Two external factors can have a critical impact on our Employee Benefits operations: claims volatility and economic conditions, including the impact of interest rates on product pricing.
The following table sets forth premium growth as a percentage by segment, without ERRs and the block of business assumed from TIAA for the years ended December 31:
Premium growth in our Individual Insurance segment was $5.4 million, or 6.8%, for 2003 compared to 2002. Increases in both sales and premiums in 2003 resulted from an expansion of distribution channels in recent years and the continuation of a national marketing agreement.
Net investment income increased $56.7 million, or 14.7%, in 2003 compared to 2002, and $32.5 million, or 9.2%, in 2002 compared to 2001. Net investment income is primarily affected by changes in levels of invested assets and interest rates. In recent years, commercial mortgage loan prepayment fees also have increased net investment income.
The operating expense ratios in 2003 and 2002 for the Employee Benefits segment were impacted by administrative fees paid to TIAA and integration costs discussed above. Looking ahead, we plan to increase our technology expense approximately 25% during 2004, resulting in a projected increase in pre-tax expense of $13 million. In 2005 and beyond, we estimate that operating efficiencies will approximate the on-going expenses.
Commissions and bonuses primarily represent sales-based compensation, which varies depending on the product, the structure of the commission program and factors such as persistency and profitability of business. Commissions and bonuses increased $11.5 million, or 8.7%, in 2003 compared to 2002, and $14.3 million, or 12.1% in 2002, compared to 2001. Increases for both comparative periods were primarily due to renewals and sales in each of our segments.
(1) Measured as a percentage of premiums remaining in force from year to year.
We attribute the decline in long term disability persistency from 2001 to 2003 to our actions to shed unprofitable business combined with more price sensitivity in the market as employers sought lower cost products. Dental persistency decreased in 2003 compared to 2002 and 2001, primarily due to the loss of several large cases that were not meeting our return objectives.
The following table sets forth the financial results for the Individual Insurance segment for the years ended December 31:
In many states, we are required to credit a minimum rate of interest to annuity contract holders. In the current low interest rate environment, we were unable to achieve sufficient margin over minimum interest crediting rates on certain annuity products and therefore have ceased offering those products until interest rates increase. Recent changes in regulation have allowed us to begin to offer new products with lower guarantees. Factors affecting the level of sales of annuity deposits include movement in interest rates, the equity markets, and other changes in economic conditions.
Standard paid dividends of $65.0 million and $50.0 million to StanCorp in 2003 and 2002, respectively. While the surplus note (see below) is outstanding, any distribution would be applied first to the interest and outstanding principal on the surplus note. There is no amount available for payment of dividends by The Standard Life Insurance Company of New York in 2004. There are no regulatory restrictions on dividends from non-insurance subsidiaries to StanCorp. StanCorp Mortgage Investors paid dividends of $13.2 million and $6.5 million to StanCorp in 2003 and 2002, respectively.
• the amount of monthly benefit paid to the insured (less claim amounts recovered from reinsurers);
• changes in the regulatory environment at the state or federal level;
We have audited the accompanying consolidated balance sheets of StanCorp Financial Group, Inc. and subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. 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.
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. Valuation adjustments are reported as net increases
The Company has two stock-based employee compensation plans. See “-Note 12, Stock-based Compensation.” Prior to 2003, the Company accounted for those plans under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issues to Employees, and related interpretations. Other than restricted stock, no stock-based employee compensation cost is reflected in net income prior to 2003, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting (“SFAS”) No. 123, Accounting for Stock-Based Compensation prospectively to all employee awards granted, modified, or settled after January 1, 2003.
State insurance departments require insurance enterprises to adhere to minimum Risk-Based Capital (“RBC”) requirements promulgated by the NAIC. At December 31, 2003 and 2002, the insurance subsidiaries’ RBC levels were significantly in excess of that which would require corrective action by the insurance subsidiaries or regulatory agencies. The authorized control level RBC was $145.6 million and $141.0 million of statutory capital and surplus at December 31, 2003 and 2002, respectively.
We currently have two unsecured credit agreements for $75 million each with credit availability totaling $150 million, expiring June 28, 2004. Under the credit agreements, we are subject to customary covenants, which take into consideration the impact of material transactions, changes to the business, compliance with legal requirements and financial performance. The financial covenants include limitations on indebtedness (funded debt to net worth less than or equal to 0.5 to 1.0), financial liquidity (fixed charge ratio greater or equal to 2.5 to 1.0 and statutory net income to total income percentage greater than or equal to 0), and risk-based capital (greater than or equal to 175% of the company action level). We are not required to maintain compensating balances, but pay commitment fees. Interest charged for use of the facilities is based on either the federal funds rate, the bank’s prime rate, or the London Interbank Offered Rate (“LIBOR”) at the time of borrowing. In addition, there is an incremental basis point charge, which varies by agreement, type of borrowing, and the amount outstanding on the lines. At December 31, 2003 and 2002, we were in compliance with all covenants under the credit agreements and have no outstanding balance on the lines of credit. Standard, our largest operating insurance subsidiary, is a guarantor for the total amount of both credit agreements. In addition, StanCorp Mortgage Investors also guarantees up to $25 million on the lines of credit. We currently have no commitments for standby letters of credit, standby repurchase obligations, or other related commercial commitments under the credit agreements.
various years through 2010 with renewal options ranging from one to five years.