. These intersegment administrative fee
The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
Assets and liabilities recorded at fair value are disclosed using a three-level hierarchy. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources while unobservable inputs reflect our estimates about market data.
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.
The table below sets forth the estimated fair value of each financial instrument and the carrying value of each financial instrument at December 31:
For disclosure purposes, the fair values of commercial mortgage loans were estimated using an option-adjusted discounted cash flow valuation. The valuation includes both observable market inputs and estimated model parameters. Significant observable inputs to the valuation include:
Adjustments in spread based on an aggregate portfolio loan-to-value ratio, estimated from historical differential yields with respect to loan-to-value ratios.
The fair values of other policyholder funds that are investment-type contracts were calculated using the income approach in conjunction with the cost of capital method. The parameters used for discounting in the calculation were estimated using the perspective of the principal market for the contracts under consideration. The principal market consists of other insurance carriers with similar contracts on their books.
The fair value for long-term debt was predominantly based on quoted market prices as of December 31, 2009 and 2008 and trades occurring close to December 31, 2009 and 2008. The fair value for the Company’s long-term debt was materially affected by depressed values for conventional debt securities as of December 31, 2008.
Fixed maturity securities-available-for-sale, Standard & Poor’s (“S&P”) 500 index options and index-based interest guarantees are recorded at fair value on a recurring basis. In the Company’s consolidated statements of income and comprehensive income, unrealized gains and losses are reported in other comprehensive income for fixed maturity securities-available-for-sale, in net investment income for S&P 500 index options and in interest credited for index-based interest guarantees.
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 in separate account liabilities.
Fixed maturity securities-available-for-sale and S&P 500 index options are reported on the balance sheet as fixed maturity securities-available-for-sale. The fixed maturity securities are comprised of corporate bonds, as well as government, agency and municipal securities and are diversified across industries, issuers and maturities. They are placed into three groups depending on the valuation technique used to determine the fair value of the securities.
In order to assist management in determining the values of these assets, the Company utilizes an independent pricing service. The pricing service incorporates a variety of market observable information in their valuation techniques, including:
External valuations are validated by the Company at least quarterly through a combination of procedures, that include the evaluation of methodologies used by the pricing service, analytical reviews and performance analysis of the prices against statistics and trends, back testing of sales activity and maintenance of a securities watch list. Additionally, as needed the Company utilizes discounted cash flow models
The Company values S&P 500 index options using the Black-Scholes option pricing model and parameters derived from market sources. The Company’s valuations maximize the use of observable inputs, which include direct price quotes from the Chicago Board Options Exchange (“CBOE”) and values for on-the-run treasury securities and London Interbank Offered Rate (“LIBOR”) rates as reported by Bloomberg. Inputs to the valuations that are not directly observable are estimated from the best sources available to the Company. Unobservable inputs to these valuations include estimates of future gross dividends to be paid on the stocks underlying the S&P 500 index, estimates of bid-ask spreads, and estimates of implied volatilities on options. Valuation parameters are calibrated to replicate the actual end-of-day market quotes for options trading on the CBOE. The Company performs additional validation procedures such as the daily observation of market activity and conditions and the tracking and analyzing of actual quotes provided by banking counterparties each time the Company purchases options from them. Additionally, in order to help validate the values derived through the procedures noted above, the Company obtains indicators of value from representative investment banks.
The following tables set forth the estimated fair values of assets and liabilities measured and recorded at fair value on a recurring basis at December 31:
The following table sets forth the changes in Level 3 assets and liabilities measured at fair value on a recurring basis at December 31, 2009:
The following table sets forth the assets measured at fair value on a nonrecurring basis during the year that the Company continued to hold at December 31:
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Callable bonds represented 2.8%, or $171.9 million, of our investment securities at December 31, 2009.
Includes net increases to the loan loss allowance of $12.8 million, $3.8 million and $0.6 million for 2009, 2008 and 2007, respectively.
Securities deposited for the benefit of policyholders in various states, in accordance with state regulations, amounted to $6.5 million and $7.0 million at December 31, 2009 and 2008, respectively.
The unrealized losses on the investment securities set forth above were primarily due to increases in market interest rates subsequent to their purchase by the Company. Additionally, unrealized losses have been affected by overall economic factors. The Company expects the fair value of these investment securities to recover as the investment securities approach their maturity dates or sooner if market yields for such investment securities decline. The Company does not believe that any of the investment securities are impaired due to reasons of credit quality or to any company or industry specific event. Based
The following table sets forth our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2008:
Although the Company underwrites commercial mortgage loans throughout the United States, commercial mortgage loans in California represent a concentration of credit risk at 26.9% and 27.7% of our commercial mortgage loan portfolio at December 31, 2009 and 2008, respectively. Through this concentration, we are exposed to potential losses from an economic downturn in California as well as to certain catastrophes, such as earthquakes and fires, which may affect certain areas of the state. We require borrowers to maintain fire insurance coverage to provide reimbursement for losses due to fire.
We diversify our commercial mortgage loan portfolio within California by both location and type of property in an effort to reduce certain catastrophe and economic exposure. However, diversification may not always eliminate the risk of such losses. Historically, the delinquency rate of our California-based commercial mortgage loans has been substantially below the industry average and consistent with our experience in other states. In addition, when we underwrite new loans, we do not require earthquake insurance for properties on which we make commercial mortgage loans. However, we do consider the potential for earthquake loss based upon seismic surveys and structural information specific to each property.
See “Note 1-Summary of Significant Accounting Policies-Investment Valuations-Commercial Mortgage Loans” for the commercial mortgage loan loss allowance valuation policy. The following table sets forth commercial mortgage loan valuation and loan loss allowance provisions at December 31:
The Company defines a non-performing loan as a loan that is not performing to the contractual terms of the loan agreement and for which the Company believes there is a probability of loss on the loan. See “Note 1-Summary of Significant Accounting Policies-Investment Valuations-Commercial Mortgage Loans” for a full discussion. The following table sets forth non-performing commercial mortgage loans identified in management’s specific review of probable loan losses and the related allowance at December 31:
Non-performing commercial mortgage loans without an allowance for losses are those for which we have determined that it remains probable that the Company will collect all amounts due. The average recorded investment in non-performing mortgages before allowance for losses was $17.5 million, $3.2 million and $2.2 million for 2009, 2008 and 2007, respectively. Interest income recognized on these non-performing loans, which is included in net investment income, was $0.1 million for 2009, 2008 and 2007. The Company continues to recognize interest income on delinquent loans until the loans are more than 90 days delinquent.
The Company purchases S&P 500 index call spread options (“index options”) for its interest crediting strategy used in its indexed annuity product. The 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 index options is a pivotal part of our risk management strategy for indexed annuity products. The index options are exclusively used for risk management. While valuations of the index options are sensitive to a number of variables, valuations for index options purchased are most sensitive to changes in the S&P 500 index value and the implied volatilities of this index. The Company generally purchases fewer than five index option contracts per month, which all have an expiry date of one year from the date of purchase. The notional amount of the Company’s index option contracts at December 31, 2009 and 2008 was $252.5 million and $281.6 million, respectively. Option premiums paid for the Company’s index option contracts for 2009 and 2008 were $6.2 million and $7.6 million, respectively. The amount received for options exercised was $4.9 million for 2009. There were no options exercised in 2008.
The Company recognizes all derivative investments as assets or liabilities in the balance sheet at fair value. The Company does not designate its derivatives as hedging instruments and thus does not use hedge accounting. As such, any change in the fair value of the derivative assets and derivative liabilities is recognized as income or loss in the period of change.
The following table sets forth the Company’s derivative liabilities as of December 31:
The Company does not bear derivative-related risk that would require it to post collateral with another institution, and its index option contracts do not contain counterparty credit-risk-related contingent features. The Company is exposed to the credit worthiness of the institutions from which it purchases its index option contracts 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 exposure would require an increase of approximately 8.5% in the value of
Classified as future policyholder benefits and claims, but excluded from the preceding table are amounts recorded for group and individual life reserves, group and individual annuity reserves, and individual disability active life reserves. Below is a table that reconciles amounts above to future policyholder benefits and claims as presented on the consolidated balance sheet:
The changes in amounts incurred related to prior years for the years 2009, 2008, and 2007 are not the result of a significant change in an underlying assumption or method used to determine the estimate. Instead we expect these amounts to change over time as a result of the growth in the size of our in force insurance business and the actual claims experience with respect to that business during the time periods captured for claims with an incurred date in years prior to the year of valuation. Interest is also a key component in the year-to-year development of the reserves and therefore the positive changes in amounts incurred related to prior years for the years 2009, 2008 and 2007 should not be taken as an indicator of the adequacy or inadequacy of the reserves held. In each of the years captured, there was a decrease in incurred amounts associated with prior years after the effect of interest is taken into account, indicating claim experience was favorable when compared to the assumptions used to establish the associated reserves.
Other policyholder funds at December 31, 2009, 2008 and 2007, included employer-sponsored defined contribution and benefit plans funds, of $1.48 billion, $1.42 billion and $1.40 billion, respectively, and individual fixed-rate annuity funds of $1.78 billion, $1.53 billion and $892.3 million, respectively. The remaining amount of other policyholder funds primarily relates to indexed
annuity funds, premiums on deposits, advanced premiums and experienced related liabilities.
On September 25, 2002, we completed an initial public debt offering of $250 million of 10-year senior notes (“Senior Notes”) with an interest rate of 6.875%. The principal amount of the Senior Notes is payable at maturity on September 25, 2012, and interest is payable semi-annually in April and October.
The Company has two non-contributory defined benefit pension plans: the employee pension plan and the agent pension plan. The employee pension plan is for all eligible employees of StanCorp and its subsidiaries, and the agent pension plan is for former field employees and agents. Both plans are sponsored and administered by Standard and are frozen for new participants. The defined benefit pension plans provide benefits based on years of service and final average pay.
The following table sets forth a reconciliation of the changes in the pension plans’ projected benefit obligations, fair value of assets and the funded status at December 31:
The estimated net loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2010 are $4.4 million and $0.6 million, respectively.
The Company made no contributions to the employee pension in 2009. The Company contributed $30.0 million to the employee pension plan in 2008. The Company is not obligated to make any contributions to its pension plans for 2010. In addition, no plan assets are expected to be returned to the Company in 2010.
The following table sets forth the expected benefit payments for the Company’s pension plans for the years indicated:
The investment goal of the agent pension plan is to invest in stable value assets in order to maintain its funded status.
The following table sets forth the Company’s target and actual weighted-average asset allocations for the pension plans at December 31:
Pension plan assets are recorded at fair value and are disclosed below using a three-level hierarchy. See “Note 4-Fair Value of Financial Instruments” for additional fair value information. The fair values of pooled separate accounts are valued daily based upon quoted market prices in an active market and are classified as Level 1 assets. Pooled separate accounts are recorded at fair value on a recurring basis. The fair value of the stable asset fund has inputs that use significant assumptions not observable in the market and is classified as a Level 3 asset. The stable asset fund is included in the financial statements at the Deposit Administration Contract value. The contract value approximates fair value, as the contract crediting rate resets annually, and the contracts are fully benefit responsive. Contract value represents contributions made under the contracts, plus earnings, less withdrawals and administrative expenses.
The following table sets forth the changes in Level 3 assets measured at fair value on a recurring basis for the year ended December 31, 2009:
In addition, eligible executive officers are covered by a non-qualified supplemental retirement plan. The unfunded status was $23.1 million and $23.2 million at December 31, 2009 and 2008, respectively. Expenses were $2.1 million, $2.5 million and $2.3 million for 2009, 2008 and 2007, respectively. At December 31, 2009, net loss and prior service cost of $4.1 million, net of tax, were excluded from the net periodic benefit cost and reported as a component of accumulated other comprehensive income. In addition, $23.3 million was reflected in other liabilities. In March 2007, additional executive officers were eligible to participate in the plan, which increased the pension benefit obligation by $2.1 million and decreased accumulated other comprehensive income by $1.4 million, net of tax.
Standard sponsors and administers a postretirement benefit plan that includes medical, prescription drug benefits and group term life insurance. Eligible retirees are required to contribute specified amounts for medical and prescription drug benefits that are determined periodically and are based on retirees’ length of service and age at retirement. Effective January 1, 2006, participation in the
postretirement benefit plan is limited to employees who had reached the age of 40 as of January 1, 2006, or whose combined age and length of service were equal to or greater than 45 years as of January 1, 2006.
The funded or underfunded status of the postretirement benefit plan, reflected as an asset or liability, is measured as the difference between the fair value of plan assets and the accumulated benefit obligation. At December 31, 2009, a liability of $15.8 million was reflected on the balance sheet for this plan.
The gains and losses, and prior service costs or credits excluded from the projected benefit obligation are recognized as a component of accumulated other comprehensive (income) loss, net of tax. The following table sets forth the amounts recognized in accumulated other comprehensive income at December 31:
The following table sets forth the assumed health care cost trend rates for next year at December 31:
The Company contributed $0.2 million and $0.2 million to fund the postretirement benefit plan in 2009 and 2008, respectively. The Company expects to make contributions of $0.5 million to its postretirement benefit plan in 2010. No plan assets are expected to be returned to the Company in 2010.
The Company has three share-based compensation plans: the 1999 Omnibus Stock Incentive Plan (“1999 Plan”), the 2002 Stock Incentive Plan (“2002 Plan”) and the 1999 Employee Share Purchase Plan (“ESPP”). Substantially all of the authorized shares in the 1999 Plan were issued or optioned as of December 31, 2009 and no new shares or options may be issued under this plan. The 2002 Plan was authorized as a replacement for the 1999 Plan. The 2002 Plan authorizes the board of directors to grant eligible employees and certain related parties incentive or non-statutory stock options and stock awards. The maximum number of shares of common stock that may be issued under the 2002 Plan is 4.8 million. At December 31, 2009, 3.0 million shares or options for shares
Income before income taxes included compensation cost related to all share-based compensation arrangements of $9.6 million, $8.7 million and $8.7 million for 2009, 2008 and 2007, respectively. The related tax benefits were $3.4 million, $3.0 million and $3.0 million for the same periods, respectively.
expected term, generally estimated to be equal to the rate for the year prior to the grant. The risk-free rate is the interest rate on a U.S. Treasury bond of a maturity closest to the expected term of the option granted.
The weighted-average grant date fair value of options granted was $11.52, $12.30 and $11.95 for 2009, 2008 and 2007, respectively. The total intrinsic value of the options exercised was $1.4 million, $5.0 million and $8.4 million for the same periods, respectively. The amount that the Company received from the exercise of stock options was $1.9 million, $5.7 million and $8.0 million for 2009, 2008 and 2007, respectively. The related tax benefit derived from the tax deduction received by the Company for the difference between the common stock price and the exercise price when the options were exercised was $0.5 million, $1.8 million and $2.8 million for 2009, 2008 and 2007, respectively.
Stock award grants are a part of the Company’s long-term compensation for certain senior officers. Annual performance-based stock awards are made to designated senior officers and vest with respect to all or a portion of the awards based on the Company’s financial performance for a given year. Under the current plans, the Company had 0.8 million shares available for issuance as stock award grants at December 31, 2009.
The compensation cost of these awards was measured using an estimate of the number of shares of Company common stock that will vest at the end of the performance period, multiplied by the fair value on the grant date. For stock awards, the fair value was measured as the closing common stock price on the grant date. For cash units, the fair value was measured as the closing common stock price on the date of the financial statements.
There were no unvested restricted shares or cash units outstanding and no unrecognized compensation cost for these awards at December 31, 2009. The total value of restricted shares vested and cash units paid was $0.8 million, $2.1 million and $2.2 million for 2009, 2008 and 2007, respectively.
following table. Expected stock price volatility was based on the volatility of the price of the Company’s common stock during the six months preceding the offering period. The risk-free rate was based on the six-month U.S. Treasury yield curve in effect at the time of the grant.
The weighted-average fair value per share for the Company’s ESPP offerings was $12.82, $12.18 and $10.27 during 2009, 2008 and 2007, respectively. The Company’s compensation cost resulting from the ESPP was $2.9 million, $1.8 million and $1.2 million for 2009, 2008 and 2007, respectively. The related tax benefit was $1.0 million, $0.6 million and $0.4 million for the same periods, respectively.
In order to limit its losses from large claim exposures, the Company enters into reinsurance agreements with other insurance companies. The Company reviews its retention limits based on size and experience. The maximum retention limit per individual for group life and AD&D is $750,000. The Company’s maximum retention limit for group disability insurance is $15,000 of monthly benefit per individual. During 2007, the Company increased its maximum retention limit from $5,000 to $5,500 of monthly benefit per individual for individual disability policies with effective dates on or after September 1, 2007. On certain Minnesota Life business, the Company has a maximum retention of $6,000 of monthly benefit per individual.
Standard maintains a strategic marketing alliance with Ameritas Life Insurance Corp. (“Ameritas”) that offers Standard’s policyholders more 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 2009, the agreement provided for 21% of
the net dental premiums written by Standard and the risk associated with this premium to be ceded to Ameritas.
In addition to product-specific reinsurance arrangements, the Company maintains reinsurance coverage for certain catastrophe losses related to group life and AD&D with partial coverage of nuclear, biological and chemical acts of terrorism. Through a combination of this agreement and its participation in a catastrophe reinsurance pool discussed below, the Company has coverage of up to $435.7 million per event.
The Company is part of a catastrophe reinsurance pool with other insurance companies. This pool spreads catastrophe losses on group life and AD&D over 28 participating members. The annual fee paid by the Company in 2009 to participate in the pool was less than $30,000. As a member of the pool, the Company is exposed to maximum potential losses experienced by other participating members of up to $104.3 million for a single event for losses submitted by a single company and a maximum of $261.2 million for a single event for losses submitted by multiple companies. The Company’s percentage share of losses experienced by pool members will change over time as it is a function of our group life and AD&D in force relative to the total group life and AD&D in force for all pool participants. The reinsurance
pool does not exclude war or nuclear, biological and chemical acts of terrorism.
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,
2009, was $361.7 million. Approximately $60 million in VOBA was capitalized related to the reinsurance agreement.
See “Note 1-Summary of Significant Accounting Policies-DAC, VOBA and Other Intangible Assets.”
During 2009 and 2008, Standard made distributions to StanCorp totaling $170.0 million and $60.0 million, respectively.
The following table reconciles statutory gain from operations based on statutory filings with applicable insurance regulatory authorities to the Company’s GAAP net income for the years ended December 31:
The following table sets forth StanCorp’s condensed statements of income for the years ended December 31:
In the normal course of business, the Company is involved in various legal actions and other state and federal proceedings. A number of actions or proceedings were pending at December 31, 2009. In some instances, lawsuits include claims for punitive damages and similar types of relief in unspecified or substantial amounts, in addition to amounts for alleged contractual liability or other
At December 31, 2009, minimum future rental receivables on non-cancelable leases of retail and office space with initial terms of one year or more are 2010, $15.2 million; 2011, $12.2 million; 2012, $8.9 million; 2013, $6.2 million; 2014 $3.5 million; and thereafter, $18.3 million.
During 2009, the Company repurchased 1.6 million shares of common stock at a total cost of $59.3 million for a volume weighted-average price of $38.20 per common share. At December 31, 2009, there were 1.3 million shares remaining under the Company’s November 2009 share repurchase program. During 2009, the Company acquired
The following table sets forth one-time costs incurred for 2009 by major category: