Commissions and bonuses primarily represent sales-based compensation, which can vary depending on the product, the structure of the commission program, and factors such as persistency (customer retention), sales, growth in assets under management, and profitability of the business in each of our segments. Commissions and bonuses increased 9.1% to $168.5 million for 2005 compared to 2004, and 7.1% to $154.4 million for 2004 compared to 2003. The increases for the comparative periods were due to premium growth, persistency, growth in assets under management and sales in each of our segments. Certain commissions and bonuses are capitalized as deferred acquisition costs and amortized over the expected life of the policy.
compared to the net increase for 2003. The increase for 2005 was primarily due to decreased amortization of the VOBA asset associated with the Teachers Insurance and Annuity Association of America (“TIAA”) reinsurance transaction. The decrease in amortization of VOBA for 2005 was a result of the receipt of higher premium levels on this block for 2005 compared to that anticipated in the development of the original amortization schedule.
Commissions and bonuses for the Individual Insurance segment increased 5.8% to $38.1 million for 2005 compared to 2004, and 16.1% to $36.0 million for 2004 compared to 2003. The increases for both comparative periods resulted primarily from increased disability sales of 13.8% and 18.1% for the same periods partially offset in 2005 by annuity sales, which decreased 34.8%. Annuity sales increased 32.0% in 2004.
The primary sources of revenue for the Retirement Plans segment include plan administration fees, fees on separate account assets (equity investments) under management, and investment margin on general account assets under management. In addition, 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.
Administrative fees for the Retirement Plans segment are generated from two sources: plan administration fees, and fees on separate account assets that are primarily based on average daily market values of assets under management. Administrative fees in our Retirement Plans segment increased 27.9% to $31.6 million for 2005 compared to 2004, and 21.7% to $24.7 million for 2004 compared to 2003. The increases for both comparative periods were primarily from fees on higher assets under management. Assets under management increased 25.4% to $4.22 billion at December 31, 2005 compared to December 31, 2004, and increased 30.6% to $3.37 billion at December 31, 2004 compared to December 31, 2003. The increases for both comparative periods were primarily due to strong sales, continued deposit growth and excellent customer retention.
Other businesses reported income before income taxes of $2.9 million, $8.1 million and $2.7 million for 2005, 2004 and 2003, respectively. Net capital gains were $2.2 million, $11.5 million and $9.3 million for 2005, 2004 and 2003, respectively.
Our fixed maturity securities totaled $4.61 billion at December 31, 2005. We believe that we maintain prudent diversification across industries, issuers and maturities. Our corporate bond industry diversification targets are based on the Lehman 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, 2005. The percentage of fixed maturity securities below investment-grade remained low at 3.8% and 3.9% at December 31, 2005 and 2004, respectively. At December 31, 2005, bonds on our watch list totaled approximately $1.8 million. Should the credit quality of our fixed maturity securities decline, there could be a material adverse effect on the Company’s business, financial position, results of operations or cash flows.
At December 31, 2005, our commercial mortgage loan portfolio was collateralized by properties with the following characteristics:
On November 14, 2005, the board of directors of StanCorp declared a two-for-one stock split, effected as a share dividend, of the Company’s common stock and an annual cash dividend of $1.25 per share, calculated and payable on a pre-stock-split basis. The ex-dividend date was November 22, 2005. The annual cash dividend for 2005 represented a 25% increase over the dividend for 2004. Shareholders of record as of the close of business on November 25, 2005, received one additional share of StanCorp common stock for each share of StanCorp common stock held on that date. The additional shares of common stock were distributed in the form of a 100 percent common stock dividend on December 9, 2005. As a result of the stock split, the number of outstanding shares of StanCorp common stock increased from 27.3 million shares to 54.7 million shares. The declaration and payment of dividends in the future is subject to the discretion of StanCorp’s board of directors and it is anticipated that annual dividends will be paid in December of each year depending on StanCorp’s financial condition, results of operations, cash requirements, future prospects, regulatory restrictions on distributions from the insurance subsidiaries, the ability of the insurance subsidiaries to maintain adequate capital, and other factors deemed relevant by StanCorp’s board of directors.
As of January 1, 2003, pursuant to SSAP No.37, Mortgage Loans, an increase of $6.2 million in surplus was reported to release the unamortized mortgage prepayment penalties included in the Interest Maintenance Reserve (“IMR”). Beginning in 2003, mortgage prepayment penalties are reported as investment income instead of realized capital gains, which are subject to the IMR amortization. The effect of this accounting change on 2003 statutory net income was an increase of $5.8 million.
On September 19, 2005, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) No. 05-01, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications of
DAC for group disability and group life insurance products is amortized in proportion to future premiums generally over five years. DAC for individual disability insurance products is amortized in proportion to future premiums over the life of the contract averaging 20 to 25 years with approximately 50% and 75% expected to be amortized by years 10 and 15, respectively. DAC for individual deferred annuities is amortized in proportion to expected gross profits generally 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 in proportion to expected gross profits over 10 years with approximately 30% expected to be amortized by year five.
VOBA primarily represents the discounted future profits of business assumed through reinsurance agreements. VOBA is amortized in proportion to future premiums or future profitability, as appropriate. If actual premiums or future profitability are inconsistent with our assumptions, we could be required to make adjustments to VOBA and related amortization. For the VOBA associated with the Minnesota Life block of business reinsured, the amortization period is up to 30 years. The amortization period of the intangible asset for the marketing agreement with Minnesota Life is 23 years. The VOBA associated with the TIAA transaction is comprised of two parts with differing amortization methods. The amortization periods are up to 10 years for VOBA that is amortized in proportion to premiums and up to 20 years for VOBA that is amortized in proportion to expected gross
adequacy of the diversification of risk by product offerings and customer industry, geography and size;
For fiscal year 2006, we are realigning our businesses into two operating segments. Our individual disability business, which has been included in the Individual Insurance segment, is being added to our Employee Benefits segment to combine our traditional insurance lines of business into an Insurance Services segment. We are also combining our asset management and accumulation businesses, which have been reported in the Individual Insurance and Retirement Plans segments and Other, into an Asset Management segment. Net capital gains and losses on investments, return on capital not allocated to the product segments, holding company expenses, interest on senior notes, and adjustments made in consolidation will continue to be reflected in “Other.”
The Company uses a December 31 measurement date for the plans. The following table provides a reconciliation of the changes in the pension plans’ projected benefit obligations, fair value of assets and the funded status at December 31:
In the normal course of business, the Company is involved in various legal actions and other state and federal