We have made in this Form 10-K, and from time to time may make in our public filings, news releases and oral presentations and discussions, certain statements, which are predictive in nature and not based on historical facts. These statements are “forward-looking” and, accordingly, involve risks and uncertainties that could cause actual results to differ materially from those discussed or implied. Although such forward-looking statements have been made in good faith and are based on reasonable assumptions, there is no assurance that the expected results will be achieved. See “Forward-looking Statements.”
The increase in net income for 2007 compared to 2006 reflected premium growth and comparatively favorable claims experience in our group insurance and individual disability businesses. Premium growth in the Insurance Services segment was 2.2%, 7.1% and 6.1% for 2008, 2007 and 2006, respectively. For the Insurance Services segment, claims experience for the group insurance products, as indicated by the benefit ratio (benefits to policyholders and interest credited measured as a percentage of premiums), was 73.6%, 77.4% and 78.3% for 2008, 2007 and 2006, respectively.
Return on average equity, excluding after-tax net capital gains and losses from net income and accumulated other comprehensive income and losses from equity, will be within the target range of 14% to 15%.
The annual benefit ratio for the group insurance business will be consistent with the experience of the
previous five years, during which it has ranged from 73.6% to 78.3%.
Expenses for our employee pension plans will increase by approximately $10 million over 2008 as a result of declines in equity values experienced during 2008.
Revenues consist of premiums, administrative fees, net investment income and net capital gains and losses. Total revenues decreased 1.6% to $2.67 billion for 2008 compared to 2007 and increased 8.7% to $2.71 billion for 2007 compared to 2006. Premium growth in our Insurance Services segment and administrative fee growth in our Asset Management segment are the primary drivers of consolidated revenue growth.
The following table sets forth percentages of premium growth, administrative fee growth and net investment income growth by segment for the years December 31:
Revenue growth in the Insurance Services and Asset Management segments was offset by net capital losses of $128.8 million in 2008. Net capital losses are reflected in the Other category.
added through the acquisition of DPA, Inc. in July 2007 and Invesmart, Inc. (“Invesmart”) in July 2006. Excluding the administrative fees related to the addition of Invesmart and DPA, Inc., administrative fee growth for the Asset Management segment was 22.9% for 2007 compared to 2006.
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 annuities. Average invested assets do not include cash and cash equivalents. 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.
The increase in net investment income for 2007 compared to 2006 was primarily due to an increase of 4.9% to $8.47 billion in average invested assets resulting from operations, and an increase in assets related to proceeds of $300 million from junior subordinated debentures (“Subordinated Debt”) issued in May 2007. Average invested assets do not include cash and cash equivalents. Also contributing to the increase was an increase in premiums on called bonds, primarily in the first six months
Net capital gains and losses are reported in “Other.” Net capital losses were $128.8 million and $0.6 million for 2008 and 2007, respectively. Net capital gains were $1.9 million for 2006. Net capital gains and losses primarily occur as a result of other-than-temporary impairments or sales of the Company’s assets, neither of which are likely to occur in regular patterns. This lack of a regular pattern was demonstrated by the $128.2 million increase in net capital losses in 2008 over 2007. The net capital losses in 2008 were primarily due to a decline in the market value of certain fixed maturity securities where management determined recovery or the intent to hold the securities was uncertain, which resulted in recording other-than-temporary impairments on those securities. Capital losses in the fourth quarter of 2008 were the result of other-than-temporary impairments in the fixed maturity securities belonging to various economic sectors. Other capital losses recorded in 2008 were primarily the result of other-than-temporary impairments of fixed maturity security holdings of certain bond insurers, financial institutions including Lehman Brothers, AIG, and Washington Mutual and several regional banks.
The slight decrease in benefits to policyholders for 2008 compared to 2007 was primarily due to comparatively favorable claims experience in our group insurance business and slowing business growth in the fourth quarter evidenced by decreased premiums in the fourth quarter of 2008. Favorable claims experience was offset by business growth in the first three quarters of the year, as evidenced by premium growth in those quarters, in both the Insurance Services and Asset Management segments.
The increase in benefits to policyholders for 2007 compared to 2006 resulted from business growth as evidenced by premium growth, partially offset by comparatively favorable claims experience in our group insurance and individual disability insurance businesses. See “Business Segments-Insurance Services Segment-Benefits and Expenses-Benefits to Policyholders.”
Interest credited represents interest paid to policyholders on retirement plan general account assets and individual fixed 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, new investment interest rates and overall portfolio yield (which influence our interest crediting rate for our customers), and customer retention. In addition, interest credited associated with our indexed annuity product may fluctuate from quarter to quarter due to changes in interest rates and equity market volatility.
The increase in interest credited for 2007 compared to 2006 resulted primarily from growth in general account assets in our retirement plans and individual fixed annuities businesses. Growth in interest credited was affected by higher Statement of Financial Accounting Standards (“SFAS”) No. 133 liability accruals for our small block of indexed annuities. In 2007, interest credited was increased by $1.6 million due to the effects of this valuation. In addition, benefits to policyholders for the Asset Management segment increased in 2007 compared to 2006 due to an increase in life-contingent annuity sales for our individual fixed annuities business.
Growth in general account assets for our retirement plans and individual fixed annuities businesses was 28.0% for 2008 compared to 2007, and 6.4% for 2007 compared to 2006. See “Business Segments-Asset Management Segment-Benefits and Expenses-Interest Credited.”
Operating expenses increased 7.9% to $469.2 million for 2008 compared to 2007, and 17.4% to $434.8 million for 2007 compared to 2006. 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.
We defer certain commissions, bonuses and operating expenses, which are considered acquisition costs. These costs are then amortized into expenses over a period not to exceed the life of the related policies, which for group insurance contracts is the initial premium rate guarantee period, which averages 2.5 years. VOBA primarily represents the discounted future profits of business assumed through reinsurance agreements. A portion of VOBA is amortized each year to achieve matching against expected gross profits. The Company’s intangibles, consisting of customer lists and marketing agreements, are also subject to amortization. Customer lists were acquired through the purchase of Invesmart, DPA, Inc. and several small investment advisory firms. The customer lists are amortized over 10 years. The amortization for the marketing agreement with the Minnesota Life Insurance Company (“Minnesota Life”) is up to 25 years. See “Critical Accounting Policies and Estimates-DAC, VOBA and Other Intangible Assets.” The net deferral for DAC, VOBA and intangibles for 2008 increased $14.5 million compared to 2007 and decreased $1.0 million for 2007 compared to 2006. The large increase in 2008 was due to large individual annuity sales. In addition, a cumulative effect adjustment of $39.4 million after-tax was recorded as a reduction to retained earnings as of January 1, 2007, as a result of the adoption of Statement of Position (“SOP”) 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts.
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 32.4%, 33.4% and 34.2% for 2008, 2007 and 2006, respectively. The lower effective income tax rate in 2008 compared to 2007 was primarily the result of the favorable resolution of prior year tax matters. At December 31, 2008, the years open for audit by the Internal Revenue Service (“IRS”) are 2005 through 2008. The federal statute of limitations for the 2004 tax year
StanCorp operates through two reportable segments: Insurance Services and Asset Management, as well as an Other category, which includes net capital gains and losses, return on capital not allocated to the product segments, holding company expenses, unallocated expenses and adjustments made in consolidation. 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, and group dental insurance. The Asset Management segment offers full-service 401(k) plans, 457 plans, defined benefit plans, money purchase pension plans, profit sharing plans, 403(b) plans and non-qualified deferred compensation products and services through an affiliated broker-dealer. This segment also offers investment advisory and management services, financial planning services, commercial mortgage loan origination and servicing, individual fixed annuities, group annuity contracts and retirement plan trust products. It also includes the former operations of Invesmart, a provider of retirement plan services, and investment advisory and management services, acquired in July 2006. The administration and servicing operations for the retirement plans group annuity contracts for the trust product is provided by Standard Retirement Services, Inc. (“Standard Retirement Services.”)
The following table sets forth segment revenues measured as a percentage of total revenues, excluding net capital gains and losses:
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 $366.4 million, $322.6 million and $282.4 million for 2008, 2007 and 2006, respectively. Results for 2008 reflected favorable claims experience in our group insurance business that was 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 several large case sales generated in 2007 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. Income before income taxes for 2006 for this segment was affected by premium growth, comparatively less favorable claims experience in our group insurance products and operating expense growth less than premium growth.
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. Revenues for the Insurance Services segment increased 6.6% to $2.40 billion for 2007 compared to 2006, primarily due to increased premiums and increased net investment income in our insurance businesses.
sales and persistency for all of our insurance products and organic growth in our group insurance product lines due to employment and wage rate growth from existing group policyholders.
Persistency. Annual persistency for our group insurance products has historically exceeded industry averages. We believe this demonstrates our commitment to customer service and pricing discipline for new sales. Our premium growth of 2.2% for 2008 incorporates three large case terminations that occurred in 2008. Premium growth for 2008 was supported by persistency in our group insurance product lines at 82.9%, compared to 87.4% for 2007. Persistency remained relatively strong in 2008 despite the three large case terminations. Persistency in our individual disability products remains favorable. A significant portion of our in force individual disability policies are non-cancelable.
Organic Growth. A portion of our 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 in 2008 resulted in rapidly rising unemployment, particularly in the second half of the year and slower wage growth throughout 2008, and adversely affected the organic growth in our group insurance businesses.
Premium growth was offset by ERRs of $44.6 million, $37.2 million and $22.6 million for 2008, 2007 and 2006,
Benefits to policyholders, including interest credited, for the Insurance Services segment decreased 1.6% to $1.56 billion for 2008 compared to 2007, and increased 5.0% to $1.59 billion for 2007 compared to 2006. The decrease in 2008 primarily resulted from favorable claims experience, offset by business growth in the first three quarters of the year as evidenced by premium growth. The increase from 2006 to 2007 primarily resulted from business growth as evidenced by premium growth, offset by favorable claims experience. Premiums for the Insurance Services segment increased 2.2% for 2008 compared to 2007, and 7.1% for 2007 compared to 2006.
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 2008 was 73.6%, compared to 77.4% for 2007 and 78.3% for 2006. The benefit ratio for 2008 was below the Company’s estimated annual range for 2008 of 77.5% to 79.5%. Claims experience can fluctuate widely from quarter to quarter. We have not experienced an increase in claims incidence in our group long term or group short term disability business during the current economic downturn.
The benefit ratio for our individual disability business was 78.7% for 2008, compared to 69.3% for 2007 and 79.4% for 2006. The increase in the benefit ratio for 2008 compared to 2007 primarily reflected less favorable claims experience. The benefit ratio for individual disability for 2008 included $3.7 million of premiums and $3.9 million in additional reserves related to the termination of reinsurance on a small block of reinsured policies and claims. Excluding the effects of this termination of reinsurance, the benefit ratio would have been 78.0% for 2008. Due to the relatively smaller size of our individual disability business, claims experience can fluctuate more widely from quarter to quarter than that of our group insurance business.
In 2006, we adjusted the claim termination rate assumptions for a small block of individual disability claims in light of a recently released industry table. This resulted in an increase in reserves of $6.0 million. These assumptions were further refined in 2007 and 2008 and resulted in an additional increase in reserves of $7.4 million and $2.5 million, respectively. Our block of business is relatively small, and, as a result, we view a blend of the new 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 our reserves accordingly.
While 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 the corresponding shift in revenues from net investment income to premiums, we recognize the individual disability insurance block of business is a smaller block of business and its benefit ratio will fluctuate more over the short-term. The anticipated decrease year to year 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.
Operating expenses in the Insurance Services segment increased 8.0% to $338.4 million for 2008 compared to 2007, and 7.3% to $313.2 million for 2007 compared to 2006. Operating expenses as a percentage of premiums were 16.0%, 15.2% and 15.1% for 2008, 2007 and 2006, respectively. 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 increase in operating expenses in 2007 was primarily due to business growth as evidenced by premium growth and additional costs related to strong sales in our group insurance business.
Revenues from the retirement plans business include plan and trust administration fees, fees on equity investments held in separate account assets and other assets under administration, and investment income on general account assets under administration. Premiums and benefits to policyholders reflect the conversion of retirement plan assets into life-contingent annuities, which can be selected by plan participants at the time of retirement, including the sale of immediate annuities. Most of the sales for this segment are recorded as deposits and are therefore not reflected as premiums. Individual fixed annuity deposits earn investment income, a portion of which is credited to policyholders.
Average assets under administration for this segment, including retirement plans, individual fixed annuities and commercial mortgage loans managed for third party investors, were $21.03 billion, $20.69 billion and $12.78 billion for 2008, 2007 and 2006, respectively. Although average assets under administration increased for 2008 compared to 2007, the balance of our assets under administration decreased significantly in the second half of 2008 due to decreased assets under administration in our retirement plan business in conjunction with the declines in equity markets, partially offset by new net customer deposits and increased assets under administration for annuities and commercial mortgage loans. Assets under administration for this segment were $19.69 million at December 31, 2008. The increase in average assets under administration for 2007 compared to 2006 was primarily due to the acquisition of Invesmart in the third quarter of 2006, to continued deposit growth, good customer retention, strong commercial mortgage loan originations for other investors, equity market appreciation in the retirement plans business and to $1.7 billion acquired through the third quarter 2007 acquisition of DPA, Inc., a retirement plans business based in Portland, Oregon. Administrative fee growth for 2007 included $2.6 million in administrative fee revenue from the DPA, Inc. business acquired in the third quarter of 2007.
Net investment income for the Asset Management segment increased 8.0% to $183.8 million for 2008, compared to $170.2 million for 2007. The increase was primarily reflective of increases in average retirement plan general account and individual annuity assets under administration in 2008. The increase was partially offset by decreases in commercial mortgage loan prepayment fees and in the fair value of derivative instruments in 2008. Average retirement plan general account assets under administration increased 4.2% to $1.47 billion for 2008 compared to 2007. Average individual annuity assets under administration increased 32.5% to $1.68 billion for 2008 compared to 2007. The significant increases in average individual annuity assets under administration were due to very strong individual annuity sales in 2008. Commercial mortgage loan prepayment fees decreased $2.4 million for 2008 compared to 2007. The fair value of derivative instruments decreased $11.1 million for 2008, compared to a decrease in the fair value of $1.0 million for 2007. See Part II, Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 7-Derivative Financial Instruments.” Excluding the effect of changes in the derivative instruments, net investment income increased 13.8% to $194.9 million for 2008 compared to 2007.
Interest credited represents interest paid to policyholders on retirement plan general account assets and individual fixed annuity deposits. Interest credited for the Asset Management segment increased 7.8% to $99.9 million for 2008 compared to 2007, and increased 9.8% to $92.7 million for 2007 compared to 2006. The increase in interest credited for 2008 compared to 2007 primarily reflects significant growth in individual fixed-rate annuity assets under administration of $760.7 million, or a 58.7% increase over balances 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 the 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 changes in the S&P 500 Index.
For 2007, interest credited to retirement plan customers increased primarily due to an increase in the interest-crediting rate to retirement plan customers and increases in average balances. Interest credited to individual fixed annuity deposits included the indexed annuity products first offered in 2006. The interest credited to the indexed
annuities increased $4.3 million for 2007 compared to 2006 primarily due to increases in the S&P 500 Index and average balances.
Operating expenses for the Asset Management segment increased 9.3% to $131.4 million for 2008 compared to 2007. The increases in operating expenses for this segment were primarily due to planned technology infrastructure costs related to completing the integration of our group annuity and trust product administrative platforms used to administer our retirement plans business. In addition, we acquired DPA, Inc., a retirement plans business based in Portland, Oregon in the third quarter of 2007. Operating expenses for 2008 included approximately $3.6 million in expenses related to the operations of DPA.
In addition to our two segments, we report our holding company and corporate activity in the Other category. This category includes net capital gains and losses, return on capital not allocated to the product segments, holding company expenses, interest on debt, other unallocated expenses and adjustments made in consolidation.
recording other-than-temporary impairments and net losses on sales of some of these securities. Net capital losses in the fourth quarter of 2008 were primarily the result of other-than-temporary impairments in the fixed maturity securities of various economic sectors and sales of some of the holdings in these sectors. In the third quarter of 2008, we recorded capital losses that were the result of other-than-temporary impairments of fixed maturity security holdings of certain financial institutions including Lehman Brothers, AIG, and Washington Mutual and the sale of holdings in several regional banks. Other-than-temporary impairments of debt security holdings of certain bond insurers were recorded in the second quarter of 2008. The additional loss for 2008 included additional interest expense of $8.6 million for the comparable periods primarily related to the $300 million Subordinated Debt issued in May 2007. Contributing to the loss before income taxes for 2007 compared to 2006 was an increase in interest expense of $12.8 million primarily related to the Subordinated Debt. The interest expense was partially offset by an increase in net investment income of $6.1 million to $20.3 million for 2007. The increase in net investment income is primarily due to increased levels of invested assets attributed to the proceeds received through the Subordinated Debt issuance. In addition, 2007 included $3.0 million in pre-tax severance costs due to the departure of the chief financial officer in the second quarter. 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 keeping with presently accepted actuarial standards, the Company has 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, 2008.
segment. There were no similar sized acquisitions during 2007 or 2008. Also contributing to the decrease in cash used for 2007 was a $606.9 million increase in proceeds from investments sold, matured or repaid. This increase was partially offset by a $495.5 million increase in cash used by the combination of new mortgage originations, purchases of fixed maturity securities, and purchases of real estate investments. Partially offsetting the overall decrease in investing cash used for acquisitions was the Company’s increased use of cash for short-term investments. The increased use of cash for short-term investments was primarily due to the investment of cash received through the Subordinated Debt offering in May 2007.
Our target investment portfolio allocation is approximately 60% fixed maturity securities and 40% commercial mortgage loans. At December 31, 2008, our portfolio consisted of 55.5% fixed maturity securities, 43.6% commercial mortgage loans, 0.9% real estate.
Our fixed maturity securities totaled $5.20 billion at December 31, 2008. We believe that we maintain prudent diversification across industries, issuers and maturities. Our corporate bond industry diversification targets are based on the Merrill Investment Grade Credit Index, which is reasonably reflective of the mix of issuers broadly available in the market. We also target a specified level of government, agency and municipal securities in our portfolio for credit quality and additional liquidity. The overall credit quality of our fixed maturity securities investment portfolio was A (Standard & Poor’s) at December 31, 2008. The percentage of fixed maturity securities below investment-grade was 4.9% and 4.1% at December 31, 2008 and 2007, respectively. At December 31, 2008, fixed maturity securities on our watch list totaled $329.5 million in market value and $439.0 million in book value after other-than temporary impairments. The Company recorded other-than-temporary impairments of $104.9 million during 2008, primarily due to a significant decline in the market value of fixed maturity securities during the deteriorating economic environment.
Capitalized commercial mortgage loan servicing rights associated with commercial loans serviced for other institutional investors were $7.6 million and $5.7 million at December 31, 2008 and 2007, respectively.
At December 31, 2008, there were 7 commercial mortgage loans totaling $7.8 million in our portfolio that were more than sixty days delinquent, of which 4 commercial mortgage loans with a total balance of $3.9 million were in the process of foreclosure. We had a net balance of restructured loans of $6.2 million at December 31, 2008, and a commercial mortgage loan loss reserve of $6.8 million. In 2008, commercial mortgage loans foreclosed or acquired through a deed in lieu and transferred to real estate were $6.8 million. In March 2008, StanCorp Mortgage Investors purchased two loans from a third party lender related to a current borrower. These loans, which had an aggregate obligation to the previous lender of $31.9 million, were purchased at a discounted price of $25.0 million. The portfolio of loans with this current borrower had a total aggregate obligation of $97.0 million and a book value of $90.2 million at December 31, 2008. At December 31, 2008, we did not have any direct exposure to sub-prime or Alt-A mortgages in our commercial mortgage loans portfolio.
The performance of our commercial mortgage loan portfolio may fluctuate in the future and due to the current state of the economy, we expect that there will be increased delinquencies in the coming year. However, we feel that our business approach of intensively underwriting high quality loans will help us keep problem loans to a reasonable level. We have steadfastly avoided the types of structured products that do not meet an adequate level of transparency for good decision making. When we undertake mortgage risk, we do so directly through loans that we originate and underwrite ourselves rather than in packaged products such as commercial mortgage-backed securities. Given that we service the 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.
real estate and before taking title through foreclosure on real estate collateralizing delinquent commercial mortgage loans held by us. Based on our environmental assessments, we believe that any compliance costs associated with environmental laws and regulations or any remediation of affected properties would not have a material adverse effect on our business, financial position, results of operations or cash flows. However, we cannot provide assurance that material compliance costs will not be incurred by us.
The primary drivers of financing cash flows for 2008 were the growth in individual annuity deposits due to increased individual annuity sales and reduced share repurchases in 2008 compared to 2007. In 2007, proceeds from the issuance of a $300 million hybrid debt offering provided the primary contribution to proceeds from financing activities partially offset by an accelerated share repurchase program. The decrease for 2007 compared to 2006 resulted from several offsetting factors. Cash inflows from a $300 million Subordinated Debt offering in May 2007 were offset by increased repurchases of common stock, the elimination of cash inflows from a third party minority interest in a limited liability company that was dissolved in December 2006 and slightly slower growth in policyholder fund deposits, net of withdrawals. The Company repurchased common stock at a total cost of
$24.9 million, $235.6 million and $70.1 million for 2008, 2007 and 2006, respectively.
Under the agreement, StanCorp is 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, the Company is 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, 2008, the Company had a debt to total capitalization ratio of 27.8% and consolidated net worth of $1.47 billion. The Company believes it 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, 2008, StanCorp was in compliance with all covenants under the Facility and had no outstanding balance on the Facility.
On May 29, 2007, the Company completed a public debt offering of $300 million of 6.90%, Subordinated Debt. The Subordinated Debt has a final maturity on June 1, 2067, is non-callable at par for the first 10 years 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 and only with securities that
more equity-like than the Subordinated Debt. The principal amount of the Subordinated Debt is payable at final maturity. Interest is payable semi-annually at 6.90% in June and December for the first 10 years 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. StanCorp is currently not deferring interest on the subordinated debt. StanCorp used approximately $30 million of the proceeds from the sale of the Subordinated Debt to fund the acquisition by StanCorp Real Estate, LLC (“Stancorp Real Estate”) (a wholly owned subsidiary) of certain real estate assets from Standard. Since the Subordinated Debt was issued in May 2007, the Company has repurchased approximately 5.1 million shares of common stock at a repurchase price of $247.6 million.
On May 7, 2007, the board of directors authorized a new repurchase program for up to 6.0 million shares of StanCorp common stock, which replaced the Company’s prior share repurchase program. We repurchased 0.5 million shares of common stock at a total cost of $24.9 million during 2008, compared to 4.8 million shares at a total cost of $235.6 million for 2007. Of the 4.8 million shares repurchased in 2007, 0.2 million shares were repurchased under the previous repurchase program. At December 31, 2008, there were 0.9 million shares remaining under the current repurchase program.
generated by the business, and at very high levels of premium growth, we could generate the need for capital infusions. At lower levels of premium growth, additional capital produced by the business exceeds the capital utilized to meet these requirements, which can result in additional capital above our targeted RBC level. At our expected growth rate, in 2009, we anticipate generating between $150 and $200 million of capital in excess of our 300% RBC target. In addition to the capital carried on the insurance subsidiaries, our non-insurance subsidiaries also hold capital in excess of regulatory requirements.
Capital above our target level is first utilized to maintain amounts sufficient to fund holding company operating expenses, interest on our debt and our annual dividend to shareholders, with remaining capital available to fund growth and enhance the return to investors.
We had debt to total capitalization ratios of 26.9% and 28.6% at December 31, 2008 and 2007, respectively. The decrease in our debt to total capitalization ratio was primarily due to an increase in equity excluding accumulated other comprehensive loss. Certain rating agencies recognize a portion of the Subordinated Debt as equity. Standard & Poor’s currently recognizes the Subordinated Debt as 100% equity, while Moody’s and AM Best currently recognize 75% of the Subordinated Debt as equity. Debt to total capitalization after the 75% equity credit was 16.2% at December 31, 2008. Our ratio of earnings to fixed charges, including interest credited to policyholders, was 2.5x and 3.3x for 2008 and 2007, respectively. Our ratio of earnings to fixed charges, excluding interest credited to policyholders, was 6.2x and 12.8x for 2008 and 2007, respectively.
StanCorp’s ability to pay dividends to its shareholders, repurchase its shares and meet its 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 RBC according to Oregon statute. Under Oregon law,
On May 7, 2007, the board of directors authorized a share repurchase program of up to 6.0 million shares of StanCorp common stock. The share repurchase program will be effected in the open market or in negotiated transactions. The share repurchase program replaced our previous share repurchase program, which had 1.2 million shares remaining that were canceled upon authorization of the new program. On November 3, 2008, the board of directors extended the expiration date of the Company’s share repurchase program to December 31, 2009.
Standard & Poor’s, Moody’s Investors Service, Inc. and A.M. Best Company provide credit ratings on StanCorp’s Senior Notes. As of February 2009, ratings from these agencies were A-, Baa1 and bbb+, respectively. As of February 2009, A.M. Best Company affirmed an issuer credit rating of a+ for Standard.
The following table summarizes the Company’s contractual obligations as of December 31, 2008:
While historical withdrawal patterns indicate withdrawal primarily occurs in periods in excess of one year, policyholder fund obligations of $2.93 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 $3.71 billion differs from the
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 of $3.08 billion have been included in the less than one year column of the table as they may be withdrawn upon request.
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 9-Long-Term Debt” for additional information.
The insurance obligations in the table are actuarial estimates of the cash required to meet our obligations for future policy benefits and claims. These estimates do not represent an exact calculation of our future benefit liabilities, but are instead based on assumptions, which involve a number of factors, including mortality, morbidity, recovery, the consumer price index, reinsurance arrangements and other sources of income for people on claim. Assumptions may vary by age and gender and, for individual policies, occupation class of the claimant; time elapsed since disablement; and contract provisions and limitations. Certain of these factors could be materially affected by changes in social perceptions about work ethics, emerging medical perceptions and legal interpretations regarding physiological or psychological causes of disability, emerging or changing health issues and changes in industry regulation. Changes in one or more of these factors or incorrect assumptions, could cause actual results
to be materially different from the information presented in the table.
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, 2006, through December 31, 2008, aggregated $0.6 million. At December 31, 2008, we maintained a reserve of $0.7 million for future assessments with respect to currently impaired, insolvent or failed insurers.
Bonds and commercial mortgage loans are reported principally at adjusted carrying value and amortized cost, respectively .
prior years and amounts incurred or received during the year relating to prior periods, to the extent not previously provided.
Deferred tax assets, net of deferred tax liabilities, are included in the regulatory financial statements but are limited to those deferred tax assets that will be realized within one year.
Statutory net gains from insurance operations before federal income taxes and excluding capital gains and losses were $341.6 million, $309.3 million and $271.1 million for 2008, 2007 and 2006, respectively. The changes in net gains were primarily due to premium growth and comparatively favorable claims experience.
Generally, statutory net gains from insurance operations before federal income taxes, including capital gains and losses, are lower than GAAP income before income taxes, including capital gains and losses. This variance between Statutory and GAAP is primarily due to DAC and VOBA being expensed in the period incurred on a statutory basis and statutory using a lower discount rate than the GAAP rate. There was an increase of the variance between Statutory and GAAP results for 2008 compared to 2007. This increase of the variance was primarily due to an increase in the expensing of DAC and VOBA and a difference in the change in reserves due to the reserve discount rate being lower on a statutory basis. The reserve discount rate for long term disability claims on a statutory basis was 4.5% during 2008 and 2007. The GAAP reserve discount rate ranged from 5.00% to 5.75% in 2008 and ranged from 5.35% to 5.50% in 2007. Differences between Statutory and GAAP results for 2007 compared to 2006 were due to a rise in the statutory discount rate effective in 2007 for certain reserves established after January 1, 2007, that decreased statutory reserve requirements.
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 the Company’s performance. These estimates have a material effect on our results of operations and financial condition.
In our quarterly impairment analysis, we evaluate whether a decline in value of fixed maturity securities is other than temporary. Factors considered in this analysis include:
The intent and ability of the Company to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value.
See Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 5-Investment Securities.” For securities expected to be sold, an other-than-temporary impairment charge is
recorded if we do not expect the realizable market value of a security to recover to adjusted carrying value prior to the expected date of sale. Once an impairment charge has been recorded, we continue to review the other-than-temporarily impaired securities for further potential impairment on an on-going basis. If the market value of the investment later recovers, the Company is not permitted to write the asset back up to its historical cost (i.e. the write-down is permanent).
Commercial mortgage loans are stated at amortized cost less a valuation allowance for potentially uncollectible amounts. The commercial mortgage loan valuation 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. We did not have any direct exposure to sub-prime or Alt-A mortgages in our commercial mortgage loan portfolio at December 31, 2008.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value and expanding disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurement. SFAS No. 157 became effective for financial statements issued for the fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. StanCorp adopted the provisions of SFAS No. 157 beginning January 1, 2008. See Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 4-Fair Value of Financial Instruments.”
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 in accordance with SFAS No. 97, Accounting and Reporting by
VOBA related to the TIAA group long term disability claims, for which no further premiums are due, is amortized in proportion to expected gross profits. The following table sets forth the amount of DAC and VOBA balances amortized in proportion to expected gross profits and the percentage of the total balance of DAC and VOBA amortized in proportion to expected gross profits at December 31:
Key assumptions, which will affect the determination of expected gross profits for determining DAC and VOBA balances are:
Although a change in a single assumption may have an impact on the calculated amortization of DAC or VOBA, 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 $0.4 million for 2008 and decreased $0.4 million for 2007. 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
Goodwill of $33.5 million was acquired by the Company during the third quarter of 2006, primarily in connection with the purchase of Invesmart, and is related to the Asset Management segment. Goodwill totaled $36.0 million at both December 31, 2008 and 2007. In accordance with SFAS No. 142, Goodwill and other Intangible Assets, 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. Per SFAS No. 142, we performed a step one test, as of December 31, 2008, in which the carrying value of tested assets was compared to the assets’ fair values. 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 of our business, discounted using a market participant weighted-average cost of capital. The estimates we use in the income approach are 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 a result of the consistency of the income approach with how we internally evaluate and manage our business, we weight the income approach more heavily than the market approach in determining the fair value of the assets. However, we do perform testing to ensure that both models are providing reasonably consistent results. Additionally, we perform sensitivity analysis on the key input factors in these models
Policy reserves for our individual life block of business totaled $606.1 million, $602.1 million and $596.6 million at December 31, 2008, 2007 and 2006, respectively. Effective January 1, 2001, substantially all of our individual life policies and the associated reserves were ceded to Protective Life Insurance Company (“Protective Life”) under a reinsurance agreement.
Policy reserves are calculated using our best estimates of assumptions and considerations at the time the policy was issued, adjusted to allow for the effect of adverse deviations in actual experience. These assumptions are not subsequently modified unless policy reserves become inadequate; at which time, we may need to change assumptions to increase reserves.
Unlike policy reserves, 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.
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 net investment yields. The discount rate used to calculate GAAP reserves for newly incurred long term disability claims increased 40 basis points to 5.75% in 2008 from 5.35%. The discount rate declined 15 basis points in 2007 and increased 75 basis points in 2006 as a result of changes in the interest rate environment. Based on our current size, a 25 basis point increase in the discount rate would result in a short-term decrease of approximately $2 million per quarter of benefits to policyholders, and a corresponding increase 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 continued favorable recovery patterns for our group long term disability insurance, partially offset by the recognition of the unique characteristics of a certain group, we released incurred but not reported reserves totaling $13.5 million in 2007. There were no similar reserve changes in 2008.
In 2006, we adjusted the claim termination rate assumptions for a small block of individual disability claims in light of a recently released industry table. This resulted in an increase in reserves of $6.0 million. These assumptions were further refined in 2007 and 2008 and resulted in an additional increase in reserves of $7.4 million and $2.5 million, respectively. Our block of business is relatively small, and, as a result, we view a blend of the new 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 monitor the adequacy of our reserves relative to our key assumptions. In our estimation, scenarios based on reasonably possible variations in claim termination assumptions could produce a percentage change in reserves for our group insurance lines of business of approximately +/- 0.2% or $7.5 million. However given that claims experience can fluctuate widely from quarter to quarter, significant unanticipated changes in claim termination rates over time could produce a change in reserves for our group insurance lines outside of this range.
Effective December 31, 2006, Standard adopted SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires the Company 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. SFAS No. 158 also requires the Company to
Our discount rate assumption is reviewed annually, and we use a December 31 measurement date for each of our plans. For more information concerning our pension and postretirement plans, see Part II, Item 8, “Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 11-Pension Benefits” and “-Note 12-Postretirement Benefits Other than Pensions.”
It is the Company’s accounting policy to record income tax interest and penalties in the income tax provision.
Some of the statements contained in this Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, including those relating to our strategy, growth prospects and other statements that are predictive in nature, that depend on or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “seeks” and similar expressions, are forward-looking statements within the meaning of Section 21E of the Exchange Act, as amended. These statements are not historical facts but instead represent only management’s expectations, estimates and projections regarding future events. Similarly, these statements are not guarantees of future performance and involve uncertainties that are difficult to predict, which may include, but are not limited to, the factors discussed below. As a provider of financial products and services, our results of operations may vary significantly in response to economic trends, interest rate changes, investment performance and claims experience. Caution should be used when extrapolating historical results or conditions to future periods.
The following factors could cause results to differ materially from management expectations as suggested by such forward-looking statements:
Changes in our liquidity needs and the liquidity of assets in our portfolio.
Growth in assets under administration including performance of equity investments in the separate account.
The effect of changing levels of commercial mortgage loan prepayment fees on cash flows.
We have audited the accompanying consolidated balance sheets of StanCorp Financial Group, Inc., and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
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, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, 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, 2008, 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 27, 2009 expressed an unqualified opinion on the Company’s internal control over financial reporting.
StanCorp is a holding company for our insurance and asset management subsidiaries and is headquartered in Portland, Oregon. We are the parent company of Standard Insurance Company, a leading provider of group insurance products and services serving the life and disability insurance needs of employer groups and the disability insurance needs of individuals. Our insurance subsidiaries also provide accidental death and dismemberment (“AD&D”) insurance and dental insurance. Through our insurance subsidiaries, we have the authority to underwrite insurance products in all 50 states. Our asset management businesses offer full-service 401(k) plans, 457 plans, defined benefit plans, money purchase pension plans, profit sharing plans, 403(b) plans and non-qualified deferred compensation products and services through an affiliated broker-dealer. Our asset management businesses also offer investment advisory and management services, financial planning services, commercial mortgage loan origination and servicing, individual fixed annuities, group annuity contracts and retirement plan trust products. StanCorp operates through two segments: Insurance Services and Asset Management, each of which is described below. See “Note 3-Segments.”
StanCorp was incorporated under the laws of Oregon in 1998 as a parent holding company and conducts business through its subsidiaries: Standard Insurance Company (“Standard”); The Standard Life Insurance Company of New York; Standard Retirement Services, Inc. (“Standard Retirement Services”); StanCorp Equities, Inc. (“StanCorp Equities”); StanCorp Mortgage Investors, LLC (“StanCorp Mortgage Investors”); StanCorp Investment Advisers, Inc. (“StanCorp Investment Advisers”); and StanCorp Real Estate, LLC (“StanCorp Real Estate”). The Company is headquartered in Portland, Oregon and, through its subsidiaries, has operations throughout the United States.
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.
Standard, the Company’s largest subsidiary, underwrites group and individual disability insurance and annuity products, group life and AD&D insurance, and group dental insurance, and provides retirement plan products. Founded in 1906, Standard is domiciled in Oregon, licensed in all states except New York, and licensed in the District of Columbia and the U.S. Territories of Guam and the Virgin Islands.
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.
StanCorp and Standard hold interests in low-income housing partnerships. Individually, the interest in these partnerships do not represent a significant variable interest
Minority interest related to consolidated entities included in other liabilities was $2.5 million and $0.5 million at December 31, 2008 and 2007, respectively.
The consolidated financial statements include StanCorp and its subsidiaries. Intercompany balances and transactions have been eliminated. Goodwill stated for prior periods has been reclassified to conform to the current period’s presentation.
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and require us to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent assets and contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The estimates most susceptible to material changes due to significant judgment (the “critical accounting policies”) are those used in determining investment valuation and other-than-temporary impairments, deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), other intangible assets, goodwill, the reserves for future policy benefits and claims, 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 the Company’s performance. These estimates have a material effect on our results of operations and financial condition.
gains or losses, and the cost basis of the investment is permanently adjusted to reflect the impairment.
See “Note 5-Investment Securities.” For securities expected to be sold, an other-than-temporary impairment charge is recorded if we do not expect the realizable market value of a security to recover to adjusted carrying value prior to the expected date of sale. Once an impairment charge has been recorded, we continue to review the other-than-temporarily impaired securities for further potential impairment on an on-going basis. If the market value of the investment later recovers, the Company is not permitted to write the asset back up to its historical cost (i.e. the write-down is permanent).
Investment securities include fixed maturity securities. Fixed maturity securities are classified as available-for-sale and are carried at fair value on the consolidated balance sheets. See “Note 4-Fair Value of Financial Instruments,” for a detailed explanation of the valuation methods the Company uses to calculate the fair value of the Company’s financial instruments. Investment securities also include derivative investments, which are carried at fair value. See “Note 7-Derivative Financial Instruments.” Valuation adjustments for fixed maturity securities that are not accounted for as other-than-temporary impairments are reported as net increases or decreases to other comprehensive income (loss), net of tax, on the consolidated statements of income and comprehensive income. Valuation adjustments for derivatives are reported as a component of net investment income.
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 $30.1 million and $29.1 million at December 31, 2008 and 2007, respectively. Real estate acquired in satisfaction of debt totaling $6.2 million at December 31, 2008 is recorded at the lower of cost or fair value, less estimated costs to sell.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value and expanding disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurement. SFAS No. 157 became effective for financial statements issued for the fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. StanCorp adopted the provisions of SFAS
DAC, VOBA and other intangible assets are considered intangible assets. These 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.
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 in accordance with SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. For the Company’s individual deferred annuities, DAC is generally amortized over 30 years with approximately 50% and 90% expected to be amortized by years 5 and 15, respectively. DAC for group annuity products is amortized over 10 years with approximately 30% expected to be amortized by year five.
Although a change in a single assumption may have an impact on the calculated amortization of DAC or VOBA, 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
The Company’s other intangible assets are subject to amortization and consist of certain customer lists and a marketing agreement. Customer lists were acquired primarily in connection with the purchase of Invesmart, Inc. (“Invesmart”) during the third quarter of 2006. Additional customer lists were acquired with the purchase of DPA, Inc. and with the acquisition of small investment advisory firms. Customer lists 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 $54.2 million and $52.1 million at December 31, 2008 and 2007, respectively.
The accumulated amortization of VOBA was $57.7 million and $54.4 million at December 31, 2008 and 2007, respectively. The accumulated amortization of other intangibles, excluding DAC, was $12.5 million and $7.4 million at December 31, 2008 and 2007, respectively.
Property and equipment are stated at cost less accumulated depreciation. The Company provides for depreciation of property and equipment using the half-year convention, and straight-line method over the estimated useful lives, which are generally 40 years for properties and 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 2008, 2007 and 2006 was $27.9 million, $22.2 million and $15.1 million, respectively.
Non-affiliated tenants leased approximately 36.5%, 38.5% and 40.0% of the corporate headquarters in Portland, Oregon at December 31, 2008, 2007 and 2006, respectively. Income from the leases is included in net investment income.
The amount of premiums that we will receive in the future.
The rate of return on assets we purchase with premiums received.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-An Amendment of ARB No. 51. SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, SFAS No. 160 requires the recognition of a noncontrolling interest (formerly referred to as “minority interest”) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be identified and included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. This statement also includes expanded disclosure requirements regarding interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008, and earlier adoption is prohibited. The Company has performed an analysis of the impact that the January 1, 2009, adoption of SFAS No. 160 will have on our financial statements, and we do not expect it to have a material effect.
In April 2008, the FASB finalized FASB Staff Position (FSP) FAS No. 142-3, Determination of the Useful Life of Intangible Assets. FSP FAS No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill
The disclosures about plan assets required by this FSP shall be provided for fiscal years ending after December 15, 2009. Upon initial adoption, the provisions of this FSP are not required for earlier periods that are presented for comparative purposes. Earlier adoption of FSP FAS No. 132(R)-1 is permitted. The Company is assessing the impact of FSP FAS No. 132(R)-1 and does not currently anticipate early adoption.
StanCorp operates through two reportable segments: Insurance Services and Asset Management, as well as an Other category, which includes net capital gains and losses, return on capital not allocated to the product segments, holding company expenses, interest on debt, unallocated expenses and adjustments made in consolidation. Resources are allocated and performance is evaluated at the segment level. The Insurance Services segment offers group and individual disability insurance, group life and AD&D insurance, and group dental insurance. The Asset Management segment offers full-service 401(K) plans, 457 plans, defined benefit plans, money purchase pension plans, profit sharing plans, 403(b) plans and non-qualified deferred compensation products and services through an affiliated broker-dealer. This segment also offers investment management and advisory services, financial planning services, commercial mortgage loan origination and servicing, individual fixed annuities, group annuity contracts and retirement plan trust products. In the third quarter of 2007, the Asset Management segment added $1.7 billion of assets under administration acquired from DPA, Inc., a retirement business based in Portland, Oregon.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels: Level 1 inputs are based upon quoted prices in active markets for identical assets or liabilities that we can access at the measurement date. Level 2 inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 inputs are generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use in pricing the asset or liability.
Under FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, the Company did not elect to measure and record commercial mortgage loans, policy loans, other policyholders funds that are investment-type contracts, and long-term debt at fair value on the consolidated balance sheets.
Indicative year-end pricing for a package of loans similar to those originated by the Company near year-end.
A liquidity premium that is estimated from historical loan sales and is applied over and above based yields.
The fair value for long-term debt was predominantly based on quoted market prices and was materially affected by depressed values for conventional debt securities as of December 31, 2008. The fair value for the Company’s long-term debt was also materially affected by the infrequent trading of our Subordinated Debt.
Fair values of fixed maturity securities for which there is active trading are determined based upon quoted market prices and are classified as Level 1 assets. The fair values for fixed maturity securities without an active market, of which there were $5.20 billion at December 31, 2008, were valued using Level 2 measurements. In order to assist management in determining the values of these assets, we utilize an independent pricing service. The pricing service incorporates a variety of market observable information in their valuation techniques, including:
The pricing service also takes into account perceived market movements and sector news, as well as the bond’s terms and conditions, including any features specific to that issue which may influence risk, and thus marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. The Company generally obtains one value from our primary external pricing service. On a
External valuations are validated by the Company at least quarterly through 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, discounted cash flow models, maintenance of a securities watch list, and independent evaluation on a case-by-case basis of inputs and assumptions similar to those used by the pricing service. Although we do identify differences from time to time as a result of these validation procedures, we did not make any significant adjustments as of December 31, 2008.
The Company recorded other-than-temporary impairments of our fixed maturity securities of $104.9 million during 2008, primarily due to a decline in the market value in the deteriorating economic environment. Impairments in the fourth quarter of 2008 were the result of other-than-temporary impairments in the fixed maturity securities of various economic sectors. In the third quarter of 2008, we recorded capital losses that were the result of other-than-temporary impairments of fixed maturity security holdings of certain financial institutions including Lehman Brothers, AIG, and Washington Mutual. Net capital losses also resulted from the sale of holdings in several regional banks in the third quarter of 2008 and the other-than-temporary impairments of debt security holdings of certain bond insurers in the second quarter of 2008.
The following table sets forth the estimated fair values of assets and liabilities measured and recorded at fair value on a recurring basis at December 31, 2008:
Changes to the fair value of fixed maturity securities were recorded to other comprehensive income. Changes to the fair value of the S&P 500 index options were recorded to net investment income. Changes in the fair value of the index-based interest guarantees were recorded as interest credited.
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment. The following table sets forth the fair value measurement for nonrecurring assets at December 31, 2008:
The following table sets forth the amount of commercial mortgage loans on the consolidated balance sheet at December 31, 2008, segregated by origination year.
The commercial mortgage loan valuation allowance is estimated based on evaluating known and inherent risks in the loan portfolio. The 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 loan is considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans that are deemed uncollectible are generally written off against the allowance, and recoveries, if any, are credited to the allowance.
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. 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. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, requires that the Company estimate the fair value of the index-based interest rate 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 hedge the guarantees, 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. The interest credited to
The Company purchases S&P 500 Index options in conjunction with its sales of indexed annuities. SFAS No. 133 requires companies to recognize all derivative investments as assets in the balance sheet at fair value. These investments are highly correlated to the portfolio allocation decisions of its policyholders, such that the Company is economically hedged with respect to index-based interest rate guarantees for the current reset period. However, the Company does not use hedge accounting. The fair value of the Company’s derivative instruments of $2.5 million and $6.0 million at December 31, 2008 and 2007, respectively, was included in fixed maturity securities in the consolidated balance sheets. The change in fair value associated with these investments was a decrease of $11.1 million for 2008, compared to a decrease of $1.0 million for 2007. The change in fair value was recorded as net investment income.
Other policyholder funds at December 31, 2008, 2007 and 2006, included $1.42 billion, $1.40 billion and $1.29 billion, respectively, of employer-sponsored defined contribution and benefit plans funds, and $1.53 billion, $892.3 million and $988.3 million, respectively, of individual fixed annuity funds.
On September 25, 2002, we completed an initial public debt offering of $250 million of 6.875%, 10-year senior notes (“Senior Notes”), pursuant to the shelf registration statement. The principal amount of the Senior Notes is payable at maturity, and interest is payable semi-annually in April and October.
The tax effect of temporary differences that gave rise to significant portions of the net deferred tax asset (liability) was as follows at December 31:
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 was frozen effective January 2003 for new participants. The agent pension plan, which is frozen for new participants, is for former field employees and agents. Both plans are sponsored and administered by Standard. The defined benefit pension plans provide benefits based on years of service and final average pay.
On September 10, 2008, the Compensation and Organization Committee of the board of directors of StanCorp approved an amendment to the employee pension plan that also had the effect of modifying the terms of the non-qualified supplemental retirement plan (“non-qualified plan”), which covers eligible executive officers. The amendment will become effective January 1, 2009. Under the employee pension plan and the non-qualified plan, a participant is entitled to a normal retirement benefit once the participant reaches age 65. Prior to the amendment, a participant could also receive a normal, unreduced retirement benefit once the participant reached age 60 and the sum of his or her age plus years of service was at least 90. The amendment eliminates the requirement that a participant reach age 60 in order to receive an unreduced early retirement benefit, thereby making a participant eligible for this unreduced benefit once the sum of his or her age plus years of service is at least 90.
Effective December 31, 2006, Standard adopted SFAS No. 158. SFAS No. 158 requires the Company to recognize the funded or underfunded status of our pension benefit plans as an asset or liability on the balance sheet. 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. At December 31, 2008, a liability of $41.0 million was reflected on the balance sheet.
The Company contributed $30.0 million and $3.0 million to the employee pension plan in 2008 and 2007, respectively. The Company is not obligated to make any contributions to its pension plans for 2009. In addition, no plan assets are expected to be returned to the Company in 2009.
Eligible employees are covered by one of two qualified deferred compensation plans sponsored by Standard and Standard Retirement Services 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 2008, 2007 and 2006 were $10.2 million, $8.8 million and $6.6 million, respectively.
In addition, eligible executive officers are covered by a non-qualified supplemental retirement plan. The unfunded status was $23.2 million and $19.9 million at December 31, 2008 and 2007, respectively. Expenses were $2.5 million, $2.3 million and $1.8 million for 2008, 2007 and 2006, respectively. At December 31, 2008, net loss and prior service cost of $4.9 million, net of tax, were excluded from the net periodic benefit cost and reported as a component of accumulated other comprehensive income. In addition, $23.2 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.
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 $8.9 million at both December 31, 2008 and 2007.
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 Company uses a December 31 measurement date for the postretirement benefit plan. The following table provides a reconciliation of the changes in the postretirement benefit plan’s accumulated benefit obligation, fair value of assets and the funded status for the years ended December 31:
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 estimated prior service credit for the postretirement benefit plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2009 is $0.4 million.
The projected discounted cash flow obligation for the postretirement benefit plan was $42.1 million and $32.5 million at December 31, 2008 and 2007, respectively.
The Company contributed approximately $0.2 million and $0.4 million to fund the postretirement benefit plan in 2008 and 2007, respectively. The Company expects to make contributions of $0.7 million to its postretirement benefit plan in 2009. No plan assets are expected to be returned to the Company in 2009.
The 2002 Stock Incentive Plan authorized the board of directors to grant eligible employees and certain related parties incentive or non-statutory stock options and restricted stock. The maximum number of shares of common stock that may be issued under this plan is 4.8 million. At December 31, 2008, 2.6 million shares or options for shares have been issued under the 2002 plan.
Income before income taxes included compensation costs related to all share-based compensation arrangements of $8.7 million, $8.7 million and $8.7 million for 2008, 2007 and 2006, respectively. The related tax benefits were $3.0 million, $3.0 million and $3.0 million for the same periods, respectively.
others vesting in four equal installments on the first four anniversaries of the grant date. Option awards to certain officers vest immediately upon a change of control of the Company as defined in the change of control agreement. Options generally expire 10 years from the grant date.
The fair value of each option award under the share-based compensation plans was estimated using the Black-Scholes option pricing model as of the grant date using the assumptions noted in the following table. The Black-Scholes model uses the expected term as an input with the calculated option value varying directly with the length of time until exercise. The Company bases its estimate of expected term on an analysis of the historical exercise experience of similar options granted to similar employee or director groups. The expected term given below represents the weighted-average expected term of options granted. Expected stock price volatility is based on volatility of the Company’s stock over the prior period equal in duration to the expected term. The dividend rate is the rate expected to be paid over the 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.
The weighted-average grant date fair value of options granted was $12.30, $11.95 and $13.14 during 2008, 2007 and 2006, respectively. The total intrinsic value of the options exercised was $5.0 million, $8.4 million and $6.8 million for the same periods, respectively. The amount received from the exercise of stock options was $5.7 million, $8.0 million and $5.2 million for 2008, 2007 and 2006, respectively. The related tax benefit derived from the tax deduction received by the Company for the difference between the stock price and the exercise price when the options were exercised was $1.8 million, $2.8 million and $2.4 million for 2008, 2007 and 2006, respectively.
Restricted stock grants are a part of the Company’s long-term compensation for certain senior officers. The Company grants both performance-based and retention-based restricted stock. Under the current plans, the Company had 0.8 million shares available for issuance as restricted stock at December 31, 2008.
A summary of the activity for performance-based restricted stock and cash performance units outstanding is presented below:
During 2008 and 2007, there were 77,712 and 83,655 Stock Performance Units granted. The total value of performance-based shares vested and cash units paid was $2.1 million, $2.2 million and $2.8 million for 2008, 2007 and 2006, respectively.
Awards of retention-based restricted stock to certain senior officers are made less frequently and at irregular intervals by the organization and compensation committee of the board of directors. Participants vest with respect to the stock after completion of a specified period of employment, generally three or four years. The compensation cost of these awards is measured using the fair market value of the stock at the grant date and is
amortized over the specified period of employment. There was no unrecognized compensation cost related to unvested retention-based shares at December 31, 2008. Unvested shares vested on January 1, 2009.
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 stock. The value of the embedded option is calculated using the Black-Scholes option pricing model using the assumptions noted in the following table. Expected stock price volatility was based on the volatility of StanCorp common stock over the six months preceding the offering period. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of the grant.
In order to limit its losses from large 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
Standard participates in a reinsurance and third party administration arrangement with Northwestern Mutual Life Insurance Company (“Northwestern Mutual”) under which Northwestern Mutual group long term and short term disability products are sold using Northwestern Mutual’s agency distribution system. Generally, Standard assumes 60% of the risk and receives 60% of the premiums for the policies issued. If Standard were to become unable to meet its obligations, Northwestern Mutual would retain the reinsured liabilities. Therefore, in accordance with an agreement with Northwestern Mutual, Standard established a trust for the benefit of Northwestern Mutual with the market value of assets in the trust equal to Northwestern Mutual’s reinsurance receivable from Standard. The market value of assets required to be maintained in the trust at December 31, 2008, was $221.7 million. Premiums assumed by Standard for the Northwestern Mutual business accounted for 3% of the Company’s total premiums for each of the three years 2008, 2007 and 2006. In addition to assuming risk, Standard provides product design, pricing, underwriting, legal support, claims management and other administrative services under the arrangement.
In addition to product-specific reinsurance arrangements, the Company maintains reinsurance coverage for certain catastrophe losses related to group life and AD&D. This agreement excludes 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 $429.0 million per event.
Recoveries recognized under reinsurance agreements were $64.0 million, $60.8 million and $56.4 million for 2008, 2007 and 2006, respectively. Amounts recoverable from reinsurers were $944.0 million and $929.6 million at December 31, 2008 and 2007, respectively. Of these
amounts, $799.6 million and $795.4 million were from the reinsurance transaction with Protective Life Insurance Company (“Protective Life”) effective January 1, 2001. See “Note 15-Reinsurance of Blocks of Business.”
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, 2008, was approximately $407.4 million. Approximately $60 million in VOBA was capitalized related to the reinsurance agreement.
Effective January 1, 2001, Standard ceded to Protective Life, through a reinsurance agreement, Standard’s individual life insurance product line. Standard received a ceding commission of approximately $90 million and transferred to Protective Life approximately $790 million in assets and corresponding statutory liabilities. If Protective Life were to become unable to meet its obligations, Standard would retain the reinsured liabilities. Therefore, the liabilities remain on Standard’s books, and an equal amount is recorded as a recoverable from the reinsurer. In accordance with the agreement, Protective Life established a trust for the benefit of Standard with assets in the trust required to be equal to Standard’s reinsurance receivable from Protective Life. The amount of assets required to be maintained in the trust is determined quarterly.
During 2008 and 2007, Standard made distributions to StanCorp totaling $60.0 million and $155.0 million, respectively.
On June 15, 2006, the Company established a five-year, $200 million senior unsecured revolving credit facility (“Facility.”) On June 15, 2008, the Facility was amended to extend the expiration date by one year to June 15, 2013. The Facility will remain at $200 million through June 15, 2012, and will decrease to $165 million thereafter until final maturity on June 15, 2013. Borrowings under the Facility will continue to be used to provide for the working capital and general corporate purposes of the Company and its subsidiaries and the issuance of letters of credit.
Under the agreement, StanCorp is 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 the Company’s total debt to total capitalization ratio and consolidated net worth. The Facility is subject to performance pricing based upon the Company’s total debt to total capitalization ratio and includes interest based on a Eurodollar margin, plus facility and utilization fees. At December 31, 2008, StanCorp was in compliance with all covenants under the Facility and had no outstanding balance on the Facility.
At December 31, 2008, minimum future rental receivables on non-cancelable leases of retail and office space with initial terms of one year or more are 2009, $15.0 million; 2010, $13.6 million; 2011, $10.6 million; 2012, $7.4 million; 2013 $5.3 million; and thereafter, $17.3 million.