This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements. See Part I, Item 1A, “Risk Factors-Forward-Looking Statements.”
statements of income as a reduction of income taxes. Our share of the operating losses of the limited partnerships decreases the carrying value of the investments and is reported as a component of net investment income.
We record interest paid on income tax liabilities as interest expense and income tax penalties incurred as an operating expense. Currently, the years 2012 through 2015 are open for audit by the IRS.
Premiums for Insurance Services are the primary driver of consolidated premiums and are affected by sales, persistency, organic growth in Employee Benefits and experience rated refunds (“ERRs”). Organic growth in Employee Benefits is derived from existing policyholders’ employment and wage growth. ERRs represent cost sharing arrangements with certain group contract holders that provide refunds to the contract holders when claims experience is more favorable than contractual benchmarks, and provide for additional premiums to be paid when claims experience is less favorable than contractual benchmarks. ERRs can fluctuate widely from quarter to quarter depending on the underlying experience of specific contracts.
The decrease in interest credited for 2015 compared to 2014 was primarily due to a decrease in the average interest-crediting rate for our annuity products and the change in fair value of the index-based interest guarantees. The change in fair value of the index-based interest guarantees increased interest credited by $4.0 million for 2015, compared to $7.2 million for 2014. See “Business Segments-Asset Management.”
We collectively view and operate our businesses as Insurance Services and Asset Management. Insurance Services contains two reportable product segments, Employee Benefits and Individual Disability. Insurance Services include our traditional risk acceptance
Under the Facility, we are subject to customary covenants that take into consideration the impact of material transactions, changes to the business, compliance with legal requirements and financial performance. Under the two financial covenants, we are required to maintain a total debt to total capitalization ratio that does not exceed 35% and a consolidated net worth that is equal to at least $1.58 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, 2015, we had a total debt to total capitalization ratio of 19.4% and consolidated net worth of $2.11 billion as defined by the financial covenants. The Facility is subject to pricing levels based upon our publicly announced debt ratings and includes an interest rate option at the election of the borrower of a base rate plus the applicable margin or the London Interbank Offered Rate (“LIBOR”) plus the applicable margin, plus facility and utilization fees. At December 31, 2015, we were in compliance with all covenants under the Facility. We issued a letter of credit, which reduced the available balance by $1.0 million on the Facility at December 31, 2015. We believe we will continue to meet the financial covenants throughout the life of the Facility.
We have $250 million of 5.00% 10-year senior notes (“Senior Notes”), which mature on August 15, 2022. Interest is paid semi-annually on February 15 and August 15.
In the second quarter of 2015, the FHLB of Seattle completed its merger with the FHLB of Des Moines. The merger has not had a material effect on our business, financial position, results of operations, cash flows, existing funding agreements with the FHLB, and is not anticipated to impact our utilization of the FHLB program or its products in the future. Standard issues collateralized funding agreements to the FHLB of Des Moines and invests the cash received from advances to support various spread-based businesses and enhance our asset-liability management. Membership also provides an additional funding source and access to financial services that can be used as an alternative source of liquidity. At December 31, 2015, Standard had $273.0 million outstanding under funding agreements with the FHLB of Des Moines and pledged $333.5 million of commercial mortgage loans as collateral for its outstanding advances. At December 31, 2014, Standard had $139.0 million outstanding under funding agreements with the FHLB of Seattle and pledged $174.4 million of commercial mortgage loans as collateral for its outstanding advances.
The insurance laws of the states of domicile and other states in which the insurance subsidiaries conduct business regulate the investment portfolios of the insurance subsidiaries. Relevant laws and regulations generally limit the admissibility of investments to bonds and other fixed maturity securities, commercial mortgage loans, common and preferred stock and real estate. Decisions to acquire and dispose of investments are made in accordance with guidelines adopted and modified from time to time by the Boards of Directors of our insurance subsidiaries. Each investment transaction requires the approval of one or more members of senior investment staff, with increasingly higher approval authorities required for transactions that are more significant. Transactions are reported quarterly to the Audit Committee of the Board of Directors for Standard and to the Board of Directors for The Standard Life Insurance Company of New York.
StanCap Insurance Company is a pure captive insurance company domiciled in Oregon. Effective September 30, 2014, StanCap Insurance Company entered into a reinsurance agreement with Standard to reinsure Standard’s group life and AD&D insurance business.
In the Company’s quarterly impairment analysis, management evaluates whether a decline in fair value of the fixed maturity security is other than temporary by considering the following factors:
Non-affiliated tenants leased 39.0%, 34.2% and 33.8% of the corporate headquarters in Portland, Oregon at December 31, 2015, 2014 and 2013, respectively. Income from the leases is included in net investment income.
Other policyholder funds are liabilities for investment-type contracts and are based on the policy account balances including accumulated interest. Other policyholder funds also include amounts related to advanced premiums of $185.6 million and $188.3 million at December 31, 2015 and 2014, respectively, and premiums on deposit and experience rated liabilities totaling $182.7 million and $187.0 million at December 31, 2015 and 2014, respectively.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement-Extraordinary and Unusual Items. The main objective of ASU No. 2015-01 is to eliminate from GAAP the concept of extraordinary items, however; the requirement to disclose unusual and infrequent items still exists. Under this guidance, an entity will no longer segregate extraordinary items from the results of ordinary operations; separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; and disclose income taxes and earnings-per-share data applicable to an extraordinary item. The ASU affects the reporting and disclosure requirements for an event that is unusual in nature or that occurs infrequently.
Options are granted to officers and certain non-officer employees. Executive officers typically receive annual grants in amounts determined by the Organization & Compensation Committee of the Board of Directors. Non-executive officers typically receive
The Company granted 50,555, 48,294 and 59,823 RSUs for 2015, 2014 and 2013, respectively. The fair value of the RSUs is determined based on the closing market price of StanCorp common stock on the grant date.
Commercial mortgage loans measured on a nonrecurring basis with a carrying amount of $72.5 million were written down to the underlying collateral fair value of $53.9 million, less selling costs, at December 31, 2015. The specific commercial mortgage loan loss allowance related to these commercial mortgage loans was $23.9 million at December 31, 2015. The Real Estate Owned measured on a nonrecurring basis as of December 31, 2015, and still held at December 31, 2015 had net capital losses totaling $0.3 million for 2015. Real Estate Owned measured on a nonrecurring basis represents newly acquired properties or properties whose value has been adjusted based on pending sale or other market information.
As a result of the Company’s annual update of the key assumptions used to value index-based interest guarantees, interest credited increased $0.6 million for 2015 and decreased $4.0 million and $4.1 million for 2014 and 2013, respectively.
The value of DAC and VOBA is dependent on key assumptions. See “Note 1-Summary of Significant Accounting Policies-DAC, VOBA and Other Intangible Assets” for a discussion of the key assumptions used to determine the values of DAC and VOBA. These assumptions are modified to reflect actual experience when appropriate. Although a change in a single assumption may have an impact on the calculated amortization of DAC or VOBA for balances associated with investment contracts, it is the relationship of that change to the changes in other key assumptions that determines the ultimate impact on DAC or VOBA amortization. Because actual results and trends related to these assumptions vary from those assumed, the Company revises these assumptions annually to reflect its current best estimate of expected gross profits. As a result of this process, known as “unlocking,” the cumulative balances of DAC and VOBA are adjusted with an offsetting increase or decrease to income to reflect changes in the period of the revision. An unlocking event generally occurs as a result of actual experience or future expectations differing from previous estimates. The Company recorded a decrease to VOBA of $1.0 million in 2013 due to changes in expected gross profits related to the block of claims assumed. The Company did not record an adjustment to VOBA as a result of unlocking in 2015 or 2014. As a result of unlocking, the amortization schedule for future periods is also adjusted.
The changes in amounts incurred related to prior years are not the result of a significant change in an underlying assumption or method used to determine the estimate. Instead the Company expects these amounts to change over time as a result of the growth in the size of the Company’s in-force insurance business and the actual claims experience with respect to that business during the time periods captured for claims with an incurred date in years prior to the year of valuation. Interest is also a key component in the year to year development of the reserves and therefore the positive changes in amounts incurred related to prior years should not be taken as an indicator of the adequacy or inadequacy of the reserves held. Significant changes to assumptions regarding unpaid claims and claims adjustment expenses for prior periods in the group long term disability insurance reserves were not made in 2015, 2014 and 2013 primarily due to the long-term nature of this product and the materiality of other factors including the potential impact of the economic uncertainty in 2015, 2014 and 2013. The Company carefully monitors trends in reserve assumptions and when these trends become credible and are expected to persist, the Company incorporates these factors into its reserves to ensure best estimates are established.
Except as set forth above, to the knowledge and in the opinion of management, there are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company, to which the Company or any of its subsidiaries is a party or of which any of its properties is the subject.
Under the agreement, the Company is subject to two financial covenants, which are based on the Company’s ratio of total debt to total capitalization and consolidated net worth. The Company is also subject to covenants that limit subsidiary indebtedness. The Facility is subject to pricing levels based upon the Company’s publicly announced debt ratings and includes an interest rate option at the election of the borrower of a base rate plus the applicable margin or LIBOR plus the applicable margin, plus facility and utilization fees. At December 31, 2015, the Company was in compliance with all financial covenants under the Facility. The Company issued a letter of credit, which reduced the available balance by $1.0 million on the Facility at December 31, 2015. On October 27, 2015, the Company amended the Facility to change the definition of change in control to allow for the proposed merger with Meiji Yasuda.
On July 23, 2015, the Company entered into a Merger Agreement with Meiji Yasuda and Merger Sub, providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Meiji Yasuda. The parties expect to close the Merger on March 7, 2016 subject to satisfaction of closing conditions.