<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-14925
----------------
STANCORP FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Oregon 93-1253576
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1100 SW Sixth Avenue, Portland, Oregon, 97204
(Address of principal executive offices)
(503) 321-7000
(Registrant's telephone number, including area code)
NONE
(Former name, former address, and former fiscal year, if changed since last
report)
----------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 13, 1999, there were 33,927,415 shares of the Registrant's
common stock, no par value, outstanding.
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- -------------------------------------------------------------------------------
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Income and Comprehensive
Income for the three and six months ended June 30, 1999 and
1998.......................................................... 1
Unaudited Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998............................................. 2
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the six months ended June 30, 1999................. 3
Unaudited Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998........................... 4
Notes to Unaudited Consolidated Financial Statements........... 5
Independent Accountants' Report................................ 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................... 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................. 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...................... 21
ITEM 3. DEFAULTS UPON SENIOR DEBT...................................... 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 21
ITEM 5. OTHER INFORMATION.............................................. 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 21
SIGNATURES.............................................................. 22
</TABLE>
i
<PAGE>
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(in millions--except share data and per share amounts)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
------------------- --------------
1999 1998 1999 1998
----------- ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Premiums................................ $ 217.8 $222.0 $456.4 $442.5
Net investment income................... 74.0 79.1 154.4 158.5
Net realized investment gains........... 1.7 5.4 2.8 5.6
Contribution from closed block.......... 3.3 -- 3.3 --
Other................................... 0.9 1.7 1.7 2.1
----------- ------ ------ ------
Total revenues........................ 297.7 308.2 618.6 608.7
----------- ------ ------ ------
Benefits and expenses:
Policyholder benefits................... 187.0 193.0 392.5 391.4
Interest paid on policyholder funds..... 21.8 23.2 43.1 46.3
Commissions............................. 15.8 16.1 32.1 33.1
Operating expenses...................... 46.7 47.7 93.0 89.7
Net (increase) decrease in deferred
policy acquisition costs............... (0.5) 0.1 (0.6) (2.1)
----------- ------ ------ ------
Total benefits and expenses .......... 270.8 280.1 560.1 558.4
----------- ------ ------ ------
Income before Federal income taxes and
extraordinary item....................... 26.9 28.1 58.5 50.3
Federal income taxes...................... 7.7 11.2 18.0 18.8
----------- ------ ------ ------
Income before extraordinary item.......... 19.2 16.9 40.5 31.5
Extraordinary item, net of tax............ 1.3 0.6 3.6 0.9
----------- ------ ------ ------
Net income................................ 17.9 16.3 36.9 30.6
----------- ------ ------ ------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
available for sale..................... (40.3) 5.7 (71.4) 6.3
Adjustment for realized losses.......... (0.7) (0.1) (2.7) (0.3)
----------- ------ ------ ------
Total comprehensive income, net of
tax.................................. (41.0) 5.6 (74.1) 6.0
----------- ------ ------ ------
Comprehensive income (loss)............... $ (23.1) $ 21.9 $(37.2) $ 36.6
=========== ====== ====== ======
Proforma net income per share:
Basic................................... $ 0.53
Diluted................................. $ 0.53
Proforma weighted-average shares
outstanding:
Basic................................... 33,520,236
Diluted................................. 33,529,295
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
1
<PAGE>
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in millions -- except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
ASSETS
------
<S> <C> <C>
Investments:
Investment securities.................................. $2,055.7 $2,214.2
Mortgage loans......................................... 1,666.7 1,708.1
Real estate, net....................................... 88.6 93.0
Policy loans........................................... 21.2 111.0
Collateral loans....................................... -- 71.2
-------- --------
Total investments.................................... 3,832.2 4,197.5
Cash and cash equivalents................................ 99.0 60.4
Deferred policy acquisition costs........................ 50.2 114.9
Premiums and other receivables........................... 70.8 73.2
Federal income taxes receivable.......................... 0.1 8.4
Accrued investment income................................ 53.4 53.5
Property and equipment, net.............................. 64.9 65.9
Other assets............................................. 17.2 36.6
Separate account assets.................................. 791.5 668.5
Closed block assets...................................... 604.7 --
-------- --------
Total assets......................................... $5,584.0 $5,278.9
======== ========
LIABILITIES AND EQUITY
----------------------
Liabilities:
Future policy benefits and claims...................... $1,580.2 $2,088.9
Other policyholder funds............................... 1,507.2 1,455.5
Deferred tax liabilities............................... 67.7 106.0
Other liabilities...................................... 130.3 120.7
Separate account liabilities........................... 791.5 668.5
Closed block liabilities............................... 635.8 --
-------- --------
Total liabilities.................................... 4,712.7 4,439.6
-------- --------
Commitments and Contingencies
Shareholders' equity:
Common stock, 300,000,000 shares authorized; 33,927,415
million shares issued and outstanding................. 852.4 --
Retained earnings...................................... 18.8 765.1
Accumulated other comprehensive income................. 0.1 74.2
-------- --------
Total shareholders' equity........................... 871.3 839.3
-------- --------
Total liabilities and shareholders' equity .......... $5,584.0 $5,278.9
======== ========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
2
<PAGE>
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(in millions)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
------ -------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1999............ $ - $ 765.1 $74.2 $839.3
Reorganization...................... 515.3 (783.2) -- (267.9)
Initial public offering............. 337.1 -- -- 337.1
Comprehensive income (loss) :
Net income before reorganization.. -- 18.1 -- 18.1
Net income after reorganization... -- 18.8 -- 18.8
------ ------- ----- ------
Net income for the six months
ended June 30,1999............. -- 36.9 -- 36.9
Other comprehensive income, net of
tax.............................. -- -- (74.1) (74.1)
------ ------- ----- ------
Comprehensive income (loss)......... -- 36.9 (74.1) (37.2)
------ ------- ----- ------
Balance, June 30, 1999.............. $852.4 $ 18.8 $ 0.1 $871.3
====== ======= ===== ======
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
For the
Six Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Operating:
Net income............................................... $ 36.9 $ 30.6
Adjustments to reconcile net income to net cash provided
by operating activities:
Net realized investment gains.......................... (2.8) (5.6)
Depreciation and amortization.......................... 14.6 8.8
Deferral of policy acquisition costs................... (6.9) (9.0)
Deferred income taxes.................................. 19.7 11.5
Changes in other assets and liabilities:
Trading securities..................................... (11.7) --
Receivables and accrued investment income.............. (5.6) (7.2)
Future policy benefits and claims...................... 86.0 100.5
Accrued Federal income taxes........................... 7.9 2.0
Closed block assets and liabilities, net............... (22.2) --
Other, net............................................. 28.6 16.8
-------- --------
Net cash provided by operating activities............ 144.5 148.4
-------- --------
Investing:
Proceeds of investments sold, matured, or repaid:
Fixed maturity securities available for sale........... 135.4 31.1
Fixed maturity securities held to maturity............. -- 9.2
Mortgage loans......................................... 156.3 134.6
Real estate, net....................................... 2.0 9.9
Costs of investments acquired:
Fixed maturity securities available for sale........... (294.7) (84.3)
Mortgage loans......................................... (243.6) (219.2)
Other investments, net................................. -- (0.4)
Net additions to property and equipment.................. (2.7) (3.1)
-------- --------
Net cash used in investing activities................ (247.3) (122.2)
-------- --------
Financing:
Policyholder fund deposits............................... 238.6 178.3
Policyholder fund withdrawals............................ (257.6) (201.2)
Issuance of common stock................................. 337.1 --
Payments to eligible policyholders....................... (176.7) --
-------- --------
Net cash provided by (used in) financing activities.. 141.4 (22.9)
-------- --------
Increase in cash and cash equivalents...................... 38.6 3.3
Cash and cash equivalents, beginning of period............. 60.4 16.8
-------- --------
Cash and cash equivalents, end of period................... $ 99.0 $ 20.1
======== ========
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the period for:
Interest............................................... $ 43.9 $ 46.1
Income taxes........................................... (7.3) 16.6
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business. On April 21, 1999, pursuant to
an order by the Director of the Department of Consumer and Business Services
of the State of Oregon approving the Plan of Reorganization dated September
28, 1998, as amended on December 14, 1998 (the "Plan"), Standard Insurance
Company ("Standard") converted from a mutual life insurance company to a stock
life insurance company and became a wholly owned subsidiary of StanCorp
Financial Group, Inc. ("StanCorp"), an Oregon corporation which was organized
for the purpose of becoming the parent holding company of Standard and its
non-insurance subsidiaries. Also, on April 21, 1999, StanCorp completed an
initial public offering (the "IPO") of approximately 15.2 million shares
(including approximately 1.3 million shares subsequently sold pursuant to the
underwriters' over-allotment option) of its common stock at the IPO price of
$23.75 per share. The shares of common stock issued in the IPO were in
addition to approximately 18.7 million shares of StanCorp common stock
distributed to Standard policyholders, pursuant to the Plan, in exchange for
their membership interests in Standard.
As used in these financial statements, the "Company" means, at all times
before the effective date of the Plan, Standard and its subsidiaries
collectively, and at all times on and after such date, StanCorp and its
subsidiaries.
StanCorp is the holding company parent of Standard and other non-insurance
subsidiaries. Standard primarily underwrites group and individual disability,
life and annuity products and group dental insurance. Standard is domiciled in
Oregon and licensed in 49 states, the District of Columbia and the US
Territory of Guam. Standard is licensed for reinsurance only in New York.
2. Basis of Presentation. The accompanying unaudited consolidated financial
statements of StanCorp and its subsidiaries have been prepared in accordance
with generally accepted accounting principles ("GAAP") for interim financial
information and in conformance with the requirements of Form 10-Q.
Accordingly, they do not include all of the information and disclosures
required by GAAP for complete financial statements. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
financial statement date, and the reported amounts of revenue and expenses
during the period. Actual results may differ from those estimates. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation of the Company's financial
condition at June 30, 1999 and December 31, 1998 and the results of operations
for the three and six months ended June 30, 1999 and 1998, and of cash flows
for the six months ended June 30, 1999 and 1998. Interim results for the three
and six month periods ended June 30, 1999 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999. This
report should be read in conjunction with the Company's 1998 Annual Report
included in the Registration Statement (Registration No. 333-72521) and
Prospectus of StanCorp.
3. Closed Block. On April 21, 1999, the Company established a closed block
for the payment of future benefits, policyholder dividends and certain
expenses and taxes related to certain classes of policies. Standard allocated
to the closed block an amount of assets expected to produce cash flows which,
together with future revenues from the policies included in the closed block,
will be sufficient to support these policies, including payment of claims,
certain expenses and taxes and continuation of policyholder dividend scales in
effect for 1998, if the experience underlying such dividend scales, including
the portfolio interest rate, continues. These assets, totaling $604.7 million
at June 30, 1999, are for the benefit of the policies in the closed block.
The contribution to operating income of the Company from the closed block is
reported as a single line item in the statements of income. Accordingly, all
components of pretax income for the closed block are shown as a net amount
under the caption "Contribution from closed block". Federal income tax expense
applicable to the closed block is reflected as a component of total tax
expense. This results in material reductions in the respective line items in
the statements of income while having no effect on net income. All assets
allocated to the closed block are grouped together and shown as a separate
line item under the caption "Closed block assets". Likewise, all liabilities
attributable to the closed block are combined and disclosed as a separate line
item under the caption "Closed block liabilities".
5
<PAGE>
Summarized financial information of the closed block at June 30, 1999 (in
millions) is as follows:
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Investments:
Investment securities........................................... $225.9
Mortgage loans.................................................. 141.0
Policy loans.................................................... 92.3
Collateral loans................................................ 69.5
------
Total investments............................................. 528.7
Cash and cash equivalents....................................... 0.6
Deferred policy acquisition costs............................... 67.4
Premiums and other receivables.................................. 4.5
Accrued investment income....................................... 3.5
------
Total closed block assets..................................... $604.7
======
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C>
Liabilities:
Future policy benefits and claims............................... $597.3
Other policyholder funds........................................ 20.0
Deferred tax liabilities........................................ 16.1
Other liabilities............................................... 2.4
------
Total closed block liabilities................................ $635.8
======
</TABLE>
Summarized financial results for the closed block for the six months ended
June 30, 1999 (in millions) are as follows:
<TABLE>
<S> <C>
Revenues:
Premiums.......................................................... $15.7
Net investment income............................................. 10.7
-----
Total revenues.................................................. 26.4
Benefits and expenses:
Policyholder benefits............................................. 17.9
Interest paid on policyholder funds............................... 0.3
Commissions....................................................... 2.2
Operating expenses................................................ 1.3
Net decrease in deferred acquisition costs........................ 1.4
-----
Total benefits and expenses..................................... 23.1
-----
Contribution from closed block................................ $ 3.3
=====
</TABLE>
The excess of closed block liabilities over closed block assets at June 30,
1999 represents the estimated future contribution from closed block, which
will be recognized in the Company's consolidated statements of income and
comprehensive income over the period the underlying policies and contracts
remain in force.
If, over the period the closed block remains in existence, the actual
cumulative contribution is greater than the expected cumulative contribution,
only such expected contribution will be recognized in the Company's
6
<PAGE>
consolidated statements of income and comprehensive income. The excess will be
paid to closed block policyholders as additional policyholder dividends.
Alternatively, if the actual cumulative contribution is less than the expected
cumulative contribution, only such actual contribution will be recognized in
the Company's statements of income. However, policyholder dividends will be
changed in the future, to increase actual contributions until the actual
cumulative contributions equal the expected cumulative contributions.
4. Segments. The following table sets forth selected segment information for
the three and six month periods ended June 30, 1999 and June 30, 1998
respectively:
<TABLE>
<CAPTION>
Group Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(in millions)
<S> <C> <C> <C> <C> <C>
Three months ended June 30,
1999:
Revenues...................... $ 247.6 $ 16.6 $ 30.4 $ 3.1 $ 297.7
Benefits and expenses:
Policyholder benefits....... 176.7 11.1 21.0 -- 208.8
Operating expenses.......... 49.7 5.8 6.2 0.3 62.0
-------- -------- -------- ------ --------
Total benefits and
expenses................. 226.4 16.9 27.2 0.3 270.8
-------- -------- -------- ------ --------
Income before Federal income
taxes and extraordinary
item......................... $ 21.2 $ (0.3) $ 3.2 $ 2.8 $ 26.9
======== ======== ======== ====== ========
Six months ended June 30,
1999:
Revenues...................... $ 496.3 $ 33.8 $ 82.9 $ 5.6 $ 618.6
Benefits and expenses:
Policyholder benefits....... 354.2 21.6 59.8 -- 435.6
Operating expenses.......... 96.1 12.0 15.7 0.7 124.5
-------- -------- -------- ------ --------
Total benefits and
expenses................. 450.3 33.6 75.5 0.7 560.1
-------- -------- -------- ------ --------
Income before Federal income
taxes and extraordinary
item......................... $ 46.0 $ 0.2 $ 7.4 $ 4.9 $ 58.5
======== ======== ======== ====== ========
Total assets.................. $2,003.9 $1,432.3 $1,627.3 $520.8 $5,584.0
======== ======== ======== ====== ========
<CAPTION>
Group Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(in millions)
<S> <C> <C> <C> <C> <C>
Three months ended June 30,
1998:
Revenues...................... $ 233.4 $ 16.7 $ 54.3 $ 3.8 $ 308.2
Benefits and expenses:
Policyholder benefits....... 166.7 11.1 38.4 -- 216.2
Operating expenses.......... 46.7 5.8 10.6 0.8 63.9
-------- -------- -------- ------ --------
Total benefits and
expenses................. 213.4 16.9 49.0 0.8 280.1
-------- -------- -------- ------ --------
Income before Federal income
taxes and extraordinary
item......................... $ 20.0 $ (0.2) $ 5.3 $ 3.0 $ 28.1
======== ======== ======== ====== ========
Six months ended June 30,
1998:
Revenues...................... $ 459.2 $ 34.3 $ 109.7 $ 5.5 $ 608.7
Benefits and expenses:
Policyholder benefits....... 337.1 23.6 76.9 -- 437.7
Operating expenses.......... 89.8 10.8 19.0 1.2 120.7
-------- -------- -------- ------ --------
Total benefits and
expenses................. 426.9 34.4 95.9 1.2 558.4
-------- -------- -------- ------ --------
Income before Federal income
taxes and extraordinary
item......................... $ 32.3 $ (0.1) $ 13.8 $ 4.3 $ 50.3
======== ======== ======== ====== ========
Total assets.................. $1,896.1 $1,266.3 $1,529.8 $311.9 $5,004.1
======== ======== ======== ====== ========
</TABLE>
Revenues include premiums, net investment income, and other income. Benefits
include policyholder benefits, interest paid on policyholder funds, and
policyholder dividends. Operating expenses include commissions, general
operating expenses and the net increase (decrease) in deferred policy
acquisition costs.
7
<PAGE>
5. Commitments and Contingencies. The Company has available lines of credit
totaling $110.0 million, including a $100.0 million unsecured revolving line
of credit that was entered into in the first quarter of 1999. The Company is
not required to maintain compensating balances, but pays a commitment fee.
Under the credit agreement, the Company is subject to customary covenants,
including limitations on indebtedness, minimum retained earnings and minimum
claims paying ability ratings. On June 30, 1999, the Company was in compliance
with all such covenants. The interest rates are based on current market rates.
On June 30, 1999, there were no outstanding borrowings on the credit lines.
In the normal course of its business, the Company is involved in various
legal actions and other state and Federal proceedings. A number of these
actions or proceedings were pending at June 30, 1999. In some instances,
lawsuits include claims for punitive damages and similar types of relief in
unspecified or substantial amounts, in addition to amounts for alleged
contractual liability or other compensatory damages. In the opinion of
management, the ultimate liability, if any, arising from these actions or
proceedings is not expected to have a material adverse effect on the Company's
business, financial condition or results of operations.
8
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
StanCorp Financial Group, Inc.
We have reviewed the accompanying consolidated balance sheet of StanCorp
Financial Group, Inc. and subsidiaries (the "Company", formerly known as
Standard Insurance Company, prior to the April 21, 1999 reorganization
discussed in Note 1) as of June 30, 1999, and the related consolidated
statements of income and comprehensive income for the three and six month
periods ended June 30, 1999 and 1998, changes in shareholders' equity for the
six month period ended June 30, 1999, and cash flows for the six month periods
ended June 30, 1999 and 1998. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Standard Insurance Company and
subsidiaries as of December 31, 1998, and the related statements of
consolidated income, comprehensive income and equity, and of cash flows for
the year then ended (not presented herein); and in our report dated February
12, 1999 (March 19, 1999 as to Note 1), we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31, 1998
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Portland, Oregon
August 12, 1999
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis of the consolidated financial condition and results of
operations of StanCorp Financial Group, Inc. should be read in conjunction with
the consolidated financial statements and related notes thereto included herein.
As used in this analysis, the "Company" means, at all times before the effective
date of the Plan of Reorganization (the "Plan"), Standard Insurance Company
("Standard") and its subsidiaries, collectively, and at all times on and after
such date, StanCorp Financial Group, Inc. ("StanCorp") and its subsidiaries.
Forward-looking Statements
The management of the Company has made in this Form 10-Q, and from time to
time may make in its public filings and press releases as well as in oral
presentations and discussions, certain statements including statements
regarding anticipated development and expansion of the Company's business, the
effects of regulatory actions, the intent, belief, or current expectations of
the Company's management, the future operating performance of the Company and
other statements regarding matters that are not historical facts. These
statements are "forward-looking" statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. Because such statements are
subject to risks and uncertainties, actual results may differ materially from
those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially from those expressed or
implied by such forward-looking statements include but are not limited to (i)
deterioration in morbidity, mortality, and persistency, (ii) changes in
interest rates or the condition of the national economy, (iii) changes in the
regulatory environment on the state or federal level, (iv) competition from
other insurers and financial institutions, (v) changes in claims paying
ability ratings, (vi) adverse findings in litigation or in state or federal
proceedings, (vii) deterioration in the experience of the closed block, and
(viii) the risks associated with Year 2000 non-compliance by StanCorp, its
subsidiaries, or third parties (including vendors and suppliers),
unanticipated costs associated with Year 2000 compliance, due to, among other
things, the inability to locate, correct and successfully test all relevant
computer codes according to schedule, the continued availability of resources
including personnel and timely and accurate responses and corrections by third
parties. Certain other factors are discussed in the StanCorp's Registration
Statement (Registration No. 333-72521) and Prospectus filed with the
Securities and Exchange Commission.
Reorganization
In December 1997, Standard's board of directors authorized management to
proceed with the development of a plan of reorganization to convert from a
mutual life insurance company to a stock life insurance company. Prior to the
reorganization, StanCorp was a wholly owned subsidiary of Standard formed with
the purpose of becoming an insurance holding company on the completion of
Standard's reorganization. StanCorp's assets consisted solely of $1,000 cash
received as a capital contribution from Standard. StanCorp had no further
activity until Standard's reorganization.
On April 21, 1999, StanCorp completed an initial public offering of common
stock, issuing 15,209,400 shares (including 1,289,400 shares subsequently sold
pursuant to the underwriters' over-allotment option) at $23.75 per share, and
received proceeds, net of IPO expenses, of $337.1 million. Of the proceeds,
$276.9 million was contributed to Standard, of which $267.9 million was used
to retire obligations to policyholders arising out of Standard's conversion to
a stock life company and $9.0 million was paid in exchange for ownership of
Standard's non-insurance subsidiaries. The remaining $60.2 million has been
retained by StanCorp for general corporate purposes, which may include
contributions to Standard or to its other subsidiaries. Concurrent with the
IPO, StanCorp issued 18,718,015 shares of common stock to eligible
policyholders under the Plan in exchange for the policyholders' membership
interests in Standard. The costs incurred and expensed in the first six months
of 1999 related to the reorganization totaled $3.6 million, and are included
in the financial statements as an extraordinary item. We estimate that an
additional $0.5 million in reorganization costs will be incurred in 1999.
On the completion of its reorganization, Standard established a closed block
for the payment of future benefits, policyholder dividends and certain
expenses and taxes related to certain classes of policies. Standard allocated
to the closed block an amount of assets expected to produce cash flows which,
together with future
10
<PAGE>
revenues from the policies included in the closed block, will be sufficient to
support these policies, including payment of claims, certain expenses and
taxes and continuation of policyholder dividend scales in effect for 1998, if
the experience underlying such dividend scales, including the portfolio
interest rate, continues. These assets, totaling $604.7 million at June 30,
1999, are for the benefit of the policies in the closed block.
The contribution to operating income of the Company from the closed block is
reported as a single line item in the statements of income. Accordingly, all
components of revenues and benefits and expenses for the closed block are
shown as a net amount under the caption "Contribution from closed block".
Federal income tax expense applicable to the closed block is reflected as a
component of total tax expense. This results in material reductions in the
respective line items in the statements of income while having no effect on
net income. All assets allocated to the closed block are grouped together and
shown as a separate line item under the caption "Closed block assets".
Likewise, all liabilities attributable to the closed block are combined and
disclosed as a separate line item under the caption "Closed block
liabilities". Management believes that the presentation of the results of
operations on a combined basis as if the closed block had not been formed
facilitates comparability with the results of operations for the periods prior
to its formation. Accordingly, the combined presentation set forth below
includes revenues and expenses associated with policies included in the closed
block. Such presentation does not affect the Company's reported net income.
<TABLE>
<CAPTION>
Six Months
Three Months Ended Ended
June 30, June 30,
------------------- -------------
1999 1998 1999 1998
--------- --------- ------ ------
(in millions)
<S> <C> <C> <C> <C>
Revenues:
Premiums.............................. $ 233.5 $ 222.0 $472.1 $442.5
Net investment income................. 84.7 79.1 165.0 158.5
Net realized investment gains......... 1.7 5.4 2.8 5.6
Other................................. 0.9 1.7 1.7 2.1
--------- --------- ------ ------
Total............................... 320.8 308.2 641.6 608.7
--------- --------- ------ ------
Benefits and expenses:
Policyholder benefits................. 205.0 193.0 410.4 391.4
Interest paid on policyholder funds... 22.1 23.2 43.4 46.3
Commissions........................... 18.0 16.1 34.3 33.1
Operating expenses.................... 47.9 47.7 94.2 89.7
Net (increase) decrease in deferred
policy acquisition costs............. 0.9 0.1 0.8 (2.1)
--------- --------- ------ ------
Total............................... 293.9 280.1 583.1 558.4
--------- --------- ------ ------
Income before Federal income taxes and
extraordinary item..................... $ 26.9 $ 28.1 $ 58.5 $ 50.3
========= ========= ====== ======
</TABLE>
Consolidated Results of Operations--Three and Six Month Periods Ended June 30,
1999 and 1998
Premiums
Premiums, which include policy and contract charges, increased by $11.5
million, or 5.2%, to $233.5 million in the second quarter of 1999 from $222.0
million in the second quarter of 1998. The increase resulted primarily from
growth in the group insurance business, as evidenced by increased group
insurance premiums of $11.2 million in the second quarter of 1999.
For the six months ended June 30, 1999, premiums were $472.1 million as
compared with $442.5 million in the second quarter of 1999, or a $29.6 million
increase. The increase resulted primarily from growth in group premiums of
$31.3 million, partially offset by a decline in individual insurance premiums
of $3.0 million (See "--Selected Segment Information).
11
<PAGE>
Net Investment Income
Net investment income increased by $5.6 million, or 7.1%, to $84.7 million
in the second quarter of 1999 compared to $79.1 million in the same period of
1998. This increase resulted from a 7.5% increase in average invested assets
to $4.32 billion for the second quarter of 1999, from $4.02 billion for the
same period of 1998, partially offset by a decrease in the portfolio yield.
The portfolio yield at June 30, 1999 and 1998 was 7.71% and 7.95%,
respectively. The primary reason for the decrease in portfolio yield was a
decreasing interest rate environment, which may or may not continue in the
future.
For the six months ended June 30, 1999 net investment income was $165.0
million compared to $158.5 million for the same period of 1998. This increase
again resulted from an increase in average invested assets, partially offset
by a decrease in the portfolio yield. Average invested assets for the six
months ended June 30, 1999 and 1998 were $4.28 billion and $3.99 billion,
respectively, or a 7.3% increase. The decrease in portfolio yield was a result
of the declining interest rate environment mentioned above, as well as a
decline through the first quarter of 1999 in mortgage loans as a percentage of
invested assets. The yield on mortgage loans typically exceeds the return
provided from fixed maturity securities.
Net Realized Investment Gains
Net realized gains and losses occur primarily as a result of dispositions of
the Company's invested assets in the regular course of investment management.
Net realized investment gains were $1.7 million and $2.8 million in the second
quarter and six months ended June 30, 1999. For the same periods of 1998, net
realized investment gains were $5.4 million and $5.6 million, respectively. In
the second quarter of 1998, $3.9 million in net realized investment gains
resulted from gains on sales of certain real estate properties. No such sales
occurred during the first half of 1999.
Policyholder Benefits
Policyholder benefits, including policyholder dividends and interest paid on
policyholder funds, increased by $10.9 million, or 5.0%, to $227.1 million in
the second quarter of 1999 from $216.2 million for the same period of 1998.
For the six months ended June 30, 1999 and 1998, policyholder benefits
including interest were $453.8 million and $437.7 million, respectively. For
both comparative periods, the increase resulted primarily from growth in the
group insurance business, partially offset by lower interest credited to group
annuity contracts. (See "--Selected Segment Information".)
Operating Expenses
Operating expenses, including state and local taxes, commissions and the net
increase or decrease in deferred policy acquisition costs, increased by $2.9
million, or 4.5%, to $66.8 million in the second quarter of 1999 from
$63.9 million in the second quarter of 1998. This growth was primarily related
to business growth, as evidenced by the 5.2% increase in premiums.
Additionally, two new Group Insurance sales offices and two new Retirement
Plans sales offices were opened during the second quarter.
For the six months ended June 30, 1999 operating expenses increased by $8.6
million, or 7.1%, to $129.3 million from $120.7 million for the same period of
1998. The increase for these comparative periods resulted from a combination
of business growth and a $2.8 million increase in expense related to policy
acquisition costs for the Individual Insurance segment (see "--Selected
Segment Information Individual Insurance Segment").
Federal Income Taxes
StanCorp's provision for Federal income taxes will differ from the amounts
calculated at the Federal corporate tax rate primarily due to permanent
differences, including nontaxable investment income and tax credits. The
effective Federal income tax rates for the second quarter of 1999 and 1998
were 28.6% and 39.9%, respectively. For the six months ended June 30, 1999 and
1998, the effective rates were 30.8% and 37.4%,
12
<PAGE>
respectively. The decrease in the effective tax rates for the comparative
periods primarily related to amounts provided for uncertainties and
adjustments to amounts provided in prior years.
Income before Extraordinary Item
Income before extraordinary item increased $2.3 million, or 13.6%, to $19.2
million in the second quarter of 1999 from $16.9 million in the same period of
1998.
For the six months ended June 30, 1999 income before extraordinary item
increased $9.0 million, or 28.6%, to $40.5 million from $31.5 million for the
same period of 1998.
Selected Segment Information:
The following table sets forth selected segment information for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -----------------
1999 1998 1999 1998
--------- --------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Revenues:
Group Insurance segment......... $ 247.6 $ 233.4 $ 496.3 $ 459.2
Retirement Plans segment........ 16.6 16.7 33.8 34.3
Individual Insurance segment.... 53.4 54.3 105.9 109.7
Other........................... 3.1 3.8 5.6 5.5
--------- --------- -------- --------
Total revenues................ $ 320.7 $ 308.2 $ 641.6 $ 608.7
========= ========= ======== ========
Income before Federal income taxes
and extraordinary item:
Group Insurance segment......... $ 21.2 $ 20.0 $ 46.0 $ 32.3
Retirement Plans segment........ (0.3) (0.2) 0.2 (0.1)
Individual Insurance segment.... 3.2 5.3 7.4 13.8
Other........................... 2.8 3.0 4.9 4.3
--------- --------- -------- --------
Total income before Federal
income taxes and
Extraordinary item........... $ 26.9 $ 28.1 $ 58.5 $ 50.3
========= ========= ======== ========
Reserves at period end (1):
Group Insurance segment......... $1,498.8 $1,330.1
Retirement Plans segment........ 634.2 631.4
Individual Insurance segment.... 1,571.6 1,458.9
-------- --------
Total reserves................ $3,704.6 $3,420.4
======== ========
</TABLE>
- --------
(1) Reserves are comprised of future policy benefits and claims and other
policyholder funds.
Group Insurance Segment
The Group Insurance segment sells long and short term disability, life,
accidental death and dismemberment and dental insurance. As the largest of the
Company's three segments, group insurance premiums accounted for 88.8% and
88.4% of Standard's total premiums for the second quarter of 1999 and 1998,
respectively.
13
<PAGE>
The following table sets forth selected financial data for the Group Insurance
segment for the periods indicated:
<TABLE>
<CAPTION>
Six Months
Three Months Ended Ended
June 30, June 30,
-------------------- --------------
1999 1998 1999 1998
--------- --------- ------ ------
(Dollars in millions,
except as indicated)
<S> <C> <C> <C> <C>
Revenues:
Premiums........................... $ 207.4 $ 196.2 $418.9 $387.6
Net investment income.............. 38.5 35.2 74.5 69.3
Net realized investment gains...... 0.8 0.7 1.3 0.6
Other.............................. 0.9 1.3 1.6 1.7
--------- --------- ------ ------
Total revenues................... 247.6 233.4 496.3 459.2
--------- --------- ------ ------
Benefits and expenses:
Policyholder benefits.............. 176.7 166.7 354.2 337.1
Operating expenses................. 49.7 46.7 96.1 89.8
--------- --------- ------ ------
Total benefits and expenses...... 226.4 213.4 450.3 426.9
--------- --------- ------ ------
Income before Federal income taxes
and extraordinary item.............. $ 21.2 $ 20.0 $ 46.0 $ 32.3
========= ========= ====== ======
Benefit ratio (% of premiums)........ 85.2% 85.0% 84.6% 87.0%
Operating expense ratio (% of
premiums)........................... 24.0% 23.8% 22.9% 23.2%
Life insurance in force at period end
(in billions)....................... $ 86.3 $ 78.6
</TABLE>
Premiums increased $11.2 million, or 5.7%, to $207.4 million in the second
quarter of 1999 from $196.2 million in the second quarter of 1998. For the six
months ended June 30, 1999, premiums increased $31.3 million, or 8.1%, to
$418.9 million from $387.6 million for the same period of 1998. For the
periods presented, approximately eighty percent of the premium growth related
to group accident and health insurance lines, concentrated in long term
disability insurance, with the remainder being primarily attributable to group
life insurance.
Net investment income increased $3.3 million, or 9.4%, to $38.5 million in
the second quarter of 1999 from $35.2 million in the second quarter of 1998.
The increase was due to an increase of 5.7% in the average assets allocated to
the segment, partially offset by a decrease due to declining portfolio yield.
Policyholder benefits increased by $10.0 million, or 6.0%, to $176.7 million
in the second quarter of 1999 from $166.7 million for the same period of 1998.
This increase was a result of growth in business for the segment, as evidenced
by the 5.7% increase in premiums, and a slight increase in the benefit ratio.
The benefit ratio increased from 85.0% in the second quarter of 1998 to 85.2%
in the second quarter of 1999. The benefit ratio averaged 85.0% in 1998.
Through June 30, 1999, policyholder benefits increased $17.1 million, or
5.1%, to $354.2 million from $337.1 million for the same period of the prior
year. The increase resulted from a combination of offsetting factors,
increasing as a result of growth in business as evidenced by the 8.1% increase
in premiums for the same periods, and decreasing due to fluctuations in the
benefit ratio. Throughout 1998, this segment experienced an improving benefit
ratio with an average for the year of 85.0%. However, in the first quarter of
1999, claims experience was favorable resulting in an 83.9% benefit ratio,
compared to 89.0% for the same period of 1998. As indicated above, claims
experience for the second quarter of 1999 was more in line with the 1998
average at 85.0%. Because benefit ratios are heavily affected by actual claims
experience, trends may or may not continue in the future.
Operating expenses increased $3.0 million, or 6.4%, to $49.7 million in the
second quarter of 1999 from $46.7 million in the second quarter of 1998.
Operating expenses for the six months ended June 30, 1999,
14
<PAGE>
increased $6.3 million, or 7.0%, to $96.1 million for 1999, compared to $89.8
million for 1998. The increases for both comparative periods primarily related
to the growth in business, including the opening of two new sales offices in
the second quarter of 1999. The operating expense ratios for the second
quarter of 1999 and 1998 were 24.0% and 23.8%, respectively, and were 22.9%
and 23.2%, respectively, for the six months ended June 30, 1999 and 1998.
Income before Federal income taxes and extraordinary item for the segment
increased by $1.2 million to $21.2 million in the second quarter of 1999 from
$20.0 million in the same period of 1998. Income before Federal income taxes
and extraordinary item for the six months ended June 30, 1999, increased $13.7
million to $46.0 million for the six months ended June 30, 1999, from $32.3
million for the same period of 1998. The increase was primarily due to the
improvement in the benefit ratio experienced in the first quarter of 1999.
Retirement Plans Segment
The Retirement Plans segment offers full-service 401(k) and other pension
plan products and services.
The following table sets forth selected financial data for the Retirement
Plans segment for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Premiums....................... $ 3.8 $ 3.1 $ 8.6 $ 7.1
Net investment income.......... 12.9 13.2 25.2 26.9
Net realized investment gains
(losses)...................... (0.1) 0.4 -- 0.3
--------- --------- -------- --------
Total revenues............... 16.6 16.7 33.8 34.3
--------- --------- -------- --------
Benefits and expenses:
Policyholder benefits.......... 11.1 11.1 21.6 23.6
Operating expenses............. 5.8 5.8 12.0 10.8
--------- --------- -------- --------
Total benefits and expenses.. 16.9 16.9 33.6 34.4
--------- --------- -------- --------
Income (Loss) before Federal
income taxes and extraordinary
item............................ $ (0.3) $ (0.2) $ 0.2 $ (0.1)
========= ========= ======== ========
Operating expense ratio (% of
total revenues)................. 34.9% 34.7% 35.5% 31.5%
Assets under management at period
end:
General account................ $ 634.2 $ 627.7
Separate account............... 791.5 611.7
-------- --------
Total........................ $1,425.7 $1,239.4
======== ========
</TABLE>
Revenues are derived from premiums, which consist of charges for
administrative services on assets managed in both the general account and
separate account, and interest income on assets managed in the general
account. Premiums increased $0.7 million and $1.5 million for the three and
six month periods ended June 30, 1999 compared to the same periods in 1998,
primarily from growth in assets under management.
For the three and six month periods ended June 30, 1999, net investment
income decreased $0.3 million and $1.7 million, respectively, compared to the
same periods of the prior year. The decline for both comparative periods was
primarily due to the decline in the net investment yield. For the first
quarter of 1999, the decline also was affected by a 2.9% decrease in assets
under management in the general account. This decrease was caused by
contractholder withdrawals and transfers to separate account contracts offered
by the Company.
15
<PAGE>
The profitability of the Retirement Plans segment is, in part, dependent on
the maintenance of targeted interest rate spreads. Therefore, policyholder
benefits (which include interest credited to policyholders) should generally
trend with net investment income. For the three and six month periods ended
June 30, 1999, policyholder benefits did just that, remaining stable for the
quarter, and decreasing $2.0 million for the six months, as compared to the
same periods of 1998. This compared with a decrease in net investment income
for these same periods of $0.3 million and $1.7 million, respectively.
Operating expenses remained stable at $5.8 million in the second quarter of
1999 compared to the same period of 1998, and increased $1.2 million for the
six months ended June 30, 1999 as compared to the same period of 1998.
Management expects the rate of expense growth to outpace revenue growth for
the remainder of 1999, due to certain initiatives. During the second quarter
of 1999, two new field offices were opened and a third was opened in July. Two
additional new field offices are planned to be opened before year end.
Management expects that the new offices will contribute to increased market
share by 2001, resulting in significant premium growth. This expectation is
supported by the segment's decision to focus on administering a single type of
plan. In the fourth quarter of 1997, the segment began to exit its traditional
business by converting existing traditional plans, which allow quarterly
investment directives by the employers and participants, to daily plans, which
allow daily investment directives. Daily plans are believed to be more
attractive to customers. Management expects the conversion to be completed or
the traditional plans discontinued by December 31, 1999. Although the
efficiencies and cost savings of the strategy cannot be readily estimated,
management believes that future expense savings will be realized.
The loss before Federal income taxes and extraordinary item for the
Retirement Plans segment in the second quarter of 1999 and 1998 was $0.3
million and $0.2 million, respectively. Income before Federal income taxes and
extraordinary item for the six months ended June 30, 1999, was $0.2 million,
compared to a loss of $0.1 million for the same period of 1998.
Individual Insurance Segment
The Individual Insurance segment sells life insurance, disability insurance,
fixed annuities and other insurance products to individuals. For the
individual insurance market, a growing percentage of consumers are now
reaching 45 years of age or older and are shifting their focus from loss
avoidance to asset accumulation, and the strong stock market has increased
competition from investments in other than traditional individual life
insurance and fixed annuities such as variable life and variable annuity
products. The following table sets forth selected financial data for the
Individual Insurance segment for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------
1999 1998 1999 1998
--------- ------------- --------- ------
(Dollars in millions,
except as indicated)
<S> <C> <C> <C> <C>
Revenues:
Premiums..................... $22.3 $22.7 $ 44.7 $ 47.7
Net investment income........ 30.0 30.5 59.7 61.0
Net realized investment gains
............................ 1.1 0.7 1.5 0.6
Other........................ -- 0.4 -- 0.4
--------- ------------ --------- ------
Total revenues............. 53.4 54.3 105.9 109.7
--------- ------------ --------- ------
Benefits and expenses:
Policyholder benefits........ 39.2 38.4 78.0 76.9
Operating expenses........... 11.0 10.6 20.5 19.0
--------- ------------ --------- ------
Total benefits and
expenses.................. 50.2 49.0 98.5 95.9
--------- ------------ --------- ------
Income before Federal income
taxes and extraordinary item.. $ 3.2 $ 5.3 $ 7.4 $ 13.8
========= ============ ========= ======
Operating expense ratio (% of
premiums)..................... 49.3% 46.7% 45.9% 39.8%
Life insurance in force at
period end (in billions)...... $ 7.9 $ 7.8
</TABLE>
16
<PAGE>
Premiums for the Individual Insurance segment typically fluctuate due, in
part, to the sale of single premium products, variations in sales volume and
fluctuations in reinsurance activity. Premiums were $25.0 million,
$22.7 million, $22.0 million and $24.5 million for the first through fourth
quarters of 1998, respectively, and were $22.4 million and $22.3 million in
the first and second quarters of 1999.
Premiums decreased $3.0 million, or 6.3%, to $44.7 million for the six
months ended June 30, 1999, compared to $47.7 million for the same period of
1998. The decrease resulted, in part, from the typical fluctuations discussed
above, and from, in part, declining demand due to the maturing individual
insurance market.
Policyholder benefits increased $0.8 million, or 2.1%, to $39.2 million in
the second quarter of 1999 compared to $38.4 million for the second quarter of
1998, and increased $1.1 million for the six months ended June 30, 1999
compared to the same period of the prior year.
Operating expenses remained relatively stable at $11.0 million in the second
quarter of 1999 compared to $10.6 million in the second quarter of 1998. For
the six months ended June 30, 1999 operating expenses increased $1.5 million
to $20.5 million from $19.0 million for the same period of 1998. The increase
included $2.8 million related to net deferred policy acquisition costs, offset
in part by a $1.0 million decrease in commission expense, which was primarily
due to decreased premiums. The deferral and amortization of policy acquisition
costs involves the use of estimates which management revises when appropriate.
Income before Federal income taxes and extraordinary item for the Individual
Insurance segment was $3.2 million and $5.3 million for the second quarter of
1999 and 1998, respectively, and $7.4 million and $13.8 million for the six
months ended June 30, 1999 and 1998, respectively.
Other
Other includes primarily mortgage lending and real estate management
subsidiaries, investments maintained by StanCorp, and real estate investments
maintained by Standard. Income before Federal income taxes and extraordinary
item for the second quarter of 1999 and 1998 was $2.8 million and $3.0
million, respectively. For the six months ended June 30, 1999 and 1998 these
amounts were $4.9 million and $4.3 million, respectively. The income primarily
related to the fees earned by the mortgage subsidiary for servicing and
originating loans, totaling $2.7 million and $2.0 million for the six month
periods ended June 30, 1999 and 1998, respectively. In addition, second
quarter 1999 results include $0.7 million in net investment income on IPO
proceeds. Second quarter 1998 results include $3.6 million in realized capital
gain primarily related to non-recurring sales of real estate investments.
Liquidity and Capital Resources
Following the effective date of the Plan, Standard became a wholly owned
subsidiary and the principal asset of StanCorp. StanCorp's ability to pay
dividends to its shareholders and meet its obligations substantially depends
upon the receipt of dividends from Standard. In the future, dividends from the
non-insurance subsidiaries may also become significant sources of funds for
StanCorp.
Standard's ability to pay dividends to StanCorp is regulated under Oregon
law. Under Oregon law, Standard may pay dividends only from the earned surplus
arising from its business. It also must receive the prior approval of the
Director of the Oregon Department of Consumer and Business Services (the
"Director") to pay a dividend, if such dividend would exceed certain statutory
limitations. The current statutory limitation is the greater of (a) 10 percent
of Standard's combined capital and surplus as of December 31, of the preceding
year and (b) the net gain from operations after dividends to policyholders and
Federal income taxes and before capital gains or losses for the twelve-month
period ending on the December 31 last preceding, in each case determined under
statutory accounting practices. Oregon law gives the Director broad discretion
to disapprove requests for dividends in excess of these limits. Based on its
statutory results, Standard will be permitted to pay up to $93.9 million in
dividends to StanCorp in 1999 without obtaining the Director's approval. These
limitations on dividends do not apply to any dividends to StanCorp from the
non-insurance subsidiaries.
17
<PAGE>
Operating Cash Flows. Operating cash inflows consist primarily of premiums
and annuity deposits. Operating cash outflows consist primarily of benefits to
policyholders and beneficiaries, operating expenses, commissions and taxes.
Investing Cash Flows. Investing cash inflows consist primarily of investment
income and the proceeds from sales or maturities of investments. Investing
cash outflows consist primarily of payments for investments acquired. Since
future benefit payments are primarily intermediate and long-term obligations,
Standard's investments are predominantly intermediate and long-term fixed-rate
instruments, such as fixed maturity securities and mortgage loans, which are
expected to provide sufficient cash flow to cover these obligations. The
nature and quality of various types of investments purchased by Standard must
comply with statutes and regulations imposed by Oregon and other states in
which Standard is licensed.
It is management's objective to generally align the cash flow
characteristics of assets and liabilities to ensure that Standard's financial
obligations can be met under a wide variety of economic conditions. Most of
Standard's policy liabilities result from participating individual life
insurance products and other life insurance and annuity products on which
interest rates can be adjusted periodically, long term disability reserves
that have proven to be very stable over time, and separate account products.
Annual cash flow scenario testing is employed to assess interest rate risk and
to permit Standard's investment policy to be modified whenever necessary to
address changing economic environments. See "--Interest Rate Risk Management".
The Company's mortgage loan portfolio represented 41.4% of total invested
assets at June 30, 1999. Policyholders or claimants cannot withdraw Standard's
large block of disability reserves and claim payments are issued monthly over
periods that may extend for many years. This holding of stable long-term
reserves makes it possible for Standard to allocate a greater portion of its
assets to long-term commercial mortgage loans than many other life insurance
companies. At June 30, 1999, the Company had outstanding commitments to fund
or acquire various assets, generally mortgage loans with interest rates
ranging from 7.25% to 8.50%, totaling $160.8 million. The Company's capital
expenditures are estimated to be $10.1 million for the remainder of 1999.
The following table sets forth selected liquidity characteristics for
policyholder reserves and deposit fund liabilities.
Policyholder Reserves and Deposit Fund Liabilities--
Liquidity Characteristics
<TABLE>
<CAPTION>
At June 30,
------------------------------
1999 1998
-------------- --------------
% of % of
Amount Total Amount Total
-------- ----- -------- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Subject to Discretionary Withdrawal:
At fund balance or with market value
adjustment or surrender charge of less
than 5%................................. $ 732.3 19.8% $ 731.4 21.4%
At fund balance, with market value
adjustment or surrender charge of 5% or
more.................................... 587.0 15.8 581.3 17.0
-------- ----- -------- -----
Total subject to discretionary
withdrawal............................ 1,319.3 35.6 1,312.7 38.4
Not subject to withdrawal.................. 2,385.3 64.4 2,107.7 61.6
-------- ----- -------- -----
Total.................................. $3,704.6 100.0% $3,420.4 100.0%
======== ===== ======== =====
</TABLE>
Financing. The Company has available lines of credit totaling $110.0
million, including a $100.0 million unsecured revolving line of credit that
was entered into in the first quarter of 1999. Under the credit agreement, the
Company is subject to customary covenants, including limitations on
indebtedness, minimum retained earnings and minimum claims paying ability
ratings. Such covenants could have the effect of limiting StanCorp's ability
to pay dividends to its shareholders.
18
<PAGE>
On June 30, 1999, the Company was in compliance with all such covenants. On
August 2, 1999, the board of directors of StanCorp declared its first
quarterly dividend of $0.06 per share of common stock. The dividend is payable
on September 3, 1999 to shareholders of record at the close of business on
August 13, 1999.
Interest Rate Risk Management
Standard manages interest rate risk, in part, through asset/liability
duration analyses. As part of this strategy, detailed actuarial models of the
cash flows associated with each type of insurance liability and the financial
assets related to these reserves are generated under various interest rate
scenarios. These actuarial models include those used to support the
unqualified statutory Statement of Actuarial Opinion, required by insurance
regulators, which states that according to presently accepted actuarial
standards of practice, and in light of the assets held, Standard's current
reserves and related items tested to support that opinion make adequate
provision for the anticipated cash flows required by Standard's contractual
obligations and related expenses.
The Company has not used derivatives, such as interest rate swaps, currency
swaps, futures or options, to manage interest rate risk or for speculative
purposes, but may use such instruments to manage interest rate risk in the
future. In the normal course of business, the Company commits to fund mortgage
loans generally up to 60 days in advance.
Year 2000
The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that include date sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruption of
operations, including, among other things, a temporary inability to process
transactions and engage in normal business activities.
Based on an assessment, the Company determined a need to modify, upgrade or
replace significant portions of its software so that its computer systems will
function properly beyond December 31, 1999. Management believes that with
modifications to existing software and hardware and conversions to new
software and hardware, the Year 2000 issue will be mitigated. However, if such
modifications and conversions are not made, or are not completed on a timely
basis, the Year 2000 issue could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has assessed its computer hardware for Year 2000 readiness. The
hardware is generally compliant, with the exception of a few personal
computers, which are being replaced in the normal course of business and will
be completed by the end of 1999. In addition, the Company has assessed its
non-information technology systems and has found them to be Year 2000 ready.
The Company has established milestone dates for each of the critical
subprojects that comprise the Company's master year 2000 plan. These milestone
dates are key events for determining whether the remediation or replacement of
a critical system will be completed successfully and on time. If any milestone
date is missed, the Company will commence the development of a contingency
plan that will either remediate or replace the system that the subproject was
designed to bring into compliance. As of June 30, 1999, all subprojects have
progressed through identified milestones, and as the result of this progress,
no contingency plans were initiated during the six months ended June 30, 1999.
There can be no guarantee that the Company's method of developing contingency
plans or the contingency plans themselves, if required, will prevent the Year
2000 issue from having a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is using both internal and external resources to reprogram,
upgrade or replace and test its software and hardware for Year 2000 readiness.
At June 30, 1999, the Company had completed the Year 2000 project for all
business-critical applications. Based on presently available information, the
Company estimates the total remaining cost at June 30, 1999 of the Year 2000
project to be approximately $1.0 million. These costs
19
<PAGE>
are being funded through operating cash flows and expensed as incurred. As of
June 30, 1999, the Company has incurred and expensed approximately $14.0
million related to assessment and remediation or replacement in connection
with the Year 2000 project since inception.
The costs of the Year 2000 project and the date on which the Company plans
to complete the Year 2000 modifications are based on management's estimates,
which were derived using various assumptions regarding future events,
including the continued availability of certain resources, third-party
modification plans and other factors. Actual results could differ materially
from these estimates. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, supplier and large customer compliance and similar
uncertainties.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which Standard is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. A majority of the Company's significant suppliers have given
assurances that they are, or will be, Year 2000 compliant by December 31,
1999. The Company continues to monitor significant suppliers and is taking
appropriate action, if necessary, for non-compliant suppliers. The Company has
also received adequate assurances that its major customers that have systems
that connect with the Company's systems are, or will be, Year 2000 compliant
by December 31, 1999. While management believes that it is not at significant
risk that its significant suppliers and large customers will not be Year 2000
compliant, there can be no guarantee that the hardware and software of other
companies, governmental agencies or other entities on which the Company relies
will be converted on a timely basis, or that a failure to convert by another
entity, or a conversion that is incompatible with the Company's hardware and
software, would not have a material adverse effect on the Company's business,
financial condition or results of operations.
Litigation
In the normal course of its business, the Company is involved in various
legal actions and other state and federal proceedings. A number of these
actions or proceedings were pending as of June 30, 1999. In some instances,
lawsuits include claims for punitive damages and similar types of relief in
unspecified or substantial amounts, in addition to amounts for alleged
contractual liability or other compensatory damages. In the opinion of
management, the ultimate liability, if any, arising from these actions or
proceedings is not expected to have a material adverse effect on the Company's
business, financial condition or results of operation.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported interest rate risks faced by
the Company since the end of the most recent fiscal year.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On April 26, 1999 Standard received notice from the San Francisco office of
the U.S. Department of Labor (the "DOL") that it was conducting an
investigation with respect to Standard's employee benefit plan clients
pursuant to Section 504(a)(1) of the Employee Retirement Income Security Act
of 1974 ("ERISA"), to determine whether any person has violated or is about to
violate any provision of Title I of ERISA. Standard and certain of its
employee benefit plan clients are subject to ERISA in connection with, among
other things, certain policies sold by Standard's Group Insurance segment. The
notice included a subpoena that certain documents and records be provided to
the DOL. Standard intends to cooperate fully with the DOL.
To date, no claims or charges have been asserted against Standard as a
result of the investigation and the DOL states that its investigation should
not be construed as an indication that any violations of ERISA have occurred
or as a reflection upon any person involved. Management believes that
Standard's business practices comply in all material respects with ERISA and
that the investigation will not have a material adverse effect on its
business, financial condition or results of operations.
In the normal course of its business, the Company is involved in various
legal actions and other state and Federal proceedings. A number of these
actions or proceedings were pending as of June 30, 1999. In some instances,
lawsuits include claims for punitive damages and similar types of relief in
unspecified or substantial amounts in addition to amounts for alleged
contractual liability or other compensatory damages. In the opinion of
management, the ultimate liability, if any, arising from these actions or
proceedings is not expected to have a material adverse effect on the Company's
business, financial condition or results of operations.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3: DEFAULTS UPON SENIOR DEBT
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
3(i). Articles of Incorporation. Incorporated by reference to Exhibit
4.1 of StanCorp's Form 8-K, filed on May 7, 1999.
15. Letter re: Unaudited interim financial statements
27. Financial Data Schedules
(b) (i) On May 5, 1999 the Company filed with the Securities and Exchange
Commission a Form 8-K, which discussed the Company's consolidated
financial results for the first quarter of 1999 and a pending
investigation by the U.S. Department of Labor, which management
believes will have no material adverse effect on the Company's
business, financial conditions or results of operations.
(ii) On May 7, 1999, the Company filed a Form 8-K which disclosed the
implementation of StanCorp's Shareholder Rights Plan and the amendment
to StanCorp's Articles of Incorporation to include a class of preferred
stock.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1999
<TABLE>
<C> <S>
/s/ Eric E. Parsons
By: _____________________________
Eric E. Parsons
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
</TABLE>
Date: August 13, 1999
<TABLE>
<C> <S>
/s/ Patricia J. Brown
By: ______________________________
Patricia J. Brown
Assistant Vice President
Controller and Treasurer
(Principal Accounting Officer)
</TABLE>
22
<PAGE>
Exhibit 15
StanCorp Financial Group, Inc.
Portland, Oregon
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of StanCorp Financial Group, Inc. and subsidiaries (formerly known
as Standard Insurance Company, prior to the April 21, 1999 reorganization
discussed in Note 1) for the periods ended June 30, 1999 and 1998, as indicated
in our report dated August 12, 1999; because we did not perform an audit, we
expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, is
incorporated by reference in Registration Statement No. 333-72521 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Portland, Oregon
August 12, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STANCORP
FINANCIAL GROUP AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 2,055,300
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 400
<MORTGAGE> 1,666,700
<REAL-ESTATE> 88,600
<TOTAL-INVEST> 3,832,200
<CASH> 99,000
<RECOVER-REINSURE> 28,000
<DEFERRED-ACQUISITION> 50,200
<TOTAL-ASSETS> 5,584,000
<POLICY-LOSSES> 1,495,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 85,700
<POLICY-HOLDER-FUNDS> 1,507,200
<NOTES-PAYABLE> 0
0
0
<COMMON> 852,400
<OTHER-SE> 18,900
<TOTAL-LIABILITY-AND-EQUITY> 5,584,000
456,400
<INVESTMENT-INCOME> 154,400
<INVESTMENT-GAINS> 2,800
<OTHER-INCOME> 5,000<F1>
<BENEFITS> 392,500
<UNDERWRITING-AMORTIZATION> (600)<F2>
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 58,500
<INCOME-TAX> 18,000
<INCOME-CONTINUING> 40,500
<DISCONTINUED> 0
<EXTRAORDINARY> 3,600
<CHANGES> 0
<NET-INCOME> 36,900
<EPS-BASIC> 1.10<F3>
<EPS-DILUTED> 1.10<F3>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Includes contribution from closed block.
<F2> Contains deferred policy acquisition costs and related amortization.
<F3> Proforma
</FN>
</TABLE>
