Principal properties owned by Standard Insurance Company (“Standard”) and used by StanCorp Financial Group, Inc. or its subsidiaries consist of two office buildings in downtown Portland, Oregon: the Standard Insurance Center, with approximately 460,000 square feet; and the Standard Plaza, with approximately 220,000 square feet. Both of our business segments use the facilities described above. We also own two buildings in Hillsboro, Oregon, each with 72,000 square feet of office space. The Hillsboro offices are used by StanCorp Mortgage Investors, LLC and our group insurance claims operations. In addition, Standard leases approximately 160,000 square feet of office space located in downtown Portland, Oregon, for home office and claims operations and 60,000 square feet of offsite storage. We lease 61 offices under commitments of varying terms to support our sales and regional processing offices throughout the United States. Management believes that the capacity and types of facilities are suitable and adequate for operations. See Part II, Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 1-Summary of Significant Accounting Policies-Property and Equipment, Net.”
Management segment increased due to increased individual annuity assets under administration. Premiums for the Insurance Services segment declined due to a group insurance market that reflected declines in employment levels and low wage growth as our customers navigated a challenging economy in a price-competitive sales environment.
We intend to remain focused on preserving the value of our business by continuing to provide excellent value to our customers, enhancing our financial strength and building value for our shareholders. We will continue to focus on optimizing shareholder value through sustainable profitability and investing in new product and service capabilities, which resonate in the group insurance marketplace, and adding value through strategic use of capital. We believe these actions position us well for growth as the economy recovers.
Premium growth-Given the challenging economic environment, including the prolonged effect on our group insurance customers, we expect premium growth to be relatively flat. However, our strong customer retention in the Insurance Services segment for 2010 has created the potential for organic growth in premiums as wage growth and employment levels improve.
Interest rates-The interest rate environment can affect our new money investment interest rate and the discount rate used to establish our long term disability reserves. Based on our current size, a 25 basis point change in the discount rate could result in a quarterly change of approximately $2 million in pre-tax income.
Revenues consist of premiums, administrative fees, net investment income and net capital gains and losses. Historically, premium growth in our Insurance Services segment and administrative fee revenues growth in our Asset Management segment have been the primary drivers of consolidated revenue growth.
The slight decrease for 2010 compared to 2009 was primarily due to an increase in net capital losses, partially offset by an increase in administrative fee revenues and net investment income from our Asset Management segment. The increase for 2009 compared to 2008 reflected a decrease in net capital losses and an increase in net investment income. These increases
in revenues were partially offset by declines in premiums from our Insurance Services segment and decreases in administrative fee revenues from our Asset Management segment. Net capital gains and losses are reflected in the Other category. See “Business Segments-Other-Net Capital Gains (Losses).”
Premiums from our Insurance Services segment are the primary driver of consolidated premiums and are primarily affected by the following factors:
Experience rated refunds (“ERRs”). ERRs represent a cost sharing arrangement with certain group contract holders that provides refunds to the contract holders when claims experience is better than contractual benchmarks, and provides for additional premiums to be paid when claims experience is below the contractual benchmarks. ERRs can fluctuate widely from quarter to quarter depending on the underlying experience of specific contracts.
The decrease in premiums for 2009 compared to 2008 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. The increase in premiums in the individual disability business partially offset the decrease in premiums in the group insurance business. See “Business Segments-Insurance Services Segment.”
The primary driver for administrative fee revenues is the level of assets under administration in our Asset Management segment, which is driven by equity market performance and asset growth from net customer deposits. Administrative fee revenues from our Insurance Services segment are primarily derived from insurance products for which we provide only administrative services.
The decrease in administrative fee revenues for 2009 compared to 2008 was due to lower levels of assets managed for retirement accounts during 2009, which was a result of a decline in equity markets. The recovery of equity markets during 2009 and new net deposits moderated the decrease in administrative fee revenues.
The decrease in net capital losses for 2009 compared to 2008 was primarily due to the recovery of the market value of certain fixed maturity securities. Net capital losses for 2009 were primarily due to the foreclosure and restructuring of commercial mortgage loans recorded as additional provisions to our commercial mortgage loan loss allowance, 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 2009 and OTTI on fixed maturity securities. The capital losses for 2009 were partially offset by capital gains from the sale of certain fixed maturity securities.
The increase in operating expenses for 2009 compared to 2008 was primarily due to costs related to operating expense reduction initiatives, partially offset by a decrease in compensation expense due to a reduction in employee headcount related to the 2009 operating expense reduction initiatives. The benefits from these enhanced efficiencies began in the second half of 2009. The run rate savings were partially offset by continuing product and capability enhancement expenses and the expected effects of employee medical cost inflation.
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.
The following table sets forth the net increase in DAC, VOBA and other intangible assets:
The net increase in DAC, VOBA and other intangible assets was higher for 2010 compared to 2009 primarily due to the following factors:
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 primary factors that affect premiums for the Insurance Services segment are sales and persistency for all of our insurance products and organic growth in our group insurance businesses derived from existing group policyholders’ employment and wage growth. Premium levels can also be influenced by ERRs. ERRs represent a cost sharing arrangement with certain group contract holders that provides refunds to the contract holders when claims experience is better than contractual benchmarks, and provides for additional premiums to be paid when claims experience is below the contractual benchmarks. ERRs can fluctuate widely from quarter to quarter depending on the underlying experience of specific contracts.
The slight decrease in premiums for 2010 compared to 2009 was primarily due to a decrease in individual disability premiums and a few large case terminations in our group insurance businesses during 2009. The decrease in individual disability premiums for 2010 was primarily related to a single premium of approximately $18 million received in the first quarter of 2009 related to the termination of reinsurance on certain individual disability reinsured policies and claims. The premiums received from these terminations of reinsurance were offset by approximately $18 million in additional reserves assumed.
The decrease in premiums for 2009 compared to 2008 was attributable to our group insurance business, which was affected by a lack of organic growth due to negative employment growth and low wage growth. In addition, lower premiums were the result of 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. The increase in individual disability premiums for 2009 compared to 2008 was primarily related to approximately $18 million received related to the termination of reinsurance on a small block of individual disability reinsured policies and claims, compared to $3.7 million received for a similar reinsurance termination in 2008. Offsetting the premiums received from these terminations of
reinsurance were approximately $18 million and $3.9 million in additional reserves assumed in 2009 and 2008, respectively. The termination of these agreements was made primarily for the purpose of gaining administrative efficiencies.
Sales. Sales of our group insurance products reported as annualized new premiums increased for 2010 compared to 2009, reflecting continued strong customer interest for our product and service enhancements. The group insurance market for 2010 continued to reflect a price-competitive sales environment.
Growth in our in force block - 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 decrease in Insurance Services benefits to policyholders (including interest credited) 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.
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 individual 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 following table sets forth the average discount rate used for newly incurred long term disability claim reserves and life waiver reserves:
The discount rate is based on the average rate we receive on newly invested assets during the previous 12 months, less a margin. We also consider our average investment yield and average discount rate on our entire block of claims when deciding whether to increase or decrease the discount rate. 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. We do not adjust group insurance premium rates based on short-term fluctuations in investment yields. Any offsetting adjustments of group insurance premium rates due to sustained changes in investment yields can take from one to three years given that most new contracts have rate guarantees in place.
The increase in revenues for 2010 compared to 2009 was primarily due to an increase in net investment income, primarily related to an increase in average individual annuity assets under administration, and administrative fee revenues, primarily due to the effect of improved equity market performance on our retirement plan assets under administration. The increase in revenues for 2009 compared to 2008 was primarily due to an increase in net investment income related to an increase in average individual annuity assets under administration, higher average yields in our commercial mortgage loan portfolios and an increase in the fair value of our S&P 500 index options.
Administrative fee revenues for the Asset Management segment include asset-based and plan-based fees related to our retirement plans and private client wealth management businesses, and fees related to the origination and servicing of commercial mortgage loans. The primary driver for administrative fee revenues is the level of assets under administration for retirement plans, which is driven by equity market performance and asset growth due to net customer deposits. Assets under administration that produce administrative fee revenues include retirement plan separate account, retirement plan trust products, private client wealth management and commercial mortgage loans under administration for other investors.
The increase in administrative fee revenues for 2010 compared to 2009 was primarily due to the effect of improved equity market performance on our retirement plan assets under administration, higher commercial mortgage loans under administration and higher private client wealth management assets under administration. These increases occurred despite a decrease in retirement plan trust assets under administration. The decline in retirement plan trust assets under
administration was primarily due to the termination of a few large trust retirement plans in the first six months of 2010 that did not meet our profitability objectives. The administrative fee revenues generated from these terminated plans were not significant. The decline in administrative fee revenues for 2009 compared to 2008 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 increase in interest credited for 2010 compared to 2009 was primarily due to growth in our individual fixed-rate annuity assets under administration enhanced by the change in fair value of the index-based interest guarantees. See Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 11-Derivative Financial Instruments” for further derivatives disclosure.
In addition to our two segments, we report our holding company and corporate activities in the Other category. This category includes return on capital not allocated to the product segments, holding company expenses, operations of certain unallocated subsidiaries, interest on debt, unallocated expenses including costs incurred during our 2009 operating expense reduction initiatives, net capital gains and losses and adjustments made in consolidation.
The increase in losses before income taxes for 2010 compared to 2009 was primarily due to higher net capital losses. The loss before income taxes for 2009 included costs related to our 2009 operating expense reduction initiatives, primarily related to severance costs and lease terminations. The benefits from these enhanced efficiencies began in the second half of 2009. See “Liquidity and Capital Resources-Financing Cash Flows.”
Asset-liability management is a part of our risk management structure. The risks we assume related to asset-liability mismatches vary with economic conditions. The primary sources of economic risk are interest-rate related and include changes in interest rate term risk, credit risk and liquidity risk. It is generally management’s objective to align the characteristics of assets and liabilities so that our financial obligations can be met under a wide variety of economic
conditions. From time to time, management may choose to liquidate certain investments and reinvest in different investments so that the likelihood of meeting our financial obligations is increased. See “-Investing Cash Flows.”
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, 2010.
Our interest rate risk analysis reflects the influence of call and prepayment rights present in our fixed maturity securities and commercial mortgage loans. The majority of these investments have contractual provisions that require the borrower to compensate us in part or in full for reinvestment losses if the security or loan is retired before maturity. Callable bonds as a percentage of our fixed maturity security investments were 2.6% at December 31, 2010. We originate commercial mortgage loans containing a provision requiring the borrower to pay a prepayment fee. The prepayment provision assures that our expected cash flow from commercial mortgage loan investments would be protected in the event of prepayment. Approximately 98% of our commercial mortgage loan portfolio contains 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.
We maintain a diversified investment portfolio primarily consisting of fixed maturity securities and fixed-rate commercial mortgage loans. Investing cash inflows primarily consist of the proceeds of investments sold, matured or repaid. Investing cash outflows primarily consist of payments for investments acquired or originated.
Net cash used in investing activities was $493.1 million, $907.6 million and $1.03 billion for 2010, 2009 and 2008, respectively. The decrease in net cash used in investing activities for 2010 compared to 2009 was primarily due to lower net purchases of fixed maturity securities, which resulted from lower policyholder fund net deposits, the termination of a few large retirement plans and higher repurchases of common stock. The decrease in net cash used in investing activities for 2009 compared to 2008 was primarily due to lower commercial mortgage loan originations and lower individual annuity sales.
Our target investment portfolio allocation is approximately 60% fixed maturity securities and 40% commercial mortgage loans with a maximum allocation of 45% to commercial mortgage loans. At December 31, 2010, our portfolio consisted of 57.6% fixed maturity securities, 40.5% commercial mortgage loans, and 1.9% real estate.
The following table sets forth fixed maturity securities and associated key indicators:
We recorded OTTI of $0.7 million for 2010. See “Critical Accounting Policies and Estimates-Investment Valuations-Fixed Maturity Securities.” We did not have any direct exposure to sub-prime or Alt-A mortgages in our fixed maturity securities portfolio at December 31, 2010. The unrealized capital losses for 2009 included $3.6 million related to noncredit losses that were reclassified from retained earnings to accumulated other comprehensive income.
The increase in commercial mortgage loan originations for 2010 compared to 2009 was primarily due to increased activity in the commercial real estate market. The decrease in commercial mortgage loan originations for 2009 compared to 2008 was primarily due to a reduction in demand from quality borrowers in the current credit environment.
An impaired commercial mortgage loan is one that is not performing to the contractual terms of the loan agreement. A specific allowance for losses is recorded when a loan is considered to be impaired. We also hold specific allowances for losses on certain performing loans that we continue to monitor and evaluate. Impaired commercial mortgage loans without specific allowances for losses are those for which we have determined that it remains probable that we will collect all amounts due. The increase in the impaired commercial mortgage loans at December 31, 2010 compared to 2009 was primarily due to an increase in restructured and sixty-day delinquent commercial mortgage loans that were not performing to the contractual terms of the loan agreements.
Interest income is recorded in net investment income. The Company continues to recognize interest income on delinquent commercial mortgage loans until the loans are more than 90 days delinquent. Interest income and accrued interest receivable are reversed when a loan is put on non-accrual status. For loans that are less than 90 days delinquent, we may make a business decision to reverse interest income and the accrued interest receivable if there is a question on the collectability of the interest. Interest income on loans in the 90-day delinquent category is recognized in the period the cash is collected. We resume the recognition of interest income when the loan becomes less than 90 days delinquent and we determine it is probable that the loan will remain performing.
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, 2010, we had a debt to total capitalization ratio of 24.6% and consolidated net worth of $1.69 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, 2010, 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”), which 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.
State insurance departments require insurance enterprises to maintain minimum levels of capital and surplus. The target for our insurance subsidiaries is generally to maintain capital at 300% of the Company Action Level of Risk-based Capital (“RBC”) required by regulators, which is 600% of the Authorized Control Level RBC required by our states of domicile. The insurance subsidiaries held estimated capital of 331% of the Company Action Level RBC at December 31, 2010. At December 31, 2010, statutory capital, adjusted to exclude asset valuation reserves, for our regulated insurance subsidiaries totaled $1.32 billion.
Available capital consists of capital in excess of our insurance subsidiaries’ target RBC ratio of 300%, as well as cash and securities available to the holding company at our non-regulated subsidiaries. During 2010, our available capital decreased approximately $60 million to over $235 million. The majority of the decrease was related to an increase in share repurchase activity and increased investment in real estate owned that is not included in our available capital calculation.
In February 2011, the Board of Directors approved dividends from Standard of up to $200 million during 2011. The approved dividend amount for 2011 was not in excess of the current statutory limitations under the Oregon Insurance Division and we therefore will not have to seek approval from the Oregon Insurance Division for the 2011 approved dividend amount.
On November 8, 2010, our Board of Directors declared an annual cash dividend of $0.86 per share, calculated and payable on a per share basis. The dividend was paid on December 3, 2010 to shareholders of record on November 19, 2010. In 2009 and 2008, we paid an annual cash dividend of $0.80 and $0.75 per share, respectively. The Board of Directors has increased the annual dividend to shareholders each year for the past 11 consecutive years. The declaration and payment of dividends to shareholders in the future is subject to the discretion of our Board of Directors. It is anticipated that annual dividends to shareholders 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 to shareholders 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.
On February 8, 2010, our Board of Directors authorized a share repurchase program of up to 3.0 million shares of StanCorp common stock. The February 2010 repurchase program took effect upon the completion of the previous share repurchase program and expires on December 31, 2011. As of December 31, 2010, we had 2.3 million shares remaining under our current share repurchase program. Share repurchases under the repurchase program 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 and other potential growth opportunities or priorities for capital use. We also acquire shares of common stock from executive officers and directors to cover tax liabilities of those officers and directors upon the release of performance-based shares. Repurchases are made at market prices on the transaction date.
Our long-term debt obligations consisted primarily of the $250 million 6.875% Senior Notes and the $300 million 6.90% Subordinated Debt. See Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 18-Long-Term Debt” for additional information.
In the normal course of business, we commit to fund commercial mortgage loans generally up to 90 days in advance. At December 31, 2010, we had outstanding commitments to fund commercial mortgage loans totaling $70.8 million, with fixed interest rates ranging from 5.75% 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 deposit may be refunded to the borrower, less an administrative fee.
Federal income tax expense includes current income taxes defined as current year estimates of federal income taxes and tax contingencies for current and prior years and amounts incurred or received during the year relating to prior periods, to the extent not previously provided.
The narrowing of the spread between Statutory Results and Adjusted GAAP Results for 2010 was due to an increase in the deferral of capital gains subject to the interest maintenance reserve on a statutory basis and an increase in reserves for the group disability business. The increase in Statutory Results compared to Adjusted GAAP Results for 2009 compared to 2008 was primarily due to favorable differences in DAC and favorable changes in reserves on a statutory basis compared to a GAAP basis.
The extent to which the fair value is below amortized cost.
In 2009, we recorded a cumulative effect adjustment of $2.3 million, net of tax, for the portion of OTTI related to noncredit losses on our debt securities for the period prior to April 1, 2009. We met the following criteria in order to record the cumulative effect adjustment:
Fixed maturity securities are classified as available-for-sale and are carried at fair value on the consolidated balance sheet. See Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 9-Fair Value” 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 (loss).
Real estate investments are stated at cost less accumulated depreciation. Generally, we depreciate this real estate using the straight-line depreciation method with property lives varying from 30 to 40 years. We record impairments when it is determined that the decline in fair value of an investment below its amortized cost is other than temporary. The impairment loss is charged to net capital losses, and the cost basis of the investment is permanently adjusted to reflect the impairment.
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, 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 profitability are inconsistent with our assumptions, we could be required to make adjustments to VOBA and related amortization. For the VOBA associated with the Minnesota Life block of business assumed, the amortization period is up to 30 years and is amortized in proportion to future premiums. The VOBA associated with the TIAA transaction is amortized in proportion to expected gross profits with an amortization period of up to 20 years. The accumulated amortization of VOBA was $60.4 million and $58.4 million at December 31, 2010 and 2009, respectively.
Reserves include policy reserve liabilities and claim reserve liabilities and represent amounts to pay future benefits and claims. Claim reserve liabilities are for claims that have been incurred or are estimated to have been incurred but not yet reported to us. Policy reserve liabilities reflect our best estimates of assumptions at the time of policy issuance including adjustments for adverse deviations in actual experience.
change assumptions to increase reserves. We maintain a policy reserve for as long as a policy is in force, even after a separate claim reserve is established.
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.
We refined our reserve calculation for certain other individual disability claims in 2010 which resulted in a decrease in our individual disability reserves of $4.7 million. There were no similar calculation refinements in 2009 and 2008.
We also have 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. Participation in the postretirement benefit plan is limited to employees who had reached the age of 40 or whose combined age and length of service were equal to or greater than 45 years as of January 1, 2006. This plan is sponsored and administered by Standard and is frozen for new participants.
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. Unrecognized actuarial gains or losses, prior service costs or credits, and transition assets are amortized, net of tax, out of accumulated other comprehensive income or loss as components of net periodic benefit cost.
We record income tax interest and penalties in the income tax provision according to our accounting policy.
Currently, years 2007 through 2010 are open for audit by the IRS. See Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 7-Income Taxes.”
“anticipates,” “intends,” “plans,” “believes,” “estimates,” “seeks,” “will be,” “will continue,” “will likely result” and similar expressions that are predictive in nature or that depend on or refer to future events or conditions. Our forward-looking statements are not guarantees of future performance and involve uncertainties that are difficult to predict. They involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements including, but are not limited to, the following:
Consolidated Statements of Income and Comprehensive Income (Loss) for the years ended December 31, 2010 2009 and 2008
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 and individual disability insurance in New York.
Standard Retirement Services, Inc. (“Standard Retirement Services”) administers and services StanCorp’s retirement plans group annuity contracts and trust products. Retirement plan products are offered in all 50 states through Standard or Standard Retirement Services.
StanCorp Equities, Inc. (“StanCorp Equities”) is a limited broker-dealer and member of the Financial Industry Regulatory Authority. StanCorp Equities serves as principal underwriter and distributor for group variable annuity contracts issued by Standard and as the broker of record for certain retirement plans using the trust platform. StanCorp Equities carries no customer accounts but provides supervision and oversight for the distribution of group variable annuity contracts and of the sales activities of all registered representatives employed by StanCorp Equities and its affiliates.
StanCorp Real Estate, LLC is a property management company that owns and manages the Hillsboro, Oregon home office properties and other properties held for investment and held for sale and manages the Portland, Oregon home office properties.
StanCorp and Standard hold interests in low-income housing tax credit investments. These interests do not meet the requirements for consolidation under existing accounting standards, and thus the Company’s interests in the low-income housing tax credit investments are accounted for under the equity method of accounting. The total investment in these interests was $57.5 million and $20.1 million at December 31, 2010 and 2009, respectively.
The Company maintains an internally identified list of securities with characteristics that could indicate potential impairment (“watch list”). At December 31, 2010, the Company’s fixed maturity securities watch list totaled $0.7 million in fair value and $1.0 million in amortized cost. There was no OTTI on the fixed maturity securities on the watch list at December 31, 2010. The Company recorded OTTI related to credit loss due to impairments of $0.7 million for 2010 and $5.9 million for 2009. There was no OTTI related to noncredit loss for 2010 and 2009. See “Note 10-Investments,” for additional discussion.
Fixed maturity securities are classified as available-for-sale and are carried at fair value on the consolidated balance sheet. See “Note 9-Fair Value,” for a detailed explanation of the valuation methods the Company uses to calculate the fair value of its 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 (loss).
All other investments include derivative financial instruments and policy loans. Capital gains and losses for these investments are recognized using the specific identification method.
Derivative financial instruments are carried at fair value, and valuation adjustments for derivative financial instruments are reported as a component of net investment income. See “Note 11-Derivative Financial Instruments.”
The Company defers certain acquisition costs that vary with and are primarily related to the origination of new business and placing that business in force. Certain costs related to obtaining new business and acquiring business through reinsurance agreements have been deferred and 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. Changes in actual persistency are reflected in the
The Company’s individual deferred annuities and group annuity products are classified as investment contracts. DAC related to these products is amortized over the life of related policies in proportion to expected gross profits. For the Company’s individual deferred annuities, DAC is generally amortized over 30 years with approximately 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.
Non-affiliated tenants leased 34.3%, 35.7% and 36.5% of the corporate headquarters in Portland, Oregon at December 31, 2010, 2009 and 2008, respectively. Income from the leases is included in net investment income.
Benefits and expenses are matched with recognized premiums to result in recognition of profits over the life of the contracts. The match is accomplished by recording a provision for future policy benefits and unpaid claims and claim adjustment expenses. For most of the Company’s product lines, management establishes and carries as a liability actuarially determined reserves that are calculated to meet the Company’s obligations for future policy benefits and claims. These reserves do not represent an exact calculation of the Company’s future benefit liabilities but are instead estimates based on assumptions and considerations concerning a number of factors, which include:
Management is required to determine whether tax return positions are more likely than not to be sustained upon audit by taxing authorities. Tax benefits of uncertain tax positions, as determined and measured by this interpretation, cannot be recognized in the Company’s financial statements.
Accounting Standards Update (“ASU”) No. 2010-06, Improving Disclosures about Fair Value Measurements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements. ASU No. 2010-06 amends the codification guidance related to fair value disclosures. ASU No. 2010-06 requirements include additional disclosures surrounding transfers between Level 1 and 2 fair value classifications, disclosure clarifications concerning the level of disaggregation for the different types of financial instruments, and separate disclosures concerning purchases, sales, issuances and settlements in the tabular Level 3 roll-forward schedule. Disclosures regarding the transfer between Level 1 and 2 fair value classifications and disaggregation for the different types of financial instruments were effective for interim and annual periods beginning after December 15, 2009 with disclosures regarding purchases, sales, issuances and settlements in the tabular Level 3 roll-forward schedule becoming effective for fiscal years beginning after December 15, 2010. The Company complied with ASU No. 2010-06 disclosures effective for interim and annual periods after December 15, 2009 and complied with the disclosures effective for interim and annual periods beginning after December 15, 2010 in this Form 10-K. Neither enhanced disclosure requirement had a material effect on the Company’s consolidated financial statements.
The nature of the credit risk inherent in the financing receivable portfolio.
The changes and underlying reason for the changes in the allowance for credit losses for each portfolio.
Credit quality indicators of financing receivables at the end of the reporting period.
The nature and extent of troubled debt restructurings that occurred during the period.
The nature and extent of financing receivables modified as troubled debt restructurings within the previous 12 months that defaulted during the reporting period.
It results directly from and is essential to the acquisition of the contract.
The ASU requires additional disclosures in the financial statements and footnotes concerning deferred acquisition costs such as the nature and type of acquisition costs capitalized, the method of amortizing capitalized acquisition costs, and the amount of acquisition costs amortized for the period. The directives of ASU No. 2010-26 are effective for fiscal years and interim periods beginning after December 15, 2011. Retrospective adoption of the rule is allowed, but not required. However, if a company does not chose retrospective adoption, additional disclosures will be required for the prior periods presented in financial statements. The Company is currently evaluating the full effects of ASU No. 2010-26 on its business and financial statements and whether it will adopt the guidance on a prospective or retrospective basis.
The Company has two active share-based compensation plans: the 2002 Stock Incentive Plan (“2002 Plan”) and the 1999 Employee Share Purchase Plan (“ESPP”). The 2002 Plan authorizes the Board of Directors to grant incentive or non-statutory stock options and stock awards to eligible employees and certain related parties. The maximum number of shares of common stock that may be issued under the 2002 Plan is 4.8 million. As of December 31, 2010, 3.2 million shares or options for shares have been issued under the 2002 Plan. The Company’s ESPP allows eligible employees to purchase StanCorp common stock at a discount. Of the 2.0 million shares authorized for this plan, 0.3 million shares remain available at December 31, 2010.
The Company has provided three types of share-based compensation pursuant to the 2002 Plan: option grants, stock award grants and director stock grants.
Options are granted to directors, officers and certain non-officer employees. Directors typically receive annual grants in amounts determined by the Nominating & Corporate Governance Committee of the Board of Directors and executive officers typically receive annual grants in amounts determined by the Organization & Compensation Committee of the Board of Directors. Each director who is not an employee of the Company receives annual stock options with a fair value equal to $50,000 on the date of the annual shareholders meeting. Officers typically receive annual grants as determined by management. Officers may also receive options when hired or promoted to an officer position. In addition, the Chief Executive Officer has authority to award a limited number of options at his discretion to non-executive officers and other employees. Options are granted with an exercise price equal to the closing market price of StanCorp common stock on the grant date. Directors’ options vest after one year with other options generally vesting in four equal installments on the first four anniversaries of the grant date. Option awards to certain officers vest if the officer’s employment is terminated by the Company without cause or the officer terminates for good reason within 24 months after a change of control of the Company as defined in the Company’s change of control agreement. Options generally expire 10 years from the grant date.
The Company grants annual performance-based stock awards to designated senior officers as long-term incentive compensation. Under the 2002 Plan, the Company had 0.8 million shares available for issuance as stock award grants at December 31, 2010.
The Company issued 10,276, 3,221 and 4,299 shares of StanCorp common stock for 2010, 2009 and 2008, respectively, to redeem Performance Shares that vested following the 2009, 2008 and 2007 performance periods, net of shares repurchased to cover required tax withholding.
The compensation cost of the Performance Shares was measured using an estimate of the number of Performance Shares that will vest at the end of the performance period, multiplied by the closing market price of StanCorp common stock on the grant date. The compensation cost that the Company will ultimately recognize as a result of these stock awards is dependent on the Company’s financial performance. Assuming that the maximum performance is achieved for each performance goal, $4.5 million in additional compensation cost would be recognized through 2012. A target or expected payout of 70% of the total would result in approximately $3.1 million of additional compensation cost through 2012. This cost is expected to be recognized over a weighted-average period of 1.7 years. During 2009, certain executive officers of the Company retired upon which they forfeited 82,027 Performance Shares in accordance with their long-term incentive compensation agreements.
In 2008, each director who was not an employee of the Company received annual compensation of 1,000 shares of StanCorp common stock, in addition to an annual stock option grant.
In February 2009, the Board of Directors of the Company approved a new director compensation schedule that became effective May 4, 2009. Under the new schedule, each director who is not an employee of the Company receives annual compensation of StanCorp common stock with a fair value equal to $50,000 based on the closing market price of StanCorp common stock on the day of the annual shareholders meeting, in addition to annual stock option grants.
The compensation cost for the ESPP is measured as the sum of the value of the 15% discount and the value of the embedded six-month option. The value of the discount is equal to 15% of the fair market value of the purchase price of the common stock. The value of the embedded option is calculated using the Black-Scholes option pricing model and the assumptions noted in the following table. Expected stock price volatility was based on the volatility of the price of StanCorp 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 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 the Company, and the agent pension plan is for former field employees and agents. The defined benefit pension plans provide benefits based on years of service and final average pay. Both plans are sponsored by Standard and administered by Standard Retirement Services and are frozen for new participants. Participation in the defined benefit pension plans is generally limited to eligible employees whose date of employment began before 2003.
The following table sets forth a reconciliation of the changes in the pension plans’ projected benefit obligations, fair value of plan assets and the funded status:
The Company recognizes 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 investment goal of the employee pension plan is to produce long-run portfolio returns that are consistent with reasonable contribution rates and a well-funded plan. To manage the overall risk of the portfolio, the portfolio is reviewed
Pension plan assets are recorded at fair value and are disclosed below using a three-level hierarchy. See “Note 9-Fair Value” for additional fair value information. 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 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 and are classified as a Level 2 asset. Contract value represents contributions made under the contracts, plus earnings, less withdrawals and administrative expenses.
The following tables set forth the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable Level 3 inputs:
As a result of inputs used during the current period to estimate the fair value of stable asset fund, Plan management has categorized the stable asset fund as having Level 2 inputs at December 31, 2010. The valuation methods as described in Note 9 may produce fair value calculations that may not be indicative of net realizable values or reflective of future fair values. Furthermore, although the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Eligible employees are covered by a qualified deferred compensation plan sponsored by Standard under which a portion of the employee contribution is matched. Employees not eligible for the employee pension plan are eligible for an additional non-elective employer contribution. Contributions to the plan for 2010, 2009 and 2008 were $10.0 million, $10.5 million and $10.2 million, respectively.
Eligible executive officers, directors, agents and group producers may participate in one of several non-qualified deferred compensation plans under which a portion of the deferred compensation for participating executive officers, agents and group producers is matched. The liability for the plans was $10.5 million and $9.9 million at December 31, 2010 and 2009, respectively.
The estimated prior service cost (credit) and net (income) loss for the postretirement benefit plan that will be amortized from accumulated other comprehensive (income) loss into net periodic benefit cost in 2011 is $0.3 million and $(0.1) million, respectively. The projected discounted cash flow obligation for the postretirement benefit plan was $50.1 million and $50.9 million at December 31, 2010 and 2009, respectively.
Eligible executive officers are covered by a non-qualified supplemental retirement plan. The unfunded status was $26.7 million and $23.1 million at December 31, 2010 and 2009, respectively. Expenses were $2.8 million, $2.1 million and $2.5 million for 2010, 2009 and 2008, respectively. At December 31, 2010, net loss and prior service cost of $5.4 million, net of tax, were excluded from the net periodic benefit cost and reported as a component of accumulated other comprehensive income. In addition, $26.7 million was reflected in other liabilities.
The Company is carrying forward net operating losses of $44.3 million that originated in StanCorp and certain subsidiaries. The losses will be used in future years to offset taxable income from those entities to the degree allowed by the Internal Revenue Code. If unutilized, these losses would expire between the years 2023 to 2030. In addition, the Company is carrying forward a $55.4 million federal net operating loss from a business acquisition. This carryforward is subject to
Goodwill is related to the Asset Management segment and totaled $36.0 million at both December 31, 2010 and 2009. 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 performed a step one test, as of December 31, 2010, in which the carrying value of tested assets was compared to the fair value of the assets. Fair value was measured using a combination of the income approach and the market approach. The income approach consisted of utilizing the discounted cash flow method that incorporates the Company’s estimates of future revenues and costs, discounted using a market participant weighted-average cost of capital. The Company’s estimates used in the income approach were consistent with the plans and estimates that the Company used to manage its operations. The market approach utilized multiples of profit measures in order to estimate the fair value of the assets. As the income approach more closely aligns with how the Company internally evaluates and manages its business, the Company weighted the income approach more heavily than the market approach in determining the fair value of the assets. However, the Company did perform testing to ensure that both models provided reasonably consistent results. Additionally, the Company 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, the Company concluded that goodwill was not impaired as of December 31, 2010.
Indicative year-end pricing for a package of commercial mortgage loans similar to those originated by the Company near year-end.
A liquidity premium that is estimated from historical mortgage loan sales and is applied over and above base yields.
The fixed maturity securities are diversified across industries, issuers and maturities. The Company calculates fair value for all classes of fixed maturity securities using valuation techniques described below. They are placed into three levels depending on the valuation technique used to determine the fair value of the securities.
The Company utilizes an independent pricing service to assist management in determining the fair value of these assets. The pricing service incorporates a variety of information observable in the market in its valuation techniques, including:
S&P 500 Index options and certain fixed maturity securities were valued using Level 3 inputs. The Level 3 fixed maturity securities were valued using matrix pricing, independent broker quotes and other standard market valuation methodologies. The fair value was determined using inputs that were not observable or could not be derived principally from, or corroborated by, observable market data. These inputs included assumptions regarding liquidity, estimated future cash flows and discount rates. Unobservable inputs to these valuations are based on management’s judgment or estimation obtained from the best sources available. The Company’s valuations maximize the use of observable inputs, which include
an analysis of securities in similar sectors with comparable maturity dates and bond ratings. Broker quotes are validated by management for reasonableness in conjunction with information obtained from matrix pricing and other sources.
The Company calculates the fair value for its S&P 500 Index options using the Black-Scholes option pricing model and parameters derived from market sources. The Company’s valuations maximize the use of observable inputs, which include direct price quotes from the Chicago Board Options Exchange (“CBOE”) and values for on-the-run treasury securities and London Interbank Offered Rate (“LIBOR”) rates as reported by Bloomberg. Unobservable inputs are estimated from the best sources available to the Company and include estimates of future gross dividends to be paid on the stocks underlying the S&P 500 Index, estimates of bid-ask spreads, and estimates of implied volatilities on options. Valuation parameters are calibrated to replicate the actual closing 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.
As shown in the tables above, fixed maturity securities were transferred into Level 3 from Level 2 for 2009 as the Company was unable to obtain pricing from an independent pricing service for these investments. Fixed maturity securities were transferred out of Level 3 into Level 2 for 2010 as the Company was able to obtain pricing from an independent pricing service for these investments.
Net capital losses for 2010 were primarily related to the foreclosure and restructuring of commercial mortgage loans with a single borrower during the second quarter of 2010 recorded as additional provisions to our commercial mortgage loan loss allowance. Capital losses were also recognized on low-income housing tax credit investments. These losses were partially offset by net capital gains related to the sale of certain fixed maturity securities and from the sale of real estate investments.
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Callable bonds represented 2.6%, or $169.9 million, of the Company’s fixed maturity securities at December 31, 2010. The Company did not have any direct exposure to sub-prime or Alt-A mortgages in its fixed maturity securities portfolio at December 31, 2010.
The Company underwrites mortgage loans on commercial property throughout the United States. In addition to real estate collateral, the Company requires either partial or full recourse on most loans.
The increase in the provisions for the commercial mortgage loan loss allowance in 2010 compared to 2009 was primarily due to increases in the provisions on restructured and sixty-day delinquent commercial mortgage loans during 2010 and was primarily related to the foreclosure and restructuring of commercial mortgage loans with a single borrower during the second quarter of 2010. Restructured commercial mortgage loans totaled $76.6 million and $28.7 million at December 31, 2010 and 2009, respectively. The Company’s sixty-day delinquent commercial mortgage loans totaled $19.6 and $17.3 million at December 31, 2010 and 2009, respectively. The increase to charge offs for 2010 compared to 2009 was primarily related to the acceptance of deeds in lieu of foreclosure on commercial mortgage loans related to a single borrower during the second quarter of 2010.
The following table sets forth the recorded investment in commercial mortgage loans and commercial mortgage loan originations:
The following table sets forth the average recorded investment in impaired commercial mortgage loans before specific allowances for losses:
The Company closely monitors all past due commercial mortgage loans; additional attention is given to those loans at least sixty-days past due. Commercial mortgage loans that were at least sixty-days past due totaled $19.6 million as of December 31, 2010. The Company’s current level of past due commercial mortgage loans is higher than its historical levels due to the current macroeconomic challenges. Overall, sixty-day delinquencies are 0.43% of the commercial mortgage loan portfolio. The Company’s experience, consistent and disciplined underwriting standards, and diligent servicing practices will continue to aid the strong performance of its commercial mortgage loan portfolio.
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 on management’s evaluation of the securities, the Company’s intent not to sell those securities, and as it is unlikely that the Company will be required to sell the securities, none of the unrealized losses summarized in this table are considered other-than-temporary. See “Note 1-Summary of Significant Accounting Policies-Investment Valuations-Fixed Maturity Securities” for a discussion regarding fixed maturity securities’ OTTI and cumulative effect adjustment.
Securities deposited for the benefit of policyholders in various states, in accordance with state regulations, amounted to $6.6 million and $6.5 million at December 31, 2010 and 2009, respectively.
The Company markets indexed annuities, which permit the holder to elect an interest rate return or an indexed return, where interest credited to the contracts is based on the performance of the S&P 500 Index, subject to an upper limit or cap and minimum guarantees. Policyholders may elect to rebalance between interest crediting options at renewal dates annually. At each renewal date, the Company has the opportunity to re-price the indexed component by changing the cap, subject to minimum guarantees. The Company estimates the fair value of the index-based interest guarantees for the current period and for all future reset periods until contract maturity. Changes in the fair value of the index-based interest guarantees are recorded as interest credited and represent an estimate of the cost of the options to be purchased in the future to manage the risk related to the index-based interest guarantees. The index-based interest guarantees are discounted back to the date of the balance sheet using current market indicators for future interest rates, option costs and actuarial estimates for policyholder lapse behavior and management’s discretion in setting renewal index-based interest guarantees.
The notional amount of the Company’s S&P 500 Index options at December 31, 2010 and 2009 was $303.8 million and $252.5 million, respectively. Option premiums paid for the Company’s S&P 500 Index options were $9.1 million and $6.2 million, for 2010 and 2009, respectively. The Company received $12.8 million and $4.9 million for options exercised in 2010 and 2009, respectively.
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. See “Note 9-Fair Value” for additional information regarding the fair value of the Company’s derivative assets and liabilities.
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.
Broad diversification of risk by customer geography, industry, size and occupation.
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 2010, the agreement provided for 23.0% of the net dental premiums written by Standard and the risk associated with this premium to be ceded to Ameritas.
Recoveries recognized under reinsurance agreements were $71.9 million, $75.2 million and $64.0 million for 2010, 2009 and 2008, respectively. Amounts recoverable from reinsurers were $938.3 million and $935.0 million at December 31, 2010 and 2009, respectively. Of these amounts, $786.6 million and $792.7 million for 2010 and 2009, respectively, were from the reinsurance transaction with Protective Life Insurance Company (“Protective Life”) effective January 1, 2001. See “Note 15-Reinsurance of Blocks of Business.”
See “Note 1-Summary of Significant Accounting Policies-DAC, VOBA and Other Intangible Assets” And “Note 12-DAC, VOBA and Other Intangible Assets.”
The Company has $300 million of 6.90%, junior subordinated debentures (“Subordinated Debt”), which matures on June 1, 2067, is non-callable at par for the first 10 years (prior to June 1, 2017) and is subject to a replacement capital covenant. The covenant limits replacement of the Subordinated Debt for the first 40 years to be redeemable after year 10 (on or after June 1, 2017) and only with securities that carry equity-like characteristics that are the same as or more equity-like than the Subordinated Debt. The principal amount of the Subordinated Debt is payable at final maturity. Interest is payable semi-annually in June and December for the first 10 years up to June 1, 2017, and quarterly thereafter at a floating rate equal to three-month LIBOR plus 2.51%. StanCorp has the option to defer interest payments for up to five years. The declaration and payment of dividends to shareholders would be restricted if the Company elected to defer interest
payments on its Subordinated Debt. If elected, the restriction would be in place during the interest deferral period. StanCorp is currently not deferring interest on the Subordinated Debt.
Under the agreement, StanCorp is subject to two financial covenants that are based on the Company’s ratio of total debt to total capitalization and consolidated net worth. The Facility is subject to performance pricing based upon the Company’s ratio of total debt to total capitalization and includes interest based on a Eurodollar margin, plus facility and utilization fees. At December 31, 2010, StanCorp was in compliance with all financial covenants under the Facility and had no outstanding balance on the Facility.
The Company leases certain buildings and equipment under non-cancelable operating leases that expire in various years through 2020. Most of these leases have renewal options for periods ranging from one to twelve years.
Total rent expense was $14.5 million, $23.5 million and $16.0 million for the years ended December 31, 2010, 2009 and 2008, respectively.
The Company’s long-term debt obligations consisted primarily of the $250 million 6.875%, Senior Notes and the $300 million 6.90% Subordinated Debt. See “Note 18-Long-Term Debt” for additional information.