<PAGE>
As filed with the Securities and Exchange Commission on February 17, 1999
Registration No. 333-.
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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STANCORP FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Oregon 6719 93-1253576
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1100 S.W. Sixth Avenue
Portland, Oregon 97204
(503) 321-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
J. Gregory Ness
Vice President and Secretary
StanCorp Financial Group, Inc.
1100 S.W. Sixth Avenue
Portland, Oregon 97204
(503) 321-7000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
-------------
With copies to:
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<S> <C> <C>
James C. Scoville, Esq. Jeffrey C. Carey, Esq. Andrew S. Rowen, Esq.
Debevoise & Plimpton Vice President and Associate Counsel John L. Savva, Esq.
875 Third Avenue Standard Insurance Company Sullivan & Cromwell
New York, New York 10022 1100 S.W. Sixth Avenue 1888 Century Park East
(212) 909-6000 Portland, Oregon 97204 Los Angeles, California 90067
(503) 321-7000 (310) 712-6600
</TABLE>
-------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
-------------------------------
Calculation of Registration Fee
<TABLE>
<CAPTION>
==========================================================================================
Proposed Maximum Aggregate
Title of Each Class of Securities Offering Amount of
to be Registered Price(1) Registration Fee
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock (no par value) $ 481,907,500 $ 133,971
==========================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a).
-------------------------------
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell nor does it seek an offer to buy
these securities in any jurisdiction where the offer or sale is not permitted.
[Logo] Subject to Completion. Dated ., 1999
14,740,000 Shares
StanCorp Financial Group, Inc.
Common Stock
-------------------------------
This is an initial public offering of shares of common stock of StanCorp
Financial Group, Inc. The offering is being made in connection with the
reorganization of Standard Insurance Company from a mutual life insurance
company owned by its policyholders to a stock life insurance company that will
be a wholly owned subsidiary of StanCorp Financial Group, Inc. in a process
known as a demutualization.
The underwriters intend to make available 1,250,000 of the shares in the
offering for sale at the initial public offering price to policyholders of
Standard Insurance Company who meet eligibility requirements set forth in
Standard's plan of reorganization.
In addition to these offered shares, an estimated 17,936,441 shares of common
stock of StanCorp Financial Group, Inc. will be issued to policyholders of
Standard Insurance Company as part of the demutualization in exchange for the
rights and interests they currently own as members of Standard Insurance
Company.
Prior to this offering, there has been no public market for the common stock.
It is currently estimated that the initial public offering price per share will
be between $. and $.. StanCorp Financial Group, Inc. intends to list the common
stock on the New York Stock Exchange under the symbol "SFG".
See "Risk Factors" beginning on page . to read about certain factors you
should consider before buying shares of the common stock.
-------------------------------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
-------------------------------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Initial public offering price $ $
Underwriting discount $ $
Proceeds, before expenses, to StanCorp Financial Group, Inc. $ $
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 2,211,000 shares from StanCorp Financial Group, Inc. at the initial
public offering price less the underwriting discount.
-------------------------------
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in New York, New York,
on , 1999.
Goldman, Sachs & Co.
-------------------------------
Prospectus dated , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Prospectus Summary...................................................................... 4
Risk Factors............................................................................ 12
Use of Proceeds......................................................................... 22
Market for Common Stock................................................................. 22
Dividend Policy......................................................................... 22
Capitalization.......................................................................... 24
Selected Consolidated Financial and Operating Data...................................... 25
Unaudited Pro Forma Condensed Consolidated Financial Information........................ 27
Management's Discussion and Analysis Of Financial Condition and Results of Operations... 34
The Demutualization..................................................................... 51
Business................................................................................ 57
Management.............................................................................. 90
Management Compensation................................................................. 95
Ownership of Common Stock............................................................... 102
Common Stock Eligible for Future Sale................................................... 103
Restrictions on Acquisitions of Common Stock............................................ 104
Description of Capital Stock............................................................ 109
Validity of Common Stock................................................................ 110
Experts................................................................................. 110
Additional Information.................................................................. 110
Glossary................................................................................ G-1
Index to Financial Statements........................................................... F-1
Underwriting............................................................................ U-1
</TABLE>
-------------------------------
As the owner of Standard Insurance Company, StanCorp Financial Group, Inc.
will be subject to special rules that apply to the acquisition of shares of its
common stock. These rules, among other things, prohibit a person or group of
persons acting together from acquiring more than 5% of the shares of the common
stock of StanCorp Financial Group, Inc. or any of its subsidiaries (including
Standard Insurance Company) for a period of five years without the approval of
the Director of the Department of Consumer and Business Services of the State of
Oregon. Other laws restrict persons from acquiring control of StanCorp
Financial Group, Inc. A person or group of persons acting together would
generally be presumed to have acquired control of StanCorp Financial Group, Inc.
upon their acquisition of 10% or more of its voting securities. See
"Restrictions on Acquisitions of Common Stock".
-------------------------------
Certain statements contained in this prospectus, including those containing
the words "believes", "expects", "intends", "estimates", "assumes" and
"anticipates", are forward-looking. Actual results may differ materially from
those suggested by the forward-looking statements for various reasons, including
those discussed under "Risk Factors".
2
<PAGE>
The following charts set forth the general organization of Standard as it
currently exists and as it is expected to exist on and after the
demutualization:
Before the demutualization:
Standard Insurance Company
StanCorp Financial Group, Inc. Non-Insurance Subsidiaries
On and after the demutualization:
StanCorp Financial Group, Inc.
Standard Insurance Company Non-Insurance Subsidiaries
"Standard Insurance Company" refers to Standard Insurance Company, excluding its
non-insurance subsidiaries.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
As a result, it does not contain all of the information that you should consider
before investing in the common stock. You should read the entire prospectus
carefully, including the "Risk Factors" section and the financial statements and
the notes to those statements. All financial data and ratios presented herein
have been prepared using generally accepted accounting principles unless
otherwise indicated.
General
Standard is a leading provider of group life and disability insurance
products, serving nearly 29,000 employer groups representing more than four
million employees. We also provide products to fund retirement plans and other
insurance products to employers and groups as well as life insurance, disability
insurance and retirement products to individuals.
We are conducting this offering in connection with the reorganization of
Standard Insurance Company from a mutual life insurance company owned by its
policyholders to a stock life insurance company that will be a wholly owned
subsidiary of StanCorp Financial Group, Inc. This process is commonly known as a
demutualization. We are undergoing the demutualization to gain access to capital
sources currently unavailable to Standard Insurance Company as a mutual life
insurance company. This will allow us to pursue growth opportunities in
underpenetrated and growing markets. We anticipate growth both through internal
expansion, particularly in our Group Insurance and Retirement Plans segments and
through our commercial mortgage lending operations, and through external
expansion by pursuing acquisitions as opportunities arise.
We divide our business into the following three segments:
Group Insurance Segment. The Group Insurance segment sells group long term
disability and group short term disability insurance, group life insurance,
group accidental death and dismemberment insurance and group dental insurance.
We have over 100 group insurance sales representatives in 29 offices throughout
the nation and relationships with approximately 13,000 brokers nationwide.
According to Employee Benefit Plan Review, based upon the number of group
policies sold in 1997, we ranked third in sales of long term disability
insurance, fifth in sales of short term disability insurance and eighth in sales
of group life insurance in the United States. This segment accounted for $933.1
million or 75.7% of our total revenues of $1.2 billion in 1998.
Retirement Plans Segment. The Retirement Plans segment sells full-service
401(k) and other pension plan products and services to employers. We market
Retirement Plans products and services primarily to employers with 50 to 500
employees, through brokers, agents, employee benefit consultants and other
distributors served by our seven regional Retirement Plans sales offices. Assets
managed by the Retirement Plans segment grew from $736.8 million at December 31,
1994 to $1.3 billion at December 31, 1998, a compound annual growth rate of
15.0%. This segment accounted for $69.1 million or 5.6% of our total revenues in
1998.
Individual Insurance Segment. The Individual Insurance segment sells life
insurance, disability insurance and annuities to individuals. Individual
Insurance products are distributed by approximately 1,680 licensed agents and
brokers in the Western and Central regions of the nation. This segment accounted
for $222.7 million or 18.1% of our total revenues in 1998.
At December 31, 1998, we had total general account invested assets of $4.2
billion, consisting of $2.2 billion in investment securities, $1.7 billion in
mortgage loans and $275.2 million in other investments. Relative to other life
insurance companies, we have historically maintained a larger portion of our
invested assets in mortgage loans, in part, due to the long-term nature of our
liabilities. The delinquency and loss performance of our mortgage loan
portfolio, however, have consistently outperformed the life insurance industry
averages as reported by the American Council of Life Insurance. At December 31,
1998, loans that were either delinquent or in process of foreclosure totaled
0.10% of our mortgage loan portfolio, compared to the industry average at
September 30, 1998 of 0.67%, the latest figure available.
We have recently commenced operations in two complementary financial service
businesses, a mortgage lending subsidiary and a real estate management firm. The
most significant of these is
4
<PAGE>
Standard Mortgage Investors, LLC, which originates mortgage loans for our
investment portfolio and generates fee income from the origination and servicing
of mortgage loans sold to institutional investors. Standard Mortgage Investors
commenced operations in 1996, and at December 31, 1998 serviced $1.7 billion of
loans for us and $239.9 million of loans for other banks and life insurance
companies.
Our principal executive offices are located at 1100 S.W. Sixth Avenue,
Portland, Oregon 97204, (503) 321-7000.
The Demutualization
In converting Standard Insurance Company to a stock life insurance company,
the rights and interests of policyholders as members of Standard Insurance
Company, including any rights to vote and any rights in the event of a
liquidation or reorganization of Standard Insurance Company, will be
extinguished. Members of Standard Insurance Company who are eligible to vote on
and receive consideration under the plan of reorganization will receive shares
of common stock of StanCorp Financial Group, Inc. or, in some cases, cash or an
adjustment to their policy values, known as policy credits. The plan requires
cash to be paid to a small number of eligible members where distribution of
common stock is impractical or unduly burdensome. In addition to these mandatory
cash payments, Standard Insurance Company may make cash payments to:
. local, state and federal governmental authorities and agencies, unless
these public eligible members indicate to Standard Insurance Company
that they prefer to receive common stock; and
. all other eligible members that are allocated an "odd-lot" of 99
shares or less of common stock, if and only if these odd-lot eligible
members have indicated to Standard Insurance Company that they prefer
to receive cash instead of common stock.
The plan allows the Board of Directors of Standard Insurance Company to reduce
the cash payments to public eligible members or odd-lot eligible members if the
cash proceeds received from the offering are insufficient to pay cash
consideration to all such members or for any other reason.
We will contribute net proceeds from the offering to Standard Insurance
Company to fund these cash payments and policy credits. Standard Insurance
Company's conversion to a stock life insurance company will become effective
upon completion of this offering. Before becoming effective, however, both the
eligible members and the Director of the Department of Consumer and Business
Services of the State of Oregon must approve the plan of reorganization. In
addition, we must receive certain opinions from our special tax counsel, which
are expected to be delivered on the effective date of the plan and closing of
the offering.
The plan of reorganization requires that we establish and operate an
accounting mechanism known as a closed block to give reasonable assurance to
holders of certain individual policies that, following the effective date of the
demutualization, assets will be available to maintain dividend scales in effect
for 1998 if the experience underlying such scales, including the portfolio
interest rate, continues. We will allocate assets to the closed block in an
amount expected to produce cash flows that will be sufficient to support the
policies included in the closed block.
In connection with the demutualization, Standard Insurance Company will
distribute its real estate management and mortgage lending subsidiaries and
other non-insurance subsidiaries to StanCorp Financial Group, Inc. We are making
this distribution to separate our non-insurance businesses from our insurance
businesses, which will permit our non-insurance subsidiaries to pursue growth
strategies free of the restrictions that they are currently subject to as
subsidiaries of an insurance company. In connection with this distribution, we
will contribute to Standard Insurance Company, out of proceeds from the
offering, an amount equal to the statutory book value of the non-insurance
subsidiaries, as shown on the audited financial statements of Standard Insurance
Company for the fiscal year immediately preceding this distribution. At December
31, 1998, the statutory book value of the non-insurance subsidiaries was $9.0
million.
5
<PAGE>
The demutualization will be accounted for using the historical carrying
values of our assets and liabilities. See "The Demutualization" and
"Unaudited Pro Forma Condensed Consolidated Financial Information" for a
general discussion of the demutualization and a more detailed discussion of the
amount and composition of the assets and liabilities included in, and the
accounting for, the closed block, and the effect of the closed block on results
of operations of Standard after the effective date of the plan of
reorganization.
In the opinion of our special tax counsel, we will not recognize any gain or
loss for Federal income tax purposes as a result of the conversion of Standard
Insurance Company from a mutual life insurance company to a stock life insurance
company or the distribution of common stock, cash or policy credits to eligible
members in exchange for the rights and interests they currently own as members
of Standard Insurance Company according to the plan. See "The Demutualiza
tion--Federal Income Tax Consequences".
Strategy
Upon completion of the offering and Standard Insurance Company's
reorganization to a stock life insurance company, we plan to pursue additional
expansion in the under-penetrated and growing group insurance markets, grow our
complementary retirement plans business and capitalize on our demonstrated
expertise in commercial mortgage lending. We believe our Individual Insurance
segment will continue to provide stability and diversification of earnings.
Group Insurance Segment. In our Group Insurance segment, our strategy is to
grow by participating in the expansion of the market for our products and
services as well as by increasing our share of that market. Since 1991, the
Group Insurance segment has pursued geographic expansion by opening new sales
offices in the Central and Eastern regions of the nation. We intend to pursue
additional sales growth in the Central and Eastern regions by opening additional
sales offices and adding sales representatives to our existing offices in these
regions.
Retirement Plans Segment. We believe that meaningful growth opportunities
exist for our Retirement Plans segment, where our target client base of small-
to medium-sized businesses is experiencing strong growth. We also plan to pursue
cross-selling opportunities between our group insurance business and our newer
retirement plans business and open new Retirement Plans offices in cities
currently served by our Group Insurance segment.
Individual Insurance Segment. We believe that the market for the fixed life
and annuity products offered by our Individual Insurance segment has matured and
provides limited growth opportunities. However, we believe there may be greater
opportunities in certain other product lines, including individual disability
income insurance and variable insurance products, and intend to pursue
opportunities in these areas in the future.
In addition, we intend to use the expertise of our subsidiary, Standard
Mortgage Investors, LLC, in order to grow our commercial mortgage lending
operations by originating and servicing mortgage loans for other institutional
investors.
6
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered............... 14,740,000 shares. This number includes the
1,250,000 shares for sale to policyholders of Standard
Insurance Company who meet the eligibility
requirements set forth in Standard's plan of reorgani
zation, but does not include 2,211,000 shares
issuable upon exercise of the underwriters' option to
purchase additional shares as described under
"Underwriting."
Shares to be outstanding after the
offering.......................... 32,676,441 shares. This number does not include the
2,211,000 shares issuable upon exercise of the
underwriters' option to purchase additional shares as
described under "Underwriting" or an estimated
2,633,822 shares to be reserved for issuance under
StanCorp's benefit plans.
Proposed New York Stock Exchange
symbol.......................... SFG
Use of proceeds.................... We estimate that we will receive net proceeds from
the offering of $280.6 million to $389.1 million, or
$323.5 million to $448.4 million if the underwriters'
option to purchase additional shares as described under
"Underwriting" is exercised in full, assuming an
initial public offering price within a range of $20.00
to $29.00 per share. We expect to contribute $250.3
million to $358.8 million of the net proceeds to
Standard Insurance Company to fund the cash payments
and policy credits to eligible members under Standard
Insurance Company's plan of reorganization and to
make the contribution required under the plan in
connection with the distribution of Standard Insurance
Company's non-insurance subsidiaries. We will retain
or contribute to our subsidiaries the remaining net
proceeds from the offering for general corporate purposes.
Dividend policy.................... We intend to declare quarterly dividends on the
common stock and expect that the first quarterly
dividend payment will be $0.06 per share, with the
initial dividend to be declared in the third quarter of
1999. The declaration and payment of dividends in
the future is subject to the discretion of our Board of
Directors and will depend on our financial condition,
results of operations, cash requirements, future
prospects, regulatory restrictions on the payment of
dividends by Standard Insurance Company and other
factors deemed relevant by our Board of Directors.
</TABLE>
The information in the table above is based on assumptions we have made as to
the number of shares of common stock and the amount of cash and policy credits
that will be distributed to eligible members in Standard Insurance Company's
demutualization. These assumptions are described in "Summary Unaudited Pro
Forma Supplementary Financial Information".
7
<PAGE>
Summary Consolidated Financial and Operating Data
The following summary income statement data for each of the three years ended
December 31, 1998 and balance sheet data at December 31, 1998 and 1997 are
derived from our audited consolidated financial statements and the notes thereto
included in this prospectus. The following summary income statement for the year
ended December 31, 1995 and summary balance sheet data at December 31, 1996 and
1995 are derived from our audited consolidated financial statements not included
herein. The following summary income statement data and balance sheet data at
and for the year ended December 31, 1994 are derived from unaudited financial
statements. In the opinion of management, the unaudited data have been prepared
on the same basis as the audited consolidated financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation. The following summary income statement and balance sheet
data have been prepared in accordance with generally accepted accounting
principles. The statutory data have been derived from Standard Insurance
Company's Annual Statements filed with insurance regulatory authorities and have
been prepared in accordance with statutory accounting practices. This summary
financial and operating data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations", our
consolidated financial statements, the notes thereto and the other financial
information included in this prospectus.
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Revenues:
Premiums............................ $ 890.9 $ 825.2 $ 745.2 $ 672.9 $ 654.2
Net investment income............... 323.1 303.2 285.2 273.5 252.8
Net realized investment gains....... 11.6 11.8 15.3 8.0 7.5
Other............................... 6.9 6.1 4.4 5.4 3.9
------------ ------------ ------------ ------------ ------------
Total revenues.................... 1,232.5 1,146.3 1,050.1 959.8 918.4
Benefits and expenses:
Policyholder benefits (1)........... 877.0 832.3 782.3 690.4 678.9
Operating expenses (2).............. 246.9 218.7 192.2 174.8 164.4
------------ ------------ ------------ ------------ ------------
Total benefits and expenses....... 1,123.9 1,051.0 974.5 865.2 843.3
Income before Federal income taxes.. 108.6 95.3 75.6 94.6 75.1
and extraordinary item
Federal income taxes................ 33.0 31.5 28.6 25.5 41.1
------------ ------------ ------------ ------------ ------------
Income before extraordinary item.... 75.6 63.8 47.0 69.1 34.0
Extraordinary item (3).............. 6.1 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income.......................... $ 69.5 $ 63.8 $ 47.0 $ 69.1 $ 34.0
============ ============ ============ ============ ============
Balance Sheet Data
General account assets.............. $ 4,610.4 $ 4,243.1 $ 3,967.8 $ 3,771.9 $ 3,374.8
Separate account assets............. 668.5 483.3 322.8 195.6 105.2
Total assets........................ 5,278.9 4,726.4 4,290.6 3,967.5 3,480.0
Total liabilities................... 4,439.6 3,994.4 3,643.1 3,340.4 2,997.0
Total equity..................... 839.3 732.0 647.5 627.1 483.0
Statutory Data
Premiums and deposits............... $ 1,127.4 $ 1,050.3 $ 946.2 $ 869.1 $ 816.9
Net gain from operations............ 93.9 38.7 10.1 56.7 7.7
Policyholder surplus and AVR........ 432.8 341.1 302.9 287.6 227.5
Net investment yield................ 8.11% 8.27% 8.37% 8.54% 8.45%
Operating Data
Group Segment
Premiums........................... $ 784.5 $ 717.1 $ 629.4 $ 557.7 $ 544.9
Life insurance in force.......... 81,039.7 74,798.3 67,418.8 60,643.2 59,245.7
Number of employer groups........ 28,787.0 27,483.0 25,195.0 22,738.0 21,374.0
Number of insureds............... 4,040,229.0 3,912,808.0 3,510,424.0 3,315,647.0 3,267,258.0
Retirement Plans Segment
Assets under management:
General account..................... $ 631.3 $ 637.7 $ 649.0 $ 668.7 $ 631.6
Separate account................. 668.5 483.3 322.8 195.6 105.2
------------ ------------ ------------ ------------ ------------
Total............................ $ 1,299.8 $ 1,121.0 $ 971.8 $ 864.3 $ 736.8
============ ============ ============ ============ ============
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Individual Segment
Total revenues.................. $ 222.7 $ 222.2 $ 228.3 $ 223.0 $ 213.4
Life insurance in force......... 7,952.0 7,732.9 7,638.4 7,627.1 7,191.3
Managed annuity assets.......... 691.8 704.7 692.5 683.8 642.6
</TABLE>
- ------------------
(1) Includes policyholder benefits, policyholder dividends and interest paid on
policyholder funds.
(2) Includes operating expenses, state and local taxes, commissions and the net
increase in deferred policy acquisition costs.
(3) Represents costs relating to the demutualization.
9
<PAGE>
Summary Unaudited Pro Forma Supplementary Financial Information
The following summary unaudited pro forma supplementary financial information
is derived from the unaudited pro forma condensed financial information and the
notes thereto included in this prospectus. This information gives effect to the
establishment of the closed block, the demutualization, and the offering as if
they each had occurred as of December 31, 1998 for purposes of the unaudited
balance sheet information and as of January 1, 1998 for purposes of the
unaudited income statement information. This information has been prepared based
on the terms of the plan of reorganization and the assumptions described in
"Unaudited Pro Forma Condensed Consolidated Financial Information". This
information assumes, among other things, (a) a total of 30,000,000 shares of
common stock is allocated to eligible members under the plan of reorganization
and (b) the underwriters' option to purchase additional shares is not exercised.
This information is provided for informational purposes only and is not
necessarily indicative of our consolidated financial position or results of
operations had the establishment of the closed block, the demutualization and
the offering been consummated on the dates assumed. It also does not project or
forecast our consolidated financial position or results of operations for any
future date or period.
The data set forth below give effect to gross proceeds of $303.6 million to
$419.0 million from the issuance of common stock in the offering less an assumed
underwriting discount and estimated offering expenses aggregating between $23.0
million and $29.9 million, or net proceeds from the offering of $280.6 million
to $389.1 million, assuming an initial public offering price within a range of
$20.00 to $29.00 per share.
Under the plan of reorganization, eligible members will receive shares of
common stock allocated to them in the demutualization, except for certain
eligible members who will receive cash or policy credits. The information set
forth in the table below assumes, depending on the initial public offering price
per share, that:
. $62.4 million to $90.4 million will be used to fund adjustments to policy
values, known as policy credits in lieu of 3,118,536 allocated shares,
. $1.5 million to $2.2 million will be used to fund mandatory cash payments
to certain eligible members under the plan of reorganization where
distribution of common stock is impractical or unduly burdensome in lieu of
76,568 allocated shares,
. $157.7 million to $228.7 million will be used to fund other cash payments
to public eligible members consisting of local, state and federal
governmental authorities and agencies in lieu of 7,884,322 allocated
shares, and
. $19.7 million to $28.5 million will be used to fund other cash payments to
odd-lot eligible members holding 99 shares or less of common stock in lieu
of 984,133 allocated shares.
The information set forth in the table below assumes that cash payments will
be made in lieu of all of the shares allocated to public eligible members and
25% of the shares allocated to odd-lot eligible members in the demutualization.
The actual amount contributed to Standard Insurance Company and used to fund
such policy
10
<PAGE>
credits and cash payments will depend on the actual initial public offering
price per share and on the elections made by public eligible members and odd-lot
eligible members to receive common stock or cash. In addition, the Board of
Directors of Standard Insurance Company, on or prior to the completion of the
offering, may reduce the cash payments to public eligible members or odd-lot
eligible members in the event that cash available is insufficient to pay cash
consideration to all such public eligible members or odd-lot eligible members or
for any other reason. See "The Demutualization--Payment of Consideration to
Eligible Members".
If cash payments to public eligible members or odd-lot eligible members are
different from those assumed in this prospectus -- whether because either more
or fewer of such members elect to receive cash than assumed or the Board of
Directors decides to reduce the level of cash payments -- there would be an
offsetting change in the number of shares issued in the offering and the amount
of proceeds received in the offering. Accordingly, the net effect of any such
change will not be material to us.
<TABLE>
<CAPTION>
Assuming the Following Initial
Public Offering Stock
Price Per Share
---------------
$20.00 $29.00
----------- -----------
<S> <C> <C>
Share Data:
Shares allocated to eligible members ............................. 30,000,000 30,000,000
Less shares allocated to eligible members who receive cash or
policy credits ................................................. 12,063,559 12,063,559
----------- -----------
Shares issued to eligible members ................................ 17,936,441 17,936,441
Shares issued in the offering .................................... 15,180,000(1) 14,450,000(1)
----------- -----------
Total shares of common stock outstanding ...................... 33,116,441 32,386,441
=========== ===========
Percentage Ownership:
Eligible members ................................................. 54.16% 55.38%
Purchasers in the offering ....................................... 45.84% 44.62%
</TABLE>
<TABLE>
<CAPTION>
Assuming the Following Initial
Public Offering Stock
Price Per Share
------------------------------
$20.00 $29.00
------ ------
(Dollars in millions, except
per share amounts)
<S> <C> <C>
At or for the Year Ended December 31, 1998:
Pro forma income before extraordinary item ............................ $ 75.6 $ 75.6
Pro forma income before extraordinary item per share -- basic
and diluted ......................................................... $ 2.28 $ 2.33
Pro forma equity, excluding accumulated other comprehensive
income(2)............................................................. $802.4 $802.4
</TABLE>
- ----------------
(1) Includes 1,250,000 shares reserved for sale in the offering at the initial
public offering price to policyholders of Standard Insurance Company who
meet eligibility requirements set forth in Standard Insurance Company's
plan of reorganization.
(2) Gives effect to estimated additional nonrecurring expenses of $2.0 million
related to the demutualization.
11
<PAGE>
RISK FACTORS
Reserves Established for Future Policy Benefits and Claims May Prove Inadequate
Standard faces the risk that its reserves that are established for future
policy benefits and claims will prove inadequate. For all of our product lines,
we establish and carry as a liability actuarially determined reserves which are
calculated to meet our obligations for future policy benefits and claims. These
reserves are computed at amounts that are expected to be sufficient to meet our
policy obligations at their maturities or in the event of an insured's death or
disability, assuming growth from premiums to be received and interest on such
reserves at certain assumed rates. However, the nature of the underlying risks
and the high degree of uncertainty associated with determining the liability for
unpaid policy benefits and claims prevent us from determining the amounts which
will ultimately be paid to settle this liability precisely. If the reserves we
originally established for future policy benefits were to prove inadequate, we
would be required to increase our reserves, which may have a material adverse
effect on our business, financial condition and results of operations.
Dependence on Profitability of Long Term Disability Products May Affect Overall
Profitability
Standard's results of operations have historically depended significantly on
the profitability of its long term disability products. Accordingly, a decrease
in the profitability of these products may have a material adverse effect on our
business, financial condition and results of operation. Our long term
disability products provide coverage for claims incurred during the policy
period. Typically, we offer rate guarantee periods from one to three years.
While we can prospectively reprice and reunderwrite coverages at the end of
these guarantee periods, we must pay benefits with respect to claims incurred
during these periods without collecting additional premiums. Historically, the
duration of approximately 50% of all claims filed under our long term disability
policies is twelve months or less. However, claims caused by more severe
disabling conditions may be paid over much longer periods of time, including, in
some cases, up to normal retirement age. Longer duration claims expose us to
the possibility that we may pay benefits materially in excess of the amount that
we anticipated when the policy was underwritten. The profitability of our long
term disability products is thus subject to volatility resulting from the
difference between our actual claims experience and our expectations at the time
of underwriting and from changes in economic conditions, changes in regulation
and changes in interest rates.
Differences between Actual Claims Experience and Underwriting and Reserving
Assumptions May Require Us to Increase Reserves
The profitability of Standard's long term disability insurance substantially
depends on the extent to which our actual claims experience is consistent with
the assumptions used in establishing our reserves. To the extent that actual
claims experience is inconsistent with our underlying assumptions used in
establishing our reserves, or our revisions to such assumptions, we could be
required to increase our reserves. Such an increase could have a material
adverse effect on our business, financial condition and results of operations.
Long term disability reserves are predictions of future claims payments based
upon the following factors:
. Claim incidence rates;
. Claim termination rates;
. Market interest rates;
. Age and gender of the claimant;
. Time elapsed since disablement;
. Contract provisions and limitations; and
. The amount of the monthly benefit, less deductible income such as Social
Security payments to the insured.
Several of these factors can be materially affected by changes in the national
or regional economy, changes in social perceptions about work ethics, emerging
medical perceptions regarding physiological or psychological causes of
disability and industry regulation. For example, we, like most of our
competitors, encountered high claims incidence and lower claims termination
rates from individuals in insured groups involving the health care and legal
professions in the mid-1990's. The higher incidence of claims from individuals
engaged in these professions reduced our profitability. Emerging health issues
such as HIV, chemical sensitivity and chronic fatigue syndrome may also affect
claim incidence and termination rates. Since emerging health issues may not be
fully recognized in the historical data we use to calculate reserves, the
reserves that we establish may not be sufficient to meet our obligations under
our long term disability policies. In sum, our assumptions with respect to the
foregoing factors in establishing our reserves involve predictions of future
events and are inherently uncertain. Actual experience with respect to such
12
<PAGE>
factors may differ substantially from our assumptions and may require us
ultimately to increase our reserves.
Changes in Economic Conditions May Affect Profitability
In recent years, the profitability of Standard's long term disability
products has been adversely affected by unfavorable claims experience. If long
term disability claims experience deteriorates in the future, there can be no
assurance that we will be able to increase rates sufficiently to maintain the
profitability of our long term disability business. For example, during the
mid-1990's and continuing through 1996, the rate of incidence and duration of
disability, known as morbidity experience, deteriorated, especially with respect
to health and legal professional groups, reducing the profitability of these
blocks of long term disability business. Management believes that the
deterioration in long term disability morbidity experience of these professional
groups paralleled industry experience. For health care groups, management
believes that morbidity experience increased due, in part, to the transition of
the health care profession into the managed care environment, which led to job
dissatisfaction (particularly for medical doctors), decreased profits for the
profession as a whole, and loss of employment. Similarly, management believes
that the increased morbidity experience for the legal profession was caused by
increased competition in an overcrowded profession, which led, in part, to
decreased profits and loss of employment. In response to the 1995 and 1996
deterioration in morbidity experience, management modified underwriting and
claims management practices for our long term disability business, particularly
for professional group coverages. These steps included:
. reducing maximum benefit and guarantee limits;
. limiting the "own occupation" definition of disability, which requires a
claimant to prove that he or she is unable to perform the duties required
by the claimant's occupation; in particular, Standard eliminated the "own
specialty" definition, which permitted a claim to be paid if the claimant
could provide satisfactory proof that he or she, because of sickness,
injury or mental disorder, was unable to perform the duties required by
his or her particular specialty within the practice of medicine or law;
and
. imposing rate increases for certain groups.
Management believes these actions resulted in improved professional morbidity
experience and improved profitability within this product line. Further, in
1996 and 1997, large group claims experience, which had historically been
profitable, was adversely affected by unusual claims experience in a few groups.
In response, management increased the renewal rates of these groups. Management
believes that these increased rates will lead to improved long term disability
profitability. However, policy terminations in this line have also increased
during the same period, which management believes is partially the result of
increased renewal rates.
Changes in Federal and State Regulation May Adversely Impact Pricing, Reserve
Adequacy and Exposure to Litigation
We are regulated by state and federal law in the marketing and administration
of our long term disability product line. While the long term disability
business is not currently subject to regulation to the same degree as medical
insurance, changes in existing laws or court interpretation of those laws or the
enactment of new legislation could affect the pricing and reserve adequacy of
our long term disability products, which could have a material adverse effect on
our business, financial condition and results of operations.
Our long term disability products, like those of most of our competitors,
generally limit the benefit period for mental disorders to 24 months. Certain
federal courts have held that the Americans with Disabilities Act requires that
such limits be justified based on an actuarial assessment of costs. Other
federal courts have held that the Americans with Disabilities Act generally does
not apply to such limits imposed by insurers. Management believes that the
mental disorder benefit limit is justified based on an actuarial assessment of
costs. The federal government and many states have also enacted "mental health
parity acts" that require medical insurers to pay the same benefits for mental
illnesses as they do for physical illnesses. While these acts have been
interpreted to apply to medical insurance only, federal or state legislation or
court decisions may broaden them to cover long term disability insurance.
13
<PAGE>
If long term disability mental disorder benefit limits are prohibited, either
through legislation or court decisions, the pricing and reserve adequacy of our
long term disability products could be materially adversely affected in the
following ways:
. We may need to raise the prices of our long term disability products to
cover the additional cost of providing mental disorder benefits beyond the
benefit limit currently stated in the policy, and such price increases may
result in fewer sales;
. Our long term disability claims experience may significantly deteriorate
because of the reopening of closed claims or the decrease in the number of
terminating claims due to the mental disorder limitation; and
. Our involvement in litigation and litigation-related expenses may
increase.
Additionally, changes in state and federal laws to require the inclusion of
certain types of benefits in long term disability policies may also adversely
affect the pricing and reserve adequacy of our long term disability products.
Several bills that seek to reform the medical managed care market have been
introduced in Congress. Many of these bills propose to amend the Employee
Retirement Income Security Act of 1974 to permit the application of state law
remedies, such as consequential and punitive damages, in lawsuits for wrongful
denial of benefits. Current law establishes a uniform federal remedy that
allows only contract damages for the amount of benefits withheld, attorneys'
fees and costs to be awarded in such lawsuits. If legislation permitting state
law remedies is enacted which is applicable to our group products, the
profitability of our group products may be materially and adversely affected in
the following ways:
. The number of lawsuits filed against us in the normal course of business
may substantially increase;
. The expense of defending such lawsuits may increase; and
. We may be subject to increased damages (including punitive damages) in
such lawsuits.
Reserve Inadequacy May Result from Interest Rate Changes
Our reserves, like most in the long term disability industry, are subject to
interest rate fluctuations. In establishing our reserves, we make assumptions
regarding the rates at which those reserves will grow as a result of interest
rates. Interest rates that are used to calculate reserves contain a margin to
account for future changes in the market rate. We believe that our
asset/liability strategy mitigates the adverse effects of interest rate
volatility. Nonetheless, a reduction in interest rates may lead us to increase
reserves, which would have a material adverse effect on profitability.
Increasing Interest Rates May Cause Increased Policy Loans, Surrenders and
Withdrawals; Declining Interest Rates May Lead to Prepayments and Redemptions
Changes in interest rates can significantly affect our profitability. In
periods of increasing interest rates, policy loans and surrenders and
withdrawals of life insurance policies and annuity contracts may increase as
policyholders seek to invest in investments with higher perceived returns. This
process, referred to as disintermediation, may lead to cash outflows. These
outflows may require investment assets to be sold at a time when the prices of
those assets are adversely affected by the increase in market interest rates,
which may result in realized investment losses. A significant portion of our
investment portfolio consists of mortgage loans, which are relatively illiquid,
thus increasing our liquidity risk in the event of disintermediation during a
period of rising interest rates. Conversely, during periods of declining
interest rates, life insurance and annuity products may be relatively more
attractive investments, resulting in increased premium payments on products with
flexible premium features, repayment of policy loans and increases in the
percentage of insurance policies remaining in force from year to year, as
measured by premiums, known as persistency, during a period when our new
investments carry lower returns. In addition, mortgages and bonds in our
investment portfolio are more likely to be prepaid or redeemed as borrowers seek
to borrow at lower market rates, and we may be required to reinvest those funds
in lower interest-bearing investments. Accordingly, during periods of declining
interest rates, our profitability may be adversely affected as the result of a
decrease in the spread between interest rates credited to policyholders and
returns on our investment portfolio.
Management employs asset/liability management strategies to reduce the
adverse effects of interest rate volatility. These strategies include:
14
<PAGE>
. product design, such as the use of surrender charges when a life insurance
policy or annuity is surrendered for its cash value prior to the end of a
set period, or market value adjustment features in certain fixed annuity
products that adjust the surrender value of a contract in the event of
surrender prior to the end of the contract period,
. structuring the bond and mortgage portfolio to limit prepayments and
. consistent monitoring of the pricing of our products.
However, such strategies may fail to eliminate or reduce the adverse effects of
interest rate volatility, which could have a material adverse effect on our
business, financial condition and results of operations.
Investment Portfolio Risks
The Market Value of Investments May Fluctuate
Our general account investments consist primarily of bonds (and other fixed-
rate securities), commercial mortgage loans, real estate, policy loans, common
stock and preferred stock. The market values of our investments vary with
changing economic and market conditions and interest rates. If interest rates
decline, we generally achieve a lower overall rate of return on our investment
portfolio. In addition, we may, for various reasons, sell certain investments
at prices that are less than their carrying value.
Defaults on Fixed Maturity Securities Portfolio May Adversely Affect
Profitability
We are subject to the risk that the issuers of the fixed maturity securities
we own will default on principal and interest repayments. Although almost all
of our fixed maturity securities are investment-grade and we believe that we
maintain prudent issuer diversification, a major economic downturn could result
in issuer defaults; and since our fixed maturity securities of $2.2 billion
represented 52.7% of our total general account invested assets at December 31,
1998, such defaults could materially adversely affect our business, financial
condition and results of operations.
Delinquencies and Balloon Payments on Mortgage Loans May Adversely Affect
Profitability
Our mortgage loans face both delinquency and default risk. Mortgage loans of
$1.7 billion represented 40.7% of our total general account invested assets at
December 31, 1998. The delinquency rate of our mortgage loan portfolio has been
lower than the industry averages for the past thirteen years. At December 31,
1998, loans that were either delinquent or in process of foreclosure totaled
0.10% of our mortgage loan portfolio, compared to the industry average at
September 30, 1998 of 0.67% as reported by the American Council of Life
Insurance. The performance of our mortgage loan portfolio, however, may
fluctuate in the future. Should the delinquency rate of our mortgage loan
portfolio increase, such an increase in delinquencies could have a material
adverse effect on our business, financial condition and results of operations.
At December 31, 1998, approximately 68.3% of our portfolio of mortgage loans
had balloon payment maturities. The default rate on mortgage loans with balloon
payment maturities has historically been higher than for mortgage loans with
standard repayment schedules. Since most of the principal is being repaid at
maturity, the amount of loss on a default is generally greater than on other
mortgage loans. A future increase in defaults on a substantial number of such
loans as a result of the foregoing factors could have a material adverse effect
on our business, financial condition and results of operations.
Mortgage Loans and Real Estate Investments Are Relatively Illiquid
Commercial mortgage loans and real estate investments are relatively
illiquid. If we require significant amounts of cash at short notice, we may
have difficulty selling these investments at attractive prices, in a timely
manner, or both.
Regional Concentration of Business and Investments in California May Subject Us
to Economic Downturns in that State
A significant portion of our business and our investments are concentrated in
California. Therefore, we are susceptible to adverse changes in economic
conditions in that state. Approximately 33.0% of our long term disability
reserves as of December 31, 1998 were derived from California business.
Management believes that an economic downturn in California during the early
1990's and continuing through 1996 contributed to the deterioration of
California long term disability claims experience generally, and particularly
for professional groups. Future adverse economic conditions in California could
adversely affect our claims experience with respect to our California long term
disability business which may have a material adverse effect on our business,
financial condition and results of operations.
15
<PAGE>
Our mortgage loans are concentrated in the Western region, particularly in
California, which accounted for 43.8% of our mortgage portfolio at December 31,
1998. While we intend to reduce this concentration, we still expect to maintain
approximately 30% to 35% in dollar amount of our mortgage loans in California.
Due to this concentration of mortgage loans in California, we are exposed to
potential losses resulting from the risk of an economic downturn in California
as well as to certain catastrophes, such as earthquakes, that may affect the
region. Although we diversify our mortgage loan portfolio within California by
both location and type of property in an effort to reduce earthquake exposure,
such diversification may not eliminate the risk of such losses. We generally do
not require earthquake insurance for properties on which we make mortgage loans.
To date, the delinquency rate of our California-based mortgage loans has been
substantially below the industry average. However, if economic conditions in
California worsen, we may experience a higher delinquency rate on the portion of
our mortgage loan portfolio located in California in the future, which may have
a material adverse effect on our business, financial condition and results of
operations.
Competitors Having Greater Financial Resources, Broader Array of Products and
Higher Ratings May Adversely Affect Our Market Share
Each of our business segments, detailed below, faces strong competition from
other insurers, other financial services companies such as banks, broker-dealers
and mutual funds, and managed care providers for employer groups, individual
consumers and distributors. Since many of our competitors have greater
financial resources, offer a broader array of products and, with respect to
other insurers, may have higher claims paying ability ratings than us, the
possibility exists that any one of our business segments could be adversely
affected which, in turn, could have a material adverse effect on our business,
financial condition and results of operations.
Competitive Factors Affecting Group Insurance Segment
According to our analysis of data published in the May 1998 Employee Benefit
Plan Review, in 1997 six companies, including Standard at 8.8%, had market
shares in the long term disability insurance market of more than 5.0% based on
1997 sales. Our leading competitors, UNUM Life Insurance Company of America and
Hartford Life Insurance Company, had market shares of 37.4% and 14.3%,
respectively. The long term disability market is highly competitive both in
terms of product pricing and product features. Because many of our major
competitors have access to greater financial resources, we could be at a
competitive disadvantage with regard to product pricing and the introduction of
alternative product features that require significant financial backing. There
is also competition in the long term disability market for qualified sales
distributors. In recent years, compensation for sales distributors has steadily
increased. As a result, we may have difficulty in attracting and retaining a
productive group field force. While management believes that we are in a
position to expand our long term disability line of business, our ability to do
so may be materially adversely affected by our better-financed competitors.
Additionally, most of our group insurance coverage is underwritten yearly,
and group purchasers may be able to obtain more favorable terms from competitors
rather than renewing coverage with us. National banks, with their preexisting
customer bases for financial services products, may become more significant
competitors to us in the future as a result of certain recent court decisions
and regulatory actions discussed below. Although the effect of these
developments on us is uncertain, both the persistency of our existing products
and our ability to sell products could be materially adversely affected in the
future.
Competitive Factors Affecting Retirement Plans and Individual Insurance
Segments
Our ability to market our 401(k) and other retirement products could be
materially adversely affected by the highly competitive nature of the retirement
plans market. While our Retirement Plans segment is growing, we have not yet
achieved the size necessary to realize the economies of scale we believe are
enjoyed by our competitors in the life insurance industry. Additionally, our
Retirement Plans segment faces competition not only from other insurance
companies, but also from other financial institutions such as banks, mutual
funds, other asset managers and broker-dealers. Many of these competitors are
better known, have access to greater financial resources and offer a broader
array of investment products.
Similarly, our ability to sell our individual life, disability, and annuity
products could be materially adversely affected by our dependence on
distributors and the highly competitive nature of this product line. Our
Individual Insurance segment competes with many larger competitors with brand
name recognition, economies of scale and greater financial resources in a market
that many industry experts consider to be mature. In addition, our lack of
variable life and annuity products and our lack of name recognition for
individual life, disability and annuity products in the Eastern and Central
regions of the nation also place us at a competitive disadvantage. Because of
these factors, we may have difficulty attracting and retaining productive
distributors.
16
<PAGE>
Legislative Changes May Lead to Increased Competition
If a financial institutions reform bill is enacted into law by Congress, such
a law may permit national banks and other financial institutions to affiliate
with insurance companies and market insurance products to their customers.
National banks and other similar financial institutions are currently restricted
from being affiliated with insurance companies under the Glass-Steagall Act of
1933. The ability of financial institutions to affiliate with insurance
companies may materially adversely affect all of our product lines by
substantially increasing the number and financial strength of potential
competitors.
Additionally, the current administration and various members of Congress have
proposed reforms to the nation's health care system. We do not write health
indemnity products, other than group dental insurance, and, accordingly, do not
expect to be directly affected by such proposals to any significant degree.
However, the uncertain environment resulting from health care reform could cause
group health insurance providers to enter the long term disability insurance
market, thereby increasing competition.
Downgrade in Claims Paying Ability Ratings May Increase Surrender Levels,
Adversely Affect Certain Relationships and Negatively Impact Persistency
Claims paying ability ratings are an important factor in establishing the
competitive position of insurance companies. Standard Insurance Company is
currently rated "A (excellent)" by A.M. Best and has claims paying ability
ratings of "AA- (very high)" from Duff & Phelps Credit Rating Co. and "A+
(good)" from Standard & Poor's. Moody's Investors Service has given Standard
Insurance Company an insurance financial strength rating of "A2 (good financial
security)". A ratings downgrade, or the potential for such a downgrade, of
Standard Insurance Company could, among other things, materially increase
surrender levels, adversely affect relationships with broker-dealers, banks,
agents, wholesalers and other distributors of Standard Insurance Company's
products and services, negatively impact persistency, adversely affect Standard
Insurance Company's ability to compete and thereby materially and adversely
affect Standard Insurance Company's business, financial condition and results of
operations.
The foregoing ratings reflect each rating agency's opinion of Standard
Insurance Company's financial strength, operating performance and ability to
meet its obligations to policyholders and are not evaluations directed toward
the protection of investors in this initial public offering and do not
constitute investment recommendations by such ratings agencies to investors.
Changes in State and Federal Regulation May Affect Profitability
Our business is subject to comprehensive state regulation and supervision
throughout the United States. While we cannot predict the impact of potential
or future state or federal legislation or regulation on our business, future
laws and regulations, or the interpretation thereof, may materially adversely
affect our business, financial condition and results of operations.
The primary purpose of comprehensive state regulation of the insurance
business is to protect policyholders, not shareholders. To that end, the laws
of the various states establish insurance departments with broad powers with
respect to such things as licensing companies to transact business; licensing
agents; admitting statutory assets; mandating certain insurance benefits;
regulating premium rates; approving policy forms; regulating unfair trade and
claims practices; establishing reserve requirements and solvency standards;
fixing maximum interest rates on life insurance policy loans and minimum rates
for accumulation of surrender values; restricting certain transactions between
affiliates; and regulating the type, amounts and valuation of investments.
State insurance regulators and the National Association of Insurance
Commissioners continually reexamine existing laws and regulations and may impose
changes in the future that materially adversely affect our business, financial
condition and results of operations.
The United States federal government does not directly regulate the insurance
business. Federal legislation and administrative policies in certain areas can,
however, significantly and adversely affect the insurance industry generally and
us in particular. These areas include pension and employee welfare benefit plan
regulation, financial services regulation and federal taxation. For example,
Congress has from time to time considered legislation relating to:
. the deferral of taxation on the growth in the amount of cash available
to a policyholder upon the surrender or withdrawal, known as cash value,
of certain annuities and life insurance products;
. the removal of barriers preventing banks from engaging in the insurance
business;
. changes in regulations for the Employee Retirement Income Security Act
of 1974 that apply to certain of Standard's group products; and
17
<PAGE>
. the alteration of the Federal income tax structure and the availability
of Section 401(k) or individual retirement accounts.
Additionally, there may be changes in the interpretation of existing laws or
the passage from time to time of new legislation that may adversely affect our
claims exposure on our policies.
Allocation of Assets to the Closed Block May Be Inadequate or Excessive
The plan of reorganization requires that Standard Insurance Company establish
and operate a closed block for the benefit of holders of certain individual
insurance policies of Standard Insurance Company. Management (based on an
independent actuary's opinion) expects the amount of assets allocated to the
closed block 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 scales (including the portfolio interest rate)
continues. The closed block will be established as an accounting mechanism and
procedure to give reasonable assurance to holders of the policies included in
the closed block of the continued payment of dividends as experience justifies.
Such policies will continue to be the obligation of Standard Insurance Company
and Standard Insurance Company remains obligated to satisfy claims on policies
included in the closed block in accordance with their terms should the assets of
the closed block be insufficient to satisfy the claims. Unless the Director of
the Department of Consumer and Business Services of the State of Oregon
otherwise consents, the closed block will continue in effect as long as any
policy in the closed block remains in force. The assets, including the revenue
therefrom, allocated to closed block policies will benefit only the holders of
these policies. If, over time, cash flows from the assets allocated to the
closed block and claims and other experience relating to the closed block are,
in the aggregate, more or less favorable than assumed in establishing the closed
block, total dividends paid to closed block policyholders in the future may be
greater than or less than that which would have been paid to these policyholders
if the dividend scales in effect for 1998 had been continued. Any excess of
cumulative favorable deviations for closed block policies over unfavorable
deviations will be available for distribution over time to closed block
policyholders and will not be available to our shareholders.
Litigation May Adversely Affect Profitability
We are a plaintiff or defendant in actions arising out of our insurance
business and investment operations. We are from time to time involved in
various governmental and administrative proceedings. While the outcome of any
pending or future litigation cannot be predicted, as of the date hereof,
management does not believe that any pending litigation will have a material
adverse effect on our business, financial condition or results of operations.
However, no assurances can be given that such litigation would not materially
and adversely affect our business, financial condition or results of operations.
Other companies in the life insurance industry have historically been subject
to substantial litigation resulting from claims disputes and other matters.
Most recently, such companies have faced extensive claims, including class-
action lawsuits, alleging improper life insurance sales practices. Negotiated
settlements of such class-action lawsuits have had a material adverse effect on
the business, financial condition and results of operations of certain of these
companies. We are not and have not been a defendant in any such class-action
lawsuit alleging improper sales practices. However, such class-action lawsuits,
if brought against us, could materially adversely affect our business, financial
condition and results of operations.
Holding Company Dividends May Be Affected by Limitation on Dividends Imposed on
Standard Insurance Company
After the effective date of the plan of reorganization, we will be an
insurance holding company, the assets of which will consist primarily of all of
the outstanding shares of the common stock of Standard Insurance Company. Our
ongoing ability to pay dividends to our shareholders and meet our obligations,
including operating expenses, primarily depends upon the receipt of dividends
from Standard Insurance Company. Any inability of Standard Insurance Company to
pay us dividends in the future in an amount sufficient for us to pay dividends
to our shareholders and meet our other obligations may materially adversely
affect our business, financial condition and results of operations and the
market value of the common stock.
Standard Insurance Company's ability to pay dividends to us is regulated
under Oregon law. Under Oregon law, without the approval of the Director of the
Department of Consumer and Business Services of the State of Oregon, Standard
Insurance Company may pay dividends only from the earned surplus arising from
its business. It must receive the prior approval of the Director of the
Department of Consumer and Business Services of the State of Oregon to pay a
dividend, if such dividend, together with other dividends
18
<PAGE>
or distributions made within the preceding twelve months, would exceed a certain
statutory limitation. The current statutory limitation is the greater of (a) 10%
of Standard Insurance Company'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
of the Department of Consumer and Business Services of the State of Oregon broad
discretion to disapprove requests for dividends in excess of these limits. Based
on statutory results, Standard Insurance Company will be permitted to pay $93.9
million in dividends to StanCorp Financial Group, Inc. in 1999 without obtaining
the Director's approval, and would have been permitted to pay $38.7 million,
$26.5 million and $56.7 million in dividends in 1998, 1997 and 1996,
respectively, without obtaining such approval. The foregoing limitations on
dividends would not apply to any dividends received by us from Standard's non-
insurance subsidiaries.
There can be no assurance that Standard Insurance Company will declare
dividends to us in the future or, if declared, that Standard Insurance Company
will obtain any approvals required from the Director of the Department of
Consumer and Business Services of the State of Oregon. Furthermore, from time
to time, the National Association of Insurance Commissioners and various state
insurance regulators have considered, and may in the future consider, proposals
to further restrict dividend payments that may be made by an insurance company
without regulatory approval. Such proposals, if enacted, could further restrict
the ability of Standard Insurance Company to pay us dividends.
Challenge to Director's Approval of Plan May Adversely Affect Terms of
Demutualization
Oregon law permits the demutualization to be challenged in two ways: either
through an action directly challenging the approval by the Director of the
Department of Consumer and Business Services of the State of Oregon of the plan
of reorganization or through an action challenging the validity of the
demutualization or any acts taken under the plan. A successful challenge to the
demutualization could result in the Director's order approving the plan being
set aside or modified, in a court remanding issues to the Department of Consumer
and Business Services of the State of Oregon for further consideration or in
cash damages or equitable relief being granted against Standard. A successful
action could result in substantial uncertainty as to whether, or on what terms,
the Director of the Department of Consumer and Business Services of the State of
Oregon would ultimately approve the plan of reorganization, and a substantial
period of time may be required to reach a final determination. Such an outcome
may be materially adverse to us and to purchasers of common stock in the
offering.
An action challenging the Director's approval of the plan would be governed
by Oregon's Administrative Procedures Act, and must be commenced within 60 days
of the date of the Director's order approving the plan. A court may affirm,
reverse or remand the Director's order. If the court finds that the Director of
the Department of Consumer and Business Services of the State of Oregon
erroneously interpreted a provision of law and that a correct interpretation
compels a particular action, it will either set aside or modify the Director's
order, or remand the case to the Department of Consumer and Business Services of
the State of Oregon for further action under a correct interpretation of the
provision of law. Also, the court will remand the Director's order for further
consideration by the Department of Consumer and Business Services of the State
of Oregon if it finds the Director's action to be:
. outside the range of discretion delegated to the Department of
Consumer and Business Services of the State of Oregon by law;
. inconsistent with a rule, an officially stated position or a prior
practice of the Department of Consumer and Business Services of the
State of Oregon, if the inconsistency is not explained by the
Department of Consumer and Business Services of the State of Oregon;
or
. otherwise in violation of a constitutional or statutory provision.
Furthermore, a court will set aside or remand the Director's order if it finds
that the Director's order is not supported by substantial evidence in the
record. If the Director declares the hearing to be a contested case, a court
will also remand the Director's order for further consideration by the
Department of Consumer and Business Services of the State of Oregon if it finds
that the fairness of the hearing or the correctness of the Director's order may
have been impaired by a material error in procedure or failure to follow
prescribed procedure.
An action challenging the validity of the demutualization or any acts taken
under the plan of reorganization would be governed by Oregon Revised Statutes
Section 732.630 and must be commenced within 60 days after the effective date of
the plan. A successful challenge under Section 732.630 would
19
<PAGE>
require a court to conclude that the demutualization is unlawful or fraudulent.
The statute establishes a rebuttable presumption that any act set forth in the
Director's order approving the plan is lawful.
Failure to Achieve Year 2000 Compliance May Adversely Impact Systems Operations
While we are in the process of modifying or replacing significant portions of
our hardware and software so that our computer systems will be Year 2000
compliant, any failure to identify all of our Year 2000 issues, or to complete
our scheduled modifications and conversions on a timely basis, could have a
material adverse effect on our business, financial condition and results of
operations. In addition, notwithstanding the fact that we have initiated formal
communications with all of our significant suppliers and large customers to
determine the extent to which we are vulnerable to those third parties' failure
to remediate their own Year 2000 issues, there can be no guarantee that the
systems of other companies, government agencies, or other entities on which we
rely will be converted on a timely basis, or that a failure to convert by
another company, or a conversion that is incompatible with our systems, would
not have a material adverse effect on our business, financial condition or
results of operations.
Environmental Liability Exposure May Result From Mortgage Loan and Real Estate
Investments
Unexpected environmental liabilities could materially adversely affect our
business, financial condition and results of operations. Under the laws of
certain states, contamination of a property may give rise to a lien on the
property to secure recovery of the costs of cleanup. In several states, such a
lien has priority over the lien of an existing mortgage against such property.
In addition, under the laws of some states and under the federal Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, we may be
liable, as an "owner" or "operator", for costs of addressing releases or
threatened releases of hazardous substances that require remedy at a property
securing a mortgage loan held by us, if our agents or employees have become
sufficiently involved in the operations of the related obligor on such loan,
regardless of whether or not the environmental damage or threat was caused by
such obligor. We also risk such liability arising out of foreclosure of a
mortgaged property securing a mortgage loan owned by us. Until recent
legislation was adopted, it was uncertain what actions could be taken by a
secured lender in the event of a loan default without it incurring exposure
under the federal Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 in the event the property was environmentally
contaminated. The Asset Conservation, Lender Liability and Deposit Insurance
Act of 1996 provides for a safe harbor for secured lenders from the federal
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
liability even though the lender forecloses and sells the real estate securing
the loan, provided the secured lender sells "at the earliest practicable,
commercially reasonable time, at commercially reasonable terms, taking into
account market conditions and legal regulatory requirements". Although the Asset
Conservation, Lender Liability and Deposit Insurance Act of 1996 provides
significant protection to secured lenders, it has not been construed by the
courts, and there are circumstances in which actions taken could expose us to
the federal Comprehensive Environmental Response, Compensation, and Liability
Act of 1980 liability. Application of various federal and state environmental
laws other than the federal Comprehensive Environmental Response, Compensation,
and Liability Act of 1980 could also result in the imposition of liability on us
for costs associated with environmental hazards.
We routinely conduct environmental assessments for real estate being acquired
for investment. As a commercial mortgage lender, we customarily conduct
environmental assessments prior to making mortgage loans secured by real estate
and before taking title through foreclosure to real estate collateralizing
delinquent mortgage loans held by us. Based on our environmental assessments,
management believes that any compliance costs associated with environmental laws
and regulations or any remediation of affected properties would not have a
material adverse effect on our business, financial condition or results of
operations.
Sales of Shares May Adversely Affect the Market Price of Common Stock
All the shares of the common stock outstanding after the offering will be
eligible for immediate resale in the public market. Sales of substantial
amounts of common stock could adversely affect the prevailing market price for
the common stock.
Additionally, the plan of reorganization requires us to establish a
commission-free program for eligible members who receive small numbers of shares
of common stock in the demutualization. Under this program, such policyholders
may sell all, but not less than all, of their shares at prevailing market prices
without brokerage commissions or similar expenses. This program will begin
between 180 days and 12 months after the effective date of the plan of
reorganization and will continue for three months or such longer period of time
as our Board of Directors determines. We may reinstate this program at a later
date; however, we have no current intention of doing so. Sales of substantial
amounts of common stock through
20
<PAGE>
this program, or the perception that substantial sales through the program could
occur, could adversely affect the prevailing market price for the common stock.
State Laws and the Articles of Incorporation and Bylaws May Discourage Takeovers
and Business Combinations
The insurance laws and regulations of Oregon, the jurisdiction in which
StanCorp Financial Group, Inc. and Standard Insurance Company are organized, may
delay or impede a business combination involving StanCorp Financial Group, Inc.,
a combination that a shareholder might consider in its best interests. Under
Oregon law, neither a person nor a group of persons acting in concert may
acquire more than 5% of the shares of capital stock of StanCorp Financial Group,
Inc. or any subsidiary thereof (including Standard Insurance Company) for a
period of five years from the effective date of the plan of reorganization,
except with the approval of the Director of the Department of Consumer and
Business Services of the State of Oregon. In addition, Oregon law applicable to
StanCorp Financial Group, Inc. generally provides that no person may seek to
acquire control of StanCorp Financial Group, Inc. or Standard Insurance Company,
without the prior approval of the Director of the Department of Consumer and
Business Services of the State of Oregon. Generally, any person who directly or
indirectly owns, controls, holds with power to vote, or holds proxies
representing 10% or more of StanCorp Financial Group, Inc.'s voting securities
would be presumed to have acquired such control, unless the Director of the
Department of Consumer and Business Services of the State of Oregon, upon
application, determines otherwise. In addition, Oregon law permits our Board of
Directors to consider certain nonmonetary factors in the event of an offer to
acquire StanCorp Financial Group, Inc. Oregon law also contains provisions
restricting the voting rights of common stock acquired by third parties in
certain circumstances and restricting business combinations with certain
shareholders.
Certain provisions included in StanCorp Financial Group, Inc.'s Articles of
Incorporation and Bylaws may also have antitakeover effects and may delay, defer
or prevent a takeover attempt that a shareholder might consider in its best
interests. In particular, the Articles of Incorporation and Bylaws provide for:
. the issuance by the Board of Directors of one or more series of
preferred stock,
. a classified Board of Directors,
. limitations on the removal of directors,
. restrictions on the maximum number of directors,
. restrictions on the filling of vacancies on the Board of Directors,
. advance notice requirements for shareholder proposals and nominations
of directors,
. restrictions on business combinations with certain shareholders, and
. supermajority voting requirements for the amendments of certain
provisions of the Articles of Incorporation and Bylaws.
Our Board of Directors intends to adopt a Shareholder Rights Plan that will
be effective upon the effective date of the plan of reorganization.
These provisions may also adversely affect the prevailing market price of the
common stock.
21
<PAGE>
USE OF PROCEEDS
The net proceeds to StanCorp Financial Group, Inc. ("StanCorp") from the
initial public offering (the "Offering") of shares of common stock of StanCorp
are estimated to be $280.6 million to $389.1 million (or $323.5 million to
$448.4 million if the underwriters' option to purchase additional shares as
described in "Underwriting" is exercised in full) assuming an initial public
offering price within a range of $20.00 to $29.00 per share, which is the
midpoint of the range stated on the cover page of this prospectus, and after
deducting an assumed underwriting discount and estimated offering expenses
payable by StanCorp. StanCorp expects to contribute $241.3 million to $349.8
million of the net proceeds to Standard Insurance Company, of which:
. $62.4 million to $90.4 million will be used to fund adjustments to
policy values, known as policy credits;
. $1.5 million to $2.2 million will be used to make mandatory cash
payments to certain eligible members under the plan of reorganization
where distribution of common stock is impractical or unduly
burdensome;
. $157.7 million to $228.7 million will be used to make other cash
payments to public eligible members consisting of local, state and
federal governmental authorities and agencies; and
. $19.7 million to $28.5 million will be used to make other cash
payments to odd-lot eligible members holding 99 shares or less of
common stock.
StanCorp also expects to retain approximately $39.3 million of net proceeds
($82.2 million to $98.6 million if the underwriters' option to purchase
additional shares is exercised in full, depending upon the initial public
offering price) for general corporate purposes, which may include contributions
to Standard Insurance Company or its non-insurance subsidiaries. Of this amount,
approximately $9.0 million is expected to be contributed to Standard Insurance
Company in connection with the distribution of the non-insurance subsidiaries to
occur contemporaneously with the closing of the offering.
This information is based on assumptions we have made as to the number of
shares of common stock and the amount of cash and policy credits that are
distributed to members of Standard Insurance Company who are eligible to vote on
and receive consideration under the plan of reorganization. These assumptions
are described in "Unaudited Pro Forma Condensed Consolidated Financial
Information."
StanCorp will not receive any proceeds from the issuance of the common stock
to such eligible members in exchange for their membership interests.
MARKET FOR COMMON STOCK
Prior to the demutualization, as a mutual life insurance company, Standard
Insurance Company will not have issued any capital stock. StanCorp has been
organized to become the parent company of Standard Insurance Company upon the
demutualization. Prior to the offering, there has not been any market for the
common stock of StanCorp. StanCorp is applying to list the common stock on the
New York Stock Exchange. There can be no assurance, however, that an active
market for the common stock will develop or, if developed, will continue.
Regardless of whether a public market for the common stock develops, if a
substantial number of shares of common stock are sold by eligible members or any
other shareholders, the market price of the common stock may be adversely
affected. See "Risk Factors -- Sales of Shares May Adversely Affect the Market
Price of Common Stock".
DIVIDEND POLICY
StanCorp intends to declare a quarterly dividend of $0.06 per share of common
stock commencing with the quarter ending on September 30, 1999. The declaration
and payment of dividends in the future is subject to the discretion of
StanCorp's Board of Directors and will depend on Standard's financial condition,
results of operations, cash requirements, future prospects, regulatory
restrictions on the payment of dividends by Standard Insurance Company and other
factors deemed relevant by StanCorp's Board of Directors. There is no
requirement or assurance that StanCorp will declare and pay any dividends. For
a discussion of StanCorp's cash sources and needs, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- StanCorp."
Following the effective date, StanCorp will be an insurance holding
company, the assets of which will consist primarily of all of the outstanding
shares of the common stock of Standard Insurance Company and the non-insurance
subsidiaries. StanCorp's ongoing ability to pay dividends to its shareholders
and meet its other obligations, including operating expenses and any debt
service, depends primarily upon the receipt of dividends from Standard Insurance
Company. The payment of dividends by Standard Insurance Company to StanCorp is
regulated under Oregon law. See "Risk Factors -- Holding Company Dividends May
Be
22
<PAGE>
Affected by Limitation on Dividends Imposed on Standard Insurance Company",
"Business -- Regulation -- General Regulation at State Level" and "Description
of Capital Stock".
23
<PAGE>
CAPITALIZATION
The information in the following table is derived from and should be read in
conjunction with the unaudited pro forma condensed consolidated financial
information and notes thereto included in this prospectus. The table presents
the consolidated capitalization of Standard at December 31, 1998 and after
giving effect to:
. the demutualization and the issuance of an estimated 17,936,441
shares of common stock in connection therewith to eligible members,
. the sale of 14,740,000 shares of common stock in the offering at an
assumed initial public offering price of $24.50 per share (the
midpoint of the range stated on the cover page of this prospectus)
and
. the application of the net proceeds from the item above as set forth
under "Use of Proceeds", as if the demutualization and the offering
had occurred at December 31, 1998. This information is based on
assumptions we have made as to the number of shares of common stock
and the amount of cash and policy credits that are distributed to
eligible members. These assumptions are described in "Unaudited Pro
Forma Condensed Consolidated Financial Information."
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------------------------------
Standard Pro Forma As Pro Forma As
Historical Adjusted for the Adjusted for the
Demutualization Offering
---------------- ---------------- ----------------
(Dollars in millions)
<S> <C> <C> <C>
Equity:
Preferred stock, no par value, 100,000,000 shares... $ -- $ -- $ --
authorized; none issued
Common stock, no par value; 300,000,000 shares...... -- 467.5 802.3
authorized; pro forma 32,676,441 shares issued
and outstanding (1)
Retained earnings................................... 765.1 295.6 --
Accumulated other comprehensive income.............. 74.2 74.2 74.2
------ ------ ------
Total equity..................................... 839.3 837.3 876.5
------ ------ ------
Total capitalization............................ $839.3 $837.3 $876.5
====== ====== ======
</TABLE>
- --------------------
(1) Excludes 2,211,000 shares issuable upon exercise of the underwriters'
option to purchase additional shares as described under "Underwriting".
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected income statement data for each of the three years
ended December 31, 1998 and balance sheet data at December 31, 1998 and 1997 are
derived from Standard's audited consolidated financial statements and the notes
thereto included in this prospectus. The following summary income statement for
the year ended December 31, 1995 and selected balance sheet data at December 31,
1996 and 1995 are derived from Standard's audited consolidated financial
statements not included herein. The following selected income statement data and
balance sheet data at and for the year ended December 31, 1994 are derived from
unaudited financial statements. In the opinion of management, the unaudited data
have been prepared on the same basis as the audited consolidated financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation. The follow ing selected income
statement and balance sheet data have been prepared in accordance with generally
accepted accounting principles ("GAAP"). The statutory data have been derived
from Standard Insurance Company's Annual Statements filed with insurance
regulatory authorities and have been prepared in accordance with statutory
accounting practices. This selected financial and operating data should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations", Standard's consolidated financial
statements, the notes thereto and the other financial information included in
this prospectus.
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Revenues:
Premiums................................... $ 890.9 $ 825.2 $ 745.2 $ 672.9 $ 654.2
Net investment income...................... 323.1 303.2 285.2 273.5 252.8
Net realized investment gains.............. 11.6 11.8 15.3 8.0 7.5
Other...................................... 6.9 6.1 4.4 5.4 3.9
------------ ------------ ------------ ------------ ------------
Total revenues........................... 1,232.5 1,146.3 1,050.1 959.8 918.4
Benefits and expenses:
Policyholder benefits (1).................. 877.0 832.3 782.3 690.4 678.9
Operating expenses (2)..................... 246.9 218.7 192.2 174.8 164.4
------------ ------------ ------------ ------------ ------------
Total benefits and expenses.............. 1,123.9 1,051.0 974.5 865.2 843.3
Income before Federal income taxes
and extraordinary item..................... 108.6 95.3 75.6 94.6 75.1
Federal income taxes....................... 33.0 31.5 28.6 25.5 41.1
------------ ------------ ------------ ------------ ------------
Income before extraordinary item............ 75.6 63.8 47.0 69.1 34.0
Extraordinary item (3)..................... 6.1 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income............................... $ 69.5 $ 63.8 $ 47.0 $ 69.1 $ 34.0
============ ============ ============ ============ ============
Balance Sheet Data
General account assets...................... $ 4,610.4 $ 4,243.1 $ 3,967.8 $ 3,771.9 $ 3,374.8
Separate account assets..................... 668.5 483.3 322.8 195.6 105.2
Total assets............................... 5,278.9 4,726.4 4,290.6 3,967.5 3,480.0
Total liabilities.......................... 4,439.6 3,994.4 3,643.1 3,340.4 2,997.0
Equity:
Retained earnings........................ $ 765.1 $ 695.6 $ 631.7 $ 584.8 $ 515.7
Accumulated other comprehensive income... 74.2 36.4 15.8 42.3 (32.7)
------------ ------------ ------------ ------------ ------------
Total equity............................ $ 839.3 $ 732.0 $ 647.5 $ 627.1 $ 483.0
============ ============ ============ ============ ============
Statutory Data
Premiums and deposits...................... $ 1,127.4 $ 1,050.3 $ 946.2 $ 869.1 $ 816.9
Net gain from operations................... 93.9 38.7 10.1 56.7 7.7
Policyholder surplus and AVR............... 432.8 341.1 302.9 287.6 227.5
Net investment yield....................... 8.11% 8.27% 8.37% 8.54% 8.45%
Operating Data
Group Segment
Premiums................................. $ 784.5 $ 717.1 $ 629.4 $ 557.7 $ 544.9
Life insurance in force.................. 81,039.7 74,798.3 67,418.8 60,643.2 59,245.7
Number of employer groups................ 28,787.0 27,483.0 25,195.0 22,738.0 21,374.0
Number of insureds....................... 4,040,229.0 3,912,808.0 3,510,424.0 3,315,647.0 3,267,258.0
Retirement Plans Segment
Assets under management:
General account........................ $ 631.3 $ 637.7 $ 649.0 $ 668.7 $ 631.6
Separate account....................... 668.5 483.3 322.8 195.6 105.2
------------ ------------ ------------ ------------ ------------
Total................................ $ 1,299.8 $ 1,121.0 $ 971.8 $ 864.3 $ 736.8
============ ============ ============ ============ ============
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Individual Segment
Total revenues........................... $ 222.7 $ 222.2 $ 228.3 $ 223.0 $ 213.4
Life insurance in force.................. 7,952.0 7,732.9 7,638.4 7,627.1 7,191.3
Managed annuity assets................... 691.8 704.7 692.5 683.8 642.6
</TABLE>
- --------------------
(1) Includes policyholder benefits, policyholder dividends and interest paid on
policyholder funds.
(2) Includes operating expenses, state and local taxes, commissions and the net
increase in deferred policy acquisition costs.
(3) Represents costs relating to the demutualization.
26
<PAGE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated financial information (the
"Unaudited Pro Forma Information") presented below gives effect to (a) the
demutualization, including the issuance of an estimated 17,936,441 shares of
common stock in connection therewith to eligible members, (b) the establishment
of the closed block for the benefit of holders of certain individual policies
and (c) the sale of shares of common stock in the offering (assuming the
underwriters' option to purchase additional shares is not exercised) at an
initial public offering price of $20.00 to $29.00 per share (before deducting
the underwriting discount and estimated offering expenses payable by StanCorp),
as if the demutualization, the establishment of the closed block and the
offering had occurred as of December 31, 1998, for the purposes of the unaudited
pro forma consolidated balance sheets, and at January 1, 1998 for the purposes
of the unaudited pro forma consolidated statements of income for the year ended
December 31, 1998.
The Unaudited Pro Forma Information reflects gross and estimated net proceeds
from the offering of $303.6 million to $419.0 million and $280.6 million to
$389.1 million, respectively, assuming an initial public offering price per
share of $20.00 to $29.00 per share.
StanCorp expects to contribute $241.3 million to $349.8 million of the net
proceeds to Standard Insurance Company, depending upon the initial public
offering price per share, of which:
. $62.4 million to $90.4 million will be used to fund policy credits in lieu
of 3,118,536 allocated shares;
. $1.5 million to $2.2 million will be used to make mandatory cash payments
in lieu of 76,568 allocated shares;
. $157.7 million to $228.7 million will be used to make other cash payments
to public eligible members in lieu of 7,884,322 allocated shares; and
. $19.7 million to $28.5 million will be used to make other cash payments to
odd-lot eligible members in lieu of 984,133 allocated shares.
The information set forth in the table below assumes that cash payments will be
made in lieu of all of the shares allocated to public eligible members and 25%
of the shares allocated to odd-lot eligible members in the demutualization. The
actual amount contributed to Standard Insurance Company and used to fund such
policy credits and cash payments will depend on the actual initial public
offering price per share and on the elections made by public eligible members
and odd-lot eligible members to receive common stock or cash. In addition, the
Board of Directors of Standard Insurance Company, on or prior to the completion
of the offering, may reduce the cash payments to public eligible members or odd-
lot eligible members in the event that cash available is insufficient to pay
cash consideration to all such public eligible members or odd-lot eligible
members or for any other reason. See "The Demutualization--Payment of
Consideration to Eligible Members".
StanCorp also expects to retain approximately $39.3 million of net proceeds
for general corporate purposes, depending upon the initial public offering price
per share, which may include contributions to Standard Insurance Company or the
non-insurance subsidiaries. Of these proceeds, an estimated $9.0 million is
expected to be contributed to Standard Insurance Company in connection with the
distribution of non-insurance subsidiaries to occur contemporaneously with the
closing of the offering. The unaudited pro forma condensed consolidated
statements of income do not give effect to any pro forma earnings resulting from
the use of the net proceeds from the offering in excess of those contributed to
Standard Insurance Company and used to fund policy credits and cash payments to
certain eligible members under the plan of reorganization.
If cash payments to public eligible members or odd-lot eligible members are
different from that assumed in this prospectus (whether because more or fewer
such members elect to receive cash than assumed or the Board of Directors
decides to reduce the level of cash payments) there would be an offsetting
change in the number of shares issued in the offering and the amount of proceeds
received in the offering. Accordingly, the net effect of any such change will
not be material to Standard.
The demutualization will be accounted for using the historical carrying values
of the assets and liabilities of Standard.
The Unaudited Pro Forma Information is based on available information and on
assumptions management believes are reasonable and that reflect the effects of
these transactions. The Unaudited Pro Forma Information is provided for
informational purposes only and is not necessarily indicative of Standard's
consolidated financial position or results of operations had these transactions
been consummated on the dates assumed and does not project or forecast
Standard's consolidated financial position or results of operations for any
future date or period. The Unaudited Pro Forma Information should be read in
conjunction with the historical consolidated financial statements of Standard
included in this Prospectus and with the information set forth under "The
Demutualization", "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business".
27
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheet
Assuming Gross Proceeds from the Offering of $303.6 million
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------------
Establishment Adjustments for As Adjusted for Adjustments
Standard of the Closed the the for the Standard
Historical Block (1) Demutualization Demutualization Offering Pro Forma
---------- -------------- ------------------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
Assets:
Investments
Investment securities ............ $2,214.2 $(220.1) $ $1,994.1 $ $1,994.1
Mortgage loans ................... 1,708.1 (133.2) 1,574.9 1,574.9
Real estate, net ................. 93.0 93.0 93.0
Policy loans ..................... 111.0 (90.4) 20.6 20.6
Collateral loans ................. 71.2 (71.2) -- --
-------- ------- --------------- -------- --------- --------
Total investments ............... 4,197.5 (514.9) -- 3,682.6 -- 3,682.6
Cash and cash equivalents ......... 60.4 (2.5) (2.0)(2) 55.9 280.6 (3) 157.6
(178.9)(4)
Deferred policy acquisition costs... 114.9 (65.4) 49.5 49.5
Premiums receivable ............... 41.5 41.5 41.5
Reinsurance receivable ............ 31.7 31.7 31.7
Accrued investment income ......... 53.5 53.5 53.5
Property and equipment, net ....... 65.9 65.9 65.9
Other assets ...................... 45.0 45.0 45.0
Closed Block assets ............... -- 582.8 582.8 582.8
Separate account assets ........... 668.5 668.5 668.5
-------- ------- --------------- -------- --------- --------
TOTAL ASSETS ....................... $5,278.9 $ -- $ (2.0) $5,276.9 $ 101.7 $5,378.6
======== ======= =============== ======== ========= ========
Liabilities and Equity
Liabilities:
Future policy benefits and claims... $2,065.2 $(592.8) $ $1,472.4 $ 62.4 (4) $1,534.8
Other policyholder funds .......... 1,455.5 1,455.5 1,455.5
Dividends and experience refunds .. 23.7 (12.7) 11.0 11.0
Deferred tax liabilities .......... 106.0 106.0 106.0
Other liabilities ................. 120.7 120.7 120.7
Closed Block liabilities .......... -- 605.5 605.5 605.5
Separate account liabilities ...... 668.5 668.5 668.5
-------- ------- --------------- -------- --------- --------
Total liabilities ............... 4,439.6 -- -- 4,439.6 62.4 4,502.0
-------- ------- --------------- -------- --------- --------
Equity:
Preferred stock ................... -- -- --
Common stock ...................... -- 521.8 (5) 521.8 280.6 (3) 802.4
Accumulated other comprehensive
income ........................... 74.2 74.2 74.2
Retained earnings ................. 765.1 (2.0)(2) 241.3 (241.3)(4) --
(521.8)(5)
Total equity .................... 839.3 -- (2.0) 837.3 39.3 876.6
-------- ------- --------------- -------- --------- --------
TOTAL LIABILITIES AND EQUITY ....... $5,278.9 $ -- $ (2.0) $5,276.9 $ 101.7 $5,378.6
======== ======= =============== ======== ========= ========
</TABLE>
(The accompanying Notes are an integral part of this
Unaudited Pro Forma Condensed Consolidated Balance Sheet.)
28
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheet
Assuming Gross Proceeds from the Offering of $419.0 million
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------------
Establishment Adjustments for As Adjusted for Adjustments
Standard of the Closed the the for the Standard
Historical Block(1) Demutualization Demutualization Offering Pro Forma
---------- ---------------- ------------------- --------------- --------------- ---------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments
Investment securities.............. $2,214.2 $(220.1) $ $1,994.1 $ $1,994.1
Mortgage loans..................... 1,708.1 (133.2) 1,574.9 1,574.9
Real estate, net................... 93.0 93.0 93.0
Policy loans....................... 111.0 (90.4) 20.6 20.6
Collateral loans................... 71.2 (71.2) -- --
-------- ------- --------------- -------- --------- --------
Total investments.................. 4,197.5 (514.9) -- 3,682.6 -- 3,682.6
Cash and cash equivalents........... 60.4 (2.5) (2.0)(2) 55.9 389.1 (6) 185.6
(259.4)(7)
Deferred policy acquisition costs... 114.9 (65.4) 49.5 49.5
Premiums receivable................. 41.5 41.5 41.5
Reinsurance receivable.............. 31.7 31.7 31.7
Accrued investment income........... 53.5 53.5 53.5
Property and equipment, net......... 65.9 65.9 65.9
Other assets........................ 45.0 45.0 45.0
Closed Block assets................. -- 582.8 582.8 582.8
Separate account assets............. 668.5 668.5 668.5
-------- ------- --------------- -------- --------- --------
TOTAL ASSETS......................... $5,278.9 $ -- $ (2.0) $5,276.9 $ 129.7 $5,406.6
======== ======= =============== ======== ========= ========
Liabilities and Equity
Liabilities:
Future policy benefits and claims... $2,065.2 $(592.8) $ $1,472.4 $ 90.4 (7) $1,562.8
Other policyholder funds............ 1,455.5 1,455.5 1,455.5
Dividends and experience refunds.... 23.7 (12.7) 11.0 11.0
Deferred tax liabilities............ 106.0 106.0 106.0
Other liabilities................... 120.7 120.7 120.7
Closed Block liabilities............ -- 605.5 605.5 605.5
Separate account liabilities........ 668.5 668.5 668.5
-------- ------- --------------- -------- --------- --------
Total liabilities.................. 4,439.6 -- -- 4,439.6 90.4 4,530.0
-------- ------- --------------- -------- --------- --------
Equity:
Preferred stock..................... -- -- --
Common stock........................ -- 413.3 (5) 413.3 389.1 (6) 802.4
Accumulated other comprehensive
income............................. 74.2 74.2 74.2
Retained earnings................... 765.1 (2.0)(2) 349.8 (349.8)(7) --
(413.3)(5)
-------- ------- --------------- -------- --------- --------
Total equity....................... 839.3 -- (2.0) 837.3 39.3 876.6
-------- ------- --------------- -------- --------- --------
TOTAL LIABILITIES AND EQUITY......... $5,278.9 $ -- $ (2.0) $5,276.9 $ 129.7 $5,406.6
======== ======= =============== ======== ========= ========
</TABLE>
(The accompanying Notes are an integral part of this
Unaudited Pro Forma Condensed Consolidated Balance Sheet.)
29
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Income
Assuming Gross Proceeds from the Offering of $303.6 million
<TABLE>
<CAPTION>
Year Ended December 31, 1998
---------------------------------------------------------------
Establishment Adjustments for As Adjusted for Adjustments Standard
Standard of the Closed the the for the Pro
Historical Block(1) Demutualization Demutualization Offering Forma
---------- ---------------- --------------- --------------- ----------- --------------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Premiums..................... $ 890.9 $(60.3) $ $ 830.6 $ $ 830.6
Net investment
income...................... 323.1 (39.1) 284.0 284.0
Net realized
investment gains............ 11.6 11.6 11.6
Contribution from the
closed block................ -- 1.3 1.3 1.3
Other........................ 6.9 6.9 6.9
-------- ------ --------------- -------- ----------- -------------
Total revenues.............. 1,232.5 (98.1) -- 1,134.4 -- 1,134.4
-------- ------ --------------- -------- ----------- -------------
Benefits and expenses:
Policyholder benefits........ 852.3 (69.8) 782.5 782.5
Policyholder
dividends................... 24.7 (24.7) -- --
Operating expenses........... 246.9 (3.6) 243.3 243.3
-------- ------ --------------- -------- ----------- -------------
Total benefits and
expenses................... 1,123.9 (98.1) -- 1,025.8 -- 1,025.8
-------- ------ --------------- -------- ----------- -------------
Income before Federal
income taxes and
extraordinary item........... 108.6 108.6 108.6
Federal income taxes.......... 33.0 33.0 33.0
-------- ------ --------------- -------- ----------- -------------
Income before
extraordinary item........... $ 75.6 $ -- --$ $ 75.6 --$ $ 75.6
======== ====== =============== ======== =========== =============
Per share data:
Income before
extraordinary item per
share-- basic and
diluted...................... $ 2.28
=============
Number of shares used
in calculation of per
share data................... 33,116,441(4)
=============
</TABLE>
(The accompanying Notes are an integral part of this
Unaudited Pro Forma Condensed Consolidated Statement of Income.)
30
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Income
Assuming Gross Proceeds from the Offering of $419.0 million
<TABLE>
<CAPTION>
Year Ended December 31, 1998
---------------------------------------------------------------
Establishment Adjustments for As Adjusted for Adjustments Standard
Standard of the Closed the the for the Pro
Historical Block(1) Demutualization Demutualization Offering Forma
---------- ---------------- --------------- --------------- ----------- --------------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Premiums..................... $ 890.9 $(60.3) $ $ 830.6 $ $ 830.6
Net investment
income...................... 323.1 (39.1) 284.0 284.0
Net realized
investment gains............ 11.6 11.6 11.6
Contribution from the
Closed Block................ -- 1.3 1.3 1.3
Other........................ 6.9 6.9 6.9
-------- ------ --------------- -------- ----------- -------------
Total revenues.............. 1,232.5 (98.1) -- 1,134.4 -- 1,134.4
-------- ------ --------------- -------- ----------- -------------
Benefits and expenses:
Policyholder benefits........ 852.3 (69.8) 782.5 782.5
Policyholder
dividends................... 24.7 (24.7) -- --
Operating expenses........... 246.9 (3.6) 243.3 243.3
-------- ------ --------------- -------- ----------- -------------
Total benefits and
expenses................... 1,123.9 (98.1) -- 1,025.8 -- 1,025.8
-------- ------ --------------- -------- ----------- -------------
Income before Federal
income taxes and
extraordinary item........... 108.6 108.6 108.6
Federal income taxes.......... 33.0 33.0 33.0
-------- ------ --------------- -------- ----------- -------------
Income before
extraordinary item........... $ 75.6 $ -- --$ $ 75.6 --$ $ 75.6
======== ====== =============== ======== =========== =============
Per share data:
Income before
extraordinary item per
share -- basic and
diluted...................... $ 2.33
=============
Number of shares used
in calculation of per
share data................... 32,386,441(7)
=============
</TABLE>
(The accompanying Notes are an integral part of this
Unaudited Pro Forma Condensed Consolidated Statement of Income.)
31
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
(1) The unaudited pro forma condensed consolidated balance sheets and
unaudited pro forma condensed consolidated statements of income reflect an
allocation of assets and liabilities to the closed block, and an allocation of
the related revenues and costs, in each case as reflected in the plan of
reorganization. Closed block invested assets on the unaudited pro forma
condensed consolidated balance sheets are reflected at their December 31, 1998
carrying values. See "The Demutualization--Establishment and Operation of the
Closed Block". Assets and liabilities allocated to the closed block on the
unaudited pro forma condensed consolidated balance sheets were determined based
upon an actuarial model based on actual assets and liabilities as of December
31, 1997. The liability model was developed from Standard's policy records, with
liabilities recorded at their historical carrying value. Based on the
liabilities of the closed block policies, an estimate of the initial assets
needed to fund the closed block was made. The assets allocated to the closed
block include policy and collateral loans on the closed block policies, plus
fixed maturity securities and mortgages owned by Standard with characteristics
(mix, quality, yield and duration) which, on average, are similar to those
assets currently backing Standard's individual life insurance business. The
closed block will not be formed until the effective date and, accordingly, the
actual assets and liabilities ultimately allocated to the closed block and their
carrying values will not be known until that date. In management's opinion, the
allocation of assets and liabilities to the closed block as of the effective
date is not expected to differ materially from the allocation reflected in the
unaudited pro forma condensed consolidated balance sheets.
The unaudited pro forma condensed consolidated statements of income reflect an
allocation of revenues and expenses to the closed block based on certain
estimates and assumptions that management believes are reasonable. The closed
block amounts in the unaudited pro forma condensed consolidated statements of
income for December 31, 1998 were determined based on an actuarial model of
closed block liabilities at December 31, 1997. Revenue and expenses related to
the closed block policies and closed block assets were then modeled to derive
the unaudited pro forma condensed consolidated statements of income for December
31, 1998. For purposes of the unaudited pro forma condensed consolidated
financial statements, the effect of new business after January 1, 1998 is
excluded from the closed block. The contribution from the closed block reflected
in the unaudited pro forma condensed consolidated statements of income is not
necessarily indicative of what the closed block's contribution would have been
had the closed block been established at January 1, 1998 or of the expected
contribution for any future period.
The model used to estimate closed block assets, liabilities, income and
expenses is based upon assumptions regarding future claims, lapses, expenses and
interest rates. The interest rates assumed in the model are the same as those
which underlie Standard's 1998 dividend scale, adjusted for investment expenses
and an allowance for future defaults. Key assumptions regarding claims and
lapses are consistent with Standard's recent experience. Operating expense
charges are fixed in the plan of reorganization and its exhibits.
The closed block will include only those revenues, benefits, expenses and
dividends considered in funding the closed block. See "The Demutualization--
Establishment and Operation of the Closed Block". The pre-tax contribution from
the closed block is reported as a single line item of total revenues from
continuing operations. Income tax expense applicable to the closed block, which
will be funded by the closed block, is reflected as a component of income tax
expense. The excess of closed block liabilities over closed block assets at the
funding date represents the total estimated future contribution from the closed
block expected to result from operations attributed to the closed block after
income taxes. The contribution from the closed block will be recognized in
income over the period the policies and contracts in the closed block remain in
force. Management believes that over time the actual cumulative contributions
from the closed block will approximately equal the expected cumulative
contributions, due to the effect of dividend changes. If, over the period the
closed block remains in existence, the actual cumulative contribution from the
closed block is greater than the expected cumulative
32
<PAGE>
contribution from the closed block, only such expected contribution will be
recognized in income, because the excess of the actual cumulative contribution
from the closed block over such expected cumulative contribution will be paid to
closed block policyholders as additional policyholder dividends. If over such
period, the actual cumulative contribution from the closed block is less than
the expected cumulative contribution from the closed block, only such actual
contribution will be recognized in income; however, dividends could be changed
in the future, which would increase future actual contributions until the actual
cumulative contributions equal the expected cumulative contributions.
Pursuant to the plan of reorganization, Standard Insurance Company will
allocate assets to the closed block in an amount expected to produce cash flows
which, together with anticipated revenues from the policies included in the
closed block, are expected to be sufficient to support certain obligations and
liabilities relating to these policies. The excess of closed block liabilities
over closed block assets at the funding date is equal to the total estimated
future after tax contribution from the closed block. As noted above, the actual
contribution from the closed block will be recognized in income over the period
the policies and contracts in the closed block remain in force.
The cash flows from the assets allocated to the closed block and the revenues
from the closed block policies will be analyzed for adequacy to fulfill closed
block liabilities at least annually. If the actual cumulative contribution from
the closed block is less than the expected cumulative contribution from the
closed block, policyholder dividends would be adjusted accordingly.
(2) The unaudited pro forma condensed consolidated balance sheets reflect
estimated additional nonrecurring expenses of $2.0 million related to the
demutualization assumed to be incurred as of the date of the unaudited pro forma
condensed consolidated balance sheets. The unaudited pro forma condensed
consolidated statements of income do not reflect such nonrecurring expenses,
since they are reflected as an extraordinary item.
(3) Represents gross proceeds of $303.6 million from the issuance of
15,180,000 shares of common stock at an assumed initial public offering price of
$20.00 per share less an assumed underwriting discount and estimated offering
expenses aggregating $23.0 million.
(4) The number of shares used in the calculation of unaudited pro forma income
per share before extraordinary item and pro forma book value per share are as
follows:
<TABLE>
<S> <C>
Shares allocated to eligible members............................................. 30,000,000
Less shares allocated to eligible members who receive cash or policy credits..... 12,063,559
----------
Shares issued to eligible members................................................ 17,936,441
Shares issued in the offering.................................................... 15,180,000
----------
Total shares of common stock outstanding......................................... 33,116,441
==========
</TABLE>
This information is based on assumptions we have made as to the number of
shares of common stock and the amount of cash and policy credits that are
distributed to eligible members. These assumptions are described in "Unaudited
Pro Forma Condensed Consolidated Financial Information."
Does not include an estimated 2,655,822 shares to be reserved for issuance
under Standard's benefit plans. See "Management Compensation--Executive Officer
Compensation--StanCorp Stock Incentive Plan" and "Management Compensation--
Options/SARs to Be Granted--StanCorp Stock Purchase Plan."
(5) Represents the reclassification of the retained earnings of Standard
Insurance Company to reflect the demutualization.
(6) Represents gross proceeds of $419.0 million from the issuance of
14,450,000 shares of common stock at an assumed initial public offering price of
$29.00 per share less an assumed underwriting discount and estimated offering
expenses aggregating $29.9 million.
(7) The number of shares used in the calculation of unaudited pro forma income
per share before extraordinary item and pro forma book value per share are as
follows:
<TABLE>
<S> <C>
Shares allocated to eligible members............................................. 30,000,000
Less shares allocated to eligible members who receive cash or policy credits..... 12,063,559
----------
Shares issued to eligible members................................................ 17,936,441
Shares issued in the offering.................................................... 14,450,000
----------
Total shares of common stock outstanding......................................... 32,386,441
==========
</TABLE>
This information is based on assumptions we have made as to the number of
shares of common stock and the amount of cash and policy credits that are
distributed to eligible members. These assumptions are described in "Unaudited
Pro Forma Condensed Consolidated Financial Information."
Does not include an estimated 2,619,322 shares to be reserved for issuance
under Standard's benefit plans. See "Management Compensation--Executive Officer
Compensation--StanCorp Stock Incentive Plan" and "Management Compensation--
Options/SARs to Be Granted--StanCorp Stock Purchase Plan."
33
<PAGE>
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 Standard should be read in conjunction with "Selected Consolidated
Financial and Operating Data", the consolidated financial statements and notes
thereto included in this Prospectus and "Unaudited Pro Forma Condensed
Consolidated Financial Information".
Background
The consolidated financial condition and results of operations of Standard
for all periods prior to the effective date of the plan of reorganization,
including the years ended December 31, 1998, 1997 and 1996, represent the
financial condition and results of operations of Standard Insurance Company and
its subsidiaries. On the effective date, Standard Insurance Company will become
a wholly owned subsidiary of StanCorp. At December 31, 1998, StanCorp was a
subsidiary of Standard Insurance Company and the financial statements at that
date reflected $1,000 of cash and equity. Management anticipates no further
activity for StanCorp until the effective date.
Standard derives its revenues primarily from premiums, contract charges and
investment income. Premium revenues are derived in part from the sale of long
term and short term disability insurance, life and accidental death and
dismemberment insurance, dental insurance and annuities to employers and other
groups, and in part from the sale of life insurance, disability insurance and
annuities to individuals. Contract charges, including asset management fees and
fees for administrative services, are earned on annuities sold to groups and
individuals. Expenses consist primarily of insurance benefits provided, interest
credited on general account liabilities, selling and servicing expenses for the
various products sold by Standard, including commissions to agents, and general
business expenses. Standard's profitability depends primarily on:
. the adequacy of its product pricing, which is a function of competitive
conditions as well as management's ability to predict trends in future
benefit payments;
. the adequacy of reserves to meet future policy benefits and obligations;
. the persistency of its policies and premiums, which determines the
recoverability of the costs incurred in selling a policy;
. the performance of its investment portfolio;
. the maintenance of target interest spreads between its policyholder
crediting rates and its earned investment rates; and
. the impact of legislation and regulation, which can affect Standard's
margins or alter a market segment.
Dependence on Group Insurance
Standard's results of operations have historically depended significantly on
the profitability of its Group Insurance segment, the primary products of which
are long term disability and life insurance. The Group Insurance segment
accounted for 77.0%, 67.7% and 51.2% of Standard's income before Federal income
taxes and extraordinary item for the years ended December 31, 1998, 1997 and
1996, respectively.
As is the case with all long term disability insurers, the profitability of
Standard Insurance Company's long term disability business is subject to
volatility as a result of variations in claims experience from that expected at
the time of underwritings, and the effects of changes in economic conditions,
regulations and interest rates. During the mid-1990's, Standard Insurance
Company's long term disability morbidity experience deteriorated, especially
with respect to health care and legal professional groups, reducing the
profitability of this block of long term disability business. Management
believes this deterioration paralleled industry experience. In response to this
deterioration in morbidity experience, in 1995 and 1996 management modified
underwriting and claims management practices for the long term disability
business, including reducing maximum benefit and guarantee limits, limiting the
"own occupation" definition of
34
<PAGE>
disability (e.g., eliminating the "own specialty" definition) and imposing rate
increases for certain groups. Management believes these actions resulted in
improved professional morbidity experience and improved profitability within
this product line. See "Risk Factors--Dependence on Profitability of Long Term
Disability Products May Affect Overall Profitability".
In 1996 and 1997, Standard Insurance Company's large group claims experience,
which had historically been profitable, was adversely affected by unusual claims
experience for a few large groups. In response, management increased the renewal
rates on these groups. Management believes that these increased rates led to
improved long term disability profitability as Standard progressed through the
1998 policy renewal cycle. Policy terminations in this line also have increased
during the same period, which management believes is partially a result of the
increased renewal rates.
Standard has taken a number of steps to manage its exposure to volatility in
its long term disability business. In 1991, it began to pursue geographic
expansion of its group insurance business, which was previously concentrated in
the Western region. As a result, group premiums for 1998 were well diversified,
with 50% from the Western region, 25% from the Central region, and 25% from the
Eastern region, compared to the 1991 distribution of 79% from the Western
region, 19% from the Central region, and 2% from the Eastern region. Its group
disability and life blocks of business are also well diversified among
industries and job classifications. In addition, Standard Insurance Company
analyzes its long term disability experience on a regular basis providing for
timely modification of underwriting and pricing standards. Standard Insurance
Company's group insurance policies are generally one to three year contracts
that allow for periodic premium rate adjustments.
Standard Insurance Company's group life business has provided diversification
to the Group Insurance segment's profitability, particularly during recent
years. Increases in group life new premiums combined with unusually favorable
group life claims experience in 1997 and 1998 have contributed to the Group
Insurance segment's overall favorable performance in those periods. Group life
insurance accounted for approximately 50% of the income before Federal income
taxes and extraordinary item for the segment for the years ended December 31,
1996, 1997 and 1998.
Demutualization
In December 1997, Standard Insurance Company's Board of Directors authorized
management to proceed with the development of the plan of reorganization. On the
effective date of the plan of reorganization, Standard Insurance Company will
convert from a mutual life insurance company to a stock life insurance company
and become a wholly owned subsidiary of StanCorp, which will be publicly traded.
The costs incurred and expensed in 1998 related to demutualization totaled $6.1
million, and are included in the financial statements as an extraordinary item.
We estimate that another $2.0 million in demutualization costs will be incurred.
Demutualization expenses consist of the aggregate cost to Standard of engaging
independent accounting, actuarial, compensation, financial, investment banking,
legal and other consultants to advise both Standard and the Department of
Consumer and Business Services of the State of Oregon (the "Department") in
the demutualization process and related matters.
The plan of reorganization requires that Standard Insurance Company establish
and operate a closed block for the benefit of holders of certain individual
insurance policies of Standard Insurance Company. The closed block is designed
to give reasonable assurance to holders of these policies that, after the
effective date, assets will be available to maintain dividend scales in effect
for 1998, if the experience underlying such scales, including the portfolio
interest rate, continues. Management (based on an independent actuary's opinion)
expects the assets allocated to the closed block 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. In any event, should the assets
remaining in the closed block be insufficient to do so, Standard Insurance
Company remains obligated to satisfy claims on policies included in the closed
block, in accordance with their terms. Unless the Director of the Department of
Consumer and Business Services of the State of Oregon (the "Director")
otherwise consents, the closed block will continue in effect as long as any
policy in the closed block remains in force. The assets, including the revenue
therefrom, allocated to closed block policies will benefit only the holders of
these policies. If, over time, cash flows from the assets
35
<PAGE>
allocated to the closed block and claims experience relating to the closed block
are, in the aggregate, more or less favorable than assumed in establishing the
closed block, total dividends paid to closed block policyholders in the future
may be greater than or less than that which would have been paid to these
policyholders if the dividend scales in effect for 1998 had been continued. Any
excess of cumulative favorable deviations for closed block policies over
unfavorable deviations will be available for distribution over time to closed
block policyholders and will not be available to shareholders of StanCorp. If
the closed block is not dissolved, its expected life is over 50 years.
The closed block is not expected to affect Standard's net income or its
liquidity after its establishment. The excess of closed block liabilities over
closed block assets at the funding date represents the total estimated future
contributions from the closed block expected to result from operations
attributed to the closed block after income taxes. The contribution from the
closed block will be recognized in income over the period the policies and
contracts in the closed block remain in force. Management believes that over
time the actual cumulative contributions from the closed block will
approximately equal the expected cumulative contributions, due to the effect of
dividend changes. If, over the period the closed block remains in existence, the
actual cumulative contribution from the closed block is greater than the
expected cumulative contribution from the closed block, only such expected
contribution will be recognized in income, because the excess of the actual
cumulative contribution from the closed block over such expected cumulative
contribution will be paid to closed block policyholders as additional
policyholder dividends. If over such period, the actual cumulative contribution
from the closed block is less than the expected cumulative contribution from the
closed block, only such actual contribution will be recognized in income;
however, dividends could be changed in the future, which would increase future
actual contributions until the actual cumulative contributions equal the
expected cumulative contributions.
Consolidated Results of Operations for the Years Ended December 31, 1998, 1997
and 1996
Premiums
Premiums, which include policy and contract charges, increased by $65.7
million, or 8.0%, to $890.9 million in 1998 from $825.2 million in 1997, and by
$80.0 million, or 10.7%, in 1997 from $745.2 million in 1996. The increases
resulted primarily from growth in the group insurance business, resulting in
increased premiums of $67.4 million in 1998 and $87.7 million in 1997, partially
offset by a decline in individual insurance premiums of $4.5 million in 1998 and
$8.6 million in 1997.
Net Investment Income
Net investment income increased by $19.9 million, or 6.6%, to $323.1 million
in 1998 from $303.2 million in 1997. This increase was the result of a 7.9%
increase in average invested assets from $3.8 billion in 1997 to $4.1 billion in
1998, partially offset by a decrease in net investment yield. The net investment
yield declined to 7.95% in 1998 from 8.01% in 1997. The statutory net investment
yield declined to 8.11% in 1998 from 8.27% in 1997.
Net investment income increased by $18.0 million, or 6.3%, to $303.2 million
in 1997 from $285.2 million in 1996. This increase was the result of a 8.6%
increase in average invested assets from $3.5 billion in 1996 to $3.8 billion in
1997, partially offset by a decrease in net investment yield. The net investment
yield declined to 8.01% in 1997 from 8.03% in 1996. The statutory net investment
yield declined to 8.27% in 1997 from 8.37% in 1996.
Net Realized Investment Gains
Net realized investment gains were $11.6 million in 1998 compared to $11.8
million in 1997 and $15.3 million in 1996. Net realized gains and losses occur
primarily as a result of dispositions of Standard's invested assets in the
regular course of investment management. In 1998, 1997 and 1996, the sale of
real estate holdings contributed $6.0 million, $6.3 million and $13.8 million,
respectively, to net realized investment gains.
36
<PAGE>
Other Revenue
Other revenue increased by $0.8 million to $6.9 million in 1998, from $6.1
million in 1997. The increase resulted primarily from commissions, expenses and
reserve adjustments related to reinsurance contracts. Other revenue increased by
$1.7 million in 1997 from $4.4 million in 1996 primarily due to an increase of
$1.2 million in fees for administrative services on long term disability
contracts and a $0.4 million increase in consideration for annuity contracts not
involving life contingencies.
Policyholder Benefits
Policyholder benefits, including policyholder dividends and interest paid on
policyholder funds, increased by $44.7 million, or 5.4%, to $877.0 million in
1998 from $832.3 million in 1997. The increase was $50.0 million, or 6.4%, in
1997 from $782.3 million in 1996. The increase for both periods primarily
related to the growth in group insurance business resulting in higher premiums
for that business of 9.4% in 1998 and 13.9% in 1997. Additionally, group
insurance benefit ratios improved to 85.0% for 1998 from 87.2% for 1997 and
89.3% for 1996.
Operating Expenses
Operating expenses, which include operating expenses, state and local taxes,
commissions and the net increase in deferred policy acquisition costs, increased
by $28.2 million, or 12.9%, to $246.9 million in 1998 from $218.7 million in
1997. This growth primarily related to premium growth of 8.0% and a $3.7 million
increase in state and local taxes for the same period. The remaining increase
was due, in part, to $7.6 million in expenses for Year 2000 computer system
remediation and replacement. Management believes that the analysis of operating
expenses is distorted by inclusion of Year 2000 related costs and that excluding
these costs provides a more meaningful basis for analyzing trends in operating
expenses. When adjusted for Year 2000 related costs, operating expenses
increased $24.3 million, or 11.3%, to $239.3 million in 1998 from $215.0 million
in 1997.
Operating expenses increased $26.5 million, or 13.8%, to $218.7 million in
1997 from $192.2 million in 1996. When adjusted for Year 2000 costs, expenses
increased $24.1 million, or 12.6%, in 1997. These increases primarily related to
premium growth of 10.7% in 1997.
In designing its approach to Year 2000 remedies, in many cases management has
opted for system replacements in lieu of system remediation. This has
effectively accelerated system replacements into late 1997 and throughout 1998,
such that management expects system replacements in 1999 and 2000 to be less
than they would have been had the acceleration not occurred. And although not
readily estimable, management expects efficiencies and cost savings from the
replaced systems to result in future years. In addition, beginning in 1999
Standard will capitalize and amortize certain computer software application
development and purchase costs in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". All such costs are currently expensed as incurred.
The following table sets forth operating expenses adjusted for costs related
to Year 2000 remediation and system replacement:
Adjusted Operating Expenses
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
(Dollars in millions)
Total operating expenses................. $246.9 $218.7 $192.2
Year 2000 remediation costs.............. (1.1) (0.2) --
Year 2000 system replacement costs....... (6.5) (3.5) (1.3)
------ ------ ------
Total adjusted operating expenses........ $239.3 $215.0 $190.9
====== ====== ======
</TABLE>
37
<PAGE>
Federal Income Taxes
The provisions for Federal income taxes differ from the amounts calculated at
the Federal corporate tax rate primarily due to nontaxable investment income,
amounts provided for uncertainties and adjustments to amounts provided in prior
years. The amounts provided for uncertainties and adjustments to amounts
provided in prior years primarily reflect uncertainties related to the use of
estimates and the change in Standard's Federal income tax filing status
effective for the 1994 tax year, and the subsequent resolution of those
uncertainties. Standard also has provided for contingencies that may arise
related to its tax filing status for 1995 through 1998. Resolution of the
uncertainties provided for 1995 through 1998 will occur when amounts provided on
an estimated basis are known or on closure of the tax year due to audit or lapse
of the statute of limitations (generally three years after the tax return filing
date). As a result of the reorganization, we anticipate no future provisions for
this uncertainty beginning in 1999.
The effective Federal income tax rates for 1998, 1997 and 1996 were 30.4%,
33.1% and 37.8%, respectively, compared to the Federal corporate tax rate for
the same years of 35.0%. The 1998 effective tax rate is less than the Federal
corporate tax rate due to an adjustment of $4.4 million related to the
resolution of uncertainties provided for in 1994, as these uncertainties were
resolved. The 1996 effective rate exceeded the Federal corporate tax rate due to
a provision for uncertainties provided in that year of $3.3 million. See Note 8
to "Notes to Consolidated Financial Statements" included in this prospectus.
Income Before Extraordinary Item
Income before extraordinary item increased $11.8 million, or 18.5%, to $75.6
million in 1998 from $63.8 million in 1997. The increase for 1997 was $16.8
million, or 35.7%, from $47.0 million in 1996.
38
<PAGE>
Selected Segment Information
The following table sets forth selected segment information for the periods
indicated:
Selected Segment Information
<TABLE>
<CAPTION>
At or for Year Ended December 31,
--------------------------------
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
(in millions)
Revenues:
Group Insurance segment................. $ 933.1 $ 851.9 $ 743.0
Retirement Plans segment................ 69.1 66.0 70.4
Individual Insurance segment............ 222.7 222.2 228.3
Other................................... 7.6 6.2 8.4
-------- -------- --------
Total revenues........................ $1,232.5 $1,146.3 $1,050.1
======== ======== ========
Income before Federal income taxes and
extraordinary item:
Group Insurance segment................. $ 83.6 $ 64.5 $ 38.7
Retirement Plans segment................ 0.4 1.1 4.5
Individual Insurance segment............ 19.2 24.2 21.5
Other................................... 5.4 5.5 10.9
-------- -------- --------
Total income before Federal income
taxes and extraordinary item......... $ 108.6 $ 95.3 $ 75.6
======== ======== ========
Reserves: (1)
Group Insurance segment................. $1,398.5 $1,251.3 $1,087.3
Retirement Plans segment................ 651.2 637.7 648.9
Individual Insurance segment............ 1,471.0 1,431.7 1,389.6
Other................................... -- -- --
-------- -------- --------
Total reserves........................ $3,520.7 $3,320.7 $3,125.8
======== ======== ========
</TABLE>
- -----------------------
(1) Reserves are comprised of future policy benefits and claims and other
policyholder funds.
Group Insurance Segment
The Group Insurance segment sells long term and short term disability, life,
accidental death and dismemberment and dental insurance. As the largest of
Standard's three segments, group insurance premiums accounted for 88.1%, 86.9%
and 84.5% of Standard's total premiums for the years ended December 31, 1998,
1997 and 1996, respectively.
39
<PAGE>
The following table sets forth selected financial data for Standard's Group
Insurance segment for the periods indicated:
Group Insurance Segment
<TABLE>
<CAPTION>
At or for Year Ended December 31,
-------------------------------------------
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
(Dollars in millions, except as indicated)
Revenues:
Premiums....................................... $784.5 $717.1 $629.4
Net investment income....................... 143.7 131.4 113.9
Net realized investment gains (losses)...... 2.5 1.0 (1.3)
Other....................................... 2.4 2.4 1.0
------ ------ ------
Total revenues........................... 933.1 851.9 743.0
------ ------ ------
Benefits and expenses:
Policyholder benefits....................... 666.5 625.5 561.8
Operating expenses.......................... 183.0 161.9 142.5
------ ------ ------
Total benefits and expenses.............. 849.5 787.4 704.3
------ ------ ------
Income before Federal income taxes and......... $ 83.6 $ 64.5 $ 38.7
extraordinary item............................ ====== ====== ======
Benefit ratio (% of premiums).................. 85.0% 87.2% 89.3%
Operating expense ratio (% of premiums)........ 23.3 22.6 22.6
Persistency (% of premiums).................... 84.8 86.1 84.1
Life insurance in force (billions)............. $ 81.0 $ 74.8 $ 67.4
</TABLE>
Group Insurance Segment Results of Operation for the years ended December 31,
1998, 1997 and 1996
Premiums increased by $67.4 million, or 9.4%, to $784.5 million in 1998 from
$717.1 million in 1997, and by $87.7 million, or 13.9%, in 1997 from $629.4
million in 1996. When adjusted for the discontinuance of medical stop loss sales
in 1997, the 1998 and 1997 growth rates were 9.9% and 14.8%, respectively. The
majority of the premium growth, approximately two-thirds for the periods
presented, related to group accident and health insurance lines, primarily long
term disability insurance, with the remainder being primarily attributable to
group life insurance. The persistency rate decreased to 84.8% in 1998 from 86.1%
in 1997, primarily resulting from terminations due to increased renewal rates
implemented in late 1997. The 1996 persistency rate was 84.1%. Group life
insurance in force at December 31, 1998, 1997 and 1996 was $81.0 billion, $74.8
billion and $67.4 billion, respectively.
Policyholder benefits increased by $41.0 million, or 6.6%, to $666.5 million
in 1998 from $625.5 million in 1998, and by $63.7 million, or 11.3%, in 1997
from $561.8 million in 1996. The increase in policyholder benefits for all three
years was partially related to the growth in premiums. Additionally,
policyholder benefits for 1997 and 1996 were negatively impacted by adverse
claims experience on long term disability business, which accounted for $39.1
million and $61.4 million of the increase in policyholder benefits in 1997 and
1996, respectively. The poor claims experience in 1996 primarily resulted from
poor morbidity experience for a few large long term disability cases. In
response, management increased renewal rates on these cases. In 1997, Standard
again experienced unfavorable loss experience for selected large cases, and
further increased rates on these cases. Partially offsetting poor long term
disability claims experience in 1997 was favorable claims experience on group
life insurance business. The 1998 benefit ratio for this segment improved to
85.0% from 87.2% in 1997 and 89.3% in 1996.
Operating expenses increased by $21.1 million, or 13.0%, to $183.0 million in
1998 from $161.9 million in 1997, and by $19.4 million, or 13.6%, in 1997 from
$142.5 million in 1996. The increases were due in part to premium growth of 9.4%
and 13.9% for the same periods, a $3.9 million increase in state and
40
<PAGE>
local taxes in 1998, and in part to Year 2000 computer system remediation and
replacement expenses of $2.4 million in 1998 and $0.2 million in 1997. Standard
began incurring Year 2000 costs in this segment in 1997. The operating expense
ratios for the years ended December 31, 1998, 1997 and 1996 were 23.3%, 22.6%
and 22.6%, respectively.
Income before Federal income taxes and extraordinary item for the segment
increased by $19.1 million, or 29.6%, to $83.6 million in 1998 from $64.5
million in 1997, and by $25.8 million, or 66.7%, in 1997 from $38.7 million in
1996. The 1996 results were substantially affected by unfavorable long term
disability morbidity experience as discussed above.
Retirement Plans Segment
The Retirement Plans segment offers full-service 401(k) and other pension
plan products and services. Standard earns fees based upon administrative
services provided and assets managed, as well as an interest rate spread on the
assets held in the general account. Assets under management for this segment
have increased from $736.8 million at December 31, 1994 to $1.3 billion at
December 31, 1998. Standard's separate account business represents the largest
portion of this growth, with separate account assets increasing from $105.2
million at December 31, 1994 to $668.5 million at December 31, 1998.
The following table sets forth selected financial data for Standard's
Retirement Plans segment for the periods indicated:
<TABLE>
<CAPTION>
Retirement Plans Segment
At or for Year Ended December 31,
---------------------------------
1998 1997 1996
---------- --------- -------
<S> <C> <C> <C>
(Dollars in millions)
Revenues:
Premiums............................... $ 14.0 $ 11.2 $ 10.3
Net investment income.................. 54.0 54.3 58.7
Net realized investment gains........... 1.1 0.8 1.6
Other................................... -- (0.3) (0.2)
-------- -------- ------
Total revenues......................... 69.1 66.0 70.4
-------- -------- ------
Benefits and Expenses:
Policyholder benefits................... 46.6 47.0 50.9
Operating expenses...................... 22.1 17.9 15.0
-------- -------- ------
Total benefits and expenses............ 68.7 64.9 65.9
-------- -------- ------
Income before Federal income............ $ 0.4 $ 1.1 $ 4.5
taxes and extraordinary item........... ======== ======== ======
Operating expense ratio (% of total.... 32.0% 27.1% 21.3%
revenues)
Assets under management:
General account....................... $ 631.3 $ 637.7 $649.0
Separate account....................... 668.5 483.3 322.8
-------- -------- ------
Total................................. $1,299.8 $1,121.0 $971.8
======== ======== ======
</TABLE>
Retirement Plans Segment Results of Operations for the Years Ended December 31,
1998, 1997, and 1996
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 by $2.8 million, or 25.0%, to $14.0 million for 1998 from
$11.2 million for 1997, and by $0.9 million, or 8.7%, in 1997 from $10.3 million
in 1996. The increases for both years result primarily from the growth in assets
under management. Net investment income remained
41
<PAGE>
stable for 1998 compared to 1997. Net investment income decreased by $4.4
million, or 7.5%, to $54.3 million in 1997 from $58.7 million in 1996. The 1997
decline in net investment income was due primarily to a decline in net
investment yield and a 1.7% decrease in assets under management in the general
account.
Policyholder benefits, which consist of interest credited to policyholders,
remained relatively constant at $46.6 million and $47.0 million for 1998 and
1997, respectively. Policyholder benefits decreased by $3.9 million, or 7.7%, in
1997 from $50.9 million in 1996, consistent with the 1997 decline in net
investment income, as a result of interest rate spread management. The
profitability of the Retirement Plans segment is, in part, dependent on the
maintenance of targeted interest rate spreads.
Operating expenses increased by $4.2 million, or 23.5%, to $22.1 million for
1998 from $17.9 million in 1997, and by $2.9 million, or 19.3%, in 1997 from
$15.0 million in 1996. The operating expense ratios were 32.0%, 27.1%, and
21.3%, for 1998, 1997 and 1996, respectively. The primary factor contributing to
the increase in operating expenses from 1996 to 1998 relates to staff additions
associated with the administration of contracts. The Retirement Plans segment
currently administers contracts under two methodologies: traditional plans,
which allow quarterly investment directives by the employers and participants,
and daily plans, which allow daily investment directives. Management believes
that daily plans are more attractive to customers and that administering both
types of plans is inefficient and requires more personnel than would be required
if only one type of plan were offered. Accordingly, management has decided to
discontinue the traditional business. Management intends to convert all
traditional plans to daily plans or discontinue these plans by December 31,
1999. Management has developed an aggressive conversion schedule to meet this
target and has increased its staffing accordingly. Approximately 40 plans were
converted in 1997, and another 200 plans were converted in 1998. Although the
efficiencies and cost savings of the transition cannot be readily estimated,
management believes future expense savings will occur. To support these
administrative processes, staff head count for the administration area since
conversion began has increased at a compound annual rate of approximately 22.2%.
Also contributing to the increase in operating expenses for 1998 compared to
1997 was a reallocation of expenses from the individual annuity line of business
of approximately $1.6 million and Year 2000 computer system remediation and
replacement expenses of approximately $0.7 million. The cost reallocation was
based on a study of shared costs between the two lines of business. No Year 2000
costs were incurred in 1997 and 1996.
Income before Federal income taxes and extraordinary item for the Retirement
Plans segment in 1998 was $0.4 million, compared to $1.1 million in 1997 and
$4.5 million in 1996.
Individual Insurance Segment
The Individual Insurance segment sells life insurance, disability insurance,
individual annuities and other insurance products to individuals. For the
individual insurance market, a growing number of consumers are now reaching 45
years of age or older and changing their focus from loss avoidance to asset
accumulation. A strong stock market has increased competition from investments
other than traditional individual life insurance and fixed annuities. Management
believes the Individual Insurance segment will continue to provide stability and
diversification of earnings for Standard. The following table sets forth
selected financial data for Standard's Individual Insurance segment for the
periods indicated:
42
<PAGE>
<TABLE>
<CAPTION>
Individual Insurance Segment
At or for Year Ended December 31,
------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
(Dollars in millions, except as indicated)
Revenues:
Premiums................................. $ 92.4 $ 96.9 $105.5
Net investment income.................... 124.0 119.8 117.4
Net realized investment gains............. 1.8 1.7 1.8
Other.................................... 4.5 3.8 3.6
------ ------ ------
Total revenues........................ 222.7 222.2 228.3
------ ------ ------
Benefits and expenses:
Policyholder benefits.................... 163.9 159.8 169.5
Operating expenses........................ 39.6 38.2 37.3
------ ------ ------
Total benefits and expenses........... 203.5 198.0 206.8
------ ------ ------
Income before Federal income.............. $ 19.2 $ 24.2 $ 21.5
taxes and extraordinary item............. ====== ====== ======
Operating expense ratio.................. 42.9% 39.4% 35.4%
(% of premiums)
Persistency (% of premiums)............... 89.5 90.9 90.5
Life insurance in force (billions)........ $ 8.0 $ 7.7 $ 7.6
</TABLE>
Individual Insurance Segment Results of Operations for the Years Ended December
31, 1998, 1997 and 1996
Premiums decreased by $4.5 million, or 4.6%, to $92.4 million for 1998 from
$96.9 million for 1997, and by $8.6 million, or 8.2%, in 1997 from $105.5
million in 1996. The decreasing trend in premiums is due to increased
competition and investment alternatives, coupled with declining demand across
the life insurance industry for the types of individual insurance products that
Standard offers. Persistency rates for individual insurance were 89.5%, 90.9%
and 90.5% for 1998, 1997 and 1996, respectively. Life insurance in force at
December 31, 1998 was $8.0 billion, compared to $7.7 billion and $7.6 billion at
the end of 1997 and 1996, respectively.
Policyholder benefits increased by $4.1 million, or 2.6%, to $163.9 in 1998
from $159.8 million in 1997, and decreased by $9.7 million, or 5.7%, in 1997
from $169.5 million in 1996. In 1997, we experienced unusually favorable life
claims experience. In 1998, life claims returned to a more normal level.
Operating expenses increased by $1.4 million, or 3.7%, to $39.6 million for
1998 from $38.2 million for 1997, and by $0.9 million, or 2.4%, in 1997 from
$37.3 million in 1996. Operating expenses include $4.5 million and $3.5 million
for 1998 and 1997, respectively, related to Year 2000 computer system
remediation and replacement expenses. The largest such expense is related to
implementation of a new administration system, which management believes will
result in future expense savings as well as solve certain Year 2000 issues.
Offsetting the 1998 increase in operating expenses was a reallocation of
approximately $1.6 million of shared expenses to the Retirement Plans segment.
The operating expense ratios for 1998, 1997 and 1996 were 42.9%, 39.4%, and
35.4%, respectively.
Income before Federal income taxes and extraordinary item for the Individual
Insurance segment was $19.2 million, $24.2 million and $21.5 million for 1998,
1997, and 1996, respectively.
Other
Other includes primarily Standard's mortgage lending and real estate
management subsidiaries and real estate investments. Income before Federal
income taxes and extraordinary item for the years ended December 31, 1998, 1997
and 1996 was $5.4 million, $5.5 million and $10.9 million, respectively. The
income primarily related to the sale of real estate holdings, resulting in net
realized investment gains for this
43
<PAGE>
segment of $6.2 million, $8.3 million and $13.1 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
Liquidity and Capital Resources
StanCorp
Following the effective date of the plan of reorganization, Standard
Insurance Company will become a wholly owned subsidiary and the principal asset
of StanCorp. StanCorp's ability to pay dividends to its shareholders and meet
its obligations, including operating expenses, primarily depends upon the
receipt of dividends from Standard Insurance Company. In the future, dividends
from the non-insurance subsidiaries also may become significant sources of funds
for StanCorp. In addition, StanCorp expects to retain at least $25.0 million
from the proceeds of the offering at the holding company level, which will be
available to pay dividends to shareholders and to meet its other obligations.
StanCorp also expects to have available to it a line of credit to be entered
into by the completion of the offering, which is currently being negotiated by
Standard.
Standard Insurance Company's ability to pay dividends to StanCorp is
regulated under Oregon law. Under Oregon law, Standard Insurance Company may pay
dividends only from the earned surplus arising from its business. It also must
receive the prior approval of the Director to pay a dividend, if such dividend
would exceed certain statutory limitations. The current statutory limitation is
the greater of (a) 10% of Standard Insurance Company'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
Insurance Company will be permitted to pay $93.9 million in dividends to
StanCorp in 1999 without obtaining the Director's approval, and would have been
permitted to pay $38.7 million, $26.5 million and $56.7 million in 1998, 1997
and 1996, respectively, without obtaining the Director's approval.
The foregoing limitations on dividends would not apply to any dividends to
StanCorp from the non-insurance subsidiaries. Combined net income of the non-
insurance subsidiaries, before elimination of intercompany amounts, was $4.9
million, $4.4 million, and $3.5 million in 1998, 1997 and 1996, respectively.
The dividend limitation is based on statutory financial results. Statutory
accounting practices differ in certain respects from accounting policies used in
financial statements prepared in accordance with GAAP. The significant
differences relate to deferred policy acquisition costs, deferred income taxes,
non-admitted asset balances, required investment reserves and reserve
calculation assumptions. The most significant differences are discussed further
below. See Note 13 to "Notes to Consolidated Financial Statements" included in
this prospectus for a reconciliation of differences between statutory and GAAP
financial results.
For statutory purposes, policy acquisition costs are charged to current
operations. For GAAP, the costs of acquiring new business, which vary with and
are directly related to the production of new business, are deferred to the
extent that the costs are deemed recoverable from future premiums.
Statutory accounting does not allow the recording of deferred income taxes,
whereas GAAP requires such recording. The effect of providing deferred income
taxes is to reduce the volatility of GAAP earnings and more closely align the
recognition of tax expense with reported earnings. Standard Insurance Company
qualifies as a nonlife insurance company as defined by the U.S. Internal Revenue
Code of 1986, as amended (the "Internal Revenue Code"), and is taxed as a
property and casualty company. As such, Standard is not subject to the mutual
company equity add-on tax, but is subject to property and casualty provisions
such as limitations imposed on the deduction of unearned premium reserves. These
limitations generally affect the timing of recognition of events for Federal
income tax purposes.
Statutory reserves for life and disability policies and contracts are based
on statutory requirements. For GAAP purposes, Standard Insurance Company's
experience, with provision for the risk of adverse deviation, is used to
determine the reserves it will establish. Thus, GAAP reserves may be more or
less than the statutory reserves.
44
<PAGE>
To the extent that statutory financial results are negatively impacted by the
effects of statutory accounting practices that differ from GAAP, the dividend
limitation will be more restrictive.
StanCorp's relationship with its subsidiaries, as well as the relationships
among the subsidiaries, will be generally governed by a series of agreements to
be entered into in connection with the demutualization. Additionally, management
intends to institute tax sharing and expense allocation agreements among
StanCorp and its subsidiaries. Such agreements will establish the method of
allocating the consolidated Federal income tax liability and expenses among the
companies.
Based on Standard's historic cash flow and current financial results,
management believes that the cash flow from Standard's operating activities,
together with the proceeds of the offering to be retained by StanCorp and the
availability of a line of credit to be entered into prior to consummation of the
offering, will be sufficient to enable StanCorp to make dividend payments, as
described in "Stockholder Dividends", and pay operating expenses and other
obligations over at least the next three years.
Standard Insurance Company
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. Cash
outflows also include payments for policy and contract surrenders and
withdrawals.
Standard Insurance Company's cash flow from operations decreased $12.8
million, or 5.3%, to $226.6 million in 1998 from $239.4 million in 1997, and
increased by $16.6 million, or 7.5%, in 1997 from $222.8 million in 1996. At
December 31, 1998, Standard had cash and cash equivalents totaling $60.4
million.
Future policy benefits and claims are liabilities of Standard as of the
balance sheet date and, as such, are not reflected in current cash flows. These
liabilities will be reflected in cash outflows as the underlying claims are
paid. In order to ensure that obligations will be met when due, Standard uses
asset/liability cash flow management techniques that take into consideration
total investment return requirements, asset and liability duration, risk
tolerance and cash flow requirements. In the event that subsequent experience
differs from earlier assumptions, maturing liabilities and maturing investment
assets may no longer be matched to the degree originally anticipated, placing
unanticipated demands on cash flow and liquidity. Management closely monitors
the general account for asset/liability matching and investment portfolio
durations are rebalanced as necessary.
Standard Insurance Company's liquidity needs vary by product line. Factors
that affect each product line's relative liquidity needs include, but are not
limited to, interest rate levels, customer size and sophistication, termination
and surrender charges, Federal income taxes, specifics of benefit payments and
level of underwriting risk.
Interest rate fluctuations can affect the duration of Standard Insurance
Company's contractual obligations as well as the value and duration of the
assets supporting these obligations and expose Standard Insurance Company to
disintermediation risk. See "Risk Factors--Increasing Interest Rates May Cause
Increased Policy Loans, Surrenders and Withdrawals; Declining Interest Rates May
Lead to Prepayments and Redemptions". In addition, cash outflows from
surrenders and withdrawals may be affected by the financial strength and claims
paying ability ratings of Standard Insurance Company, events in the insurance
industry that affect policyholders' or contractholders' confidence, and
competition from alternative financial products which may be perceived as
providing better investment returns or other desirable features.
Standard Insurance Company's vulnerability to disintermediation risk is
mitigated because a substantial portion of its policyholder reserves and deposit
fund liabilities are reserves for long term disability and individual disability
insurance, which are not subject to discretionary withdrawal. At December 31,
1998, $1.1 billion, or approximately 31.4%, of Standard's total policyholder
reserves and deposit fund liabilities were comprised of reserves for group and
individual accident and health insurance, primarily for long term disability
products. In addition, at December 31, 1998, an additional $911.0 million, or
approximately 25.9%, of total policyholder reserves and deposit fund
liabilities, comprised primarily of group and individual term life insurance
reserves, claims liabilities and annuity deposits, were not subject to
discretionary withdrawal.
45
<PAGE>
With respect to Standard Insurance Company's products that are subject to
discretionary withdrawal, which are primarily individual whole life, universal
life and individual and group annuities, Standard Insurance Company manages
liquidity and asset/liability risk through a combination of product features and
investment portfolio management techniques. Product features designed to manage
such risk include surrender and withdrawal charges, market value adjustment
features and products, such as universal life, that permit credited interest to
be adjusted as market interest rates change. In addition, Standard Insurance
Company utilizes investment portfolio management techniques designed to maintain
an investment portfolio with sufficient liquidity to pay current obligations
under a variety of economic conditions while maintaining an appropriate
relationship between the duration of its assets and the duration of its
liabilities.
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 December 31,
--------------------------------------------------------------------
1998 1997 1996
Amount % of Total Amount % of Total Amount % of Total
------------------ ------------------ ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
Subject to Discretionary Withdrawal:
At fund balance or with market value.... $ 709.0 20.1% $ 720.6 21.7% $ 700.7 22.4%
adjustment or surrender charge of
less than 5%
At fund balance, with market value...... 603.9 17.2 587.6 17.7 604.4 19.3
adjustment or surrender charge of...... -------- ----- -------- ----- -------- -----
5% or more
Total subject to discretionary.......... 1,312.9 37.3 1,308.2 39.4 1,305.1 41.7
withdrawal
Not Subject to Withdrawal............... 2,207.8 62.7 2,012.5 60.6 1,820.7 58.3
-------- ----- -------- ----- -------- -----
Total................................... $3,520.7 100.0% $3,320.7 100.0% $3,125.8 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
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 Insurance Company 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 Insurance
Company'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, which 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".
Management believes that historically its liquidity, capital resources or
results of operations have not been materially affected by any failure to align
the cash flow characteristics of Standard's assets and liabilities.
The carrying value of Standard's general account invested assets at December
31, 1998 was $4.2 billion. At December 31, 1998, investment securities
constituted $2.2 billion, or 52.7% of general account invested assets, of which
$2.0 billion, or 92.1%, were publicly traded. Of Standard's fixed maturity
securities,
46
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based on amortized cost, 85.1% were assigned National Association of Insurance
Commissioners ("NAIC") designation 1, which is equivalent to a Standard &
Poor's rating of A or higher, and 14.4% were assigned NAIC designation 2, which
is equivalent to a Standard & Poor's rating of BBB through BBB+, at December 31,
1998. Net unrealized gains on Standard's investment securities were $117.6
million at December 31, 1998.
Standard's mortgage loans comprised 40.7% of total general account invested
assets at December 31, 1998. Standard's large block of disability reserves
cannot be withdrawn by policyholders or claimants and claim payments are issued
monthly over periods that may extend for many years. This holding of 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. The delinquency and loss performance of Standard's mortgage loan
portfolio has consistently outperformed the life insurance industry averages, as
reported by the ACLI, by wide margins.
In the normal course of business, Standard commits to fund mortgage loans
generally up to 60 days in advance. At December 31, 1998, Standard had
outstanding commitments to fund or acquire various assets, generally mortgage
loans with interest rates ranging from 7.25% to 9.00%, totaling $114.2 million.
Standard's capital expenditures are estimated to be $11.9 million for 1999.
Risk Based Capital. The NAIC has implemented a tool to aid in the
assessment of the statutory capital and surplus of life and health insurers.
This tool, known as Risk Based Capital ("RBC"), augments statutory minimum
capital and surplus requirements. The RBC system employs a risk-based formula
that applies prescribed factors to the various risk elements inherent in an
insurer's business to arrive at minimum capital requirements in proportion to
the amount of risk assumed by the insurer. At December 31, 1998, Standard's RBC
level was significantly above the ranges that would require regulatory action or
corrective action by Standard Insurance Company. Management believes that RBC
levels, without taking into account proceeds from the offering in excess of
those required under the plan of reorganization to be contributed to Standard
Insurance Company, will remain significantly in excess of RBC thresholds as of
the effective date of the plan of reorganization. See "Business--Regulation--
State Insurance Law Regulatory Initiatives".
Financing. Standard has available lines of credit with various institutions
totaling $55.0 million. At December 31, 1998, there were no outstanding
borrowings on the lines of credit. Because these lines expire during the first
half of 1999, Standard is negotiating a new line of credit totaling $100.0
million.
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 statutory
Statement of Actuarial Opinion required by insurance regulators. According to
presently accepted actuarial standards of practice, Standard's current reserves
and related items make adequate provision for the anticipated cash flows
required by Standard's contractual obligations and related expenses.
Standard does not use 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, Standard commits to fund mortgage
loans generally up to 60 days in advance.
Standard's financial instruments are exposed to financial market volatility
and potential disruptions in the market that may result in certain financial
instruments becoming less valuable. Standard's primary market risk is interest
rate risk, which exposes Standard's earnings and cash flows and the fair value
of its financial assets to the risk of changes in the level of interest rates.
In accordance with Item 305 of Regulation S-K of the Securities and Exchange
Commission, Standard has analyzed the estimated loss in fair value of certain
market sensitive financial assets held at December 31, 1998, given a
hypothetical ten percent increase in interest rates, and related qualitative
information on how Standard manages interest rate risk.
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The interest rate sensitivity analysis is based upon Standard's fixed
maturity securities, mortgage loans and collateral loans held at December 31,
1998. For Standard's fixed maturity securities portfolio, the analysis estimates
the reduction in fair value of the portfolio utilizing a duration-based analysis
that assumes a hypothetical ten percent increase in treasury rates. For
Standard's mortgage and collateral loan portfolios, the analysis estimates the
reduction in fair value by discounting expected cash flows at theoretical
treasury spot rates in effect at December 31, 1998. These analyses discount cash
flows using an average of possible discount rates to provide for the potential
effects of interest rate volatility. These analyses do not provide for the
possibility of non-parallel shifts in the yield curve, which would involve
discount rates for different maturities being increased by different amounts.
The actual decrease in fair value of Standard's financial assets that would have
resulted from a ten percent increase in interest rates could be significantly
different from that estimated by the model. The hypothetical reduction in the
fair value of Standard's financial assets that results from the model is
estimated to be $58.9 million at December 31, 1998.
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
Standard'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 disruptions of operations,
including, among other things, a temporary inability to process transactions and
engage in normal business activities.
Based on an assessment, Standard 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 impact on Standard's business,
financial condition and results of operations.
Standard has assessed its computer hardware for Year 2000 readiness. The
hardware is generally compliant, with the exception of a portion of the personal
computer inventory. These personal computers are being replaced in the normal
course of business. In addition, Standard has assessed its non-information
technology systems and has found them to be Year 2000 ready.
Standard has established milestone dates for each of the critical subprojects
that comprise Standard'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, Standard automatically commences 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 December 31, 1998, milestone dates on
only three subprojects had been missed. In each case, an existing Standard
system that was to be replaced was instead remediated to resolve the Year 2000
issue. There can be no guarantee that Standard's method of developing
contingency plans or the contingency plans themselves will prevent the Year 2000
issue from having a material adverse effect on Standard's business, financial
condition and results of operations.
Standard is using both internal and external resources to reprogram, upgrade
or replace and test its software and hardware for Year 2000 readiness. Standard
plans to complete the Year 2000 project for all business-critical applications
no later than June 30, 1999. At that time, management believes, the Year 2000
issue will be mitigated. Based on presently available information, Standard
estimates the total remaining cost at December 31, 1998 of the Year 2000 project
to be approximately $2.0 million. These costs are being funded through operating
cash flows and expensed as incurred. Through December 31, 1998, Standard has
incurred and expensed approximately $12.6 million related to assessment and
remediation or replacement in connection with the Year 2000 project.
The costs of the Year 2000 project and the date on which Standard plans to
complete the Year 2000 modifications are based on management's estimates, which
were derived using numerous 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
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trained in this area, the ability to locate and correct all relevant computer
codes, supplier and large customer compliance and similar uncertainties.
Standard 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 Standard's significant suppliers have given assurances
that they are, or will be, Year 2000 compliant by December 31, 1999. Standard
continues to monitor its significant suppliers. If it does not receive adequate
assurances of Year 2000 compliance from its significant suppliers by June 30,
1999, Standard will seek alternative suppliers, if available. Standard has also
received adequate assurances that its major customers that have systems that
connect with Standard'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 Standard relies will be
converted on a timely basis, or that a failure to convert by another entity, or
a conversion that is incompatible with Standard's hardware and software, would
not have a material adverse effect on Standard's business, financial condition
or results of operations.
Insolvency Assessments
Many of the jurisdictions in which Standard Insurance Company is admitted to
transact business require life insurance companies doing business within the
jurisdiction to participate in guaranty associations, which are organized to pay
contractual benefits owned under insurance policies issued by impaired,
insolvent or failed life insurance companies. These associations levy
assessments, up to prescribed limits, on all member insurers in a particular
state on the basis of the proportionate share of the premiums written by member
insurers in the lines of business in which the impaired, insolvent or failed
insurer is engaged. Some states permit member insurers to recover assessments
paid through full or partial premium tax offsets. Assessments levied against
Standard Insurance Company from January 1, 1996 though December 31, 1998
aggregated $2.2 million. At December 31, 1998, Standard Insurance Company
maintained a reserve of $0.9 million for future assessments in respect of
currently impaired, insolvent or failed insurers.
Accounting Pronouncements Adopted
Effective January 1, 1998, Standard adopted Statement of Financial Accounting
Standards ("FAS") No. 130, "Reporting Comprehensive Income", which requires
presentation of comprehensive income within an entity's primary financial
statements. Comprehensive income is defined as net income as adjusted for
changes to equity resulting from events other than net income or transactions
related to an entity's capital structure.
Effective July 1, 1998, Standard adopted FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting
requirements for derivative instruments and for activities related to the
holding of such instruments, including hedging activities. Standard does not
have any derivative instruments that meet the scope of this statement. The
statement also allows, on the date of initial application, an entity to transfer
any held to maturity securities into the available for sale or trading
categories. Standard transferred all held to maturity securities to its
available for sale security portfolio. The transfer was recorded as a direct
increase to other comprehensive income of $13.2 million.
Effective December 31, 1998, Standard adopted FAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which establishes
standards for reporting information regarding an entity's operating activities.
FAS No. 131 requires that operating segments be defined at the same level and in
similar manner as management evaluates operating performance. Management has
determined that, for purposes of the pronouncement, its operating segments are
comprised of Group Insurance, Retirement Plans and Individual Insurance. The
pronouncement does not impact measurement of operating performance, but only
changes financial statement disclosure. Prior periods have been presented on a
basis consistent with the current year.
Effective December 31, 1998, Standard adopted FAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits", which revises
current disclosure requirements for employers'
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pension and other retiree benefits. The pronouncement does not impact
measurement of pension benefits or other postretirement benefit costs, but only
changes financial statement disclosure. Prior periods have been presented on a
basis consistent with the current year.
New Accounting Pronouncements
In December 1997, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments", which provides guidance on
accounting for state mandated guaranty assessments. Standard is required to
adopt SOP 97-3 effective January 1, 1999. Management does not expect that the
adoption of SOP 97-3 will have a material impact on Standard's consolidated
financial statements.
In March 1998, the AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which establishes
accounting requirements for the capitalization of software costs incurred for
the use of the organization. Standard is required to adopt this pronouncement on
a prospective basis beginning January 1, 1999. Management estimates adoption of
SOP 98-1 will result in capitalization of approximately $2.8 million in costs of
computer software developed or obtained for internal use in 1999. It is expected
that the amortization period for these costs will approximate three to five
years.
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THE DEMUTUALIZATION
The following is a summary of the material terms of the plan of
reorganization. Although the material provisions of the plan of reorganization
have been accurately summarized, the statements below concerning the plan of
reorganization are not necessarily complete, and in each instance reference is
made to the plan of reorganization itself, a copy of which is filed as an
exhibit to the Registration Statement of which this prospectus forms a part.
Each statement is qualified in its entirety by such reference.
Purpose
The principal purpose of the demutualization is to enhance Standard's
strategic and financial flexibility by, among other things, creating a corporate
structure that will provide Standard with opportunities for obtaining additional
capital from sources that are unavailable to it in its current form and that
will fund Standard's future growth. The demutualization will also provide
eligible members with an opportunity to convert their illiquid interests as
members of Standard Insurance Company into publicly traded shares of common
stock, cash or adjustments to policy values, known as policy credits. Standard's
management believes that its growth and financial flexibility might be
constrained in the future by its mutual company form, and is pursuing the
demutualization to provide the financial flexibility to grow while enhancing
Standard's financial strength for the benefit of its policyholders.
Summary of the Plan of Reorganization
Upon effectiveness of the plan of reorganization, Standard Insurance Company
will convert from a mutual life insurance company to a stock life insurance
company and become a wholly owned subsidiary of StanCorp. Each member's
interests in Standard Insurance Company, including, but not limited to, any
right to vote and any rights which may exist with regard to the surplus of
Standard Insurance Company not apportioned or declared by the Board of Directors
of Standard Insurance Company for policyholder dividends, including any such
rights in liquidation or reorganization of Standard Insurance Company, will be
extinguished on the effective date and, in consideration thereof, eligible
members will receive, pursuant to the plan of reorganization, shares of common
stock of StanCorp, cash or policy credits. StanCorp will contribute net proceeds
from the offering to Standard Insurance Company in an amount at least equal to
the amount required for Standard Insurance Company to pay cash and fund policy
credits to eligible members under the plan of reorganization. Any proceeds in
excess of such contribution may be retained for general corporate purposes,
which may include contributions to Standard Insurance Company or the non-
insurance subsidiaries. Approximately $9.0 million is expected to be contributed
to Standard Insurance Company in connection with the distribution of the non-
insurance subsidiaries to occur contemporaneously with the closing of the
offering.
The Board of Directors of Standard Insurance Company adopted the plan of
reorganization at its meeting on September 28, 1998, which was then amended by
the Board on December 14, 1998. The Director held a public hearing regarding the
demutualization on January 27, 1999 and in an order issued February 12, 1999,
approved the plan of reorganization, subject to certain conditions set forth in
the order, after finding, among other things, that the plan of reorganization is
fair and equitable to Standard Insurance Company's policyholders. The plan of
reorganization must also be approved by eligible members voting at a special
members' meeting, which has been scheduled to be held on March 19, 1999. Under
the plan of reorganization, eligible members entitled to vote on and receive
consideration under the plan of reorganization are defined as the owners, at
December 17, 1997, which is the record date under the plan of reorganization, of
policies issued by Standard Insurance Company that are in force on such date. In
order for the plan of reorganization to be approved, a majority of the eligible
members voting at the meeting, in person or by proxy, must vote in favor of the
plan of reorganization. As provided in Oregon law, no dissenters' rights will be
available to any member. Prior to the special members' meeting, eligible members
entitled to vote on the plan of reorganization will receive an estimate of the
shares of common stock allocated to them for the purpose of determining the
consideration they are entitled to receive under the plan of reorganization.
Effectiveness of the plan of reorganization is also subject to the receipt by
Standard of certain opinions from its special tax counsel, which are expected to
be delivered on the effective date of the plan of reorganization. Subject to the
foregoing conditions, the plan of reorganization will become effective upon
completion of the offering.
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The allocation of consideration among eligible members will be based on
actuarial principles and will not be based on an assigned market value of their
membership interests. For a description of the actuarial principles used in this
allocation, see "--Payment of Consideration to Eligible Members". The value of
the consideration received by eligible members who receive shares of common
stock will depend on the future value of the common stock, which cannot be
predicted. Eligible members who receive cash or policy credits will be allocated
shares using the same formulas as eligible members who receive common stock, and
the amount of cash or policy credits they receive will be determined by
multiplying the number of shares they are allocated by the initial public
offering price per share of common stock in the offering.
Incident to the demutualization, Standard began incurring expenses in 1998.
The costs incurred and expensed in 1998 related to the demutualization totaled
$6.1 million, and are included in the financial statements as an extraordinary
item. We estimate that another $2.0 million in demutualization costs will be
incurred. Demutualization expenses consist of the aggregate cost to Standard of
engaging independent accounting, actuarial, compensation, financial, investment
banking and legal advisors and other consultants to advise Standard in the
demutualization process and related matters as well as other administrative
costs. The Director has engaged experts to provide actuarial, investment banking
and legal advice. Pursuant to Oregon law, Standard will pay the fees and
expenses of such consultants, which are estimated by Standard to be $2.5 million
and which are included in the above amounts. Standard has also agreed to
indemnify certain of its and the Department's consultants against liabilities
arising out of their engagements in connection with the demutualization.
Distribution of Non-Insurance Subsidiaries
In connection with the demutualization, Standard Insurance Company will
distribute the non-insurance subsidiaries to StanCorp. This distribution will
separate Standard's non-insurance businesses from its insurance businesses and
will permit the non-insurance subsidiaries to pursue growth strategies free of
the restrictions they are currently subject to as subsidiaries of an insurance
company. In connection with this distribution, StanCorp will contribute proceeds
from the offering to Standard Insurance Company in an amount equal to the
statutory book value of the non-insurance subsidiaries, as shown on the audited
financial statements of Standard Insurance Company filed with the Department for
the fiscal year immediately preceding this distribution. At December 31, 1998,
the statutory book value of the non-insurance subsidiaries was $9.0 million.
Payment of Consideration to Eligible Members
The plan of reorganization provides that on the effective date each member's
membership interests will be extinguished and, in consideration thereof,
eligible members will receive shares of common stock, cash or policy credits.
Solely for purposes of calculating the amount of consideration each eligible
member shall receive, (i) each eligible member will be allocated a minimum of 52
shares (subject to adjustment in certain circumstances) of common stock and (ii)
certain eligible members may be allocated additional shares, based on actuarial
formulas which take into account, among other things, the past and expected
future contribution of certain specified policies held by such eligible member
to Standard Insurance Company's surplus. The actuarial formulas, in general,
utilize Standard Insurance Company's historical experience (for example,
mortality, morbidity, expenses, taxes, persistency and investment results) and
expected future experience to arrive at the expected future contributions.
All eligible members will receive shares of common stock allocated to them in
the demutualization, except for certain eligible members, described below, who
will receive cash or policy credits.
Under the plan of reorganization, policy credits will be provided with
respect to all policies that are IRAs, TSAs or individual life insurance
policies or individual annuity contracts issued directly to plan participants
pursuant to plans qualified under Section 401(a) of the Internal Revenue Code,
including any such IRAs, TSAs or individual annuity contracts issued under
Standard's "group retirement annuity contract" arrangements. Policy credits
will be credited in the form of an increase in accumulation account value (to
which no surrender or similar charges will be applied) or, if the policy does
not provide for an accumulation account value, then an increase in dividend
accumulations.
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The plan of reorganization requires that, except for policies in which policy
credits are to be provided as described above, mandatory cash payments be made
to the extent that shares of common stock are allocable to an eligible member
whose address for mailing purposes, as shown on Standard's records, is located
outside the United States, is shown on Standard's records to be an address at
which mail to such eligible member is undeliverable or is allocated with respect
to a policy that is known to Standard to be subject to a bankruptcy proceeding.
Cash that cannot be provided to eligible members will be subject to the
unclaimed property acts and escheat laws of applicable jurisdictions.
In addition to the mandatory cash payments, cash payments may be made under
the plan of reorganization to (i) all public eligible members consisting of
local, state and federal governmental authorities and agencies, except for those
public eligible members that affirmatively indicate a preference to receive
common stock and (ii) odd-lot eligible members holding 99 shares or less of
common stock that have affirmatively indicated a preference to receive cash. The
plan of reorganization does not limit the amount of cash that may be
distributed; however, the Board of Directors of Standard Insurance Company may
reduce the cash payments to public eligible members or odd-lot eligible members
in the event that cash available is insufficient to pay cash consideration to
all such public eligible members or odd-lot eligible members or for any other
reason. In such a case, cash will only be distributed to those public eligible
members or odd-lot eligible members that are allocated under the plan of
reorganization less than or equal to a specified number, determined by the
Board, of shares of common stock, and stock will be distributed to the
remainder. Notwithstanding the foregoing, no cash payments will be made to any
odd-lot eligible member if Standard Insurance Company has reduced the cash
payments to public eligible members as discussed above.
Consideration will be distributed to eligible members as soon as reasonably
practicable after the effective date.
Standard has retained Milliman & Robertson, Inc., an actuarial consulting
firm, to advise it in connection with actuarial matters involved in the
development of the plan of reorganization and the payment of consideration to
eligible members. The opinion of Daniel J. McCarthy, a consulting actuary
associated with Milliman & Robertson, Inc., dated September 28, 1998, and
confirmed and restated on January 19, 1999, states (in reliance upon the matters
and subject to the limitations described in such opinion), among other things,
that the plan for allocation of member consideration set forth in the plan of
reorganization is fair and equitable to members and will not prejudice the
interests of the members as required by Oregon law. The restated opinion, dated
January 19, 1999, is included as Annex A of this prospectus.
Directed Share Offering
StanCorp will reserve up to 1,250,000 shares of common stock sold in the
offering for sale, at the initial public offering price, to eligible members and
such other members of Standard Insurance Company that owned, on December 31,
1998, policies that are in force at such date ("Directed Share Members"). The
number of shares reserved for the Directed Share Offering has been increased
from the original 1,000,000 shares reserved under the plan of reorganization,
pursuant to a condition contained in the order of approval of the Director of
the Department of Consumer and Business Services of the State of Oregon. The
plan of reorganization provides that if the aggregate number of shares
subscribed for by all Directed Share Members is greater than the maximum
1,250,000 shares that are available, the 1,250,000 available shares will be
allocated to the subscribing Directed Share Members on a pro rata basis
according to the number of shares subscribed for by each such Directed Share
Member, subject to a minimum allocation of 100 shares, or, if the number of
shares available is insufficient to allow for allocations of 100 shares to all
such subscribing Directed Share Members, such lower number, as determined by
StanCorp, as may allow shares to be sold to all subscribing Directed Share
Members. The plan of reorganization allows Standard Insurance Company to limit
the availability of such reserved shares to any class of Directed Share Members
if it deems it necessary or advisable to do so for legal, tax or other reasons.
Officers and directors of Standard Insurance Company and its affiliates may not
subscribe for such reserved shares. Directed Share Members that notify Standard
Insurance Company of their interest by filling out a card that will be provided
to them will be given further information regarding this program, which will be
administered by one of the underwriters or StanCorp's transfer agent.
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Commission-Free Program
The plan of reorganization requires StanCorp to establish the Commission-Free
Program, under which certain eligible members holding small amounts, as
determined by StanCorp's Board of Directors after the demutualization and prior
to the commencement of the Commission-Free Program, of common stock may sell
all, but not less than all, of the shares of common stock received in the
demutualization without paying brokerage commissions or similar expenses.
StanCorp's Board of Directors will establish eligibility to participate in the
Commission-Free Program based on the number of shares that an eligible member
may receive in the plan of reorganization. In addition, any record holder as of
the effective date of fewer than a certain number, to be specified by StanCorp's
Board of Directors but which shall be no more than 99, of shares of common stock
may purchase enough additional shares to own exactly 100 shares. The sales and
purchases made under the Commission-Free Program will be at prevailing market
prices without brokerage commissions or similar expenses. The Commission-Free
Program will involve transactions effected on a periodic basis on the New York
Stock Exchange, and will not involve any purchases or sales by Standard or its
affiliates for their own accounts. The Commission-Free Program will begin
between 180 days and 12 months after the effective date and will continue for
three months or such longer period of time as StanCorp's Board of Directors
determines. StanCorp may reinstate the Commission-Free Program at a later date;
however, it has no current intention of doing so. See "Certain Investment
Considerations--Sales of Shares May Adversely Affect the Market Price of Common
Stock".
Establishment and Operation of the Closed Block
The closed block is based on a concept included in demutualization plans of
other insurance companies and is designed to give reasonable assurance to
holders of policies included therein that, after the effective date, assets will
be available to maintain dividend scales in effect for 1998 if the experience
underlying such scales continues. The establishment and operation of the closed
block will not modify or amend the provisions of the policies included therein.
Oregon law permits, but does not require, the creation of a closed block.
The closed block will be established as of the effective date. The policies
included in the closed block consist of all of the classes of individual
policies for which Standard had an experience-based dividend scale in effect for
1998 and certain other individual policies, but only to the extent such policies
are in force on the effective date. Pursuant to the plan of reorganization,
Standard Insurance Company will allocate assets to the closed block in an amount
expected to produce cash flows which, together with anticipated revenues from
the policies included in the closed block, are expected to be sufficient to
support certain obligations and liabilities relating to these policies. These
obligations and liabilities include, but are not limited to, the payment of
claims, certain expenses and taxes, and the provision for the continuation of
dividend scales in effect for 1998, if the experience underlying such scales
(including the portfolio interest rate) continues, and for appropriate
adjustments in such scales if the experience changes. These liabilities will be
determined based upon the historical carrying value of the liabilities that
relate to the policies included in the closed block. The assets, including the
revenue therefrom, allocated to the closed block policies will accrue solely to
the benefit of the holders of these policies until such time as the closed block
is no longer in effect. To the extent that over time cash flows from the assets
allocated to the closed block and other experience relating to the closed block
are, in the aggregate, less favorable than assumed in establishing the closed
block, total dividends paid to closed block policyholders in the future may be
less than the total dividends that would have been paid to these policyholders
if the dividend scales in effect for 1998 had been continued. Dividends on
policies included in the closed block, as in the past, will be declared at the
discretion of the Board of Directors of Standard Insurance Company, may vary
from time to time (reflecting changes in investment results, mortality,
persistency and other experience factors) and are not guaranteed. Standard
Insurance Company will not be required to support the payment of dividends on
closed block policies from its general funds, although it could choose to
provide such support.
Standard Insurance Company will continue to pay guaranteed benefits under all
policies in accordance with their terms, including the policies included in the
closed block. If the assets allocated to the closed block, the investment cash
flows from those assets and the revenues from the policies included in the
closed block prove to be insufficient to pay the benefits guaranteed under the
policies included in the closed block, Standard Insurance Company will be
required to make such payments from its general funds. Since the closed block
has been funded to provide for payment of guaranteed benefits, and for
continuation
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of dividend scales in effect for 1998, if experience underlying such scales
continues, it should not be necessary to use general funds to pay guaranteed
benefits unless the policies included in the closed block experience substantial
adverse deviations in investment income, mortality, persistency or other
experience factors. While Standard Insurance Company will use its best efforts
to support the policies included in the closed block with the assets allocated
to the closed block, these assets will be subject to the same liabilities (with
the same priority in liquidation) as assets outside the closed block.
A policy may be within a class for which there is an experience-based
dividend scale in effect for 1998, even if it does not receive a 1998 dividend,
and, therefore, the policy would be included in the closed block. Experience-
based dividend scales (based on experience factors relating to, among other
things, investment results, mortality, lapse rates, expenses, premium taxes and
policy loan interest and utilization rates) are calculated for classes of
insurance policies based upon actuarial formulas. Generally, actual mortality,
morbidity, expenses and investment income for each class are compared to what
was predicted when the policy class was priced to determine the amount, if any,
of the dividend that should be paid. Approximately 36% of all of Standard
Insurance Company's in force policies as of December 31, 1998 had an experience-
based dividend scale in effect for 1998. In addition to individual life policies
that have experience-based dividend scales, Standard Insurance Company has, for
administrative convenience, also included certain other individual policies in
the closed block.
Premiums received and policy benefits paid by Standard Insurance Company on
the policies included in the closed block and investment cash flows from the
assets allocated to the closed block will be added to or withdrawn from the
closed block as provided in the plan of reorganization. Standard Insurance
Company will charge the closed block with foreign, federal, state or local taxes
as well as investment management expenses relating to the closed block as
provided in the plan of reorganization. Standard Insurance Company will also
charge the closed block for commissions and other expenses of administering the
policies included in the closed block. Cash payments with respect to reinsurance
will be withdrawn from or paid to the closed block. Cash flows from assets and
premiums allocated to the closed block should be sufficient to pay the benefits,
dividends and expenses of policies included in the closed block and the
commissions, expenses and taxes relating to the closed block.
Dividends on the closed block policies will be set annually by the Board of
Directors of Standard Insurance Company in accordance with applicable law and
with the objective of exhausting the assets of the closed block upon the final
required payment under the last policy included in the closed block. Such
dividends will also be allocated among the policies included in the closed block
so as to reflect the underlying experience of the closed block and the degree to
which the various classes of closed block policies contributed to such
experience. An income statement and balance sheet for the closed block will be
prepared and submitted to the Director and the Board of Directors of Standard
Insurance Company annually. Standard Insurance Company will retain an
independent consulting actuary to review the operation of the closed block and
dividend determinations and to report to the Director and the Board of Directors
of Standard Insurance Company at least every three years, with the first review
to be made as of December 31, 2001.
Distribution of consideration for closed block policyholders will be
calculated in the same manner as for non-closed block policyholders. Other than
the additional assurance that their dividend expectations will be met, closed
block policyholders' interests in Standard Insurance Company after the
demutualization will be identical to those of non-closed block policyholders.
The closed block will continue in effect until either (i) the last policy in
the closed block is no longer in force or (ii) the closed block is dissolved.
The plan of reorganization provides that the closed block may not be dissolved
without the approval of the Director. If the closed block is dissolved, the
assets associated with the closed block will become part of Standard Insurance
Company's general funds. If the closed block is not dissolved, the expected life
of the closed block is over 50 years. Even if the Director approves the
dissolution of the closed block, the policies included in the closed block at
the time of dissolution will remain obligations of Standard Insurance Company
and dividends on these policies shall be apportioned by the Board of Directors
of Standard Insurance Company in accordance with applicable law.
55
<PAGE>
Closed Block Assets and Liabilities
In accordance with the plan of reorganization, certain of Standard Insurance
Company's invested assets, as well as cash and short-term investments, will be
allocated by Standard Insurance Company to the closed block. The mix of invested
assets allocated to the closed block will be generally the same as the mix of
invested assets constituting the assets which support Standard Insurance
Company's Individual Insurance segment. See "Business--Investments". Invested
assets with the following carrying values as of December 31, 1998 were allocated
to the closed block:
<TABLE>
<CAPTION>
December 31, 1998
--------------------------
Carrying Value % of Total
-------------- ----------
<S> <C> <C>
(Dollars in millions)
Fixed maturity securities....... $220.1 42.7%
Mortgage loans.................. 133.2 25.9
Policy loans.................... 90.4 17.6
Collateral loans................ 71.2 13.8
------ -----
Total $514.9 100.0%
====== =====
</TABLE>
The composition of assets in the closed block will change over time as a
result of new investments. New investments for the closed block acquired on and
after the funding date with closed block cash flows will be allocated to the
closed block upon acquisition and will consist only of investments permitted by
the investment policy for the closed block in effect at the time of investment.
Standard Insurance Company's management will manage the assets of the closed
block separately from its other assets. The assets allocated to the closed block
will be subject to the same liabilities (with the same priority in liquidation)
as assets outside the closed block.
Standard has retained Milliman & Robertson, Inc. to advise it in connection
with actuarial matters involved in the establishment and operation of the closed
block. The opinion of Daniel J. McCarthy, a consulting actuary associated with
Milliman & Robertson, Inc., dated September 28, 1998, and confirmed and restated
on January 19, 1999, states (in reliance upon the matters and subject to the
limitations described in such opinion), among other things, that the
establishment and operation of the closed block as contemplated make adequate
provision for allocating to the closed block assets which will be reasonably
sufficient to enable the closed block to provide for the guaranteed benefits,
certain expenses and taxes associated with closed block policies, and to provide
for the continuation of the dividend scales in effect for 1998 if the experience
underlying those scales (including the portfolio interest rate) continues. The
restated opinion, dated January 19, 1999, is included as Annex A of this
prospectus.
Effect of Closed Block on Consolidated Financial Statements
As a result of the establishment of the closed block, certain line items in
Standard's consolidated financial statements subsequent to the establishment of
the closed block will reflect material reductions in the reported amounts, as
compared to years prior to the establishment of the closed block, although these
changes will include amounts reflected for the addition of the closed block and
will thus have no effect on net income. The actual pre-tax results of operations
of the closed block will be reflected as a single line item in Standard's
consolidated statements of income entitled "Contribution from Closed Block",
whereas prior to establishment of the closed block, the results from the
underlying assets and business were reported in various line items in Standard's
consolidated statements of income, including premiums, net investment income,
policyholder benefits, policyholder dividends, commissions and operating
expenses. In addition, all assets and liabilities allocated to the closed block
will be reported in StanCorp's consolidated balance sheets separately as single
line items under the captions "closed block assets" and "closed block
liabilities". See "Unaudited Pro Forma Condensed Consolidated Financial
Information."
Federal Income Tax Consequences
It is a condition to the effectiveness of the plan of reorganization that
Standard receive an opinion of its special tax counsel, Debevoise & Plimpton,
that, based on the law, regulations and other authorities in effect as of the
effective date of the plan of reorganization:
56
<PAGE>
. Policies issued before the effective date will not be treated as newly
issued policies for any material Federal income tax purpose as a result
of the consummation of the plan of reorganization.
. The addition of policy credits as consideration to IRAs, TSAs or
individual life or annuity contracts issued to participants in qualified
plans will not adversely affect the tax-favored status of the contract
as an IRA or TSA, will not be a taxable transaction to the holder and
will not be treated as a contribution or distribution which will result
in any penalties to the holder.
. Eligible members receiving solely common stock under the plan of
reorganization will not recognize gain or loss for Federal income tax
purposes as a result of the demutualization.
. The summary of the principal Federal income tax consequences to eligible
members, set forth under the heading "Federal Income Tax Consequences
to Members" in the Information Statement provided to eligible members,
is complete and correct in all material respects.
Standard has not sought a private letter ruling from the Internal Revenue
Service regarding the Federal income tax consequences of the consummation of the
plan of reorganization.
In the opinion of Debevoise & Plimpton, special tax counsel to Standard, the
following sets forth the principal Federal income tax consequences to Standard
of the consummation of the plan of reorganization under current federal income
tax law and administrative rulings of the Internal Revenue Service. The opinion
of special tax counsel regarding the principal Federal income tax consequences
of the plan of reorganization to Standard is based on the accuracy of certain
representations and undertakings by Standard Insurance Company. No gain or loss
will be recognized for Federal income tax purposes by StanCorp, Standard
Insurance Company or any of their affiliates as a result of the conversion of
Standard Insurance Company from a mutual life insurance company to a stock life
insurance company or the distribution of common stock, cash or policy credits to
eligible members in exchange for their membership interests in Standard
Insurance Company. Standard Insurance Company's Federal income tax attributes,
including its tax basis and holding period in its assets, earnings and profits
and tax accounting methods should not be significantly affected by the
consummation of the plan of reorganization. For Federal income tax purposes, the
affiliated group of which Standard Insurance Company is the common parent
immediately before the consummation of the plan of reorganization should remain
in existence and continue to be eligible to file a consolidated return, with
StanCorp as the new common parent of such group. It is also expected that
StanCorp, Standard Insurance Company and their affiliates will not incur any
current Federal income tax liability as a result of the distribution of the non-
insurance subsidiaries to StanCorp under the terms of the plan of
reorganization.
Certain ERISA Considerations
The receipt of common stock, cash or policy credits by members that are
employee benefit plans with respect to which Standard is a "party in interest"
under ERISA or a "disqualified person" under the Internal Revenue Code could
be viewed as prohibited by, respectively, Section 406 of ERISA and Section 4975
of the Internal Revenue Code. Accordingly, Standard has applied for an
administrative exemption from the Department of Labor to cover such
transactions. In the event the Department of Labor were not to grant an
administrative exemption, either prior to the effective date or after the
effective date on a retroactive basis, or the receipt of consideration by
members that are employee benefit plans were determined to be prohibited by
Section 406 of ERISA and Section 4975 of the Internal Revenue Code, Standard
could be subject to substantial excise taxes under Section 4975 of the Internal
Revenue Code. Administrative exemptions have been provided in previous
demutualizations similar to Standard's, however, and Standard believes that it
is likely that such an exemption will be granted to it.
BUSINESS
Standard is a leading provider of group life and disability insurance
products, serving approximately 29,000 employer groups representing over four
million employees. Standard also provides products to fund retirement plans and
other insurance products to employers and groups as well as life insurance,
disability insurance and retirement products to individuals. As of December 31,
1997, Standard was the
57
<PAGE>
16th largest mutual life insurance company in the United States, as measured by
statutory premiums of $1.1 billion.
Standard intends to reorganize from a mutual life insurance company to a stock
life insurance company through the demutualization, which will be completed upon
the consummation of the offering. Standard is undergoing the demutualization, in
part, to gain access to capital sources that will allow it to pursue growth
opportunities in the expanding group disability and retirement plans markets.
Standard divides its business into three segments: Group Insurance, Retirement
Plans and Individual Insurance. Standard's 1998 revenues of $1.2 billion
included $933.1 million (75.7% of total revenues) from its Group Insurance
segment, $69.1 million (5.6% of total revenues) from its Retirement Plans
segment and $222.7 million (18.1% of total revenues) from its Individual
Insurance segment. Standard is licensed to sell insurance in all U.S. states
(except New York, where it is an authorized reinsurer), the District of Columbia
and the U.S. Territory of Guam.
Group Insurance Segment. Standard's Group Insurance segment sells long
term disability and short term disability insurance, group life insurance,
accidental death and dismemberment insurance and group dental insurance.
According to Employee Benefit Plan Review, based upon the number of group
policies sold in 1997, Standard ranked third in sales of long term disability
insurance, fifth in sales of short term disability insurance and eighth in
sales of group life insurance in the United States. Group insurance products
are sold by Standard's group insurance sales representatives through brokers,
agents, employee benefit consultants and other distributors. Standard has
over 105 group insurance sales representatives in 29 offices throughout the
nation and relationships with approximately 13,000 brokers nationwide.
Premiums for the Group Insurance segment grew at a compound annual rate of
9.6% from 1994 through 1998.
Retirement Plans Segment. The Retirement Plans segment sells full-service
401(k) and other pension plan products and services to employers. Standard
markets Retirement Plans products and services primarily to employers with 50
to 500 employees, through brokers, agents, employee benefit consultants and
other distributors served by Standard's seven regional Retirement Plans sales
offices. Participants in retirement plans may choose from a variety of fixed
income investments managed in Standard's general account, and equity and fixed
income investments in 43 nationally known mutual funds held in its separate
account. Standard earns fees based upon administrative services provided and
assets managed, as well as an interest spread on the assets held in the
general account. Assets managed by the Retirement Plans segment grew from
$736.8 million at December 31, 1994 to $1.3 billion at December 31, 1998, a
compound annual growth rate of 15.0%.
Individual Insurance Segment. The Individual Insurance segment sells life
insurance, disability insurance and annuities to individuals. Standard's
Individual Insurance products are distributed by approximately 2,280 licensed
agents and brokers in the Western and Central regions of the nation. Standard
has focused on providing high value products in its Individual Insurance
segment. In 1998, its Flexible Premium Deferred Annuity was rated by A.M. Best
Policy Reports as the best product of its type for 10-year accumulation and
surrender values. As a result, total revenues in the Individual Insurance
segment have remained relatively stable in recent years.
At December 31, 1998, Standard had total general account invested assets of
$4.2 billion, consisting of $2.2 billion in investment securities, $1.7 billion
in mortgage loans, and $275.2 million in other investments. Relative to other
life insurance companies, Standard has historically maintained a larger portion
of its invested assets in mortgage loans, which are well-matched against its
large block of long-term reserves, particularly for its long term disability
products. Standard has focused on originating small commercial mortgage loans,
which it believes provide a higher yield for its mortgage portfolio. The
delinquency and loss performance of Standard's mortgage loan portfolio has
consistently outperformed the life insurance industry averages as reported by
the ACLI. At December 31, 1998, Standard's loans that were either delinquent or
in process of foreclosure totaled 0.10% of its mortgage loan portfolio, compared
to the ACLI industry average at September 30, 1998 of 0.67%.
Standard has recently commenced operations in two complementary financial
service businesses, a mortgage lending subsidiary and a real estate management
firm. The most significant of these is Standard Mortgage Investors, LLC
("SMI") which originates mortgage loans for Standard's investment portfolio
and generates fee income from the origination and servicing of mortgage loans
sold to institutional investors.
58
<PAGE>
SMI commenced operations in 1996 and is staffed by former members of Standard's
mortgage loan department. At December 31, 1998, SMI serviced $1.7 billion of
loans for Standard and $239.9 million of loans for other banks and life
insurance companies. New loan originations increased from $280.8 million in 1996
to $440.9 million in 1998.
Strategy
Upon completion of the demutualization, Standard plans to pursue additional
expansion in the under-penetrated and growing group insurance markets, grow its
complementary retirement plans business and capitalize on its demonstrated
expertise in commercial mortgage lending. Management believes its Individual
Insurance segment will continue to provide stability and diversification of
earnings.
Standard's growth strategy builds on actions taken in 1994, when Ronald E.
Timpe became the Chief Executive Officer. At that time, senior management
undertook a strategic review to identify key growth opportunities for Standard's
continued success. Senior Management determined that there were significant
opportunities for growth in the Group Insurance and Retirement Plans segments
and in its mortgage loan business. In 1997, Standard's management and its Board
of Directors concluded that Standard's future growth and financial flexibility
might be constrained by its mutual company form and, therefore, recommended that
Standard undertake the demutualization. Standard intends to pursue its growth
objectives by internal expansion and may also consider acquisitions as
opportunities arise.
In the Group Insurance segment, Standard's strategy is to grow by
participating in the expansion of the market for its products and services as
well as by increasing market share. According to a survey conducted for the U.S.
Department of Labor in 1994-95 (the most recent survey by the Department of
Labor), only one-fourth of all U.S. workers were covered by long term disability
insurance and one-third of such workers were covered by short term disability
insurance. As reported by the Life Insurance Marketing Research Association
("LIMRA"), annualized new premiums for long term disability and short term
disability insurance grew at a compound annual rate of 16.7% between 1994 and
1997, and Standard's management expects the market to continue growing in the
future.
Since 1991, Standard's Group Insurance segment has pursued geographic
expansion by opening 12 new sales offices in the Central and Eastern regions of
the nation. Standard intends to pursue additional sales growth in the Central
and Eastern regions by opening additional sales offices and adding sales
representatives to its existing offices in these regions. Standard also intends
to retain a strong focus on diversification among industry segments and job
classifications. Long term disability and group life insurance annualized sales
by region among the three regions in which Standard operates was distributed as
follows at December 31, 1991 and 1998:
Long Term Disability and Group Life Insurance Annualized Sales by Region
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1991
-------------------- --------------------
Sales % of Total Sales % of Total
--------- ---------- ------ -----------
<S> <C> <C> <C> <C>
(Dollars in millions)
Western Region... $ 34.3 33.7% $21.1 49.1%
Central Region... 30.6 30.1 16.2 37.7
Eastern Region... 36.9 36.2 5.7 13.2
------ ----- ----- -----
Total......... $101.8 100.0% $43.0 100.0%
====== ===== ===== =====
</TABLE>
The opening of additional sales offices and the continued addition of sales
representatives to Standard's newer offices in the Central and Eastern regions
are expected to result in additional sales growth in these regions. As
geographic expansion is pursued, Standard also intends to retain a strong focus
on diversification among industry segments and job classifications.
Management also believes that meaningful growth opportunities exist for its
Retirement Plans segment. Standard's target client base of small- and medium-
sized businesses is experiencing strong growth, and many of these businesses do
not yet provide 401(k) programs for their employees. According to LIMRA, in
1996, less than 50% of employee groups with between 25 and 100 employees were
covered
59
<PAGE>
by a 401(k) plan. Approximately two-thirds of new sales by Standard's Retirement
Plans segment are to businesses instituting a 401(k) program for the first time.
Assets under management in existing plans have grown rapidly. Assets in Standard
plans that were continuously in force from December 31, 1993 to December 31,
1998 grew at a compound annual rate of 18.9%. Additionally, Standard's
management believes that meaningful cross-selling opportunities exist between
its group insurance business and its newer retirement plans business. Standard
has opened three new Retirement Plans sales offices since 1992 and expects to
continue its expansion into additional markets where Standard's group insurance
presence will allow it to take advantage of existing client and broker
relationships.
Management expects that the Individual Insurance segment will continue to
provide stability and diversification of earnings. Management believes that the
market for the fixed life and annuity products offered by the segment has
matured and provides limited growth opportunities. However, it believes there
may be growth opportunities in certain other product lines, including individual
disability income insurance and variable insurance products, and Standard
intends to pursue these opportunities in the future.
Standard has developed a recognized expertise in originating and servicing
small commercial mortgage loans that has contributed to industry-leading returns
in its investment portfolio. In 1998, Standard recorded a statutory net
investment yield on its general account invested assets of 8.11%. Standard's
mortgage loan delinquency and loss rates have been significantly less than
industry averages for the past thirteen years, and its ability to underwrite
small commercial mortgages has been recognized by rating agencies as a strength.
Standard intends to leverage its expertise and grow its commercial mortgage
operations by originating and servicing mortgage lending for other institutional
investors.
Group Insurance Segment
Standard's Group Insurance segment markets group insurance and other
ancillary products to public and private employers and associations. The Group
Insurance segment was responsible for 75.7%, 74.3% and 70.8% of Standard's
revenues in 1998, 1997, and 1996, respectively. According to Employee Benefit
Plan Review, based upon the number of group policies sold in 1997, Standard
ranked third in sales of long term disability insurance, fifth in sales of short
term disability insurance and eighth in sales of group life insurance in the
United States. Group insurance products are sold by Standard's group insurance
sales representatives through a national network of brokers, agents, employee
benefit consultants and other distributors.
Standard seeks to provide high-quality employee benefit products that are
competitively priced and supported by industry-leading customer service to
brokers, employers and insured employees. In a recent independent survey
conducted on Standard's behalf by the Life Office Management Association, Inc.,
an industry-sponsored research organization, 95% of Standard's brokers and
insured employers responding indicated that they were satisfied with Standard's
service.
Products
Standard's group insurance products include long term disability insurance,
short term disability insurance, life insurance, accidental death and
dismemberment and dental insurance. Standard does not market or sell any medical
indemnity or medical managed care products. The following table sets forth the
premiums and sales activity for each of Standard's Group Insurance products for
the periods indicated:
60
<PAGE>
Premiums and Sales Activity by Product
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
(Dollars in millions)
Premiums:
Long term disability........... $350.5 $323.6 $279.7
Short term disability.......... 75.4 61.9 49.4
Life and accidental death and.. 285.0 262.2 234.0
dismemberment
Dental and other............... 73.6 66.4 58.9
------ ------ ------
784.5 714.1 622.0
Medical stop loss (1).......... -- 3.0 7.4
------ ------ ------
Total........................ $784.5 $717.1 $629.4
====== ====== ======
Sales (annualized new premiums):
Long term disability........... $ 50.6 $ 66.8 $ 58.5
Short term disability.......... 28.7 14.4 16.9
Life and accidental death and.. 51.2 43.9 48.0
dismemberment
Dental and other............... 18.4 16.8 12.9
------ ------ ------
148.9 141.9 136.3
Medical stop loss (1).......... -- 1.3 3.4
------ ------ ------
Total........................ $148.9 $143.2 $139.7
====== ====== ======
Persistency ratio (premiums)........ 84.8% 86.1% 84.1%
</TABLE>
___________________________
(1) Standard discontinued offering medical stop loss insurance effective January
1, 1997. Sales for 1997 reflected above include policies in process of
issuance at January 1, 1997.
Long Term Disability Insurance. Long term disability plans provide partial
replacement of earnings to insured employees who become disabled for extended
periods of time. Standard's basic long term disability product covers
disabilities which occur both at work and elsewhere. In order to receive
disability benefits, an employee must be continuously disabled for a specified
waiting period, generally ranging from 30 to 180 days, as provided by the
policy. Monthly benefit payments ranging from 50% to 70% of salary are provided
as long as the employee remains continuously disabled. These benefits usually
are offset by other income that the disabled employee receives from sources such
as social security disability, workers compensation and sick leave. These
benefits also may be subject to certain maximum amounts and to maximum benefit
periods. Long term disability accounted for 44.7%, 45.1%, and 44.4% of group
insurance premiums for 1998, 1997, and 1996, respectively.
Short Term Disability Insurance. Short term disability plans provide
partial replacement of earnings to insured employees who are temporarily
disabled. Short term disability plans generally require a short waiting period,
ranging from one to thirty days, before an employee may receive benefits.
Maximum benefit periods generally do not exceed 26 weeks. Short term disability
benefits also may be offset by other income, such as sick leave, that a disabled
employee may receive. Standard's basic short term disability policy covers non-
occupational disabilities only. Short term disability accounted for 9.6%, 8.6%,
and 7.8% of group insurance premiums for 1998, 1997, and 1996, respectively.
Life and Accidental Death and Dismemberment Insurance. Group life insurance
provides coverage on the insured for a specified period and has no cash value.
Coverage is offered to employees and their dependents. Accidental death and
dismemberment insurance is usually provided in conjunction with group life and
is payable after the accidental death of the insured employee in an amount based
on the face amount of the policy. Accidental death and dismemberment also covers
dismemberment of the insured employee in an amount based on a schedule contained
in the policy. Group life and accidental
61
<PAGE>
death and dismemberment insurance accounted for 36.3%, 36.6%, and 37.2% of group
insurance premiums for 1998, 1997, and 1996, respectively.
Dental Insurance and Other. Group dental insurance plans reimburse insured
employees and their dependents for dental services. Plans may cover only
preventive and basic care or more comprehensive care, including major services
and orthodontia. Group dental insurance and other accounted for 9.4%, 9.3%, and
9.4% of group insurance premiums for 1998, 1997, and 1996, respectively.
Medical Stop Loss Insurance. Group medical stop loss plans are written to
insure an employer's medical reimbursement plan for a single claim over a
specified amount, to reimburse an employer when claims exceed an aggregate
amount, or both. In order to concentrate on its core group insurance business,
Standard discontinued the sale of group medical stop loss plans effective
January 1, 1997.
Marketing and Distribution
Over 100 well-trained group insurance sales representatives market Standard's
group products exclusively. These sales representatives, who are employees of
Standard, are compensated through salary and an incentive compensation program.
They sell Standard's group insurance products through a nationwide network of
approximately 13,000 employee benefits brokers, agents and consultants.
Standard's group insurance sales representatives are located in 29 offices in
principal cities of the United States and are managed by three regional
managers. These group field offices also provide field underwriting, sales
support and service through a field administrative staff of more than 150
employees.
Standard's group insurance products are designed for groups ranging in size
from two to over 150,000 lives. Standard is one of the leading providers of
group disability insurance to state governments and other public entities,
insuring approximately 1,600 such groups. Nonetheless, Standard endeavors to
market its group products to many different industries to provide industry
diversification, reducing potential claim fluctuations that may be associated
with specific businesses or professional groups. Standard's long term disability
and group life insurance annualized premiums in force by industry at December
31, 1998 are set forth in the table below:
Long Term Disability and Group Life Insurance Annualized Premiums In Force by
Industry
<TABLE>
<CAPTION>
At December 31, 1998
---------------------
Premiums % of Total
---------- ----------
<S> <C> <C>
(Dollars in millions)
Public Entities..... $143.2 24.5%
Services............ 101.3 17.3
Professional........ 90.4 15.4
Manufacturing....... 81.9 14.0
Finance............. 34.9 6.0
Schools............. 33.2 5.7
Retail.............. 27.5 4.7
Transportation...... 24.9 4.2
Utility............. 13.5 2.3
Construction........ 8.4 1.4
Resources........... 6.3 1.1
Other............... 20.0 3.4
------ -----
Total............ $585.5 100.0%
====== =====
</TABLE>
Standard's management believes that diversification by case size also
contributes to more stable claims experience and strives to maintain a diverse
range of case sizes in its group insurance portfolio. Standard's long term
disability and group life insurance annualized premiums in force by case size at
December 31, 1998 are set forth in the table below:
62
<PAGE>
Long Term Disability and Group Life Insurance Annualized Premiums In Force by
Case Size
<TABLE>
<CAPTION>
At December 31, 1998
---------------------
Premiums % of Total
---------- ----------
<S> <C> <C>
(Dollars in millions)
Small (fewer than 100 lives).............................. $164.0 28.0%
Medium (100-999 lives).................................... 133.6 22.8
Large (1000 or more lives, but less than $1 million of.... 124.2 21.2
annualized premium)
Jumbo ($1 million or more of annualized premium).......... 163.7 28.0
------ -----
Total........................................................ $585.5 100.0%
====== =====
</TABLE>
Standard's strong market position has been based upon a historical focus on
the Western United States. Since 1991, however, Standard has opened twelve new
sales offices in the Eastern and Central regions of the nation. As staff members
in the newer offices have gained experience selling Standard's products and
additional sales representatives have been added, sales of group insurance
products in Standard's Eastern and Central regions have grown.
While sales in all regions are increasing, management believes that Standard
can achieve additional growth and penetration in all of its markets, but
particularly in the Eastern and Central regions where most offices have been
established for only a few years. Standard's long term disability and group life
insurance annualized premiums in force, by region, at December 31, 1998 are set
forth in the following table:
Long Term Disability and Group Life Insurance Annualized Premiums In Force by
Region
<TABLE>
<CAPTION>
At December 31, 1998
---------------------
Premiums % of Total
---------- ----------
<S> <C> <C>
(Dollars in millions)
Western...... $290.8 49.7%
Central...... 152.4 26.0
Eastern...... 142.3 24.3
------ -----
Total... $585.5 100.0%
====== =====
</TABLE>
Standard's long term disability and group life insurance annualized premiums
in force by state at December 31, 1998 are set forth in the following table:
Long Term Disability and Group Life Insurance Annualized Premiums In Force by
State
<TABLE>
<CAPTION>
At December 31, 1998
----------------------
Premiums % of Total
---------- -----------
<S> <C> <C>
(Dollars in millions)
California.... $107.9 18.4%
Oregon........ 74.1 12.7
Washington.... 72.7 12.4
Texas......... 40.4 6.9
Florida....... 25.9 4.4
Missouri...... 25.8 4.4
Pennsylvania.. 18.7 3.2
Arizona....... 15.7 2.7
Colorado...... 15.3 2.6
Other......... 189.0 32.3
------ -----
Total....... $585.5 100.0%
====== =====
</TABLE>
63
<PAGE>
Product Development
Standard continually monitors its Group Insurance products to ensure that its
products and services remain innovative and competitively priced and provide the
benefits that customers desire. While many customers seek only basic coverage,
Standard's management believes that it is also important to offer customized
coverage for groups with unique needs. Examples of recent product innovations
that are offered to Standard customers are:
. An accelerated benefits feature for group life policies that, under
certain conditions, provides up to 70% of the face amount to fund
medical and other expenses for an employee who is terminally ill, while
still assuring a minimum payment to the designated beneficiary.
. A "family benefit" package for group life policies that can include
funds to pay college or retraining expenses for the spouse or other
dependent of a deceased employee, as well as designated funeral
expenses.
. A short term disability administrative-services-only contract for long
term disability customers who wish to self-insure their short term
disability coverage or replace their sick leave program. This provides a
valuable service for employers and allows Standard to become involved
earlier in the management of disability claims so that rehabilitation
and back-to-work strategies can be instituted at the earliest
appropriate time for each claimant.
Product Pricing and Management
Management believes that the flexibility in Standard's group products to
periodically re-underwrite and re-price group policies assists Standard in
maintaining the profitability of its group business. Standard initially sells
its group insurance products with a rate guarantee period of up to three years.
During the rate guarantee period, rates may only be changed in the event of a
material change in the composition of the insured group or a change in law. Once
this period has expired, Standard may assess the profitability of each group
policy annually and adjust rates to reflect claims experience and other relevant
factors.
Pricing for new and renewing group policies is based upon expected morbidity,
mortality and persistency, as well as on assumptions concerning operating
expenses, projected investment income and other relevant factors. Pricing rates
are adjusted regularly to reflect current trends.
Underwriting and Policy Issue
Standard's Group Underwriting and Policy Issue Department consists of
approximately 80 experienced case underwriters who have access to doctors,
medical underwriters and more than 75 other support personnel, including
specialized legal and accounting staff, to assist in evaluating the
occupational, geographic, medical, legal, financial and other risks associated
with each group coverage.
Extensive job-specific training is provided for Standard's underwriting staff.
An internal education and development unit is responsible for ensuring that each
newly hired underwriter is fully trained in risk assessment techniques. A
considerable amount of additional training in more advanced topics is regularly
provided to the more senior members of the underwriting staff.
Underwriters are assigned to regional teams to focus on the unique risks and
economic factors that affect each area of the nation. In addition, because large
employee groups often present unique underwriting and plan design challenges,
Standard has formed a special unit that specializes in large case underwriting.
Underwriters on all teams maintain regular contact with Standard's benefit
analysts and actuarial staff to remain current on experience trends and special
claims circumstances.
An extensive policy manual, developed over the 45-year period during which
Standard has been active in the group insurance business, guides the
underwriting decision-making process. Each underwriting quotation is subject to
the review of an independent senior member of the Underwriting Department before
it is issued.
64
<PAGE>
Claims Administration
Approximately 270 Standard employees manage group and individual disability
claims with an emphasis on getting people back to work. The staff includes
approximately 30 health care specialists and over 180 professional benefits
analysts who receive extensive and ongoing training in claims management
techniques.
Disability claims are managed by teams that include a nurse case manager,
several analysts and a vocational specialist. The benefit teams are supported by
doctors, specialty nurses and rehabilitation specialists, as well as legal and
accounting professionals and a special investigation unit that is used when
fraudulent claims are suspected.
Fair and objective claim determinations are emphasized, as is the importance
of communicating regularly with each claimant. Company experience has shown that
active management during the early period of a claim enhances the likelihood of
successfully returning the claimant to work. Accordingly, registered nurses and
vocational specialists actively review each new claim to determine appropriate
intervention strategies and seek to identify reasonable accommodations to
facilitate return-to-work opportunities. Historically, the duration of
approximately 50% of all claims filed under Standard Insurance Company's long
term disability policies are of twelve months or less.
The long term disability claims management staff use computer software that
aids in determining benefits in accordance with the provisions of each specific
contract, calculating reserves, offsetting benefits, taxes and overpayments,
establishing duration guidelines and generating correspondence and management
reports.
A separate staff manages group and individual life and dental claims. Life and
accidental death and dismemberment claims are managed by approximately 25 claims
examiners and support personnel. Dental claim processing is a high-volume
activity that relies primarily on automated systems for efficient processing.
Approximately 40 dental claims examiners and support staff process more than
50,000 claims per month using increasingly sophisticated technology.
Approximately 23% of dental claims are currently submitted to Standard
electronically by dental providers, and that number is expected to grow to 35%
within two years. More than 30% are adjudicated automatically, using systems
designed to screen for routine procedures, oral exams and preventive care.
Remaining claims that are received in paper format are scanned into an
electronic imaging system and processed by the examiners for payment.
Northwestern Mutual Life Insurance Company
Standard Insurance Company is involved in a reinsurance/third-party
administration arrangement with Northwestern Mutual Life Insurance Company
("NML") to market long term disability and short term disability products
using NML's name and career agency distribution system. Under this arrangement,
Standard reinsures 60% of the risk, and receives 60% of the premiums, for
policies issued on NML's behalf. In addition to assuming insurance risk,
Standard provides product design, pricing, state regulatory filings,
underwriting, legal support, claims management and other administrative services
under this arrangement. Premiums received by Standard for the assumed NML
business accounted for 4.2% of Standard's total premiums in 1998, and 4.0% of
Standard's total premiums in both 1997 and 1996.
Standard may consider similar arrangements with other financial institutions
in the future.
Retirement Plans Segment
Standard's Retirement Plans segment offers full-service 401(k) and other
pension plan products and services to private and public employers. Most sales
of Standard's Retirement Plans products include both financial services and
record-keeping arrangements, although financial services may be provided on a
stand-alone basis. The Retirement Plans segment was responsible for 5.6%, 5.8%,
and 6.7% of Standard's total revenues in 1998, 1997, and 1996, respectively.
The following table shows the number of retirement plan contracts in force and
assets under management for the periods indicated:
65
<PAGE>
Retirement Plans Segment
<TABLE>
<CAPTION>
At December 31,
---------------------------
1998 1997 1996
-------- ------ -------
<S> <C> <C> <C>
(Dollars in millions)
Contracts in force:
Defined benefit........... 70 78 78
Defined contribution....... 705 670 604
Financial services only.... 90 89 90
-------- -------- ------
Total..................... 865 837 772
======== ======== ======
Assets under management:
General account........... $ 631.3 $ 637.7 $649.0
Separate account........... 668.5 483.3 322.8
-------- -------- ------
Total..................... $1,299.8 $1,121.0 $971.8
======== ======== ======
</TABLE>
Products
Standard's primary retirement plan product is a bundled 401(k) plan which
provides both financial services and record-keeping arrangements. Standard
currently offers 44 investment options, of which any single plan may include 20
alternatives. Investments may be directed at the employer or employee level, or
both. Investment options include a short-term investment fund and two fixed-rate
portfolio funds that are managed by Standard's internal investment staff as a
portion of Standard's general account. In addition, plan sponsors may choose
from among 43 mutual funds provided by well-known managers including Vanguard,
Warburg Pincus, Janus, Columbia, and Fidelity, which are included in Standard's
separate account. A wide range of investment styles is offered including large-
and small-cap, growth, value, balanced, and indexed funds. All investment gains
and losses on separate account investments, net of fees charged by Standard and
the fund manager, accrue to the plan participants.
Standard does not offer guaranteed investment contracts.
Marketing and Distribution
Standard's retirement plan products are designed to appeal primarily to groups
of 50 to 500 participants. Standard targets its sales effort toward employer
groups that can provide at least $120,000 of new deposits annually or $200,000
of assets that can be transferred from existing plans.
Retirement plan products are currently marketed by salaried sales
representatives in seven offices through a network of employee benefit brokers
in the Western and Central United States. According to LIMRA, in 1996, fewer
than 50% of employee groups with between 25 and 100 employees were covered by
qualified 401(k) plans. In addition, fewer than 200 of Standard's current Group
Insurance customers (representing less than 1% of its group insurance customers)
are covered by a retirement plan provided by Standard. Standard believes
significant potential exists to increase sales of 401(k) products through the
enhancement of cross-selling efforts in its current retirement plan markets and
the establishment of cross-selling opportunities in markets not yet served by
the Retirement Plans segment.
The Retirement Plans segment has opened three new offices since 1992,
including its first Retirement Plans sales office in the Central region in
Cincinnati in December 1996. Standard expects to expand its marketing network in
other Central and Eastern markets that are currently served by Standard's Group
Insurance segment. Standard has been successful in achieving meaningful
increases in retirement plan assets under management in its newer offices. The
table below shows sales results and assets under management from these offices
for the periods presented:
66
<PAGE>
Sales and Assets under Management by Offices
<TABLE>
<CAPTION>
At or for the Year Ended
December 31,
-------------------------
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
(Dollars in millions)
Cincinnati
Sales....................... $14.9 $ 0.2 $ --
Assets under Management (1)... 52.2 28.4 --
Dallas
Sales......................... $ 9.1 $10.2 $11.0
Assets under Management (1)... 75.0 55.7 64.0
Denver
Sales......................... $ 7.5 $ 7.9 $ 5.2
Assets under Management....... 35.0 37.6 28.6
</TABLE>
(1) Approximately $28.3 million of assets under management were transferred from
Dallas to the Cincinnati office during 1997.
Product Pricing and Management
Factors considered in the pricing of retirement plan products include
projected investment returns, expenses, and persistency. Standard charges fees
for investment management and record-keeping services and establishes interest
crediting rates on fixed-rate funds to maintain a positive spread between the
return on invested assets and the interest credited to plan participants.
Returns on mutual fund investments are reported to plan participants net of fees
charged by Standard and the fund managers. Pricing levels for investment
management and administrative services may be adjusted periodically. For fixed-
rate funds managed in the general account, interest crediting rates may
generally be adjusted periodically as market interest rate changes occur. See
"--Investments" for a description of Standard's approach to asset/liability
management.
Most of Standard's retirement plan contracts permit the partial or total
withdrawal of fund balances under certain circumstances, but may be subject to
withdrawal fees or penalties. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Liquidity and Capital Resources--
Standard Insurance Company". Some withdrawals may be discouraged by federal tax
laws that impose penalties on plan participants for withdrawals under certain
circumstances.
Administration
All retirement plans are administered in Standard's home office in Portland,
Oregon, by a staff of more than 125 professional and support personnel. The
Retirement Plans segment currently administers contracts under two
methodologies: traditional plans that allow quarterly investment directives by
employers and/or participants, and daily plans that allow daily investment
directives. Management believes that daily plans are more attractive to
customers and that administering both types of plans is inefficient and requires
more personnel than would be required if only one type of plan were offered.
Accordingly, management has decided to discontinue the traditional business.
Approximately 78% of Standard's retirement plan business has been converted to
daily administration as of December 31, 1998, and Standard plans to provide
daily administration for all plans by the end of 1999. Standard currently
provides systems that enable plan participants to access information regarding
their accounts by interactive telephone and a system to provide secure Internet
access to account information.
67
<PAGE>
Individual Insurance Segment
The Individual Insurance segment sells life insurance, disability insurance,
individual annuities and other insurance products to individuals. For the
individual insurance market, a growing segment of customers is now reaching 45
years of age and older and changing their focus from loss avoidance to asset
accumulation. A strong stock market is increasing competition from investments
other than life insurance and annuities. Management believes that the Individual
Insurance segment will continue to provide stability and diversification of
earnings. The Individual Insurance segment was responsible for 18.1%, 19.4%, and
21.7% of Standard's total revenues in 1998, 1997, and 1996, respectively.
Products
Standard's individual insurance products include whole life, universal life
(both single life and second-to-die), term life, disability income insurance and
individual annuities. For the life insurance-related products, several options
and riders are offered to provide such benefits as waiver of premium, accidental
death benefits, paid-up additions and accelerated benefits. Standard currently
does not offer a variable insurance product, but is investigating strategic
alliances or initiatives that will enable it to do so. A breakdown of premium
and sales by product is contained in the table below:
Premium and Sales by Product
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997 1996
------- ------ -----
<S> <C> <C> <C>
(Dollars in millions)
Premiums and contract charges:
Life............................... $82.0 $82.5 $ 90.9
Disability income.................. 8.7 8.2 8.1
Annuities.......................... 1.7 6.2 6.5
----- ----- ------
Total............................ $92.4 $96.9 $105.5
===== ===== ======
Sales (annualized new premiums):
Life............................... $ 9.3 $ 9.8 $ 9.4
Disability income.................. 2.4 1.5 1.3
Annuities.......................... 12.3 26.0 19.6
----- ----- ------
Total sales...................... $24.0 $37.3 $ 30.3
===== ===== ======
Persistency (% of premiums and contract 89.5% 90.9% 90.5%
charges)
</TABLE>
The Individual Insurance segment's major products are described below:
Whole Life. Whole life insurance provides guaranteed minimum death benefits
and guaranteed cash values in return for the periodic payment of a fixed premium
amount. Standard offers two plans, "whole life" with relatively lower premiums
and cash values and "special life" with higher premiums and cash values. Both
products offer a participating dividend scale. Policy dividends can currently be
paid in cash or used to reduce premiums, held to accumulate interest, purchase
paid-up insurance, purchase one-year term coverage or reduce a policy loan.
Standard plans to continue to offer products with a participating dividend scale
after the demutualization.
Term Life. Term life insurance provides life insurance protection for a
fixed period and has no cash value. Standard offers three major plans: an
increasing premium term to age 95, a ten-year level premium term, and a twenty-
year level premium product.
Universal Life. Universal life insurance provides guaranteed minimum death
benefits while providing the policyholder the flexibility to change both the
death benefit and premium payments. The cash values that emerge depend upon the
amount of premiums paid and the insurance charges. Cash values earn a minimum
guaranteed interest rate or higher if experience warrants. Insurance charges are
based on the
68
<PAGE>
more favorable of a current or a guaranteed scale. Standard offers a traditional
universal life policy and a second-to-die universal life policy.
Disability Income Insurance. Disability income insurance provides partial
replacement of earnings to insured participants who become disabled. The amount,
timing and duration of payments vary by policy type and coverage level
purchased. Standard offers both non-cancelable and guaranteed renewal disability
income products. Products designed specifically for small businesses include
coverage to reimburse the expense of ongoing overhead and assist in ownership
transition in the event of the disability of a key owner.
Annuities. Annuities are contracts that usually fund a stream of payments
either for a certain period or for life. Premium payments may vary from an
initial lump sum payment to fixed or variable monthly payments. Benefits may
commence either immediately or be deferred to a later date to take advantage of
certain tax laws. Annuities are often used to fund IRAs and other tax-favored
retirement plans.
Marketing and Distribution
Standard's Individual Insurance segment markets a broad line of individual
life and disability insurance and annuity products to middle- and upper-middle
income individuals and families, professionals and executives, small- to medium-
size business owners and individuals aspiring to these groups.
Standard's individual insurance products are distributed by approximately
2,280 licensed agents and brokers. Primary distribution channels include 15
career general agencies in seven western states, 16 independent master general
agencies in the Western and Central regions of the nation, and four regional
directors who oversee independent personal producing general agents in the
Central region.
Product Development
Standard monitors its individual insurance and annuity products to ensure
that they are competitively priced and meet customer needs. In 1998, A.M. Best's
Policy Reports rated Standard's Flexible Premium Deferred Annuity as the best
product of its type for 10-year accumulation and surrender values and ranked
certain of Standard's whole life products and certain of Standard's universal
life products among the top ten of such products among reporting companies. The
comparison of whole life products was based upon a twenty-year analysis of
actual premiums and other consideration paid, net of policyholder dividends and
other credits, while rankings of universal life products were determined by a
ten-year study of surrender values.
Product Pricing and Management
Factors considered in setting premiums, interest rates and benefits for
individual insurance and annuity products include assumptions as to future
investment returns, expenses, persistency, mortality and morbidity. Long-term
profitability of these products is affected by the degree to which future
experience deviates from these assumptions, as well as by Standard's adjustments
to non-guaranteed benefits and by other contract elements.
An important element of product pricing and management of interest-sensitive
products (universal life and deferred annuities) is the maintenance of target
interest rate spreads. For interest-sensitive products, crediting rates are
reviewed at least monthly (or more often if rates are changing rapidly) by
investment officers and pricing actuaries, with adjustments made as necessary.
Individual insurance products with cash values permit the policyholder to
partially or totally surrender or withdraw for the cash value. Such surrenders
or withdrawals may be subject to a charge imposed by Standard. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources--Standard Insurance Company". In
addition, some withdrawals may be discouraged by federal tax laws that impose
penalties on plan participants for withdrawals under certain circumstances.
69
<PAGE>
Underwriting and Administration
Individual underwriting is centralized at Standard's home office in Portland,
Oregon. In order to benefit from economies of scale, individual insurance claims
are managed by the Group Insurance segment's benefit staff and claim
administration systems.
Customer services for the segment's agency force and its individual insureds
and annuitants are provided by Standard's home office in Portland, Oregon. In
1998, Standard completed the installation of a new policy administration system
for the Individual Insurance segment which replaced several systems, the most
significant of which had been in operation since 1980. The new system is
designed to provide real-time access to customer records, which is expected to
allow Standard to substantially enhance its customer service to agents,
individual insureds and annuitants. In addition, management believes that the
newly installed system will contribute to increased efficiency and reduced
staffing levels in the Individual Insurance segment in the future.
Other
Standard's other financial service businesses are generally non-insurance
related, including its commercial mortgage loan business conducted by SMI and
its real estate management business conducted by Standard Real Estate Investors,
LLC ("SREI").
SMI. SMI originates small commercial mortgage loans, generally ranging in
size from $500,000 to $2.0 million, through a nationwide network of mortgage
banking companies. In addition to supplying loans for Standard's investment
portfolio, SMI sells mortgage loans and participation interests in such loans to
non-affiliated institutional investors such as banks and other life insurance
companies. SMI earns fees by providing loan servicing and other administrative
services to such investors. SMI commenced operations in 1996 and is staffed by
former members of Standard's mortgage loan department. Mortgage loans under
management, mortgage loans originated, mortgage commitment fees and servicing
and administrative income from Standard and non-affiliated investors for the
periods indicated are shown in the following table:
Standard Mortgage Investors, LLC
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
-------------------------------------
1998 1997 1996
--------- ------ ---------
<S> <C> <C> <C>
(in millions)
Mortgage loans under management:
Standard............................ $1,718.7 $1,595.9 $1,511.9
Other investors..................... 239.9 197.6 104.3
-------- -------- --------
Total............................ $1,958.6 $1,793.5 $1,616.2
======== ======== ========
Mortgage loans originated............. $ 440.9 $ 391.8 $ 280.8
Mortgage commitment fees received..... $ 4.8 $ 3.9 $ 2.6
Servicing and administration income:
Standard............................ $ 3.2 $ 2.5 $ 2.4
Other investors..................... 0.6 0.4 0.1
-------- -------- --------
Total............................ $ 3.8 $ 2.9 $ 2.5
======== ======== ========
</TABLE>
Management believes that SMI can originate more commercial mortgage loans
than will be required by Standard for its investment portfolio. SMI believes
that it is the largest life insurance company originator of small commercial
loans in the U.S., although its market share of small commercial loan
originations is less than 1% nationwide. Further, although SMI currently
originates mortgage loans in 85 Metropolitan Statistical Areas ("MSAs"), there
are at least 86 additional MSAs with populations of 300,000 or more which are
not yet served by SMI. Management believes it can increase its loan origination
market share and enhance fee income from both mortgage loan originations and
mortgage loan servicing. It has expanded its underwriting, closing and servicing
staff from 24 in 1996 to 34 at December 31, 1998 to process the increased volume
of business. SMI intends to expand its marketing of mortgage loans, loan
participations
70
<PAGE>
and related services to additional life insurance companies and commercial
banks, as well as to pension funds and mortgage loan conduits.
SREI. SREI commenced operations in 1996. It is staffed by former members of
Standard's real estate department and continues to manage Standard's home office
complex, as well as its investment and development real estate. SREI is licensed
to offer property and asset management services to non-affiliated investors, but
does not yet provide such services. See "Investments--Real Estate".
Investments
General
Standard maintains a diversified investment portfolio, which is regulated by
the insurance laws of the state of Oregon and other states in which Standard
does business. Oregon law generally limits investments to bonds and other fixed
maturity securities, mortgage loans, common and preferred stocks, real estate,
and obligations collateralized by cash values of life insurance policies.
Decisions to acquire and dispose of investments are made in accordance with
guidelines adopted and modified from time to time by Standard's Board of
Directors. Each transaction requires the approval of one or more members of
Standard's senior investment staff, with increasingly higher approval
authorities required for larger investments. All transactions are reported
monthly to the Executive Committee of the Board of Directors.
Asset allocation is dependent on factors such as asset/liability matching and
liquidity considerations, economic conditions, tax issues, regulatory
considerations and social/community considerations. Standard's policy reserves
and other liabilities are calculated in accordance with regulations and contract
provisions that must assume compounding interest at fixed rates of return.
Maturities and provisions for early withdrawal vary widely by product type and
contract form and are monitored continuously by Standard's actuaries. Cash flow
testing is performed annually to ensure that asset types and maturities are
appropriate for Standard's product mix and that Standard can meet its
obligations to policyholders under a wide variety of economic conditions.
Standard's cash flow testing consistently supports the allocation of a large
majority of assets to fixed income investments under a wide range of economic
scenarios. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Interest Rate Risk Management".
The following table summarizes consolidated general account invested assets at
the dates indicated:
71
<PAGE>
Summary of Investments
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------------------
Estimated Estimated
Carrying Value Market Value Yield (2) Carrying Value Market Value Yield (2)
--------------- ------------ -------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
Fixed Maturity Securities (1):
Available for Sale........... $2,188.5 $2,188.5 6.92% $1,709.7 $1,709.7 7.02%
Held to Maturity............. -- -- -- 324.8 343.7 7.77
Trading Securities........... 25.4 25.4 -- (3) -- -- --
Equity Securities............... 0.3 0.3 -- 0.1 0.1 --
Mortgage Loans.................. 1,708.1 1,887.1 9.64 1,603.2 1,631.8 9.37
Real Estate..................... 93.0 93.0 6.12 102.3 102.3 5.28
Policy Loans.................... 111.0 111.0 6.78 107.0 107.0 6.79
Collateral Loans................ 71.2 68.0 10.22 73.8 69.4 10.30
-------- -------- ----- -------- -------- -----
Total Investments............ $4,197.5 $4,373.3 7.95% $3,920.9 $3,964.0 8.01%
======== ======== ===== ======== ======== =====
</TABLE>
(1) Effective July 1, 1998, Standard adopted FAS No. 133 and in connection
therewith designated all bonds formerly classified as Held to Maturity as
Available for Sale.
(2) Yield is calculated as net investment income divided by average assets.
(3) Yield is not meaningful due to short-term asset holding period.
Because a significant portion of Standard's business is long term disability
insurance, Standard's liability structure is significantly different from that
of most U.S. life insurance companies. Standard's large block of disability
reserves cannot be withdrawn by policyholders or claimants, and claim payments
are issued monthly over periods that may extend for many years. This holding of
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. The delinquency and loss performance of Standard's mortgage
loan portfolio has consistently outperformed the life insurance industry
averages by wide margins as reported by the ACLI. The following table sets forth
the mortgage loan delinquency rates for Standard and the industry as a whole, as
reported by ACLI, at the dates indicated:
Mortgage Loan Delinquency (1)
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990
------ ------ ------- ---- ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Industry (2)... 0.67% 0.92% 1.76% 2.37% 3.31% 4.38% 6.37% 5.71% 3.62%
Standard....... 0.10 0.04 0.08 0.27 0.63 0.49 0.38 0.83 0.68
</TABLE>
(1) Includes loans that are delinquent and in process of foreclosure. As
defined by the ACLI, mortgage loans are classified as delinquent when they
are 60 days or more past due as to the payment of interest or principal.
(2) As reported by the ACLI. 1998 data reported as of September 30, 1998.
Due in part to the performance of the mortgage loan portfolio, Standard has
consistently recorded investment yields that are substantially more favorable
than the average life insurance industry performance. Standard's investment
strategy has been recognized by rating agencies as a competitive advantage for
Standard. The following table sets forth Standard's statutory net investment
yield and average statutory net investment yield for the industry as a whole, as
reported by the ACLI, at the dates indicated:
72
<PAGE>
Statutory Net Investment Yield (1)
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990
------ ----- ------ ------ ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ACLI Industry Average... -- 7.71% 7.79% 7.90% 7.63% 8.04% 8.58% 9.09% 9.31%
Portfolio Yield(2)(3)
Standard Investment..... 8.11% 8.27 8.37 8.54 8.45 8.84 9.25 9.46 9.53
Portfolio Yield(2)
Standard Mortgage Loan
Portfolio Yield(2)..... 9.29 9.46 9.90 10.12 10.15 10.45 10.63 10.84 10.83
</TABLE>
(1) Statutory net investment yield is defined as the quotient of (i) two times
net investment income for the period, divided by (ii) invested assets at the
beginning of the period plus invested assets at the end of the period, minus
net investment income for the period.
(2) Calculated on the basis of statutory accounting practices, net of expenses.
(3) 1998 annual data not yet available.
Fixed Maturity Securities
Standard's objective is to maintain a high quality, well-diversified fixed
income portfolio that provides both liquidity and competitive investment
returns. Standard's portfolio of fixed maturity securities consists primarily of
highly rated corporate bonds, U.S. treasury securities and obligations of U.S.
government sponsored agencies. The amount invested in fixed maturity securities
at December 31, 1998 was $2.2 billion, representing 52.7% of total general
account invested assets. At December 31, 1998, publicly traded bonds comprised
92.1% of Standard's total fixed maturity securities portfolio.
The public and private fixed maturity securities held by Standard are
evaluated annually by the Securities Valuation Office ("SVO") of the NAIC. The
SVO evaluates the investments of insurers for regulatory reporting purposes and
assigns securities to one of six categories called "NAIC Designations." NAIC
designations of "1" or "2" include bonds considered investment grade, which
include bonds rated Baa3 or higher by Moody's Investors Service or BBB- or
higher by Standard & Poor's. NAIC Designations of "3" through "6" are
referred to as below investment grade, which include bonds rated Ba1 or lower by
Moody's Investors Service and BB+ or lower by Standard & Poor's. At December 31,
1998, 99.5% of the fixed maturity securities portfolio was invested in NAIC
designation "1" and "2" investment grade securities. The weighted average
remaining maturity of the portfolio at that date was 6.6 years and the overall
average S&P quality rating was AA. There were no bonds in default at December
31, 1998.
New investments for the publicly traded portfolio consist of issues which are
rated BBB/Baa2 or higher. The same minimum credit standards apply to private
placements, which consist primarily of rated securities sold pursuant to Rule
144A under the Securities Act of 1933 (the "Securities Act") and
participations in private issues of larger companies, which also maintain rated
public debt. In cases where no public rating information is available, members
of Standard's securities staff satisfy themselves that the financial and
operating performance of the issuer would reasonably justify at least a Baa2/BBB
rating. No public or private issue is purchased unless it has received an NAIC 1
or 2 designation.
The following table sets forth the fixed maturity securities portfolio by
NAIC designation at the dates indicated:
73
<PAGE>
Fixed Maturity Securities by NAIC Designation
<TABLE>
<CAPTION>
At December 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Rating
Agency
NAIC Equivalent Carrying % of Carrying % of
Designation Designations Value Total Value Total
- ------------- ------------- --------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
1 A or higher $1,883.2 85.1% $1,767.6 86.9%
2 BBB/Baa 319.1 14.4 257.4 12.6
3 BB/Ba 10.7 0.5 9.5 0.5
4 B or lower 0.9 -- -- --
-------- -------- -------- --------
Total........................ $2,213.9 100.0% $2,034.5 100.0%
======== ======== ======== =========
</TABLE>
The table below sets forth the carrying value and the estimated fair value of
Standard's fixed maturity securities portfolio at the dates indicated:
Fixed Maturity Securities Carrying Value and Estimated Fair Value
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------
1998 1997
---------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Fair
Value Value
----------- ---------- --------- --------
<S> <C> <C> <C> <C>
(in millions)
U.S. Treasury and agency........ $ 589.7 $ 589.7 $ 598.2 $ 606.4
securities
Obligations of states and..... 36.8 36.8 36.0 36.2
political subdivisions
Debt securities issued by....... 69.5 69.5 65.4 66.6
foreign governments and
political subdivisions and
international agencies
Mortgage backed................. 9.4 9.4 12.5 12.6
securities
Corporate securities............ 1,508.5 1,508.5 1,322.4 1,331.6
-------- -------- -------- --------
Total................. $2,213.9 $2,213.9 $2,034.5 $2,053.4
======== ======== ======== ========
</TABLE>
The estimated fair values of fixed maturity securities are based on quoted
market prices, where available, or on values obtained from independent pricing
services. Where no independent value is available, fair value is estimated by
Standard. Foreign securities are limited to those issued in Canada and
denominated in U.S. dollars.
Standard believes that the maturity distribution of its fixed maturity
portfolio is sufficiently diversified and adequately matched to the durations
and cash flow requirements of its liabilities. Management carefully monitors and
manages the maturity distribution of its fixed maturity securities portfolio,
taking into consideration investment return requirements, asset and liability
durations, risk tolerance and cash flow requirements.
The following table summarizes fixed maturity securities by remaining
contractual maturity as of the dates indicated:
74
<PAGE>
Maturity Distribution of Fixed Maturity Securities Portfolio
<TABLE>
<CAPTION>
At December 31,
------------------------------------
1998 1997
----------------- ----------------
Carrying % of Carrying % of
Value Total Value Total
--------- ------- --------- -------
<S> <C> <C> <C> <C>
(Dollars in millions)
1 year or less....... $ 79.1 3.6% $ 49.4 2.4%
1 year to 5 years.... 941.7 42.5 637.3 31.3
5 years to 10 years.. 873.8 39.5 1,019.3 50.1
Over 10 years........ 319.3 14.4 328.5 16.2
-------- ----- -------- -----
Total................ $2,213.9 100.0% $2,034.5 100.0%
======== ===== ======== =====
</TABLE>
Management recognizes that adequate diversification of Standard's fixed
maturity portfolio is desirable to reduce Standard's vulnerability to adverse
credit events in specific businesses or economic sectors. With the exception of
U.S. treasury and agency securities, Standard's policy is to limit individual
issuer exposure in the fixed.maturity portfolio to no more than 10% of the sum
of statutory capital and surplus and the asset valuation reserve ("AVR")
($43.3 million at December 31, 1998). Fixed maturity securities were diversified
by category at December 31, 1998 as follows:
Fixed Maturity Securities Portfolio
<TABLE>
<CAPTION>
At December 31, 1998
--------------------------------------------------------
Public Private Total
------------------- ------------------ ----------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
---------- -------- --------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
U.S. Treasury and agency..... $ 575.1 28.2% $ 14.6 8.4% $ 589.7 26.6%
securities
Obligations of states and.... 36.8 1.8 -- -- 36.8 1.7
political subdivisions
Debt securities issued by.... 57.1 2.8 12.4 7.1 69.5 3.1
foreign governments and
political subdivisions and
international agencies
Mortgage backed securities... 8.9 0.4 0.5 0.3 9.4 0.4
Corporate securities:
Utilities................... 314.8 15.4 21.5 12.3 336.3 15.2
Transportation............... 85.7 4.2 17.8 10.2 103.5 4.7
Finance/Insurance............ 262.4 12.9 40.3 23.1 302.7 13.7
Industrial................... 698.5 34.3 67.5 38.6 766.0 34.6
-------- ----- ------ ----- -------- -----
Total....................... $2,039.3 100.0% $174.6 100.0% $2,213.9 100.0%
======== ===== ====== ===== ======== =====
</TABLE>
Mortgage Loans
Mortgage loans of $1.7 billion represented 40.7% of Standard's total general
account invested assets at December 31, 1998. Substantially all of this amount
were commercial mortgage loans, with the remainder in residential and
agricultural loans. Standard's mortgage loan portfolio is originated and managed
by SMI, which is wholly owned by Standard.
The focus of Standard's mortgage loan portfolio is on existing income-
producing properties with proven ability to generate net cash flow in excess of
debt service requirements. Diversification is accomplished by adherence to a
policy of making a large number of relatively small loans, typically ranging in
size from $500,000 to $2.0 million. Standard believes that because many other
long-term lenders compete for larger loans, there is decreased competition in
the small loan market. As a result, Standard is able to earn a higher yield on
its mortgage portfolio and enforce stricter underwriting requirements.
Major mortgage loan property types include industrial, retail and professional
and medical office, with lesser emphasis on multi-family housing, mobile home
parks and other property types. Standard does not
75
<PAGE>
make construction loans, land loans or loans which expose Standard to
significant development or initial leasing risk.
SMI's underwriting staff values each property, utilizing information from
mortgage banking correspondents and independent appraisers. SMI maintains strict
underwriting criteria, which limit loan-to-value ratios to 75% and amortization
periods to 25 years or less. Debt service requirements limit loan-to-value
ratios further on loans with shorter amortization periods. On new loans
originated in 1998, the approximate average amortization period was 19.4 years
and the average loan-to-value ratio was 66.5%.
Mortgage lending in the United States may be conducted on a recourse or non-
recourse basis. A fully non-recourse loan is one in which the loan is
collateralized by real estate, but the lender receives no pledge of repayment
from the borrower. Recourse loans are those in which the real estate collateral
is additionally supported by a pledge to repay from a borrower or guarantor.
Recourse may consist of an unconditional pledge to repay the loan in full, known
as "full recourse", or it may be limited to a specific maximum dollar amount,
known as "partial recourse". It may also be limited to specific obligations
such as the payment of real estate taxes, casualty insurance premiums and
proceeds and environmental claims. Standard's experience indicates that loans
with full or significant partial recourse are more likely to be repaid than non-
recourse loans. We estimate that at December 31, 1998, more than 90% of
Standard's mortgage loans provided for full recourse to borrowers deemed by
Standard to be creditworthy. An additional 5% had partial recourse, which
pledged repayment of no less than 25% of the loan amount in the event of
foreclosure. All of Standard's loans provide for recourse to the borrower or a
guarantor with respect to representations and warranties in the loan documents,
in the event of fraud, and with respect to environmental claims. Standard does
not make non-recourse loans.
Standard carefully monitors its mortgage lending exposure to individual
borrowers. No single borrower exceeded Standard's self-imposed limit of 10% of
the sum of statutory capital and surplus and AVR ($43.3 million at December 31,
1998).
Standard faces several different risks in connection with its mortgage loans
operations. Standard is exposed to the credit risks of delinquency and default
on its mortgage loans. However, the delinquency rate of Standard's mortgage loan
portfolio has historically been lower than the industry average. At December 31,
1998, Standard's loans that were either delinquent or in process of foreclosure
totaled 0.10% of its mortgage loan portfolio, compared to the ACLI industry
average at September 30, 1998 of 0.67%, the latest figures available. Such
credit risk is greater with respect to mortgage loans having balloon payment
maturities. The default rate on mortgage loans with balloon payment maturities
has historically been higher than for mortgage loans with standard repayment
schedules. In addition, since most of the principal is being repaid at maturity,
the amount of loss on a default is generally greater than on other mortgage
loans. At December 31, 1998, approximately 68.3% of Standard's portfolio of
mortgage loans had balloon payment maturities. See "Risk Factors--Investment
Portfolio Risks--Delinquencies and Balloon Payments on Mortgage Loans May
Adversely Affect Profitability".
Commercial mortgage loans and real estate investments are relatively illiquid.
If Standard requires significant amounts of cash at short notice, Standard may
have difficulty selling these investments at attractive prices, in a timely
manner or both.
In addition, under the laws of some states and under CERCLA, Standard may be
liable for certain environmental liabilities at a property securing a mortgage
held by Standard. Standard also risks such liability arising out of foreclosure
of a mortgaged property securing a mortgage loan owned by it. Standard routinely
conducts environmental assessments for real estate being acquired for
investment. As a commercial mortgage lender, Standard customarily conducts
environmental assessments prior to making mortgage loans secured by real estate
and before taking title through foreclosure to real estate collateralizing
delinquent mortgage loans held by Standard. See "Risk Factors--Environmental
Liability Exposure May Result From Mortgage Loan and Real Estate Investments".
The following table sets forth Standard's mortgage portfolio by property type
at the dates indicated:
76
<PAGE>
Composition of Mortgages by Property Type
<TABLE>
<CAPTION>
At December 31,
--------------------------------------
1998 1997
------------------ ----------------
Carrying % of Carrying % of
Value Total Value Total
---------- ------- --------- --------
<S> <C> <C> <C> <C>
(Dollars in millions)
Retail......... $ 845.2 49.5% $ 815.8 50.9%
Industrial..... 449.4 26.3 412.0 25.7
Office......... 291.5 17.1 259.7 16.2
Commercial..... 61.1 3.6 56.1 3.5
Apartment...... 43.1 2.5 40.6 2.5
Residential.... 16.0 0.9 15.4 1.0
Agricultural... 1.1 0.1 1.4 0.1
Hotel/Motel.... 0.7 -- 2.2 0.1
-------- ----- -------- -----
Total........ $1,708.1 100.0% $1,603.2 100.0%
======== ===== ======== =====
</TABLE>
Standard's concentration of mortgage loans in the Western states is the
result of its location on the West Coast and the historical focus of its
business activities west of the Rocky Mountains. At December 31, 1998, 43.8% of
the carrying value of the portfolio was collateralized by properties in
California, which represents a decrease from 48.6% at December 31, 1997 and
51.5% at December 31, 1996. Standard has established a program to expand and
diversify geographically its mortgage banking correspondent network, with a
particular emphasis on the Central and Eastern regions of the United States. The
allocation of new mortgage loan money to California was approximately 38% for
1998 and 35% for 1997.
77
<PAGE>
The following table sets forth by region the composition of Standard's
mortgage loan portfolio at the dates indicated:
Composition of Mortgage Loan Portfolio by Region
<TABLE>
<CAPTION>
At December 31,
-------------------------------------
1998 1997
------------------ -----------------
Carrying % of Carrying % of
Value Total Value Total
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
(Dollars in millions)
New England........... $ 7.1 0.4% $ 2.6 0.2%
Middle Atlantic....... 28.3 1.7 10.4 0.6
East North Central.... 142.6 8.3 110.9 6.9
West North Central.... 78.5 4.6 60.7 3.8
South Atlantic........ 103.4 6.0 63.7 4.0
East South Central.... 9.5 0.6 7.0 0.4
West South Central.... 147.0 8.6 141.2 8.8
Mountain.............. 203.3 11.9 193.2 12.0
California
Los Angeles County... 231.7 13.6 261.7 16.3
Orange County......... 86.3 5.0 84.5 5.3
Other Southern........ 167.6 9.8 180.7 11.3
Counties.........
Central............... 116.1 6.8 122.2 7.6
Northern.............. 146.2 8.6 130.0 8.1
Oregon................ 147.8 8.6 145.7 9.1
Washington............ 91.5 5.4 82.6 5.2
Alaska/Hawaii......... 1.2 0.1 6.1 0.4
-------- ----- -------- -----
Total $1,708.1 100.0% $1,603.2 100.0%
======== ===== ======== =====
</TABLE>
Standard has invested in mortgage loans in California and other West Coast
states for more than 40 years, and believes it has gained considerable
experience during that time in evaluating earthquake risk. Standard generally
does not require earthquake insurance for properties on which it makes mortgage
loans; however, management believes that earthquake risk can be effectively
mitigated by:
. diversifying its risk by making a large number of loans on smaller
properties in many diverse locations;
. avoiding loans secured by properties located in immediate proximity to
known earthquake fault lines;
. limiting loans predominantly to building types that have shown an
ability to withstand earthquakes, such as single-story wood frame and
concrete tilt-up structures; and
. ensuring that properties are inspected for structural soundness and
compliance with earthquake and other building codes prior to the funding
of loans.
Following the Northridge, California earthquake in January 1994, Standard
identified and, over a two-year period, studied its experience on the 143 loans
in its portfolio that were secured by properties located within approximately 5
miles of the epicenter of the earthquake. During the study period, monthly
payments were made on a timely basis on all but five of the identified loans.
One was restructured to allow no more than five payments to be deferred while
property repairs were undertaken, and all subsequent payments were made as
agreed. Only one property, with a loan balance of approximately $807,000, was
damaged so severely that it could not be repaired, and the loan was ultimately
foreclosed.
78
<PAGE>
The following table sets forth additions to and reductions from the mortgage
loan portfolio for the periods indicated:
Mortgage Loan Asset Flow
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997 1996
-------- ------ --------
<S> <C> <C> <C>
(in millions)
Mortgage loan balance, beginning of period $1,603.2 $1,514.5 $1,474.9
Additions during period:
New mortgage loans................... 440.8 376.9 278.0
Cost of mortgages purchased -- 14.7 2.4
Other................................ 0.1 0.2 0.4
-------- -------- --------
Total additions..................... 440.9 391.8 280.8
-------- -------- --------
Deductions during the period:
Payments and other credits 243.4 191.0 168.7
Foreclosures......................... 0.8 1.3 5.6
Sales................................ 91.6 110.5 65.4
Other................................ 0.2 0.3 1.5
-------- -------- --------
Total deductions.................... 336.0 303.1 241.2
-------- -------- --------
Mortgage loan balance, end.of period.... $1,708.1 $1,603.2 $1,514.5
======== ======== ========
</TABLE>
The following table shows the disposition of scheduled balloon mortgage loan
maturities for the dates indicated:
Mortgage.Loan Scheduled Principal Repayments
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1998 1997
------------------------- --------------------------
% of % of
Principal Balance Total Principal Balance Total
------------------- ------ ----------------- ------
<S> <C> <C> <C> <C>
(Dollars in millions)
Paid as scheduled.......... $28.6 49.7% $28.7
43.0%
Voluntary extensions....... 17.0 29.6 11.3 17.0
Voluntary refinances....... 11.9 20.7 25.3 38.0
Restructured............... -- -- -- --
Delinquent or foreclosed... -- -- 1.3 2.0
----- ----- ----- -----
Total repayments........ $57.5 100.0% $66.6 100.0%
===== ===== ===== =====
</TABLE>
Standard seeks to refinance maturing mortgage loans in good standing or
extend them on a long-term basis.
The weighted average maturity of the mortgage loan portfolio at December 31,
1998 was 9.0 years, based on contractual maturity dates rather than the dates on
which interest rates on the loans may be reset. At December 31, 1998, 68.3% of
the principal balance of Standard's mortgage portfolio consisted of mortgage
loans with balloon maturities.
79
<PAGE>
The following table shows the contractual maturities for the mortgage loan
portfolio at the dates indicated:
Mortgage Loan Portfolio Contractual Maturities
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
1998 1997
% of % of
Principal Balance Total Principal Balance Total
------------------ ------ ------------------ ---------
<S> <C> <C> <C> <C>
(Dollars in millions)
3 years or less..... $ 170.0 10.0% $ 195.7 12.2%
3 to 5 years........ 143.4 8.4 187.3 11.7
5 to 10 years....... 763.7 44.7 724.8 45.2
10 to 15 years...... 534.3 31.3 418.6 26.1
15 to 20 years...... 74.1 4.3 58.9 3.7
Over 20 years....... 22.6 1.3 17.9 1.1
-------- ----- -------- -----
Total $1,708.1 100.0% $1,603.2 100.0%
======== ===== ======== =====
</TABLE>
Mortgage loan payments are collected either directly by SMI staff members or
by mortgage loan correspondents who enter into contracts to provide limited
services with respect to loans. Payments on all loans are tracked daily by SMI
staff and, in the event they are late, collection efforts are initiated
promptly. Each property that secures a loan with a princip al balance in excess
of $1,000,000 is required to be inspected annually. For portfolio surveillance
purposes, loans that Standard believes may be potential problem loans are placed
on an internal watchlist and monitored regularly.
In the event of delinquencies in excess of 60 days, Standard retains outside
legal counsel. Standard's policy is to cause receivers to be appointed as soon
as possible with foreclosure generally pursued as quickly as statutorily
allowed.
The following table sets forth the mortgage loans that are delinquent or in
the process of foreclosure by property type, at the dates indicated:
Mortgage Loans Delinquent or in Process of Foreclosure by Property Type
<TABLE>
<CAPTION>
At December 31,
---------------------------------------
1998 1997
----------------- -------------------
Carrying Number Carrying Number
Value of Value of
Loans Loans
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
(Dollars in millions)
Retail....... $0.9 2 $0.7 1
Office....... 0.8 1 -- --
Other........ 0.1 1 -- --
---- - ---- ----
Total $1.8 4 $0.7 1
==== = ==== ====
</TABLE>
Standard continues to experience rates of delinquencies, foreclosures and
losses significantly below industry averages and believes that strict
underwriting criteria, combined with aggressive action on delinquencies, has
contributed to these favorable results. See "--Investments--General".
Restructured mortgage loans are loans whose original terms, such as interest
rate, periodic payment and/or maturity date, have been modified as the result of
an actual or anticipated delinquency and are currently in good standing relative
to their restructured terms. At December 31, 1998, Standard had ten restructured
loans with a carrying value of $7.7 million. Only two of these loans, with an
aggregate carrying value of $1.7 million, have interest rates that were below
market at the date the loan was restructured.
80
<PAGE>
Real estate acquired in satisfaction of debt is transferred to Standard's
real estate portfolio at the lower of cost or fair value as determined by
current appraisals performed by independent appraisers. Cost includes the
outstanding principal balance of the mortgage loan at the time of foreclosure,
uncollected interest and foreclosure costs. Subsequent to transfer to the real
estate portfolio, foreclosed real estate is carried at the lower of depreciated
cost or fair value less estimated selling costs, which is based on annual
evaluations of estimated fair value.
At December 31, 1998, Standard owned 9 foreclosed properties, all of which
were commercial properties, with an aggregate book value of $6.6 million. In
addition to these properties, Standard carries contracts of sale with a book
value of $1.7 million in connection with the prior sale of foreclosed
properties. Foreclosed properties are actively managed for disposition. During
1998, five foreclosed properties with a carrying value of $3.4 million were sold
at a combined net gain, after selling expenses, of $0.1 million.
Real Estate
Standard's real estate portfolio is managed by SREI, which is wholly owned by
Standard. At December 31, 1998, the carrying value of Standard's real estate
portfolio was as shown in the chart below:
Real Estate Holdings
<TABLE>
<CAPTION>
At December 31, 1998
----------------------
Carrying % of Total
Value
----------- ----------
<S> <C> <C>
(Dollars in millions)
Investment......... $74.6 80.2%
Undeveloped land... 10.1 10.9
Acquired by
Foreclosure..... 8.3 8.9
----- -----
Total........... $93.0 100.0%
===== =====
</TABLE>
Of Standard's $93.0 million real estate portfolio at December 31, 1998, $71.0
million, or 76.3%, represents retail properties of which there were 45 separate
locations. Land held for future development represented $10.1 million, and
consists of property at a single location in Hillsboro, Oregon for which
infrastructure improvements have been completed on lots for retail, office,
industrial, and residential use. These lots have been actively marketed for
sale.
The properties in Standard's real estate portfolio are geographically
concentrated in California and Oregon, which accounted for 48.9% and 35.8%,
respectively, of the aggregate carrying value of Standard's real estate
portfolio at December 31, 1998.
Other Investments
At December 31, 1998, Standard had investments of $0.3 million in equity
securities. Standard's historical practice has been to hold a smaller investment
in stocks than the industry average due to its higher than average holdings of
commercial mortgage loans and real estate equity investments.
Total policy loans were $111.0 million at December 31, 1998. Collateral loans
were $71.2 million at December 31, 1998. Collateral loans are made in connection
with sales of individual life insurance policies and are fully collateralized by
policy cash values.
81
<PAGE>
Reserves
For all of its product lines, Standard establishes and carries as a liability
actuarially determined reserves which are calculated to meet Standard's
obligations for future policy benefits and claims. These reserves are computed
at amounts that, with additions from premiums to be received and with interest
on such reserves at certain assumed rates, are expected to be sufficient to meet
Standard's policy obligations at their maturities or in the event of an
insured's death or disability. Reserves include:
. unearned premiums;
. premium deposits;
. claims reported but not yet paid;
. claims incurred but not reported; and
. claims in the process of settlement.
Standard's reserves are based on actuarially recognized methods for developing
assumptions for estimating future policy benefits and claims experience,
including an evaluation of interest rates, mortality, morbidity, persistency and
expenses. Standard's reserves for assumed reinsurance are computed on bases
essentially comparable to direct insurance reserves.
Management believes its reserves for future policy benefits and claims are
adequate to cover the ultimate liability that may arise. Due to the nature of
the underlying risks and the high degree of uncertainty associated with the
determination of the liability for unpaid policy benefits and claims, however,
the amounts which will ultimately be paid to settle this liability cannot be
determined precisely and may vary from the estimated amounts. Standard evaluates
its reserves periodically, based on changes in the assumptions used to establish
the reserves as well as Standard's actual policy benefits and claims experience.
The establishment of reserves (or the increase of reserves in a later period)
are charged as expenses in the period the reserves are established or increased.
If Standard's reserves originally established for future policy benefits were to
prove inadequate, Standard would be required to increase its reserves, which may
have a material adverse effect on its business, financial condition and results
of operations.
Long Term Disability Insurance
Standard establishes reserves for long term disability policies in an amount
equal to the net present value of the probable future payments associated with a
claim or pool of claims. Claim payments made on long term disability policies
consist of payments made to claimants each month pursuant to the contractual
terms of the policy and the waiver of monthly life insurance premiums for
insureds who are disabled. In either case, payments begin at the claimant's
eligibility date as defined by the policy and end upon the earliest of (i) the
expiration of contract limitations set forth in the policy, (ii) the claimant's
recovery or (iii) the claimant's death. At December 31, 1998, Standard held
reserves for long term disability policies, including reserves for the waiver of
life insurance premiums resulting from disability, equal to $1.3 billion. Long
term disability reserves established by Standard consist of (i) reserves for
claims which are incurred but not reported ("IBNR") and (ii) individual
specific reserves.
IBNR. Most of Standard's long term disability policies provide for an
period of 30 to 180 days between the occurrence of an event that may lead to a
claim and the claimant's eligibility to receive payments. Additionally, some
claims may not be filed promptly on the eligibility date under the policy.
Reserves are established for the payment of these IBNR claims based on industry
experience, as modified by Standard's own experience, with regard to the
following factors:
. claim incidence rates;
. claim termination rates; and
. market interest rates.
82
<PAGE>
Specific Reserves. When a claim has been received by Standard and approved
for payment, a specific reserve is established for the case. The factors that
are considered in establishing specific reserves are:
. limitations contained in the policy;
. amount of monthly benefit provided in the policy, less deductible income
allowed under the policy, such as expected Social Security payments;
. expected claim termination rates;
. market interest rates; and
. the age of the claimant at time of disability, the time elapsed since
disablement ("duration"), and the gender of the claimant.
Changes to Long Term Disability Reserve Levels. In the normal course of
managing Standard's long term disability reserves, Standard Insurance Company's
actuarial staff regularly compares actual experience with assumptions utilized
in the establishment of reserves. This is done with respect to specific segments
of the total reserve block, such as reserves by year of incurral, reserves by
expected duration, reserves by location of the claimant, reserves by
occupational group and reserves associated with specific diagnoses. In the event
of a divergence between actual experience and the assumptions utilized with
respect to any specific segment of the reserves, the reserves are adjusted
appropriately. The net change in reserves is charged or credited to Standard's
current operations. Changes in reserves plus claim payments together constitute
Standard's total cost of claims. Total reserves are reported as liabilities on
Standard's balance sheet.
In addition, Standard monitors legislative, judicial, regulatory, societal
and other factors that could have a significant impact on reserve adequacy. In
the event that a material change in one or more of these factors were to have a
significant impact on current or future claim levels, Standard, like others in
the long term disability industry, could be required to make a one-time
adjustment to reserve levels.
Individual Life Insurance and Annuities
Reserves for future policy benefits on long-duration participating policies
for individuals, on which dividends are determined under the contribution
principle, are calculated using the net level premium method. The interest rates
and mortality tables used are those which are used to calculate guaranteed cash
values. Reserves for interest-sensitive products, primarily universal life and
deferred annuities, are principally composed of policyholder account values
determined by the retrospective deposit method. Reserves for future policy
benefits on other individual life insurance policies are calculated by the net
level premium method based on assumptions as to investment yield, mortality,
morbidity, and withdrawal rates that were determined at the date of issue, and
include provision for the risk of adverse deviation. These assumptions are based
principally on Standard's experience and vary by plan, issue age, issue year and
duration.
Reinsurance
Standard follows the industry practice of reinsuring ("ceding") portions of
its insurance risks with other insurance companies under traditional indemnity
reinsurance agreements. This practice permits Standard to write policies in
amounts larger than the risk it is willing to retain. For each of Standard's
lines of business, reinsurance arrangements with different insurance carriers
are established as deemed appropriate. Generally, Standard has entered into
yearly renewable term insurance contracts. Standard's method for allocating
reinsurance obligations among such reinsurers varies by product line. At
December 31, 1998, the life insurance in force ceded to Standard's third-party
reinsurers was $2.4 billion and Standard's reinsurance receivable was $31.7
million. At December 31, 1998, amounts receivable from two reinsurers totaled
$23.4 million.
Reinsurance does not discharge Standard's obligations to pay policy claims on
the reinsured business. Standard remains responsible for policy claims to the
extent the reinsurer fails to pay such claims. Standard
83
<PAGE>
therefore seeks to enter into reinsurance treaties with highly rated reinsurers
that have passed an internal due diligence review. At December 31, 1998, 99.3%
of premiums ceded were reinsured with companies having an A.M. Best rating of
"A" or better.
Standard uses reinsurance to manage the net exposure in its group insurance
and individual insurance lines of business. The risks that are reinsured vary by
product line. The maximum retention on a single life is $500,000. Standard also
reinsures amounts in excess of $10,000 gross monthly benefit per insured person
for long term disability and amounts in excess of $4,000 or $2,000 gross monthly
benefit per insured person, depending on the type of policy, for individual
disability income. In addition to the above, Standard has a catastrophic
coverage arrangement that provides financial protection from aggregate losses.
This arrangement covers accidents involving the deaths of three or more persons
insured by Standard under group life and accidental death and dismemberment
policies. The limit for each accident is $50.0 million, with a retention of $1.0
million per accident.
Regulation
General Regulation at State Level
Standard's insurance business is subject to comprehensive state and federal
regulation and supervision throughout the United States. The laws of the various
jurisdictions establish supervisory agencies with broad administrative powers
with respect to, among other things:
. licensing to transact business;
. licensing agents;
. admittance of assets;
. regulating premium rates;
. approving policy forms;
. regulating unfair trade and claims practices;
. establishing reserve requirements and solvency standards;
. fixing maximum interest rates on life insurance policy loans and minimum
rates for accumulation of surrender values;
. restricting certain transactions between affiliates; and
. regulating the type, amounts and valuations of investments permitted.
Several states, including Oregon, regulate affiliated groups that include one
or more insurers, such as Standard, under insurance holding company legislation.
As a holding company with no significant business operations of its own,
StanCorp will rely on dividends from Standard Insurance Company, which is
domiciled in Oregon, as the principal source of cash to meet its obligations,
including the payment of dividends and operating expenses. Standard Insurance
Company's ability to pay dividends to StanCorp is regulated under Oregon law.
Under Oregon law, without the Director's approval, Standard Insurance Company
may pay dividends only from the earned surplus arising from its business. It
must receive the prior approval of the Director to pay a dividend, if such
dividend, together with other dividends or distributions made within the
preceding twelve months, would exceed a certain statutory limitation. The
current statutory limitation is the greater of (a) 10% of Standard Insurance
Company'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 this
limitation and 1998 statutory results, Standard Insurance Company is permitted
to pay $93.9 million in dividends to StanCorp in 1999 without obtaining the
Director's approval, and would have been able to pay $38.7 million, $26.5
million and $56.7 million in dividends to StanCorp in 1998, 1997 and
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1996, respectively, without obtaining the Director's approval. The foregoing
limitations on dividends would not apply to any dividends to StanCorp from the
non-insurance subsidiaries.
Life insurance companies are required to establish an AVR consisting of two
components: (i) a "default component" which provides for future credit-related
losses on fixed maturity investments and (ii) an "equity component" which
provides for losses on all types of equity investments, including real estate.
Insurers also are required to establish an interest maintenance reserve
("IMR") for fixed maturity net realized capital gains and losses, net of tax,
related to changes in interest rates. The IMR is required to be amortized into
statutory earnings on a basis reflecting the remaining period to maturity of the
fixed maturity securities sold. These reserves are required by state insurance
regulatory authorities to be established as a liability on a life insurer's
statutory financial statements, but do not affect financial statements of
Standard prepared in accordance with GAAP. Although future additions to AVR will
reduce the future statutory capital and surplus of Standard Insurance Company,
Standard's management does not believe that the impact under current regulations
of such reserve requirements will materially affect the ability of Standard
Insurance Company to grow its statutory capital and surplus and pay dividends to
StanCorp in the future.
Oregon insurance laws applicable to StanCorp generally provide that no person
may acquire control of StanCorp, and thus indirect control of Standard Insurance
Company, without the prior approval of the Director. In general, any person who
acquires beneficial ownership of 10% or more of the voting securities of
StanCorp would be presumed to have acquired such control, although the Director,
upon application, may determine otherwise. See "Restrictions on Acquisitions of
Common Stock--Restrictions on Acquisitions of Securities".
Each insurance company is required to file detailed annual reports with
supervisory departments in each of the jurisdictions in which it does business,
and its operations and accounts are subject to examination by such departments
at regular intervals. Standard Insurance Company prepares statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Department. Prescribed statutory accounting practices are defined in
publications of the NAIC, as well as state laws, regulations and general
administrative rules.
In addition, as part of their routine regulatory oversight process, state
insurance departments conduct detailed examinations periodically, generally once
every three to five years, of the books, records, accounts and market conduct of
insurance companies domiciled in their states. Such examinations are generally
conducted in cooperation with the departments of two or three other states under
guidelines promulgated by the NAIC. In October 1998, the Department issued its
Report of Financial Examination of Standard Insurance Company's operations for
the three years ended December 31, 1997, with no adjustments of surplus. In
addition, Standard Insurance Company was recently subject to separate periodic
market conduct examinations conducted by the Department, covering the two years
ended March 31, 1998, and the Arizona Department of Insurance, covering the
three years ended December 31, 1997. Standard Insurance Company has received a
draft of the Arizona Report of Market Conduct containing a number of criticisms
and recommendations. Standard has submitted a written response to the draft
report and is implementing corrective actions.
State Insurance Law Regulatory Initiatives
State insurance regulators and the NAIC are continually re-examining existing
laws and regulations, specifically focusing on insurance company investments and
solvency issues, risk-adjusted capital guidelines, interpretations of existing
laws, the development of new laws, the implementation of non-statutory
guidelines and the circumstances under which dividends may be paid. These
initiatives may be adopted by the various states in which Standard Insurance
Company is licensed, but the ultimate content and timing of any statutes and
regulations adopted by the states cannot be determined at this time. It is
impossible to predict the future impact of changing state and federal
regulations on Standard's operations, and there can be no assurance that
existing or future insurance-related laws and regulations will not become more
restrictive.
In the 1970s, the NAIC developed a set of financial relationships or
"tests" known as the Insurance Regulatory Information System ("IRIS") that
was designed for early identification of companies that may require special
attention by insurance regulatory authorities. Insurance companies submit data
annually to the NAIC, which in turn analyzes the data using ratios covering
twelve categories of financial data with
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defined "usual ranges" for each such category. An insurance company may fall
out of the usual range for one or more ratios because of specific transactions
or events that are in and of themselves immaterial or eliminated at the
consolidated level. Generally, an insurance company will become subject to
regulatory scrutiny if it falls outside the usual ranges of four or more of the
ratios, and regulators may then act, if such company has insufficient capital,
to constrain such company's underwriting capacity. At December 31, 1998, the
"Total Real Estate and Total Mortgage Loans to Cash and Invested Assets" was
the only IRIS ratio for Standard Insurance Company that was outside the usual
range, due to the size of Standard's mortgage loan portfolio. See "Risk
Factors--Investment Portfolio Risks--Delinquencies and Balloon Payments on
Mortgage Loans May Adversely Affect Profitability".
The NAIC also has approved Risk Based Capital standards, which are used to
determine the amount of total adjusted capital that a life insurance company
must have, taking into account the risk characteristics of such company's
investments and liabilities. The formula establishes a standard of capital
adequacy that is related to risk. The RBC formula establishes capital
requirements for four categories of risk: asset risk, insurance risk, interest
rate risk and business risk. For each category, the capital requirements are
determined by applying specified factors to various asset, premium, reserve and
other items, with the factor being higher for items with greater underlying risk
and lower for items with less risk. The formula is used by insurance regulators
as an early warning tool to identify deteriorating or weakly capitalized
companies for the purpose of initiating regulatory action.
The NAIC's RBC requirements provide for four levels of regulatory attention
depending on the ratio of a company's total adjusted capital to its RBC. If a
company's total adjusted capital is less than 100% but greater than or equal to
75% of its RBC, or if a negative trend has occurred (as defined in the
regulations) and total adjusted capital is less than 125% of its RBC, the
company must submit a comprehensive plan to the regulatory authority which
discusses proposed corrective actions to improve its capital position. If a
company's total adjusted capital is less than 75% but greater than or equal to
50% of its RBC, the regulatory authority will perform a special examination of
the company and issue an order specifying corrective actions that must be
followed. If a company's total adjusted capital is less than 50% but greater
than or equal to 35% of its RBC, the regulatory authority may take any action it
deems necessary, including placing the company under its control. If a company's
total adjusted capital is less than 35% of its RBC, the regulatory authority is
mandated to place the company under its control. The RBC ratio for Standard
Insurance Company has consistently been significantly above the ranges that
would require regulatory action or corrective action by Standard Insurance
Company.
In addition, state regulatory authorities, industry groups and rating
agencies have developed several initiatives regarding market conduct. For
example, the NAIC has adopted the NAIC Life Insurance Illustrations Model
Regulation, which applies to group and individual life insurance policies and
certificates, and the Market Conduct Handbook. State regulators have imposed
significant fines on various insurers for improper market conduct. The ACLI
established the Insurance Marketplace Standards Association ("IMSA"), a self-
regulatory organization, to implement its Principles and Code of Ethical Life
Insurance Market Conduct, which includes a third-party assessment procedure.
Standard Insurance Company is certified by IMSA. Market conduct also has become
one of the criteria used to establish the ratings of an insurance company. For
example, A.M. Best's ratings analysis now includes a review of the insurer's
compliance program. Management does not believe that these market conduct
initiatives will have a material adverse effect on Standard's business,
financial condition or results of operations.
In addition, the NAIC has adopted a model regulation called "Valuation of
Life Insurance Policies Model Regulation", which would establish new minimum
statutory reserve requirements for individual life insurance policies written in
the future. Before the new reserve standards can become effective, individual
states must enact the model regulation. If these reserve standards were adopted
in their current form, companies selling certain individual life insurance
products such as term life products with guaranteed premium periods and
universal life products with no-lapse guarantees would be required to adjust
reserves to be consistent with the new minimum standards. It is impossible at
this time to predict if the model regulation will be enacted and, if enacted,
when it will become applicable. However, Standard's management anticipates no
material impact as a result of the enactment of this legislation.
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Assessments Against Insurers
Under the insurance guaranty fund laws existing in each state and the
District of Columbia, insurers licensed to do business can be assessed by state
insurance guaranty associations for certain obligations of insolvent insurance
companies to policyholders and claimants. Most of these laws provide that an
assessment may be excused or deferred if it would threaten an insurer's solvency
and further provide for annual limits on such assessments. A large part of the
assessments paid by Standard Insurance Company pursuant to these laws may be
used as credits for a portion of its premium taxes. Standard Insurance Company
was assessed $0.4 million, $0.5 million, and $1.3 million in 1998, 1997 and
1996, respectively. Since such assessments are typically not made for several
years after an insurer fails and depend upon the final outcome of liquidation or
rehabilitation proceedings, Standard cannot accurately determine the amount or
timing of any future assessment on Standard Insurance Company. However, based on
the best information presently available, management believes Standard Insurance
Company's total future assessments will not be material to Standard's operating
results or financial position. At December 31, 1998, Standard Insurance Company
maintained a reserve of $0.9 million for future assessments.
Regulation at Federal Level
Although the federal government does not directly regulate the business of
insurance, federal legislation and administrative policies in several areas,
including pension regulation, financial services regulation and federal
taxation, can significantly and adversely affect the insurance industry and thus
Standard. For example, Congress has from time to time considered legislation
relating to the deferral of taxation on the accretion of value within certain
annuities and life insurance products, the removal of barriers preventing banks
from engaging in the insurance business, changes in ERISA regulations, the
alteration of the Federal income tax structure and the availability of Section
401(k) or individual retirement accounts. In particular, Congress has reviewed
various proposals to repeal or modify the McCarran-Ferguson Act (which exempts
the insurance industry from certain federal laws), the Glass-Steagall Act (which
restricts banks from engaging in a insurance-related business) and the Bank
Holding Company Act (which prohibits banks from being affiliated with insurance
companies).
Moreover, the United States Supreme Court held in 1995 in NationsBank of
North Carolina v. Variable Annuity Life Insurance Company that annuities are not
insurance for purposes of the National Bank Act. In addition, the Supreme Court
also held in 1996 in Barnett Bank of Marion City v. Nelson that state laws
prohibiting national banks from selling insurance in small-town locations are
preempted by federal law. The Office of the Comptroller of the Currency also
adopted a ruling in November 1996 that permits national banks, under certain
circumstances, to expand into other financial services, thereby increasing
competition for Standard. At present, the extent to which banks can sell
insurance and annuities without regulation by state insurance departments is
being litigated in various courts in the United States. Although the effect of
these recent developments on Standard and its competitors is uncertain, both the
persistency of Standard Insurance Company's existing products and Standard
Insurance Company's ability to sell products may be materially impacted by these
developments in the future.
Securities Laws
Certain of Standard's subsidiaries, and certain policies and contracts
offered by them, are subject to regulation under the federal securities laws
administered by the Securities and Exchange Commission and certain state
securities laws. Certain separate accounts of Standard Insurance Company are
registered as investment companies under the Investment Company Act of 1940. An
indirect subsidiary of Standard, StanWest Equities, Inc., is a broker-dealer
licensed under the Securities Exchange Act of 1934.
ERISA Considerations
Enacted into law on August 20, 1996, the Small Business Protection Act (the
"SBPA") offered insurers protection from potential litigation exposure
prompted by the 1993 U.S. Supreme Court decision in John Hancock Mutual Life
Insurance Company v. Harris Trust & Savings Bank (the "Harris Trust Decision")
in which the Court held that, with respect to a portion of the funds held under
certain general account group annuity contracts, an insurer is subject to the
fiduciary requirements of ERISA. The pertinent SBPA
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provisions provide that insurers are protected from lawsuits claiming breaches
of fiduciary duties under ERISA for past actions. However, insurers remain
subject to federal criminal law and liable for actions brought by the U.S.
Secretary of Labor alleging breaches of fiduciary duties that also constitute a
violation of federal or state criminal law. The SBPA also provides that
contracts issued from an insurer's general account on or before December 31,
1998, that are not guaranteed benefit policies, will be permanently
grandfathered if they meet the requirements of regulations to be issued by the
United States Department of Labor. The SBPA further provides that contracts
issued from an insurer's general account after December 31, 1998 that are not
guaranteed benefit policies, will be subject to ERISA. In December 1997, the
Department of Labor published proposed regulations pursuant to the SBPA that
provide, among other things, that when an employee benefit acquires an insurance
policy (other than a guaranteed benefit policy) issued on or before December 31,
1998 that is supported by the assets of the insurer's general account, the
plan's assets for purposes of ERISA will not be deemed to include any of the
assets of the insurer's general account, provided that certain requirements are
met. Accordingly, if those requirements are met, the insurer would not be
subject to the fiduciary obligations of ERISA as a result of issuing such an
insurance policy. These requirements include detailed disclosures to be made to
the employee benefit plan and the requirement that the insurer must permit the
policyholder to terminate the policy on 90 days' notice and receive without
penalty, at the policyholder's option, either (i) the accumulated fund balance
(which may be subject to market value adjustment) or (ii) a book value payment
of such amount in annual installments with interest. Standard cannot predict
whether these regulations will be adopted in the form proposed. In the event the
regulations are adopted in the form proposed and Standard elects to comply with
the requirements set forth therein to secure the exemption provided by the
regulations from the fiduciary obligations of ERISA, Standard's exposure to
disintermediation risk could increase due to the termination options that it
would be required to provide to policyholders. Standard does not believe that
the Harris Trust Decision has had, or that the proposed regulations under the
SBPA will have, a material adverse effect on its business, financial condition
or results of operations.
With respect to employee welfare benefit plans subject to ERISA, the United
States Congress periodically has considered amendments to the law's federal
preemption provision, which would expose Standard, and the insurance industry
generally, to state law causes of action, and accompanying extra-contractual
(e.g., punitive) damages in lawsuits involving, for example, group life and
group disability claims. To date, all such amendments to ERISA have been
defeated.
Competition
Standard competes with other insurers, financial services companies
(including banks, broker-dealers and mutual funds) and managed care providers
for employer groups, individual consumers and distributors. Many of Standard's
competitors have greater financial resources, offer a broader array of products
and, with respect to other insurers, may have higher ratings than Standard.
Group Insurance
According to Standard's analysis of data published in the May 1998 Employee
Benefit Plan Review, in 1997 six companies, including Standard at 8.8%, had
market shares in the long term disability insurance market of above five percent
based on 1997 sales. Standard's leading competitors are UNUM Life Insurance
Company of America and Hartford Life Insurance Company, which had market shares
of 37.4% and 14.3%, respectively. The long term disability market is highly
competitive both in terms of product pricing and product features. Because many
of Standard's major competitors have access to greater financial resources,
Standard could be at a competitive disadvantage with regard to product pricing
and the introduction of alternative product features that require significant
financial backing. There is also competition in the long term disability market
for qualified sales distributors. In recent years, compensation for sales
distributors has steadily increased. As a result, Standard may have difficulty
in attracting and retaining a productive group field force. While management
believes that Standard is in a position to expand its long term disability line
of business, Standard's ability to do so may be materially adversely affected by
its better-financed competitors.
Additionally, most of Standard's group insurance coverage is underwritten
yearly, and group purchasers may be able to obtain more favorable terms from
competitors rather than renewing coverage with Standard. National banks, with
their pre-existing customer bases for financial services products, may
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become more significant competitors of Standard in the future as a result of
certain recent court decisions and regulatory actions. See "--Regulation--
Regulation at Federal Level" and "--Competition--Other Competitive Factors".
Although the effect of these developments on Standard is uncertain, both the
persistency of Standard's existing products and Standard's ability to sell
products could be materially adversely affected in the future.
Retirement Plans
The Retirement Plans market is highly competitive. While the Retirement Plans
segment is growing, Standard has yet to achieve the size necessary to realize
the economies of scale it believes are enjoyed by its competitors in the life
insurance industry. Additionally, the Retirement Plans segment faces competition
not only from other insurance companies, but also from other financial
institutions such as banks, mutual funds, other asset managers and broker-
dealers. Many of these competitors are better known, have access to greater
financial resources and offer a broader array of investment products. Standard's
ability to market its 401(k) and other retirement products could be materially
adversely affected by the highly competitive nature of this market.
Individual Insurance
Standard's Individual Insurance segment competes with many larger competitors
with brand name recognition, economies of scale and greater financial resources
in a market that many industry experts consider to be mature. Standard's lack of
variable life and annuity products and its lack of name recognition for
individual life, disability and annuity products in the Eastern and Central
regions of the nation also place it at a competitive disadvantage. Because of
these factors, Standard may have difficulty attracting and retaining productive
distributors. Standard's ability to sell its individual life, disability, and
annuity products could be materially adversely affected by its dependence on
distributors and the highly competitive nature of this product line.
Other Competitive Factors
If a federal financial institutions reform bill is enacted into law by
Congress, such a law may permit national banks and other financial institutions
to affiliate with insurance companies and market insurance products to their
customers. National banks and other similar financial institutions are currently
restricted from being affiliated with insurance companies under the Glass-
Steagall Act of 1933. The ability of financial institutions to affiliate with
insurance companies may materially adversely affect all of Standard's product
lines by substantially increasing the number and financial strength of potential
competitors.
Additionally, the Clinton administration and various members of Congress have
proposed reforms to the nation's health care system. Standard does not write
health indemnity products, other than group dental insurance, and, accordingly,
does not expect to be directly affected by such proposals to any significant
degree. However, the uncertain environment resulting from health care reform
could cause group health insurance providers to enter the long term disability
insurance market, thereby increasing competition.
Claims Paying Ability Ratings
Claims paying ability ratings are an important factor in establishing the
competitive position of insurance companies. Standard Insurance Company is
currently rated "A (excellent)" by A.M. Best and has claims paying ability
ratings of "AA- (very high)" from Duff & Phelps Credit Rating Co. and "A+
(good)" from Standard & Poor's. Moody's Investors Service has given Standard
Insurance Company an insurance financial strength rating of "A2 (good financial
security)". A ratings downgrade (or the potential for such a downgrade) of
Standard Insurance Company could, among other things, materially increase
surrender levels, adversely affect relationships with broker-dealers, banks,
agents, wholesalers and other distributors of Standard Insurance Company's
products and services, negatively impact persistency, adversely affect Standard
Insurance Company's ability to compete and thereby materially and adversely
affect Standard Insurance Company's business, financial condition and results of
operations.
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The foregoing ratings reflect each rating agency's opinion of Standard
Insurance Company's financial strength, operating performance and ability to
meet its obligations to policyholders and are not evaluations directed toward
the protection of investors and do not constitute investment recommendations by
such ratings agencies to investors.
Employees
At December 31, 1998, Standard and its subsidiaries employed 1,849 employees.
Twenty of its employees are covered under a collective bargaining agreement.
Standard believes that its relations with its unionized and non-unionized
employees are satisfactory.
Legal Proceedings
Companies in the life insurance industry have historically been subject to
substantial litigation resulting from claims disputes and other matters. Most
recently, such companies have faced extensive claims, including class-action
lawsuits, alleging improper life insurance sales practices. Negotiated
settlements of such class-action lawsuits have had a material adverse effect on
the business, financial condition and results of operations of certain of these
companies. Standard is not and has not been a defendant in any such class-action
lawsuit alleging improper sales practices. Such class-action lawsuits, if
brought against Standard, could materially adversely affect Standard's business,
financial condition and results of operations.
Standard is a plaintiff or defendant in actions arising out of its insurance
business and investment operations and is from time to time involved in various
governmental and administrative proceedings. While the outcome of any pending or
future litigation cannot be predicted, as of the date hereof, management does
not believe that any pending litigation will have a material adverse effect on
Standard's financial condition or results of operations. However, no assurances
can be given that such litigation would not materially and adversely affect
Standard's business, financial condition or results of operations.
Properties
Standard owns two buildings in Portland, Oregon, which comprise its home
office complex. Standard occupies approximately 57% of the total net rentable
area in its home office complex. Standard has entered into an agreement to lease
space in a third Portland office building, beginning in late 1999, for home
office expansion.
Standard is the tenant of record in office leases in 29 locations throughout
the United States. Such leases typically have a term of five years with renewal
options.
As an owner and operator of real estate, Standard is subject to extensive
federal, state, and local environmental laws and regulations. Inherent in such
ownership and operation is the risk of environmental liabilities and costs in
connection with any required remediation of affected properties. See "Risk
Factors--Environmental Liability Exposure May Result From Mortgage Loan and Real
Estate Investments".
MANAGEMENT
Set forth below is information regarding the directors and executive officers
of StanCorp and Standard Insurance Company:
<TABLE>
<CAPTION>
Name Age (1) Position
- ---------------------------- --------- -------------------------------------------------------------
<S> <C> <C>
Ronald E. Timpe, FSA, CLU 59 Chairman of the Board, President, Chief Executive Officer
and
Director of StanCorp and Standard Insurance Company (2)
Virginia L. Anderson 51 Director (2)
Frederick W. Buckman 52 Director (2)
John E. Chapoton 62 Director (2)
</TABLE>
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<TABLE>
<CAPTION>
Name Age (1) Position
- ---------------------------- --------- -------------------------------------------------------------
<S> <C> <C>
Barry J. Galt 65 Director (2)
Richard Geary 63 Director (2)
Peter T. Johnson 66 Director (2)
Peter O. Kohler, MD 60 Director (2)
Jerome J. Meyer 60 Director (2)
Ralph R. Peterson 54 Director (2)
E. Kay Stepp 53 Director (2)
William Swindells 68 Director (2)
Michael G. Thorne 58 Director (2)
Franklin E. Ulf 67 Director (2)
Benjamin R. Whiteley, FSA 69 Director (2)
E. Wayne Atteberry, LLIF 60 Senior Vice President, Investments of Standard Insurance
Company
Gerald B. Halverson, CLU 60 Senior Vice President, Individual Insurance of Standard
Insurance Company (retired)
Kim W. Ledbetter, FSA, CLU 46 Senior Vice President, Individual Insurance and Retirement
Plans of Standard Insurance Company
Douglas T. Maines 46 Senior Vice President, Group Insurance of Standard
Insurance Company
Eric E. Parsons, FLMI 50 Senior Vice President and Chief Financial Officer of
StanCorp and Standard Insurance Company
J. Gregory Ness, LLIF 41 Vice President and Corporate Secretary of StanCorp
and Standard Insurance Company
Wilbur R. Willard, FLMI 60 Vice President, Information Systems of Standard Insurance
Company
- ---------------------------
</TABLE>
(1) As of December 31, 1998.
(2) StanCorp expects that each of the listed nominees will be elected as a
Director of StanCorp prior to the effective date.
Set forth below is biographical information for the directors and executive
officers of Standard:
Ronald E. Timpe, FSA, CLU, has been Chairman, President and Chief Executive
Officer of StanCorp since its incorporation. He was appointed President and
Chief Executive Officer of Standard Insurance Company in 1994 and became
Chairman of Standard Insurance Company in 1998. Prior to 1994 he served as
President and Chief Operating Officer and Senior Vice President for Standard
Insurance Company. He formerly held management positions in each of Standard
Insurance Company's operating divisions. He is a fellow, Society of Actuaries
and a graduate of the Harvard Advanced Management Program. He chairs the
Management Committee of Standard Insurance Company and the Executive Committee
of the Board of Directors of Standard Insurance Company.
Virginia L. Anderson has been a Director of Standard Insurance Company since
1989. Since 1988, Ms. Anderson has been director of the Seattle Center, a 74-
acre, 31-facility urban civic center located in Seattle, Washington. Ms.
Anderson chairs the Budget Review Committee and is a member of both the
Nominating and Audit Review Committees of Standard Insurance Company.
Frederick W. Buckman has been a Director of Standard Insurance Company since
1996. From 1992 to 1994, Mr. Buckman served as President and Chief Executive
Officer of Consumers Power Company. From 1994 to 1998, Mr. Buckman was
president, chief executive officer and director of PacifiCorp, a holding company
of diversified businesses, including an electric utility based in Portland,
Oregon. Mr. Buckman is a member of the Demutualization and Audit Review
Committees of Standard Insurance Company.
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John E. Chapoton has been a Director of Standard Insurance Company since 1996.
Since 1984, Mr. Chapoton has been the managing partner of the Washington, DC
office of the law firm Vinson & Elkins, LLP. Mr. Chapoton is a member of the
Audit Review Committee of Standard Insurance Company.
Barry J. Galt has been a Director of Standard Insurance Company since 1988.
From 1983 to 1998, Mr. Galt was the chairman and chief executive officer of
Seagull Energy Corporation, a diversified energy company located in Houston,
Texas. Since 1998 Mr. Galt has been Chairman of Seagull Energy Corporation.
Mr. Galt chairs the Audit Review Committee of Standard Insurance Company. Mr.
Galt serves as a director of Trinity Industries, Inc. and Halter Marine Group,
Inc.
Richard Geary has been a Director of Standard Insurance Company since 1991.
From 1984 to 1998, Mr. Geary was president of Kiewit Pacific Company (Vancouver,
Washington), a subsidiary of Peter Kiewit & Sons, Inc., a diversified
construction company located in Omaha, Nebraska. Mr. Geary chairs the
Organization and Executive Compensation Committee and is a member of the
Executive Committee of Standard Insurance Company.
Peter T. Johnson has been a Director of Standard Insurance Company since 1987.
Mr. Johnson of McCall, Idaho, has been a private investor since retiring in 1986
as administrator of the Bonneville Power Administration, a federal power
marketing agency. He is a member of the Executive and Budget Review Committees
of Standard Insurance Company. Mr. Johnson serves as a director of Idaho Power
Company and its wholly owned subsidiary IDA West Corporation.
Peter O. Kohler, MD, has been a Director of Standard Insurance Company since
1990. Since 1988, Dr. Kohler has been president of the Oregon Health Sciences
University located in Portland, Oregon. Dr. Kohler is a member of the Budget
Review and Executive Committees of Standard Insurance Company.
Jerome J. Meyer has been a Director of Standard Insurance Company since 1995.
Since 1990, Mr. Meyer has been chairman of the board and chief executive officer
of Tektronix, Inc., a high technology company consisting of measurement, color
printing and video and networking businesses located in Wilsonville, Oregon.
Mr. Meyer chairs the Demutualization Committee and is a member of the
Organization and Executive Compensation Committee of Standard Insurance Company.
Mr. Meyer serves as a director of Esterline Technologies Corporation, Enron
Corporation and AMP, Inc.
Ralph R. Peterson has been a Director of Standard Insurance Company since 1992.
Since 1991, Mr. Peterson has been president and chief executive officer of CH2M
Hill Companies Ltd, an engineering, design and consulting firm located in
Denver, Colorado. Mr. Peterson is a member of the Organization and Executive
Compensation Committee of Standard Insurance Company.
E. Kay Stepp has been a Director of Standard Insurance Company since 1997.
Since 1994, Ms. Stepp has been principal and owner of Executive Solutions, a
management consulting firm in Portland, Oregon. From 1989 to 1992, Ms. Stepp
was president and chief operating officer of Portland General Electric, an
electric utility. Ms. Stepp is a member of the Budget Review and Audit Review
Committees of Standard Insurance Company. Ms. Stepp serves as a director of
Gardenburger, Inc., Planar Systems, Inc. and Franklin Covey Company.
William Swindells has been a Director of Standard Insurance Company since 1988.
Since 1985, Mr. Swindells has been chairman of the board of directors of
Willamette Industries, Inc., a diversified, integrated forest products company
located in Portland, Oregon. From 1997 to 1998, Mr. Swindells was the chief
executive officer of Willamette Industries, Inc. a position he also held from
1985 to 1995. Mr. Swindells is a member of the Executive Committee of Standard
Insurance Company. Mr. Swindells serves as a director of Airborne Express and
Oregon Steel Mills.
Michael G. Thorne has been a Director of Standard Insurance Company since 1992.
Since 1991, Mr. Thorne has been executive director of the Port of Portland,
Oregon, a public corporation whose primary business is providing facilities and
services to move cargo and people. Mr. Thorne is a member of the
Demutualization and Executive Committees of Standard Insurance Company.
Franklin E. Ulf has been a Director of Standard Insurance Company since 1987.
From 1983 to 1997, Mr. Ulf was chief executive officer of U.S. Trust Company,
N.A., a national bank located in Los Angeles, California. Since 1997, Mr. Ulf
has been chairman of the same organization. Mr. Ulf is the chairman of the
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Nominating Committee and a member of the Organization and Executive Compensation
Committee of Standard Insurance Company.
Benjamin R. Whiteley, FSA, has been a Director of Standard Insurance Company
since 1982. Mr. Whiteley retired as Chairman of the Board of Directors of
Standard Insurance Company in March 1998 and as chief executive officer of
Standard Insurance Company in 1994. Mr. Whiteley joined Standard Insurance
Company in 1956 and served in various senior management positions, including
president. Mr. Whiteley is a member of the Budget Review, Nominating and
Executive Committees of Standard Insurance Company. Mr. Whiteley serves as a
director of NW Natural, The Greenbrier Companies, Inc. and Willamette
Industries.
E. Wayne Atteberry, LLIF, has been senior vice president, Investments, of
Standard Insurance Company since 1998. From 1994 to 1998, Mr. Atteberry was
senior vice president, Group Insurance, of Standard Insurance Company; and from
1989 to 1994, Mr. Atteberry was vice president, Retirement Plans, of Standard
Insurance Company. He has served in various management positions with Standard
Insurance Company since 1969. Mr. Atteberry is a member of the Management
Committee of Standard Insurance Company.
Gerald B. Halverson, CLU, was senior vice president, Individual Insurance, of
Standard Insurance Company from 1984 to 1998 and was vice president of
Individual Insurance, Standard Insurance Company from 1981 to 1984. Prior to
that time he was vice president of Individual Insurance, Sales and Marketing of
Standard Insurance Company. Mr. Halverson was a member of the Management
Committee of Standard Insurance Company and retired on November 30, 1998.
Kim W. Ledbetter, FSA, CLU, has been senior vice president, Individual Insurance
and Retirement Plans, of Standard Insurance Company since 1997. From 1994 to
1997, Mr. Ledbetter was vice president, Retirement Plans, of Standard Insurance
Company. He has served in various management positions with Standard Insurance
Company since 1991. Mr. Ledbetter is a member of the Management Committee of
Standard Insurance Company.
Douglas T. Maines has been senior vice president, Group Insurance, of Standard
Insurance Company since 1998. From 1996 to 1998, Mr. Maines was vice president
and general manager, claims, for Liberty Mutual Insurance Company. From 1993 to
1996, Mr. Maines was vice president, Business Development, and from 1992 to
1993, Mr. Maines was the head of disability product lines for Liberty Mutual
Insurance Company. Mr. Maines is a member of the Management Committee of
Standard Insurance Company.
Eric E. Parsons, FLMI, has been senior vice president and chief financial
officer of StanCorp since its in corporation. Mr. Parsons has been senior vice
president and chief financial officer of Standard Insurance Company since 1998.
From 1997 to 1998, Mr. Parsons was senior vice president and chief financial
officer and chief investment officer of Standard Insurance Company. From 1993
to 1997, Mr. Parsons was vice president, Investments, and from 1990 to 1993, was
vice president, Real Estate Finance, of Standard Insurance Company. Mr. Parsons
is a member of the Management Committee of Standard Insurance Company.
J. Gregory Ness, LLIF, has been vice president and corporate secretary of
StanCorp since its incorporation. He has been vice president and corporate
secretary of Standard Insurance Company since 1997. From 1996 to 1997, Mr. Ness
was vice president, Retirement Plans Sales and Marketing, of Standard Insurance
Company. He has served in various management positions with Standard Insurance
Company since 1988. Mr. Ness is a member of the Management Committee of
Standard Insurance Company.
Wilbur R. Willard, FLMI, has been vice president, Information Systems, of
Standard Insurance Company since 1984. From 1981 to 1984, Mr. Willard was
assistant vice president, Information Systems, of Standard Insurance Company.
Mr. Willard is a member of the Management Committee of Standard Insurance
Company.
Currently, the Directors of StanCorp are elected to serve annually and hold
office until their successors are elected and qualified, or until earlier
removal or resignation. Upon the effective date of the plan of reorganization,
the Board of Directors of StanCorp will be organized into the following classes
of directors with terms ending at the annual meeting of shareholders to be held
in the year following their names: Class
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I, Messrs. Galt, Geary, Johnson, Swindells and Whiteley (2000); Class II, Ms.
Anderson and Ms. Stepp and Messrs. Meyer, Peterson and Thorne (2001); and Class
III, Messrs. Buckman, Chapoton, Kohler, Timpe and Ulf (2002). See "Restrictions
on Acquisitions of Common Stock-- Classified Board of Directors and Removal of
Directors". The officers of StanCorp are elected annually by its Board of
Directors for one year terms, subject to removal by StanCorp's Board of
Directors.
Composition of Board and Committees
The Board of Directors and Executive Committee
The business of StanCorp is managed under the direction of StanCorp's Board of
Directors. It is intended that the Board of Directors will be composed of 15
directors, 13 of whom will be independent directors. StanCorp's Board of
Directors will also establish an Executive Committee. It is currently intended
that this committee will consist of Directors Geary, Johnson, Kohler, Thorne,
Ulf and Whiteley and will be chaired by Mr. Timpe. The Executive Committee
exercises the power and authority of the Directors in all matters that do not
require action by the entire Board of Directors.
The Audit Committee
StanCorp's Board of Directors will also establish an Audit Committee. It is
intended that the Audit Committee will consist of Directors Anderson, Buckman,
Johnson and Swindells and will be chaired by Mr. Chapoton. All directors on the
Audit Committee are currently independent directors. The Audit Committee
recommends the firm to be appointed as independent accountants to audit the
financial statements and to perform services related to the audit, reviews the
scope and results of the audit with the independent accountants, reviews with
management and the independent accountants StanCorp's year-end operating
results, and considers the adequacy of StanCorp's internal control procedures,
in part through the review of reports of StanCorp's internal auditors.
The Organization and Compensation Committee
StanCorp's Board of Directors will establish an Organization and Compensation
Committee. It is in tended that the Organization and Compensation Committee
will consist of Directors Galt, Peterson and Stepp and will be chaired by Mr.
Meyer. The Organization and Compensation Committee reviews and recommends the
compensation of senior officers (including benefits and perquisites), oversees
the im plementation of the stock option and employee stock purchase programs,
monitors performance of the Chief Executive Officer, monitors outside activities
of officers, monitors fees paid to directors and monitors the results of
StanCorp's Affirmative Action Program. Each of the directors who will comprise
the Organization and Compensation Committee qualifies as a non-employee
director, as such term is used in Rule 16b-3 as promulgated under the Securities
Exchange Act of 1934.
The Board of Directors may form such other committees of the Board as it
deems appropriate.
Board of Standard Insurance Company
It is intended that the Board of Directors of Standard Insurance Company will
be composed of the same 15 Directors as those serving on the Board of Directors
of StanCorp.
Compensation of Directors
Following the demutualization, each member of the Board of Directors of
StanCorp, who is not an employee of Standard, will receive a $20,000 annual
retainer fee and $1,000 for each board meeting and committee meeting attended.
Each chairman of a board committee receives an additional $3,000 retainer fee.
One-half of the annual retainer fee will be paid in cash and one-half in
restricted stock or restricted stock units. On or after six months following
the effective date of the plan of reorganization, StanCorp will make a
restricted stock or restricted unit grant in respect of each such director's
retainer fees following the effective date. Directors are eligible to
participate in StanCorp's Stock Incentive Plan described under "Management
Compensation -- StanCorp Stock Incentive Plan". Such non-employee directors of
StanCorp who also serve on the Board of Directors of Standard Insurance Company
will receive only one annual retainer fee for their board memberships and will
receive only one meeting fee for each joint meeting of the Board of Directors of
StanCorp and the Board of Directors of Standard Insurance Company (or a joint
committee of both boards) attended. In addition, StanCorp will reimburse all
directors for travel
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expenses incurred in attending meetings. Since the formation of StanCorp, the
members of the Board of Directors of StanCorp have not received any compensation
from StanCorp.
MANAGEMENT COMPENSATION
Executive Officer Compensation
The information set forth below describes the components of the total
compensation of the Chief Executive Officer and the four other most highly
compensated executive officers of Standard for the fiscal year ended December
31, 1998, based on 1998 salary and bonuses (collectively, the "Named
Executives"). The principal components of the Named Executives' current cash
compensation are the annual base salary and bonus included in the Summary
Compensation Table. Also described below is other compensation the Named
Executives have received and may receive under employment agreements entered
into between the Named Executives and Standard and certain compensation plans
maintained by Standard and StanCorp. The Organization and Executive Compensation
Committee, which is comprised solely of non-employee directors, recommends the
compensation of senior officers to the Board of Directors.
The following table sets forth the compensation paid by Standard Insurance
Company to the Named Executives during the fiscal year ended December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation (1)
--------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C><C>
Other Annual LTIP All other
Name and Principal Salary Bonus Compensation Payouts Compensation
Position Year ($) ($) ($) ($) ($) (2)
- ---------------------- ----- ------- --------- -------------- -------- -------------
Ronald E. Timpe,
Chairman of the Board, President
and Chief Executive Officer 1998 450,000 142,419 150 126,492 4,350
Eric E. Parsons,
Senior Vice President and Chief
Financial Officer 1998 220,000 42,583 4,524 39,847 4,656
E. Wayne Atteberry,
Senior Vice President, 1998 194,000 38,763 163 38,220 4,559
Investments
Gerald B. Halverson, Senior Vice
President, Individual Insurance(3) 1998 174,167 40,424 4,030 38,627 5,483
Kim W. Ledbetter,
Senior Vice President, Individual
Insurance and Retirement Plans 1998 170,000 19,582 391 26,937 1,614
</TABLE>
_________________________
(1) Amounts shown are cash amounts paid in early 1998 with respect to the
performance period from 1995 through 1997, based on achievement of certain
performance objectives related to improvement in Standard's financial
strength and growth.
(2) Amounts shown are matching contributions credited to the accounts of the
Named Executives under Standard's nonqualified Supplemental Executive
Deferred Compensation Plan.
(3) Mr. Halverson retired on November 30, 1998.
Employment Agreements
In connection with the demutualization, Standard Insurance Company has
entered into a Retention Agreement (the "Retention Agreement") and Change of
Control Agreement (the "Change of Control Agreement") with each Named
Executive and certain other of its executive officers (each, an "executive").
Retention Agreement. Pursuant to the Retention Agreement, Standard agrees
to pay the executive a retention bonus (the "Retention Bonus"), provided that
the executive remains continuously employed by Standard until December 31, 2000
(the "Retention Bonus Maturity Date"). Such
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Retention Bonus shall be equal to the product of (i) the executive's base salary
as of January 1, 1998 or such other date as approved by the Board, (ii) 100%,
75% or 50%, as provided in the Retention Agreement, (iii) the "Return on Equity
Factor" which is a factor ranging from 0.0 to 2.0 based on the average quarterly
rate of return on equity achieved by Standard in the fiscal quarters from
January 1, 1998 through the end of the first full calendar quarter immediately
following the quarter during which a market price for common stock is first
established, and (iv) the "Stock Price Factor" which is the quotient of the
closing price of Standard's stock on the Retention Bonus Maturity Date divided
by the closing price of Standard's stock on the last business day of the first
full calendar quarter immediately following the quarter during which a market
price for common stock is first established. If either or both of the Return on
Equity Factor and the Stock Price Factor is zero, then the executive will
receive no Retention Bonus. The Retention Agreement provides that the Board of
Directors of Standard Insurance Company may, in its sole discretion, decrease
the amount of the Retention Bonus by up to 50%. The Retention Agreement requires
Standard to pay at least 40% of the Retention Bonus in cash, while up to 60% of
the Retention Bonus may be paid in the voting stock of StanCorp or any insurance
holding company with which Standard Insurance Company is affiliated, valued at
the closing price for common stock on the Retention Bonus Maturity Date. The
Retention Agreement does not provide the executive with any right to be retained
as an employee of Standard and Standard retains the right to terminate such
executive at any time with or without cause. In addition, the agreement may be
terminated, in whole or in part, if the executive fails to fulfill his assigned
duties in a satisfactory manner, as provided in the Retention Agreement.
If a change of control occurs prior to the expiration of the Retention
Agreement, and an executive is terminated in a way which entitles him to pay
under the Change of Control Agreement, such executive shall be entitled to a
prorated retention bonus under the Retention Agreement based upon the full
calendar quarters accrued prior to the calendar quarter in which the executive
was terminated.
Change of Control Agreement. Standard has also entered into Change of
Control Agreements with each of Messrs. Timpe, Parsons, Atteberry, and Ledbetter
and other executive officers of Standard. The provisions of these agreements
become effective if and when there is a Change of Control (as defined below) of
StanCorp or Standard. The Change of Control Agreements commenced during April
1998 and will continue in effect through December 31, 2001, and will be
automatically renewed for successive one-year terms unless Standard gives notice
to the executive (within the period specified in the Change of Control
Agreements) that it will not extend the expiration date (provided that no such
notice can be given during the pendency of a potential Change of Control). If a
Change of Control occurs, the expiration date is automatically extended for
twenty-four months beyond the month in which the Change of Control occurs.
The Change of Control Agreements provide that Standard will have the right at
any time to terminate the executive's employment, and that the executive will
have the right at any time to terminate his employment with Standard. Under the
Change of Control Agreements, Standard will provide the executive with the
following benefits in the event of termination by StanCorp or Standard within
twenty-four months of a Change of Control other than for cause (as defined in
the Change of Control Agreements) or by the executive for good reason (as
defined in the Change of Control Agreements):
. a lump-sum payment in an amount equal to three times the sum of (a) the
executive's annual base salary in effect at the time the Change of
Control occurs and (b) incentive compensation payable to the executive
under Standard's short term incentive plan calculated at the target
bonus rate for the year in which the Change of Control occurs;
. an amount equal to the target bonus payable under any cash long term
incentive plan in effect immediately prior to the Change of Control,
which amount shall be prorated based on the number of months such plan
was in effect prior to the Change of Control, except that no such
payment shall be made if the executive received payment under such plan
before his or her termination;
. outstanding stock options, stock bonuses or other stock awards shall
become immediately vested and become exercisable in full and all
outstanding stock options shall remain exercisable for a period of time
stated in the Change of Control Agreements;
. if the Stock Incentive Plan has not been adopted or implemented prior to
the Change of Control, an amount equal to the value of the grants
planned to be made to the executive as calculated pursuant to the terms
of the Change of Control Agreements;
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. immediate vesting of all benefits to which the executive is entitled
under Standard's Defined Benefit Retirement Plan, the Senior Officers
Deferred Compensation Plan, Senior Officers Supplemental Retirement Plan
and any other retirement or deferred compensation plan; and
. continuation of health, dental and life insurance benefits for a 30-
month period following termination unless the executive obtains similar
benefits from another employer during such 30-month period.
The Change of Control Agreements also provide that, to the extent any
payments to the executives would be subject to "golden parachute" excise taxes
under Section 4999 of the Code, the executives will receive "gross-up"
payments in order to make them whole with respect to such taxes and any related
interest and penalties.
For the purposes of the Change of Control Agreements, a "Change of Control"
is defined generally to include:
. an acquisition of 30% or more of the voting stock of Standard or
StanCorp;
. a change in the majority of the members of StanCorp's or Standard's
Board within a twelve-month period that is not supported by two-thirds
of the incumbent directors;
. approval by the shareholders of a merger or reorganization in which
StanCorp's or Standard's shareholders do not own at least 51% of the
voting securities of the resulting entity;
. a sale of all or substantially all of the assets of StanCorp or
Standard;
. a tender or exchange offer which results in at least 30% of the voting
securities of StanCorp or Standard being purchased by the offeror; or
. adoption by StanCorp's or Standard's Board of Directors of a resolution
to the effect that a Change of Control has occurred.
Acquisition by an executive, or a group of persons including an executive, of
25% or more of the voting securities of StanCorp or Standard does not constitute
a Change of Control under the Change of Control Agreements. Additionally, the
demutualization does not constitute a Change of Control under the Change of
Control Agreements.
StanCorp Stock Incentive Plan
General Terms. In connection with the offering, StanCorp will adopt the
StanCorp Stock Incentive Plan (the "Stock Incentive Plan"). Under the Stock
Incentive Plan, the Board of Directors or the committee of the Board of
Directors of StanCorp responsible for administering the Stock Incentive Plan
(the "Committee") may from time to time grant officers and employees of Standard
nonqualified and incentive stock options to purchase shares of common stock
having an exercise price at least equal to the fair market value of a share of
common stock on the effective date of the grant of such stock option. The Board
of Directors or the Committee may also award stock bonuses and restricted stock
under the Stock Incentive Plan as well as stock appreciation rights that entitle
the holder, upon exercise, to receive from StanCorp an amount equal to the
excess of the fair market value, on the date of exercise, of one share of common
stock over its fair market value on the date of the grant (or, in the case of a
stock appreciation right granted in connection with an option, the excess of the
fair market value of one share of common stock over the option price per share)
multiplied by the number of shares covered by the stock appreciation right or
the option or portion thereof, that is surrendered. The Plan also allows the
Board of Directors to grant cash bonus rights in connection with options, stock
bonuses, stock appreciation rights or stock purchases made under the Stock
Incentive Plan as well as performance units consisting of monetary units to be
earned if Standard achieves certain goals established by the Board of Directors
over a designated period of time. The Stock Incentive Plan further provides that
the Committee must consist of two or more members, each of whom must be a "non-
employee director" within the meaning of Rule 16b-3, as promulgated pursuant to
the Exchange Act. The maximum number of shares of common stock that may be
issued under the Stock Incentive Plan is 5% of the total number of shares of
common stock that are issued and outstanding immediately following the initial
public offering of common stock (the "Authorized Shares"). The shares to
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be issued under the Stock Incentive Plan may be unissued shares. If there is a
stock split, stock dividend, recapitalization or other relevant change affecting
the outstanding shares of common stock, appropriate adjustments will be made in
the number and kind of shares available for award under the Stock Incentive Plan
in the future and in the number and kind of shares as to which outstanding
options and stock appreciation rights shall be exercisable. If any grant is for
any reason canceled, terminated or otherwise settled without the issuance of
some or all of the shares of common stock subject to the grant, such shares will
be available for future grants.
The Board of Directors of StanCorp may terminate, suspend or amend the Stock
Incentive Plan at any time but such termination, suspension or amendment may not
adversely affect any options then outstanding under the Stock Incentive Plan
without the consent of the recipients thereof. Unless terminated by action of
the Board of Directors of StanCorp, the Stock Incentive Plan will continue in
effect until all shares available for issuance under the Plan have been issued
and all restrictions on such shares have lapsed. No incentive stock options will
be granted after the tenth anniversary of the date of the Board's adoption of
the Stock Incentive Plan. Options granted prior to such date shall continue in
effect until they expire in accordance with their terms.
Termination of Employment. In the event of a grantee's employment
termination due to disability or death, all options held by such grantee will
immediately vest and may thereafter be exercised in full for a period of 12
months (or such shorter period as the Committee shall determine at the time of
such grant), subject in each case to the stated term of the option or the
expiration of three years from the date of retirement, whichever is earlier. In
the event of a grantee's employment termination due to retirement, all options
will vest in accordance with the stated vesting schedule and may be exercisable
during the stated term of the option. In the event of a grantee's resignation or
termination without cause (as defined in the Stock Incentive Plan), any unvested
options granted to such grantee will be forfeited and any vested options may be
exercised at any time prior to the option's termination date or for a period of
90 days, whichever is the shorter period, unless otherwise approved by the Board
of Directors or the Committee. In all other events, any outstanding options
granted to such grantees will be forfeited regardless of whether such options
are exercisable. Notwithstanding the foregoing, unless the Board of Directors or
the Committee determines otherwise, in the event of a "change in control" as
defined in the Stock Incentive Plan, all outstanding options granted to such
grantee will immediately vest and become exercisable, restricted stock will
immediately vest free of restrictions and performance share awards will become
payable.
Federal Income Tax Aspects. The following is a brief summary of the Federal
income tax consequences of awards made under the Stock Incentive Plan based upon
the Federal income tax laws in effect on the date hereof. This summary is not
intended to be exhaustive and does not describe state or local tax consequences.
Incentive Stock Options. No taxable income is realized by the grantee upon
the grant or exercise of an Incentive Stock Option (an "ISO"). If a grantee
does not sell the stock received upon the exercise of an ISO ("ISO Shares")
for at least two years from the date of grant and one year from the date of
exercise, when the ISO Shares are sold any gain or loss realized will be treated
as long-term capital gain or loss. In such circumstances, no deduction will be
allowed to the grantee's employer for Federal income tax purposes.
If ISO Shares are disposed of prior to the expiration of the holding periods
described above, the grantee generally will realize ordinary income at that time
equal to the lesser of the excess of the fair market value of the shares at
exercise over the price paid for such ISO Shares or the actual gain on the
disposition. The grantee's employer will generally be entitled to deduct any
such recognized amount. Any further gain or loss realized by the grantee will be
taxed as short-term or long-term capital gain or loss. Subject to certain
exceptions for disability or death, if an ISO is exercised more than three
months following the termination of the grantee's employment, the ISO will
generally be taxed as a nonqualified stock option.
Nonqualified Stock Options. No income is realized by the grantee at the
time a nonqualified stock option is granted. Generally upon exercise of a
nonqualified stock option, the grantee will realize ordinary income in an amount
equal to the difference between the price paid for the shares and the fair
market value of the shares on the date of exercise. The grantee's employer will
generally be entitled to a tax deduction In the same amount and at the same time
as the grantee recognizes ordinary income. Any appreciation or
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depreciation after the date of exercise will be treated as either short-term or
long-term capital gain or loss, depending upon the length of time that the
grantee has held the shares.
Stock Option Grants. In connection with the offering, the Committee expects
to make an initial grant of options, pursuant to and in accordance with the
terms of the Stock Option Plan, to all eligible employees of Standard to
purchase an aggregate amount of shares not to exceed 40% of the Authorized
Option Shares, to be apportioned among employees and officers of Standard at the
discretion of the Organization and Executive Compensation Committee. The options
shall be granted to officers of Standard and its affiliates not earlier than six
months following the effective date of the plan of reorganization, respectively;
and to non-officer employees of StanCorp and its affiliates at the effective
date. Stock options shall have an exercise price equal to the fair market value
of the common stock on the date of the grant. Subject to the grantees' continued
employment with Standard, these stock options shall have a term of ten years and
shall generally vest and become exercisable following three years from the
effective date of the grant.
Stock Options to Be Granted
The following table sets forth information concerning the initial stock
options that Standard intends to grant to the Named Executives. Mr. Timpe will
receive option grants with respect to shares of common stock having a net
present value (using a variation of the Black-Scholes methodology) equal to
twice his annual base salary and each of the other Named Executives will receive
option grants with respect to shares of common stock having a net present value
equal to 1.3 times the Named Executive's annual base salary.
The chart below illustrates the number of shares that would be granted if the
value per share of such common stock in this offering were $24.50, which is the
midpoint of the range for the assumed initial public offering price provided in
this prospectus. The actual number of shares to be granted will vary if the
offering price is higher or lower. The potential realizable value of such stock
options are calculated based on assumed increases of 5% and 10% per annum (as
required under Securities and Exchange Commission rules), respectively, over the
term of the option, and using the assumed stock value stated above. The actual
amount, if any, realized upon the exercise of stock options will depend upon the
amount by which the market price of the common stock on the date of exercise
exceeds the exercise price. There is no assurance that the hypothetical values
of stock options reflected in this table will actually be realized.
If the potential values in this table are realized upon exercise of the
options, the corresponding increase in total stockholder value would be
approximately $504.6 million or $1,278.8 million, assuming an increase in value
of 5% and 10% per annum, respectively, over the term of the options and assuming
that 32,751,441 shares of common stock are outstanding following the initial
public offering and the demutualization, which number is the midpoint of the
range of potential shares to be outstanding following the initial public
offering and the demutualization, as provided in this prospectus.
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Options/SARs to Be Granted
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed
Annual Rates
of Stock
Price
Appreciation
for Option
Individual Grants(1) Term
--------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Number of % of Total Exercise
Securities Options/SARs or Base
Underlying to Be Granted Price
Options/SARs to Employees Per Expiration
Name Granted (2) in Fiscal Year(2) Share Date(3) 5% 10%
- ----------------------- ------------ -------------- -------- ---------------- ------------ ------------
Ronald E. Timpe . 131,251 20.0% $24.50 October 15, 2009 $2,022,305 $5,124,917
- -----------------------
Eric E. Parsons . 41,174 6.3 24.50 October 15, 2009 634,406 1,607,708
E. Wayne Atteberry . 32,940 5.0 24.50 October 15, 2009 507,537 1,286,198
Kim W. Ledbetter . 29,646 4.5 24.50 October 15, 2009 456,783 1,157,578
</TABLE>
- ----------------
(1) Douglas T. Maines is expected to receive 39,527 options.
(2) The number of options to be granted to the Named Executives and to
Standard's employees are based on estimates by the Board of Directors as to
the options that will be granted in 1999. As such, the actual numbers may
differ from those shown in this table.
(3) Each option has a term of ten years and an exercise price equal to the fair
market value of the common stock on the date of the installment grant. The
October 15, 2009 expiration date is based on the assumption that options
will be granted on October 15, 1999, which date is subject to change
depending upon the actual date of the initial public offering. Subject to
the Named Executive's continued employment with Standard Insurance Company,
all options vest and become exercisable on the third anniversary following
the date of such option grant.
StanCorp Stock Purchase Plan
In connection with the offering, StanCorp will adopt the StanCorp Stock
Purchase Plan (the "Stock Purchase Plan") satisfying the requirements of Section
423 of the Internal Revenue Code. Under the Stock Purchase Plan, each employee
of Standard (including each of the Named Executives) who has been employed by
Standard for at least one month shall have the opportunity to contribute up to
10% of such employee's gross base salary plus commissions and incentive
payments, if any, to purchase up to a maximum of $25,000 fair market value of
shares of common stock per year, at a price that is 15% less than the fair
market value of a share of common stock on the effective date of the purchase of
such stock or the effective date of the offering of such stock, as specified in
the Stock Purchase Plan. Upon an employee's termination, Standard will refund to
such employee all payroll deductions in connection with the Stock Purchase Plan
that have not been used to purchase shares. All employees, excluding officers of
Standard, will be eligible to participate in the Stock Purchase Plan immediately
following the effective date of the plan of reorganization; officers of Standard
(including the Named Executives) will be eligible to participate in the Stock
Purchase Plan six months following the effective date. Under the Director's
order, employees may not purchase common stock under the Stock Purchase Plan for
at least 15 days after the effective date. The maximum number of shares of
common stock that may be issued under the Stock Purchase Plan is 1.0 million
shares (the "Authorized Shares"). If there is a stock split, stock dividend,
recapitalization or other relevant change affecting the outstanding shares of
common stock, appropriate adjustments will be made by StanCorp's Board of
Directors in the number of shares reserved for issuance.
The Board of Directors of StanCorp may terminate, suspend or amend the Stock
Purchase Plan at any time. Any increase in the number of shares reserved under
the Stock Purchase Plan, however, will require the approval of the shareholders
of StanCorp. Unless terminated by action of the Board of Directors of Standard,
the Stock Purchase Plan will continue in effect until all the shares reserved
for purposes of the Stock Purchase Plan have been purchased.
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Long-Term Incentive Compensation Plan
Each of the Named Executives and such other officers as may be selected by
the Board of Directors of Standard are participants in the Long Term Incentive
Compensation Plan (the "LTIP"). The LTIP operates during successive three-year
periods, with two LTIP's currently operating for the periods 1997-1999 and 1998-
2000. The LTIP provides a payment to each participant if certain designated
performance objectives, based on the success of Standard, are achieved. These
objectives include growth in Standard's revenues, control of expenses and
Standard's financial strength based on its risk-based capital ratio. The 1997-
1999 plan will make any awards in cash. The target for this plan in 30% of 1999
base salary for Mr. Timpe and 20% of 1999 base salary for all other
participants. The 1998-2000 plan contains identical targets of 2000 base salary,
however, a minimum of 40% of any award will be paid in cash, with up to 60%
payable in shares of common stock. No other LTIP's are currently contemplated.
<TABLE>
<CAPTION>
Potential Awards to be Granted Under the 1998-2000 Plan
Performance or Other Period Estimated Future Payments under Non-
Until Stock Price-Based Plans(1)
Name Maturation or Payout Target ($) Maximum ($)
- ---------------------- ----------------------------- ------------------------------------
<S> <C> <C> <C>
Ronald E. Timpe....... December 31, 2000 135,000 270,000
Eric E. Parsons....... December 31, 2000 44,000 88,000
E. Wayne Atteberry.... December 31, 2000 38,800 77,600
Kim W. Ledbetter...... December 31, 2000 34,000 68,000
</TABLE>
(1) The target and maximum amounts actually payable will be based on the Named
Executive's annual base salary in effect at the end of the performance
cycle. Estimates shown are based on the Named Executive's annual base
salary for 1998. Actual payout will be based on the Named Executive's year
2000 base salary.
Retirement Plans
Each of the Named Executives participates in both the Standard Retirement Plan
for Home Office Personnel (the "Retirement Plan") and the Supplemental
Retirement Plan for Senior Executives (the "Supplemental Retirement Plan").
The following table sets forth the benefits payable, assuming retirement at
age 65, to participants in the Retirement Plan and the Supplemental Retirement
Plan (the "Retirement Plans") at the levels of compensation and the periods of
service contained therein.
- -
<TABLE>
<CAPTION>
Annual Retirement Plan Benefits
- --------------------------------------------------------------------
High 5 Year Years of Service at Normal Retirement Date(1)
Average -----------------------------------------------
Remuneration 15 20 25 30 35
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$125,000 $ 29,325 $ 39,100 $ 48,875 $ 58,650 $ 68,425
150,000 35,325 47,100 58,875 70,650 82,425
175,000 41,325 55,100 68,875 82,650 96,425
200,000 47,325 63,100 78,875 94,650 110,425
225,000 53,325 71,100 88,875 106,650 124,425
250,000 59,325 79,100 98,875 118,650 138,425
300,000 71,325 95,100 118,875 142,650 166,425
350,000 83,325 111,100 138,875 166,650 194,425
400,000 95,325 127,100 158,875 190,650 222,425
450,000 107,325 143,100 178,875 214,650 250,425
500,000 119,325 159,100 198,875 238,650 278,425
550,000 131,325 175,100 218,875 262,650 308,425
600,000 143,325 191,100 238,875 266,650 334,425
- --------------------------------------------------
</TABLE>
(1) Maximum service under the Retirement Plan is 35 years.
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The benefits shown in the above table are payable in the form of a straight
life annuity with annualized cost of living increases not to exceed a cumulative
limit of 3% of the original benefit amount for each year after retirement.
Benefits payable under the Retirement Plans are not subject to offset for Social
Security benefits. Compensation taken into account under the Retirement Plans is
the average monthly compensation paid to a participant during the consecutive
60-month period over the most recent 120-month period that produces the highest
average compensation. For this purpose, compensation includes the total of base
salary and bonus.
As of December 31, 1998, the estimated highest five year average remuneration
and credited years of service of each of the Named Executives under the
Retirement Plans was: Mr. Timpe, $473,779 and 30 years; Mr. Parsons, $217,969
and 8 years; Mr. Atteberry, $203,548 and 30 years; Mr. Halverson, $214,269 and
21 years and Mr. Ledbetter, $145,083 and 24 years.
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of common stock as of the effective date of the plan of reorganization
by:
. each person who Standard believes will own beneficially more than 5%
of the outstanding shares of common stock;
. each director and each Named Executive; and
. all directors and executive officers of Standard as a group.
The number of shares of common stock beneficially owned by each director and
executive officer is based upon an estimate of the number of shares each
director and executive officer and certain persons and entities affiliated with
each director and executive officer will receive as eligible members under the
plan of reorganization. See "Management Compensation--Stock Options to Be
Granted". Standard believes that no person will own more than 5% of the
outstanding shares of common stock as a result of the shares distributed under
the plan of reorganization. Except as noted below, each holder listed below
will have sole investment and voting power with respect to the shares
beneficially owned by the holder.
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Number of Shares
To Be
Name Beneficially Owned*
- ---- -------------------
Ronald E. Timpe, FSA, CLU.................. .
Virginia L. Anderson....................... .
Frederick W. Buckman....................... .
John E. Chapoton........................... .
Barry J. Galt.............................. .
Richard Geary.............................. .
Peter T. Johnson........................... .
Peter O. Kohler, M.D....................... .
Jerome J. Meyer............................ .
Ralph R. Peterson.......................... .
E. Kay Stepp............................... .
William Swindells.......................... .
Michael G. Thorne.......................... .
Franklin E. Ulf............................ .
Benjamin R. Whiteley, FSA.................. .
E. Wayne Atteberry, LLIF................... .
Gerald B. Halverson, CLU................... .
Kim W. Ledbetter, FSA, CLU................. .
Douglas T. Maines.......................... .
Eric E. Parsons, FLMI...................... .
J. Gregory Ness, LLIF...................... .
Wilbur R. Willard, FLMI.................... .
All directors and executive officers of Standard
(22 persons)............................ .
- ------------------------
* Number of shares listed represents less than one percent (1%) of the number
of shares of common stock expected to be outstanding on the effective date.
COMMON STOCK ELIGIBLE FOR FUTURE SALE
Initially, all the issued common stock will be distributed to eligible
members in the demutualization or sold in the offering. See "The
Demutualization--Payment of Consideration to Eligible Members". All the shares
of the common stock outstanding after the offering will be eligible for
immediate resale in the public market.
The plan of reorganization requires StanCorp to establish the Commission-Free
Program under which eligible members who receive fewer than a certain number, to
be specified by StanCorp's Board of Directors after the demutualization and
prior to the commencement of the Commission-Free Program, of shares of common
stock pursuant to the plan of reorganization may sell all, but not less than
all, of such shares. In addition, any record holder as of the effective date of
fewer than a certain number, to be specified by Standard Insurance Company's
Board of Directors, but shall be no more than 99, of shares of common stock may
purchase enough additional shares to own exactly 100 shares. The sales and
purchases made under this Commission-Free Program will be at prevailing market
prices without brokerage commissions or similar expenses. The Commission-Free
Program will involve transactions effected on a periodic basis on the New York
Stock Exchange and will not involve any purchases or sales by Standard or its
affiliates for their own accounts. The Commission-Free Program will begin
between 180 days and 12 months after the effective date and will continue for
three months or such longer period of time as StanCorp's Board of Directors
determines. StanCorp may reinstate the Commission-Free Program at a later date;
however, it has no current intention of doing so. See "The Demutualization--
Commission-Free Program".
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RESTRICTIONS ON ACQUISITIONS OF COMMON STOCK
Antitakeover Provisions in StanCorp's Articles of Incorporation and Bylaws and
in Oregon Law
A number of provisions of StanCorp's Articles of Incorporation and Bylaws
deal with matters of corporate governance and certain rights of shareholders.
The following discussion is a general summary of certain provisions of
StanCorp's Articles of Incorporation and Bylaws and regulatory provisions that
might be deemed to have a potential "antitakeover" effect. These provisions may
have the effect of discouraging a future takeover attempt which is not approved
by the Board of Directors but which individual StanCorp shareholders may deem to
be in their best interests or in which shareholders may receive a substantial
premium for their shares over then current market prices. As a result,
shareholders who might desire to participate in such a transaction may not have
an opportunity to do so. Such provisions will also render the removal of the
incumbent Board of Directors or management of Standard more difficult. Certain
provisions of the Oregon Business Corporation Act ("OBCA") and the Oregon
Insurance Code ("OIC") may also have an antitakeover effect. The following
description of certain of the provisions of the Articles of Incorporation and
Bylaws of StanCorp and certain provisions of the OBCA and OIC are necessarily
general and reference should be made in each case to such Articles of
Incorporation and Bylaws, which are incorporated herein by reference, and to the
provisions of Oregon law. See "Additional Information" as to where to obtain a
copy of these documents.
Unissued Shares of Capital Stock
Common Stock. Based upon the assumptions described under "Unaudited Pro Forma
Condensed Consolidated Financial Information", StanCorp currently plans to issue
an estimated 32,676,441 shares of its authorized common stock in the offering
and the demutualization. The remaining shares of authorized and unissued common
stock will be available for future issuance and may not require additional
shareholder approval. While the additional shares are not designed to deter or
prevent a change of control, under certain circumstances StanCorp could use the
additional shares to create voting impediments or to frustrate persons seeking
to effect a takeover or otherwise gain control of StanCorp by, for example,
issuing those shares in private placements to purchasers who might side with the
Board in opposing a hostile takeover bid.
Preferred Stock. The Board of Directors has the authority to issue Preferred
Stock in one or more series and to fix the number of shares constituting any
such series and the preferences, limitations and relative rights, including
dividend rights, dividend rate, voting rights, terms of redemption, redemption
price or prices, conversion rights and liquidation preferences of the shares
constituting any series, without any further vote or action by the shareholders
of StanCorp. The existence of authorized but unissued Preferred Stock could
reduce the attractiveness of StanCorp as a target for an unsolicited takeover
bid since StanCorp could, for example, issue shares of the Preferred Stock to
parties who might oppose such a takeover bid or containing terms the potential
acquiror may find unattractive. This may have the effect of delaying or
preventing a change in control of StanCorp, may discourage bids for the common
stock at a premium over the market price of the common stock and may adversely
affect the market price of, and the voting and other rights of the holders of,
common stock.
Classified Board of Directors and Removal of Directors
StanCorp's Articles of Incorporation provide that the directors shall be
divided into three classes, as nearly equal in number as possible, with the term
of office of each class to be three (3) years. The classes serve staggered
terms, such that the term of one class of directors expires each year. Any
effort to obtain control of the Board of Directors by causing the election of a
majority of the Board may require more time than would be required without a
staggered election structure. StanCorp's Articles of Incorporation also provide
that directors of StanCorp may be removed only for cause at a meeting of
shareholders called expressly for that purpose. This provision may have the
effect of slowing or impeding a change in membership of the Board of Directors
that would effect a change of control of StanCorp.
Restriction on Maximum Number of Directors and Filling of Vacancies on the
Board of Directors
StanCorp's Articles of Incorporation provide that the number of directors of
StanCorp shall be not less than nine (9) nor more than twenty-one (21), and
within such limits the exact number shall be fixed and increased or decreased
from time to time by resolution of the Board of Directors. Any vacancy on the
Board
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<PAGE>
of Directors, including a vacancy resulting from an increase in the number of
directors, may be filled by the Board of Directors, the remaining directors if
less than a quorum (by the vote of a majority thereof) or by a sole remaining
director. If the vacancy is not so filled, it shall be filled by the
shareholders at the next annual meeting of shareholders. The shareholders are
not permitted to fill vacancies between annual meetings. These provisions give
incumbent directors significant authority that may have the effect of limiting
the ability of shareholders to effect a change in management.
Advance Notice Requirements for Nomination of Directors and Presentation of
New Business at Meetings of Shareholders; Action by Written Consent
StanCorp's Bylaws provide for certain advance notice requirements for
shareholder proposals and nominations for director. In addition, pursuant to
the OBCA, action may not be taken by written consent of shareholders without a
meeting unless such written consents are signed by all shareholders entitled to
vote on the action to be taken. These provisions make it more procedurally
difficult for a shareholder to place a proposal or nomination on the meeting
agenda or to take action without a meeting, and therefore may reduce the
likelihood that a shareholder will seek to take independent action to replace
directors or with respect to other matters that are not supported by management
for shareholder vote.
Supermajority Voting Requirement for Amendment of Certain Provisions of the
Articles of
Incorporation and Bylaws
The provisions of the Articles of Incorporation governing the number of
directors and the filling of vacancies and restricting the removal of directors
without cause may not be amended, altered, changed or repealed unless the
amendment is approved by the vote of holders of 70 percent of the shares then
entitled to vote at an election of directors. This requirement exceeds the
majority vote of the outstanding stock that would otherwise be required by the
OBCA for the repeal or amendment of such provisions of the Articles of
Incorporation. StanCorp's Bylaws may be amended by the Board of Directors or by
the vote of holders of 70 percent of the shares then entitled to vote. These
provisions make it more difficult for any person seeking to remove or amend
provisions having antitakeover effect to do so.
Board Consideration of Certain Nonmonetary Factors in the Event of an Offer
by Another Party
Pursuant to the OBCA, the Board of Directors may consider certain nonmonetary
factors when evaluating any offer of another party to make a tender or exchange
offer for any equity security of StanCorp, or any proposal to merge or
consolidate StanCorp with another corporation or to purchase or otherwise
acquire all or substantially all the properties and assets of StanCorp. The
Board of StanCorp may, in determining what they believe to be in the best
interests of StanCorp, give due consideration to the social, legal and economic
effects on employees, customers and suppliers of StanCorp and on the communities
and geographical areas in which StanCorp and its subsidiaries operate, the
economy of the state and nation, the long-term as well as short-term interests
of StanCorp and its shareholders, including the possibility that these interests
may be best served by the continued independence of StanCorp, and other relevant
factors.
Oregon Control Share and Business Combination Statutes; Fair Price Provision
Upon completion of the offering, StanCorp will become subject to the Oregon
Control Share Act (the "Control Share Act"). The Control Share Act generally
provides that a person (the "Acquiror") who acquires voting stock of an Oregon
corporation in a transaction (other than a transaction in which voting shares
are acquired from the issuing public corporation) that results in the Acquiror
holding more than 20%, 33% or 50% of the total voting power of the corporation
(a "Control Share Acquisition") cannot vote the shares it acquires in the
Control Share Acquisition ("control shares") unless voting rights are accorded
to the control shares by (i) the holders of a majority of the outstanding voting
shares and (ii) the holders of a majority of the outstanding voting shares,
excluding the control shares held by the Acquiror and shares held by StanCorp's
officers and inside directors. The term "Acquiror" is broadly defined to
include persons acting as a group.
The Acquiror may, but is not required to, submit to StanCorp a statement
setting forth certain information about the Acquiror and its plans with respect
to StanCorp. The statement may also request that StanCorp call a special
meeting of the shareholders to determine whether voting rights will be accorded
to the control shares. If the Acquiror does not request a special meeting of
shareholders, the issue of voting
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<PAGE>
rights of control shares will be considered at the next annual or special
meeting of shareholders. If the Acquiror's control shares are accorded voting
rights and represent a majority or more of all voting power, shareholders who do
not vote in favor of voting rights for the control shares will have the right to
receive the appraised "fair value" of their shares, which may not be less than
the highest price paid per share by the Acquiror for the control shares.
Upon completion of the offering, StanCorp will become subject to certain
provisions of the OBCA that govern business combinations between corporations
and interested shareholders (the "Business Combination Act"). The Business
Combination Act generally provides that if a person or entity acquires 15% or
more of the outstanding voting stock of an Oregon corporation (an "Interested
Shareholder"), the corporation and the Interested Shareholder, or any affiliated
entity of the Interested Shareholder, may not engage in certain business
combination transactions for three years following the date the person became an
Interested Shareholder. Business combination transactions for this purpose
include (a) a merger or plan of share exchange with or caused by the Interested
Shareholders, (b) any sale, lease, mortgage or other disposition of 10% or more
of the assets of the corporation to or with an Interested Shareholder, (c)
certain transactions that result in the issuance or transfer of capital stock of
the corporation to the Interested Shareholder and (d) receipt by the Interested
Shareholder of the benefit of any loan, guarantee or any other financial
benefit, except proportionately as a shareholder of the corporation. These
restrictions do not apply if (i) the Interested Shareholder, as a result of the
transaction in which such person became an Interested Shareholder, owns at least
85% of the outstanding voting stock of the corporation (disregarding shares
owned by directors who are also officers and certain employee benefit plans),
(ii) the board of directors approves the business combination or the transaction
that resulted in the shareholder becoming an Interested Shareholder before the
Interested Shareholder acquires 15% or more of the corporation's voting stock or
(iii) the board of directors and the holders of at least two-thirds of the
outstanding voting stock of the corporation not owned by the Interested
Shareholder approve the business combination after the Interested Shareholder
acquires 15% or more of the corporation's voting stock.
StanCorp's Articles of Incorporation further provide that if a person or
entity acquires, directly or indirectly, beneficial ownership of 15% or more of
the outstanding voting stock of StanCorp (a "Substantial Shareholder"), StanCorp
and the Substantial Shareholder or any affiliate of the Substantial Shareholder
may not engage in certain business combination transactions without the vote of
at least 70 percent of the outstanding voting shares unless (a) two-thirds of
the continuing directors who served on the Board immediately prior to the time
when such person or entity became a Substantial Shareholder have approved, in
advance, the transaction that caused such person or entity to become a
Substantial Shareholder, (b) two-thirds of the continuing directors have
approved such business combination with the Substantial Shareholder or (c)
certain equal price criteria are met. Business combinations under this
provision are generally of the same types as those covered by the Business
Combination Act.
Restrictions on Acquisitions of Securities
On the effective date of the plan of reorganization, StanCorp will own all of
the outstanding shares of capital stock of Standard Insurance Company. Under
the Oregon demutualization statute, neither a person nor a group of persons
acting in concert may acquire, through public offering (including the offering),
exchange or subscription rights or otherwise, more than 5% of the shares of
capital stock of StanCorp or any subsidiary thereof (including Standard
Insurance Company) for a period of five years from the effective date, except
with the approval of the Director. In addition, Oregon law applicable to
StanCorp generally provides that no person may seek to acquire control of
StanCorp, and thus indirect control of Standard Insurance Company, without the
prior approval of the Director. Generally any person who directly or indirectly
owns, controls, holds with power to vote, or holds proxies representing 10% or
more of StanCorp's voting securities would be presumed to have acquired such
control, unless the Director upon application determines otherwise.
Shareholder Rights Plan
The Board of Directors intends to adopt a Shareholder Rights Plan under
which the Board of Directors of StanCorp will declare a dividend of one Right
for each outstanding share of common stock to shareholders of record at the
close of business immediately prior to the effective date, (and with respect to
StanCorp issued thereafter until the Distribution Date (as defined below). Each
Right will entitle the registered holder to purchase from StanCorp one one-
hundredth of a share of Series A Preferred Stock at
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<PAGE>
a purchase price, subject to adjustment, to be determined by the Board of
Directors or a committee thereof. The description and terms of the Rights are
set forth in a Rights Agreement (the "Rights Agreement") between StanCorp and
ChaseMellon Shareholder Services, Inc., as Rights Agent. A copy of the form of
Rights Agreement has been field as an exhibit to the Registration Statement of
which this prospectus is a part. Although the material provisions of the Rights
Agreement have been accurately summarized, the statements below concerning the
Rights Agreement are not necessarily complete, and in each instance reference is
made to the Rights Agreement itself, a copy of which is filed as an exhibit to
the Registration Statement of which this prospectus forms a part. Each statement
is qualified in its entirety by such reference.
Initially, the Rights will be attached to the certificates representing
outstanding shares of common stock, and no separate Rights certificates will be
distributed. The Rights will separate from the common stock at the Distribution
Date, which is defined to occur upon the earlier of (i) the close of business on
the tenth day after a public announcement that a person or group of affiliated
or associated persons has acquired, or obtained the right to acquire from
shareholders, beneficial ownership of 15% or more of the outstanding common
stock (an "Acquiring Person"), or (ii) the close of business on the tenth day
after the commencement of a tender offer or exchange offer that would result in
a person or group beneficially owning 15% or more of such outstanding common
stock, as such periods may be extended pursuant to the Rights Agreement.
Until the Distribution Date, (i) the Rights will be evidenced by and will
be transferred with and only with such common stock certificates, (ii) new
common stock certificates issued after the effective date will contain a legend
incorporating the Rights Agreement by reference, and (iii) the surrender for
transfer of any certificate for common stock will also constitute the transfer
of the Rights associated with the common stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on the tenth anniversary of its adoption, unless
earlier redeemed by StanCorp as described below.
As soon as practicable after the Distribution Date, Rights certificates
will be mailed to holders of record of the common stock as of the close of
business on the Distribution Date, and thereafter the separate Rights
certificates alone will represent the Rights. Except as otherwise determined by
the Board of Directors, only common stock issued prior to the time the Rights
become exercisable or issued upon exercise or conversion of rights, warrants,
options or convertible securities issued prior to the time the Rights become
exercisable will be issued with Rights.
In the event that any person becomes an Acquiring Person, each holder of a
Right shall thereafter have the right to receive, upon exercise, in lieu of
Series A Preferred Stock, common stock (or, in certain circumstances, cash,
property or other securities of StanCorp) having a value equal to two times the
exercise price of the Right. However, Rights are not exercisable as described
in this paragraph until such time as the Rights are no longer redeemable by
StanCorp as set forth below. Notwithstanding any of the foregoing, if any
person becomes an Acquiring Person all Rights that are or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by an
Acquiring Person will become null and void.
In the event that, at any time following the Distribution Date, (i)
StanCorp is acquired in a merger or other business combination transaction in
which StanCorp is not the surviving corporation or in which shares of common
stock are exchanged for stock or other securities or property, or (ii) 50% or
more of StanCorp's assets or earning power is sold or transferred, each holder
of a Right (except Rights which previously have been voided as set forth above)
shall thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of the
Right.
The purchase price payable, the number of one one-hundredths of a share of
Series A Preferred Stock or other securities or property issuable upon exercise
of the Rights and the number of Rights outstanding, are subject to adjustment
from time to time to prevent dilution (i) in the event of a stock dividend on,
or a subdivision, combination or reclassification of, the Series A Preferred
Stock or the common stock, (ii) if holders of the Series A Preferred Stock are
granted certain rights or warrants to subscribe for Series A Preferred Stock or
convertible securities at less than the current market price of the Series A
Preferred Stock, (iii) if holders of common stock are granted certain rights or
warrants to subscribe for common stock or convertible securities at less than
the current market price of the common stock or (iv) upon the distribution to
holders of Series A Preferred Stock or common stock of evidences of indebtedness
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or assets (excluding regular quarterly cash dividends) or of subscription rights
or warrants (other than those referred to above).
With certain exceptions, no adjustment in the purchase price or the number
of shares of Series A Preferred Stock issuable upon exercise of a Right will be
required until cumulative adjustments would require an increase or decrease of
at least 1 percent in the purchase price or number of shares for which a Right
is exercisable. No fractional shares of Series A Preferred Stock will be issued
(other than fractions which are integral multiples of one one-hundredth of a
share of Series A Preferred Stock) and, in lieu thereof, an adjustment in cash
will be made based on the market price of the Series A Preferred Stock on the
last trading date prior to the date of exercise.
At any time until the earlier of (i) 10 days (or longer if extended
pursuant to the terms of the Rights Agreement) after a person becomes an
Acquiring Person and (ii) the termination of the Rights Agreement, StanCorp may
redeem the Rights in whole, but not in part, at a price of $.001 per Right
(payable in cash, common stock or other consideration), appropriately adjusted
to reflect any stock split. stock dividend or similar transaction occurring
after the date hereof. Immediately upon the action of the Board of Directors
ordering redemption of the Rights, the Rights will terminate and the only right
of the holders of Rights will be to receive the $.001 redemption price.
At any time after a public announcement that a person has become an
Acquiring Person, the Board of Directors of StanCorp may exchange the Rights
(other than Rights owned by such person or group which become void), in whole or
in part, at an exchange ratio of one share of common stock, or one one-hundredth
of a share of Series A Preferred Stock (or of a share of a class or series of
StanCorp's preferred stock having equivalent rights, preferences and
privileges), per Right (subject to adjustment). Immediately upon the action of
the Board of Directors ordering the exchange of any Rights, the right to
exercise such Rights will terminate and the only right of the holders of such
Rights will be to exchange such Rights for the amount of securities determined
in accordance with the exchange ratio.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of StanCorp, including, without limitation, the right to
vote or to receive dividends. While the distribution of the Rights will not be
taxable to shareholders or to StanCorp. shareholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exercisable for common stock (or other consideration) of StanCorp or for common
stock of the acquiring company as set forth above.
The Series A Preferred Stock will be nonredeemable. The Series A
Preferred Stock may rank on a lower priority in respect of the preference as to
dividends and the distribution of assets with other classes or series of
StanCorp's Preferred Stock. Each share of Series A Preferred Stock will be
entitled to an aggregate of 100 times the cash and noncash (payable in kind)
dividends and distributions (other than dividends and distributions payable in
common stock) declared on the common stock. In the event of liquidation, the
holders of Series A Preferred Stock will be entitled to receive a liquidation
payment in an amount equal to 100 times the payment made per share of common
stock, plus an amount equal to declared and unpaid dividends and distributions
thereon. In the event of any merger, consolidation or other transaction in
which common stock is exchanged, each share of Series A Preferred Stock will be
entitled to receive 100 times the amount received per share of common stock.
The dividend and liquidation rights of the Series A Preferred Stock are
protected by antidilution provisions. Each share of Series A Preferred Stock
will be entitled to 100 votes (subject to certain adjustments) on all matters
submitted to the shareholders.
Certain Effects of the Shareholder Rights Plan. The Shareholder Rights
Plan is designed to protect shareholders of StanCorp in the event of unsolicited
offers to acquire StanCorp and other coercive takeover tactics which, in the
opinion of the Board of Directors of StanCorp, could impair its ability to
represent shareholder interests. The provisions of the Shareholder Rights Plan
may render an unsolicited takeover of StanCorp more difficult or less likely to
occur or might prevent such a takeover, even though such takeover may offer
StanCorp's shareholders the opportunity to sell their stock at a price above the
prevailing market rate and may be favored by a majority of the shareholders of
StanCorp.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of StanCorp consists of 300,000,000 shares of
common stock and 100,000,000 shares of preferred stock.
Common Stock
Holders of common stock are entitled to receive such dividends as may from
time to time be declared by the Board of Directors of StanCorp out of funds
legally available therefor. See "Dividend Policy". Holders of common stock are
entitled to one vote per share on all matters on which the holders of common
stock are entitled to vote and do not have any cumulative voting rights.
Holders of common stock have no preemptive, conversion, redemption or sinking
fund rights. In the event of a liquidation, dissolution or winding up of
StanCorp, holders of common stock are entitled to share equally and ratably in
the assets of StanCorp, if any, remaining after the payment of all liabilities
of StanCorp and the liquidation preference of any outstanding class or series of
preferred stock. The outstanding shares of common stock are, and the shares of
common stock offered by StanCorp hereby when issued will be, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to any series of preferred stock that StanCorp may issue in the
future, as described below. StanCorp's Articles of Incorporation limit the
personal liability of a director to StanCorp or its shareholders for monetary
damages for conduct as a director, except that such limitation does not apply to
(i) any breach of the director's duty of loyalty to StanCorp or its
shareholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) any unlawful
distribution or (iv) any transaction from which the director derived an improper
personal benefit.
Preferred Stock
The Board of Directors has the authority to issue preferred stock in one or
more series and to fix the number of shares constituting any such series and the
preferences, limitations and relative rights, including dividend rights,
dividend rate, voting rights, terms of redemption, redemption price or prices,
conversion rights and liquidation preferences of the shares constituting any
series, without any further vote or action by the shareholders of StanCorp. The
issuance of preferred stock by the Board of Directors could adversely affect the
rights of holders of common stock.
StanCorp expects to authorize shares of Series A Preferred Stock for issuance
in connection with its Shareholder Rights Plan. See "Restrictions on
Acquisitions of Common Stock--Shareholder Rights Plan".
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, Inc.
109
<PAGE>
VALIDITY OF COMMON STOCK
The validity of the shares of common stock offered hereby will be passed upon
for StanCorp by Debevoise & Plimpton and Stoel Rives LLP and for the
underwriters by Sullivan & Cromwell. Debevoise & Plimpton and Sullivan &
Cromwell will rely upon the opinion of Stoel Rives LLP with respect to all
matters of Oregon law.
EXPERTS
The balance sheet of StanCorp Financial Group, Inc. as of December 31, 1998,
and the consolidated financial statements of Standard Insurance Company as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998 included in this prospectus and the related financial
statement schedules of Standard Insurance Company included elsewhere in the
Registration Statement (as defined herein) have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein,
and have been so included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
Standard has retained Milliman & Robertson, Inc., an actuarial consulting
firm, to advise it in connection with actuarial matters involved in the
development of the plan of reorganization and the establishment and operation of
the closed block. The opinion of Daniel J. McCarthy of Milliman & Robertson,
Inc. is included as Annex A of this prospectus in reliance upon his authority as
an expert in actuarial matters generally and in the application of actuarial
concepts to insurance matters.
ADDITIONAL INFORMATION
StanCorp has filed with the Securities Exchange Commission ("SEC") a
Registration Statement on Form S-1 (together with all amendments, exhibits,
schedules and supplements thereto, the "Registration Statement"), under the
Securities Act and the rules and regulations thereunder, for the registration of
the common stock offered hereby. This prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which have been omitted as permitted by
SEC rules and regulations. For further information with respect to StanCorp and
the common stock offered hereby, reference is made to the Registration
Statement. Statements made in this prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference. The Registration
Statement may be inspected and copied at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-
0330. The SEC maintains an Internet site, http://www.sec.gov, that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC.
As a result of the offering, StanCorp will become subject to the
informational requirements of the Securities Exchange Act of 1934. After the
effective date, StanCorp will fulfill its obligations with respect to such
requirements by filing periodic reports and other information with the SEC. It
intends to furnish its shareholders with annual reports containing consolidated
financial statements certified by an independent public accounting firm.
StanCorp is applying to list the common stock on the New York Stock Exchange.
Upon such listing, copies of the Registration Statement, including all exhibits
thereto, and periodic reports, proxy statements and other information will be
available for inspection at the offices of the New York Stock Exchange, Inc.
located at 20 Broad Street, New York, New York 10005.
110
<PAGE>
GLOSSARY
The following Glossary includes definitions of certain insurance terms.
Each term defined in this Glossary is printed in boldface type the first time it
appears in this prospectus.
<TABLE>
<S> <C>
Account Value ........................The amount of money held in either a general account or separate account of an
insurance company to support policyholder liabilities.
Admitted Assets ......................Assets which are included in an insurance company's financial statements to
measure policyholder surplus as determined in accordance with state insurance
laws.
Annual Statement .....................The report filed annually with state insurance regulatory authorities that contains
financial and other information on a calendar year basis and is prepared in
accordance with statutory accounting practices. The form of the Annual Statement
is prescribed by the NAIC.
Annuitant ............................A person who receives an income benefit from an annuity for life or for a specified
period of time.
Annuity ..............................A contract that pays or permits the election of a periodic income benefit for the life of
a person, the lives of two or more persons for a specific period of time, or a
combination thereof.
Asset Valuation Reserve ("AVR") ......The reserve required by insurance regulators to stabilize statutory policyholder surplus from
fluctuations in the market value of and/or realized gains or losses on bonds, stocks, mortgage
loans, real estate and other invested assets (other than fluctuations captured by the IMR).
AVR has no effect on financial statements prepared in accordance with GAAP.
Cash Value ...........................The amount of cash available to a policyholder on the surrender of or withdrawal from
a life insurance policy or annuity contract.
Cede or Ceding .......................The reinsurance of all or a portion of an insurer's risk with another insurer.
Crediting Rate .......................The interest rate credited on a life insurance policy or annuity contract. This credited
interest rate may be a guaranteed fixed rate, a variable rate or some combination of
both.
Disability Insurance .................Insurance which provides income payments to the insured when employment is
interrupted or terminated because of illness or accident. The level, timing and
duration of payments vary by contract provision.
Disintermediation ....................The risk to a financial institution of a loss due to the movement of policyholder funds
at book (i.e., without a market value adjustment) when interest rates are higher than
at contract inception.
Dividend Scales ......................The actuarial formulas used by life insurance companies to determine amounts payable as
dividends on participating policies based on experience factors relating to, among other
things, investment results, mortality, lapse rates, expenses, premium taxes and policy loan
interest and utilization rates.
</TABLE>
G-1
<PAGE>
<TABLE>
<S> <C>
Duration .............................With respect to a disability, the time elapsed since disablement.
GAAP .................................United States generally accepted accounting principles.
General Account ......................The aggregate of an insurance company's assets other than those allocated to
separate accounts.
General Account Invested
Assets ...............................The assets held in the general account associated with the operations of an insurance company
which include bonds, mortgages, real estate, equity interests, policy loans, cash and short-
term investments and other invested assets.
IBNR .................................Claims which are incurred but not reported.
IMSA .................................The Insurance Marketplace Standards Association, a self-regulatory organization
established by the ACLI to implement its Principles and Code of Ethical Life
Insurance Market Conduct.
In Force..............................Generally, as provided in the plan of reorganization, a policy that is shown in Standard
Insurance Company's records to be in force on a given date and that has not matured by death
or otherwise or been surrendered or otherwise terminated.
Interest Maintenance
Reserve ("IMR") ......................The reserve required by insurance regulators to capture non-credit, interest-related
realized capital gains and losses (net of taxes) on fixed income investments (primarily
bonds and mortgage loans), which are amortized into net income over the estimated
otherwise remaining periods to maturity of the investments sold. IMR has no effect
on financial statements prepared in conformity with GAAP.
IRA .................................Individual retirement annuity within the meaning of Section 408(b) of the Internal
Revenue Code.
IRIS .................................A set of financial relationships or "tests" known as the Insurance Regulatory Information
System developed in the 1970s by the NAIC that was designed for early identification of
companies that may require special attention by insurance regulatory authorities.
LIMRA ................................Life Insurance Marketing Research Association.
Market Value Adjustment ..............The market value adjustment feature in certain of Standard's fixed annuity products that
adjusts the surrender value of a contract in the event of surrender prior to the end of the
contract period to protect Standard against losses due to higher interest rates at the time of
surrender.
Morbidity ............................Incidence rates and duration of disability used in pricing and computing reserves for
disability insurance. Morbidity varies by such parameters as age, gender and
duration since disability.
Mortality ............................Rates of death, varying by such parameters as age, gender and health, used in
pricing and computing reserves for life and annuity products.
</TABLE>
G-2
<PAGE>
<TABLE>
<S> <C>
National Association of Insurance
Commissioners ("NAIC") ...............The national association of state insurance regulators that sets guidelines for
statutory policies, procedures and reporting for insurance enterprises.
Non-Admitted Assets ..................Certain assets or portions thereof which are not permitted to be reported as admitted
assets in the Annual Statement. As a result, certain assets which normally would be
accorded value in non-insurance corporations are accorded no value and thus reduce
the reported policyholder surplus of the insurance company.
Own Occupation .......................This definition of disability requires that the claimant provide satisfactory proof that the
claimant, because of sickness, injury or a mental disorder, is unable to perform the material
duties of the claimant's occupation. Generally, the claimant must prove that he or she is not
capable of performing the claimant's occupation as it generally exists and not as modified by
a particular employer.
Own Specialty ........................This definition is a variant of the own occupation definition of disability. The claimant
must provide satisfactory proof that he or she, because of sickness, injury or mental
disorder, is unable to perform the material duties of his or her own recognized
specialty within the practice of medicine or law (e.g., urology, anesthesiology, etc.).
Persistency ..........................Measurement of the percentage of insurance policies remaining in force from year
to year, as measured by premiums.
Personal Producing General
Agents ...............................Independent agents who sell products directly to the consumer and write business
directly with insurance companies and who are compensated primarily for personal
production.
Policyholder Dividends ...............Premiums for participating policies are set with margins designed and intended to allow for
certain refund provisions, usually called policyholder dividends, paid over the term of the
policy, if and as declared by the insurer's board of directors, and adjusted, over time, to
reflect the actual experience of the class of policies involved.
Policyholder Surplus .................The excess of admitted assets over liabilities, in each case under statutory
accounting practices.
Premiums .............................Payments and considerations received on insurance policies issued or reinsured by
an insurance company. Under GAAP, premiums on universal life and other
investment-type contracts are not accounted for as revenues.
Reinsurance ..........................The acceptance by one or more reinsurance companies of a portion of risk underwritten by
another insurance company that has directly written the coverage in return for a portion of
the premium related thereto. The legal rights of the insured generally are not affected by the
reinsurance transaction, and the insurance enterprise issuing the insurance contract remains
liable to the insured for payment of policy benefits.
</TABLE>
G-3
<PAGE>
<TABLE>
<S> <C>
Reserves .............................Liabilities established by insurers to reflect the estimated discounted present value of cost
of claims, payments or contract liabilities and the related expenses that the insurer will
ultimately be required to pay in respect of insurance or annuities it has written.
Risk Based Capital ("RBC") ...........Regulatory targeted surplus level based on the relationship of statutory capital and
surplus, with certain adjustments, to the sum of stated percentages of each element
of a specified list of company risk exposures.
Separate Account .....................Investment accounts maintained by an insurance company to which funds have been allocated for
certain policies under provisions of relevant state insurance law. The investments in each
separate account are maintained separately from those in other separate accounts and the
general account. The investment results of the separate account assets generally pass through
to the separate account policyholders and contractholders, less management fees, so that an
insurer bears limited or no investment risk on such assets.
Statutory Accounting Practices .......Those accounting practices prescribed or permitted by an insurance company's domiciliary state
insurance regulator for purposes of financial reporting to insurance regulators.
Statutory Admitted Assets ............Assets which are included in measuring an insurer's statutory capital and surplus for
purposes of statutory accounting practices. Designation of an asset as a statutory
admitted asset of Standard Insurance Company requires authorization under Oregon
law or by the Director. Other assets, consisting principally of amounts due from
insurance agents, prepaid expenses and furniture and equipment are non-admitted
assets for statutory accounting practices.
Statutory Capital and Surplus ........The excess of statutory admitted assets over statutory liabilities as shown on an insurer's
statutory financial statements.
Statutory Reserve ....................Amounts established by state insurance law that an insurer must have available to
provide for future obligations with respect to all policies. Statutory reserves are
liabilities on the balance sheet of financial statements prepared in conformity with
statutory accounting practices.
Surrender Charge .....................The fee charged to a policyholder when a life insurance policy or annuity is
surrendered for its cash value prior to the end of the surrender charge period. Such
charge is intended to recover all or a portion of policy acquisition costs and act as a
deterrent to early surrender. Surrender charges typically decrease over a set period
of time as a percentage of the account value.
Surrenders and Withdrawals ...........Surrenders of life insurance policies and annuity contracts for their entire net cash
values or a portion of such values.
Term Life ............................Life insurance which provides insurance protection for a fixed period (which often
may be renewed at an increased premium) and has no cash value.
</TABLE>
G-4
<PAGE>
<TABLE>
<S> <C>
TSA .................................Tax-sheltered annuity within the meaning of section 403(b) of the Internal Revenue
Code.
Underwriting .........................The process of examining, accepting or rejecting insurance risks, and classifying
those accepted, in order to charge an appropriate premium for each accepted risk.
Universal Life .......................Life insurance under which (1) premiums are generally flexible, (2) the level of death
benefits may be adjusted, (3) maximum charges for expenses, mortality and other charges are
set forth and (4) actual interest crediting rates and expenses, mortality and other charges
are used by Standard to determine "current" charges.
Whole Life ...........................These policies provide guaranteed death benefits for life and guaranteed cash values in return
for periodic fixed premium payments or, in the case of single premium whole life policies, a
lump-sum payment when the policy is issued.
</TABLE>
G-5
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report on StanCorp Financial Group, Inc............................. F-2
Balance Sheet of StanCorp Financial Group, Inc. at December 31, 1998...................... F-3
Notes to Balance Sheet of StanCorp Financial Group, Inc................................... F-4
Independent Auditors' Report on Standard Insurance Company................................ F-5
Consolidated Balance Sheets of Standard Insurance Company at December 31, 1998 and 1997... F-6
Consolidated Statements of Income, Comprehensive Income and Equity of Standard Insurance
Company for the years ended December 31, 1998, 1997 and 1996........................... F-7
Consolidated Statements of Cash Flows of Standard Insurance Company for the years ended
December 31, 1998, 1997 and 1996....................................................... F-9
Notes to Consolidated Financial Statements of Standard Insurance Company.................. F-11
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
StanCorp Financial Group, Inc.
We have audited the accompanying balance sheet of StanCorp Financial Group, Inc.
as of December 31, 1998. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of the Company as of December 31, 1998, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
January 21, 1999
F-2
<PAGE>
STANCORP FINANCIAL GROUP, INC.
BALANCE SHEET
December 31, 1998
(Dollars in thousands)
<TABLE>
ASSETS:
<S> <C>
Cash....................................................................... $ 1
----
Total Assets............................................................... $ 1
=====
STOCKHOLDER'S EQUITY:
Preferred Stock, no par value, 100,000,000 shares authorized, none $
issued.................................................................... --
Common Stock, no par value, 300,000,000 shares authorized, 100
shares issued and outstanding............................................. 1
----
Total Stockholder's Equity................................................. $ 1
=====
</TABLE>
See Notes to Balance Sheet.
F-3
<PAGE>
STANCORP FINANCIAL GROUP, INC.
NOTES TO BALANCE SHEET
1. Organization and Significant Accounting Policies
StanCorp Financial Group, Inc. ("StanCorp") was incorporated on September 23,
1998 as a wholly owned subsidiary of Standard Insurance Company, an Oregon
mutual life insurance company. StanCorp was formed for the purpose of becoming
an insurance holding company on the completion of Standard Insurance Company's
reorganization from a mutual life insurance company to a stock life insurance
company. The assets of StanCorp will consist primarily of all of the outstanding
shares of the common stock of Standard Insurance Company. Aside from its initial
funding, StanCorp has been inactive and will remain inactive until the effective
date of Standard Insurance Company's reorganization. At December 31, 1998,
StanCorp had no material commitments or contingencies.
StanCorp's assets consist solely of $1,000 cash received as a capital
contribution from Standard Insurance Company. As there was no other activity
during the period September 23, 1998 through December 31, 1998, StanCorp has not
included a statement of income or of cash flows for the period then ended.
The balance sheet has been prepared on the basis of generally accepted
accounting principles.
2. Federal Income Taxes
StanCorp participates in an intercompany tax allocation agreement with Standard
Insurance Company which will result in StanCorp's inclusion in Standard
Insurance Company's consolidated Federal income tax filing. Under the terms of
this agreement, StanCorp's Federal income tax liability or receivable is
calculated and settled as if it were a stand-alone company.
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
Standard Insurance Company
We have audited the accompanying consolidated balance sheets of Standard
Insurance Company and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income and equity, and
of cash flows for each of the three years in the period ended December 31, 1998.
Our audits also included the financial statement schedules listed in the index
at Item 16. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Standard Insurance Company and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 12, 1999
F-5
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Investments:
Investment securities................... $2,214,162 $2,034,494
Mortgage loans.......................... 1,708,135 1,603,175
Real estate, net........................ 92,978 102,335
Policy loans............................ 111,027 107,041
Collateral loans........................ 71,229 73,829
---------- ----------
Total investments.................... 4,197,531 3,920,874
Cash and cash equivalents........................ 60,372 16,834
Deferred policy acquisition costs................ 114,880 106,923
Premiums receivable.............................. 41,457 36,217
Reinsurance receivable........................... 31,711 33,298
Federal income taxes receivable.................. 8,372 --
Accrued investment income........................ 53,548 50,592
Property and equipment, net...................... 65,879 65,108
Other assets..................................... 36,583 13,245
Separate account assets.......................... 668,513 483,260
---------- ----------
TOTAL................................ $5,278,846 $4,726,351
========== ==========
LIABILITIES AND EQUITY
LIABILITIES:
Future policy benefits and claims....... $2,065,161 $1,878,260
Other policyholder funds................ 1,455,504 1,442,479
Dividends and experience refunds........ 23,715 20,790
Accrued Federal income taxes............ -- 6,737
Deferred tax liabilities................ 106,002 51,335
Other liabilities....................... 120,669 111,478
Separate account liabilities............ 668,513 483,260
---------- ----------
Total liabilities.................... 4,439,564 3,994,339
---------- ----------
COMMITMENTS AND CONTINGENCIES
EQUITY:
Accumulated other comprehensive income.. 74,201 36,427
Retained earnings....................... 765,081 695,585
---------- ----------
Total equity......................... 839,282 732,012
---------- ----------
$5,278,846 $4,726,351
TOTAL..................................... ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND EQUITY
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Premiums................................ $ 890,940 $ 825,176 $ 745,141
Net investment income................... 323,120 303,153 285,235
Net realized investment gains........... 11,606 11,833 15,299
Other................................... 6,886 6,046 4,394
---------- ---------- ----------
Total................................ 1,232,552 1,146,208 1,050,069
---------- ---------- ----------
BENEFITS AND EXPENSES:
Policyholder benefits................... 760,910 714,881 662,392
Interest paid on policyholder........... 91,516 95,207 97,861
funds
Commissions............................. 65,560 63,969 59,760
Operating expenses...................... 185,559 161,314 139,826
Net increase in deferred policy......... (4,212) (6,632) (7,470)
acquisition costs
Policyholder dividends................. 24,646 22,184 22,062
---------- ---------- ----------
Total................................ 1,123,979 1,050,923 974,431
---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAXES AND
EXTRAORDINARY ITEM...................... 108,573 95,285 75,638
FEDERAL INCOME TAXES..................... 32,975 31,437 28,642
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM......... 75,598 63,848 46,996
EXTRAORDINARY ITEM, NET OF TAX........... 6,102 -- --
---------- ---------- ----------
NET INCOME............................... 69,496 63,848 46,996
---------- ---------- ----------
OTHER COMPREHENSIVE INCOME, NET
OF TAX:
Unrealized gains (losses) on securities
available for sale...................... 40,073 22,369 (25,866)
Adjustment for realized gains............ (2,299) (1,693) (746)
---------- ---------- ----------
Total................................... 37,774 20,676 (26,612)
---------- ---------- ----------
</TABLE>
F-7
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND EQUITY
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
COMPREHENSIVE INCOME..................... 107,270 84,524 20,384
EQUITY, BEGINNING OF YEAR................ 732,012 647,488 627,104
---------- ---------- ----------
EQUITY, END OF YEAR...................... $ 839,282 $ 732,012 $ 647,488
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING:
Net income..................................... $ 69,496 $ 63,848 $ 46,996
Adjustments to reconcile net income to
net cash provided by operating
activities:
Net realized investment gains................ (11,606) (11,833) (15,299)
Depreciation and amortization................ 22,254 22,166 19,331
Deferral of policy acquisition costs............ (17,780) (18,863) (19,887)
Deferred income taxes........................ 34,326 2,099 (951)
Changes in other assets and liabilities:
Trading securities.............................. (25,428) -- --
Receivables and accrued investment.............. (6,609) (1,145) (7,559)
income
Future policy benefits and claims........... 186,901 184,859 178,974
Dividends and experience refunds............ 2,925 (1,929) 34
Federal income taxes receivable and payable. (15,109) (12,707) 22,684
Other, net.................................. (12,742) 12,887 (1,567)
--------- --------- ---------
Net cash provided by operating activities... 226,628 239,382 222,756
--------- --------- ---------
INVESTING:
Proceeds of investments sold,
matured, or repaid:
Fixed maturity securities available for sale.... 116,975 236,257 54,511
Fixed maturity securities held to maturity...... 9,155 23,035 33,806
Mortgage loans............................... 334,901 302,544 234,260
Real estate, net............................. 14,001 16,167 25,684
Other investments, net....................... -- 19,521 --
Costs of investments acquired:
Fixed maturity securities available for sale.... (221,035) (429,759) (216,701)
Fixed maturity securities held to maturity...... -- (21,367) (44,436)
Mortgage loans............................... (440,931) (394,733) (281,501)
Other investments, net....................... (1,386) -- (19,889)
Net additions to property and
equipment.................................... (7,795) (8,311) (10,726)
--------- --------- ---------
Net cash used in investing activities........... (196,115) (256,646) (224,992)
--------- --------- ---------
FINANCING:
Policyholder fund deposits..................... 379,438 357,071 315,151
Policyholder fund withdrawals.................. (366,413) (347,017) (323,757)
--------- --------- ---------
Net cash provided by (used in) financing
activities..................................... 13,025 10,054 (8,606)
INCREASE (DECREASE) IN CASH AND --------- --------- ---------
CASH EQUIVALENTS............................... 43,538 (7,210) (10,842)
</TABLE>
F-9
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR.............................. 16,834 24,044 34,886
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR.......... $ 60,372 $ 16,834 $ 24,044
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the year for:
Interest..................................... $ 91,622 $ 94,956 $ 99,075
Income taxes................................. 13,758 43,433 8,102
</TABLE>
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Organization and Significant Accounting Policies. Standard Insurance
Company is a mutual life insurance company that underwrites group and individual
disability, life and annuity products and dental insurance for groups. Standard
Insurance Company is domiciled in Oregon and licensed in 49 states, the District
of Columbia and the U.S. Territory of Guam. Standard Insurance Company is
licensed for reinsurance only in New York.
The consolidated financial statements include the accounts of Standard
Insurance Company and its subsidiaries (collectively, "Standard"). All
significant intercompany balances and transactions have been eliminated.
The accompanying consolidated financial statements have been prepared on the
basis of generally accepted accounting principles ("GAAP"). In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the financial statements and
revenues and expenses for the year then ended. Actual results could differ from
those estimates. The estimates most susceptible to significant changes are those
used in determining deferred policy acquisition costs, the liability for future
policy benefits and claims, and the provision for income taxes. The estimates
are continually reviewed and adjusted as necessary. Such adjustments are
reflected in current earnings.
Significant Accounting Policies.
Investments. Investment securities include fixed maturity and equity
securities. Securities are categorized as either held to maturity, stated at
amortized cost; trading, stated at fair value with changes in fair value
reflected as net realized investment gains and losses; or available for sale,
stated at fair value with net unrealized gains and losses recorded as a direct
increase or decrease to other comprehensive income.
Mortgage loans are stated at amortized cost less a valuation allowance for
estimated uncollectible amounts. Impairment losses are recognized on specific
mortgage loans when it is probable that Standard will be unable to collect all
contractual principle and interest payments under the original loan terms.
Real estate is reported at depreciated cost less an allowance for impairment
losses. Policy and collateral loans are stated at their aggregate unpaid
principal balances and are secured by policy cash values.
Investment income is presented net of investment expenses. For all investments
except investment securities, realized investment gains and losses are
recognized using the specific identification method. For investment securities,
realized investment gains and losses are recognized on a first-in, first-out
basis. For all investments, declines in fair values below amortized cost that
are determined to be other than temporary are recorded as realized investment
losses.
On July 1, 1998, Standard adopted Financial Accounting Standard ("FAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and disclosure requirements for derivative instruments,
including certain instruments embedded in other financial instruments, and for
hedging activities. Standard does not have any derivative instruments that meet
the scope of this statement. The statement also allows, on the date of initial
application, an entity to transfer any held to maturity securities into the
available for sale or trading categories. Standard transferred held to maturity
securities with a book value and fair value of $315,148,000 and $335,390,000,
respectively, to its available for sale portfolio. The transfer was recorded as
a direct increase to other comprehensive income of $13,157,000 (net of income
tax of $7,085,000).
F-11
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash equivalents. Cash equivalents include investments purchased with
original maturities of less than three months.
Deferred policy acquisition costs. The costs of acquiring new business that
vary with and are primarily related to the production of new business have been
deferred to the extent that such costs are deemed recoverable from future
premiums. Such costs include commissions, certain costs of policy issuance and
underwriting and certain variable field office expenses. For group life and
health and individual term life insurance products, the costs are amortized in
proportion to expected future premiums. The amortization periods for the
contracts generally range from five to ten years. For universal life-type
policies, individual deferred annuities and investment-type contracts, the costs
are amortized over periods ranging from 20 to 30 years, in proportion to the
present value of estimated gross profits from interest margins, mortality and
other elements of performance under the contracts and adjusted to reflect actual
gross profits. The discount rate applied to expected gross profits is revised
for actual changes in rates adjusted over the remaining benefit period. For
participating individual life insurance policies, such costs are deferred and
are amortized, for no more than 30 years, in proportion to the present value of
estimated gross profits.
Deferred policy acquisition costs are charged to current earnings to the
extent it is determined that future policy premiums and investment income or
gross profits are not adequate to cover related losses and expenses.
The amounts deferred and amortized were as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Deferred policy acquisition costs................. $17,780 $18,863 $19,887
Amortization...................................... 13,568 12,231 12,417
------- ------- -------
Net increase in deferred policy acquisition
costs................................... $ 4,212 $ 6,632 $ 7,470
======= ======= =======
</TABLE>
Property and equipment. Property and equipment consist primarily of home
office properties and office furniture and equipment, and are stated at cost
less accumulated depreciation of $70,676,000 and $63,837,000 at December 31,
1998 and 1997, respectively. Standard provides for depreciation of property and
equipment using the straight-line method over the estimated useful lives, which
are 40 years for properties, and from 3 to 7 years for equipment. Depreciation
expense for 1998, 1997 and 1996 was $7,834,000, $6,668,000 and $7,424,000,
respectively. Non-affiliated tenants leased approximately 43 percent of the home
office properties. Income from these leases is included in net investment
income.
Separate account. The assets and liabilities of the separate account
represent segregated funds for non-guaranteed account assets held for the
exclusive benefit of policyholders. The activities of the account primarily
relate to policyholder-directed 401(k) contracts. Standard Insurance Company
charges the separate account for asset management fees and administrative
expense associated with the contracts. The assets and liabilities of the
separate account are carried at fair value.
Future policy benefits and claims. Liabilities for future policy benefits
for traditional life insurance contracts are computed using the net level
premium method with interest rate assumptions varying from 3.00 percent to 5.50
percent and mortality, dividend and withdrawal characteristics appropriate at
the time the policies were issued. The assumptions are based on projections of
past experience and include provision for possible adverse deviation.
The liabilities for future policy and contract benefits for group long term
disability and life waiver of premium reserves are based upon interest rate
assumptions and morbidity and termination rates from
F-12
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
published industry tables, adjusted for actual experience. Changes to
assumptions that result in an adjustment to the reserves are reflected in
current earnings.
Other policyholder funds. Other policyholder funds are liabilities for
universal life-type and investment-type contracts and are based on the policy
account balance including accumulated interest.
Dividends and experience refunds. Certain life insurance policies contain
dividend payment or experience rated refund provisions that enable the
policyholder to participate in the earnings of Standard Insurance Company. Of
total insurance premium in force, the participating policies accounted for 36
percent, 37 percent and 37 percent for 1998, 1997 and 1996, respectively.
Dividends are distributed to the policyholders through an annual dividend, using
current dividend scales that are approved by the Board of Directors.
Experience refunds are computed based on the terms of the contracts with the
group policyholders and are accounted for as a reduction of premiums.
Income taxes. The provision for income taxes includes amounts currently
payable and deferred income taxes that result from temporary differences between
financial reporting and tax bases of assets and liabilities, as measured by
current tax rates and laws. A valuation allowance is established for deferred
tax assets when it is more likely than not that an amount will not be realized.
Recognition of premium revenues and policyholder benefits. Premiums from
group life, group and individual disability and traditional life insurance
products are recognized as revenue when due. Benefits and expenses are matched
with earned premiums to result in recognition of profits over the life of the
contracts. This match is accomplished by recording a provision for future policy
benefits and unpaid claims and claim adjustment expenses and by amortizing
deferred policy acquisition costs.
Universal life-type and investment-type contracts premium and other policy fee
revenue consists of charges for the cost of insurance policy administration and
surrenders assessed during the period. Charges related to services to be
performed are deferred until earned. The amounts received in excess of premiums
and fees are recorded as deposits and included in other policyholder funds in
the consolidated balance sheets. Benefits and expenses include benefit claims in
excess of related account balances and interest credited.
Other comprehensive income. Effective January 1, 1998, Standard adopted FAS
No. 130, "Reporting Comprehensive Income", and has presented all prior periods
on a comparative basis.
Other comprehensive income consists of the current increase or decrease in net
unrealized investment gains and losses on securities available for sale, net of
related deferred policy acquisition costs and tax effects. The tax effects
related to the unrealized investment gains and losses and the adjustment for
realized gains were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Tax expense (benefit) related to unrealized
investment gains (losses)..................... $21,578 $12,045 $(13,928)
Tax benefit related to adjustment for realized
gains......................................... (1,237) (912) (402)
</TABLE>
F-13
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated other comprehensive income represents the net unrealized gains
and losses on securities available for sale. The amounts reported are net of
related deferred policy acquisition costs of $3,511,000, $7,256,000 and
$2,936,000 and tax effects of $39,955,000, $19,614,000 and $8,481,000 at
December 31, 1998, 1997 and 1996, respectively.
Recently issued pronouncements. In December 1997, the Accounting Standards
Executive Committee ("AcSEC") issued Statement of Position ("SOP") 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments", which provides guidance on accounting for state mandated guaranty
assessments. Standard Insurance Company is required to adopt SOP 97-3 effective
January 1, 1999. Management does not expect that the adoption of SOP 97-3 will
have a material impact on the consolidated financial statements.
In March 1998, the AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which establishes
accounting requirements for the capitalization of software costs incurred for
the use of the organization. Standard is required to adopt this pronouncement on
a prospective basis beginning January 1, 1999. Management estimates adoption of
SOP 98-1 will result in capitalization of approximately $2,800,000 in costs of
computer software developed or obtained for internal use in 1999. It is expected
that the amortization period for these costs will approximate three to five
years.
In October 1998, the AcSEC issued SOP 98-7, "Deposit Accounting: Accounting
for Insurance Contracts and Reinsurance Contracts That Do Not Transfer Insurance
Risk", which revises current accounting practices related to the revenue
recognition of annuity and other investment-type contract consideration
received. Standard Insurance Company is required to adopt this pronouncement on
a prospective basis beginning January 1, 2000. Management does not expect that
the adoption of SOP 98-7 will have a material impact on the consolidated
financial statements.
Extraordinary item. On December 15, 1997, the Board of Directors authorized
management to proceed with the development of a plan of demutualization (the
"Plan") and approved the Plan on September 28, 1998. The Department of
Consumer and Business Services of the State of Oregon (the "Department") held
a public hearing regarding the demutualization on January 27, 1999, and in an
order issued February 12, 1999, approved the Plan, subject to conditions set
forth in the order. The Plan must also be approved by policyholders at a special
policyholder meeting, which is scheduled to be held on March 19, 1999.
Expenses incurred in conjunction with the demutualization, including
development of the Plan, have been classified as an extraordinary item.
Demutualization expenses are generally non-deductible for tax purposes.
Reclassification. Certain 1997 and 1996 amounts have been reclassified to
conform to the current year's presentation.
F-14
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Investment Securities. Investment securities were composed of the
following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Fixed maturity securities:
Available for sale............... $2,188,470 $1,709,682
Held to maturity................. -- 324,688
Trading securities............... 25,428 --
Equity securities.................. 264 124
---------- ----------
Total investment securities... $2,214,162 $2,034,494
========== ==========
</TABLE>
F-15
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Amortized cost and fair value of investment securities, excluding trading
securities, were as follows at December 31:
<TABLE>
<CAPTION>
1998
------------
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
---------- ---------- -------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government bonds............... $ 565,085 $ 33,636 $ 54 $ 598,667
States and political subdivision
bonds.......................... 34,631 2,180 -- 36,811
Corporate bonds..................... 1,398,588 79,366 1,237 1,476,717
Foreign bonds....................... 64,766 3,683 1 68,448
Redeemable preferred stock.......... 7,773 588 534 7,827
---------- -------- ------ ----------
Total fixed maturity securities $2,070,843 $119,453 $1,826 $2,188,470
========== ======== ====== ==========
Equity securities................... $ 224 $ 40 $ -- $ 264
========== ======== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
1997
------------
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
---------- ---------- -------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government bonds.............. $ 454,781 $12,595 $ 472 $ 466,904
States and political subdivision
bonds.......................... 28,146 1,349 -- 29,495
Corporate bonds.................... 1,101,300 47,524 365 1,148,459
Foreign bonds...................... 48,503 1,867 4 50,366
Redeemable preferred stock......... 13,651 1,068 261 14,458
---------- ------- ------ ----------
Total fixed maturity securities $1,646,381 $64,403 $1,102 $1,709,682
========== ======= ====== ==========
Equity securities.................. $ 128 $ 1 $ 5 $ 124
========== ======= ====== ==========
Held to maturity:
U.S. Government bonds.............. $ 142,926 $ 8,432 $ 107 $ 151,251
States and political subdivision
bonds.......................... 6,523 197 -- 6,720
Corporate bonds.................... 160,218 9,419 104 169,533
Foreign bonds...................... 15,021 1,198 -- 16,219
---------- ------- ------ ----------
Total fixed maturity securities $ 324,688 $19,246 $ 211 $ 343,723
========== ======= ====== ==========
</TABLE>
F-16
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The contractual maturities of fixed maturity securities, excluding trading
securities, were as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
Amortized Estimated Fair Estimated Fair
Cost Value Amortized Cost Value
---------- ---------- -------------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale:
Due in 1 year or less............ $ 77,796 $ 79,043 $ 46,074 $ 46,861
Due 1 through 5 years............ 887,450 931,291 510,542 531,944
Due 5 through 10 years........... 817,820 866,200 838,145 863,852
Due after 10 years............... 287,777 311,936 251,620 267,025
---------- ---------- ---------- ----------
Total available for sale... $2,070,843 $2,188,470 $1,646,381 $1,709,682
========== ========== ========== ==========
Held to maturity:
eue in 1 year or less............ $ -- $ -- $ 2,518 $ 2,530
Due 1 through 5 years............ -- -- 105,309 110,138
Due 5 through 10 years........... -- -- 155,340 163,399
Due after 10 years............... -- -- 61,521 67,656
---------- ---------- ---------- ----------
Total held to maturity..... $ -- $ -- $ 324,688 $ 343,723
=========== ============== ========== ==========
</TABLE>
Actual maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations.
Investment income summarized by type of investment was as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Fixed maturity securities:
Available for sale......... $135,868 $111,989 $ 99,896
Held to maturity........... 11,035 25,276 24,680
Mortgage loans............... 159,621 146,077 143,050
Real estate.................. 15,199 16,488 16, 194
Policy loans................. 7,387 7,348 7,395
Collateral loans............. 7,411 7,470 6,516
Other........................ 1,461 4,012 3,464
-------- -------- --------
Gross investment income.... 337,982 318,660 301,195
Investment expenses.......... 14,862 15,507 15,960
-------- -------- --------
Net investment income...... $323,120 $303,153 $285,235
======== ======== ========
</TABLE>
F-17
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Realized investment gains (losses) were as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(in thousands)
Fixed maturity securities:
<S> <C> <C> <C>
Available for sale.............. $ 1,415 $ 981 $ (350)
Trading securities.............. 2,137 -- --
Equity securities................. -- 1,581 --
Mortgage loans.................... 2,074 2,959 1,801
Real estate....................... 5,980 6,312 13,848
------- ------- -------
Net realized investment gains... $11,606 $11,833 $15,299
======= ======= =======
</TABLE>
3. Mortgage Loans. Standard held primarily commercial mortgage loans that
were concentrated in the following states at December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ----------
Amount Percent Amount Percent
---------- ------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C>
California.................... $ 747,849 44% $ 779,093 49%
Oregon........................ 147,807 9 145,678 9
Texas......................... 146,958 9 141,246 9
Washington.................... 91,542 5 82,658 5
Other......................... 573,979 33 454,500 28
---------- --- ---------- ----
Total mortgage loans........ $1,708,135 100% $1,603,175 100%
========== === ========== ====
</TABLE>
Although Standard underwrites commercial mortgages throughout the United
States, mortgage loans in California represent a concentration of credit risk.
Standard requires mortgage collateral, and underwrites loans on either a partial
or full recourse basis.
Mortgage loans foreclosed and transferred to real estate totaled $804,000,
$1,293,000 and $5,559,000 for 1998, 1997 and 1996 respectively.
4. Real Estate. Real estate held for investment is stated at cost less
accumulated depreciation. Depreciation is provided generally on the straight-
line method, with property lives varying from 30 to 40 years. Accumulated
depreciation totaled $27,918,000 and $25,110,000 at December 31, 1998 and 1997,
respectively. Real estate acquired in satisfaction of debt is stated at the
lower of cost or fair value less estimated costs to sell. At December 31, 1998
minimum future rentals receivable on non-cancelable leases with initial terms of
one year or more were: 1999, $11,809,000; 2000, $10,391,000; 2001, $6,892,000;
2002, $6,163,000; 2003, $4,782,000; thereafter, $15,891,000.
5. Liability for Unpaid Accident and Health Claims and Claim Adjustment
Expenses. Accident and health insurance products offered by Standard Insurance
Company include group long term and short term disability, individual
disability, group dental and group accidental death and dismemberment. The
liability for unpaid accident and health claims and claim adjustment expenses is
included in future policy benefits and claims, and other liabilities,
respectively, on the consolidated balance sheets.
F-18
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The change in the liability for unpaid claims and related claim adjustment
expenses was as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year......... $ 998,546 $871,566 $746,621
Less reinsurance recoverable....... 25,146 32,764 31,175
---------- -------- --------
Net balance, beginning of year... 973,400 838,802 715,446
---------- -------- --------
Incurred related to:
Current year....................... 450,424 399,692 344,803
Prior years........................ 46,646 61,413 67,110
---------- -------- --------
Total incurred................... 497,070 461,105 411,913
---------- -------- --------
Paid related to:
Current year....................... 146,693 126,894 110,651
Prior years........................ 225,510 199,613 177,906
---------- -------- --------
Total paid....................... 372,203 326,507 288,557
---------- -------- --------
1,098,267 973,400 838,802
Net balance, end of year
Plus reinsurance recoverable....... 25,444 25,146 32,764
---------- -------- --------
Balance, end of year............. $1,123,711 $998,546 $871,566
========== ======== ========
</TABLE>
The increase in incurred claims and expenses related to prior years is
primarily the result of interest on long term disability reserves. Interest rate
assumptions range from 6.00 percent to 8.75 percent for all years presented.
Variations between years are caused by differences in actual from expected
incurred but not reported claims and by differences in actual from expected
claim terminations.
6. Other Policyholder Funds. Other policyholder funds at December 31, 1998
and 1997, included $582,619,000 and $571,562,000, respectively, of employer-
sponsored defined contribution plan deposits, and $517,674,000 and $539,085,000,
respectively, of individual deferred annuity deposits.
For certain contracts, interest rates are guaranteed for up to five years. For
1998, interest was credited on policyholder funds at rates ranging from 3.00
percent to 7.22 percent.
7. Reinsurance. Standard routinely assumes and cedes reinsurance with
other companies. The primary purpose of ceded reinsurance is to limit losses
from large exposures; however, if the reinsurer is unable to meet its
obligations, the originating issuer of the insurance contract retains the
liability. Deferred policy acquisition costs, premiums and commissions are
stated net of reinsurance ceded to other companies. Standard maintains maximum
retention limits of $500,000 aggregated per individual for both group and
individual life policies. For group disability policies, Standard maintains a
maximum retention limit of $10,000 gross monthly benefit aggregated per
individual. Standard generally enters into yearly renewal term reinsurance
agreements with the counterparty. Reinsurance information was as follows for the
years ended December 31:
F-19
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Ceded to Assumed Percentage
Gross Other From Other of Assumed to
Amount Companies Companies Net Amount Net
----------- ----------- -------- ----------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Life insurance in force......... $88,854,341 $2,411,578 $137,012 $86,579,775 0.2%
=========== ========== ======== =========== ===
Premiums
Life insurance and annuities.... $ 367,847 $ 10,370 $ 378 $ 357,855 0.1%
Accident and health insurance... 503,744 6,640 35,981 533,085 6.7
----------- ---------- -------- ----------- ---
Total premiums.................. $ 871,591 $ 17,010 $ 36,359 $ 890,940 4.1%
=========== ========== ======== =========== ===
Year ended December 31, 1997:
Life insurance in force......... $82,354,595 $2,290,901 $176,592 $80,240,286 0.2%
=========== ========== ======== =========== ===
Premiums
Life insurance and annuities.... $ 352,932 $ 11,617 $ 551 $ 341,866 0.2%
Accident and health insurance... 462,261 11,781 32,830 483,310 6.8
----------- ---------- -------- ----------- ---
Total premiums.................. $ 815,193 $ 23,398 $ 33,381 $ 825,176 4.0%
=========== ========== ======== =========== ===
Year ended December 31, 1996:
Life insurance in force......... $74,873,955 $2,900,476 $183,212 $72,156,691 0.3%
=========== ========== ======== =========== ===
Premiums
Life insurance and annuities.... $ 333,509 $ 13,167 $ 505 $ 320,847 0.2%
Accident and health insurance... 414,343 21,499 31,450 424,294 7.4
----------- ---------- -------- ----------- ---
Total premiums.................. $ 747,852 $ 34,666 $ 31,955 $ 745,141 4.3%
=========== ========== ======== =========== ===
</TABLE>
Recoveries recognized under reinsurance agreements were $13,482,000,
$6,448,000 and $21,275,000 for 1998, 1997 and 1996, respectively.
Although Standard seeks to diversify its credit exposure related to
reinsurance ceded, certain concentration of credit risks related to reinsurance
receivables exists. At December 31, 1998, amounts receivable from two reinsurers
totaled $23,373,000.
F-20
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Federal Income Taxes. The provision (benefit) for income taxes was as
follows for the years
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Current.................................... $(1,351) $29,338 $29,593
Deferred................................... 34,326 2,099 (951)
------- ------- -------
Total Federal income taxes............ $32,975 $31,437 $28,642
======= ======= =======
</TABLE>
The provision for Federal income taxes differs from the income taxes
calculated by applying the corporate Federal rate as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Tax at corporate Federal rate of 35%............... $ 38,001 $33,350 $26,473
Tax exempt interest................................ (1,021) (1,029) (734)
Dividend received deduction........................ (495) (548) (1,114)
Amounts provided for uncertainties................. 2,552 2,262 3,270
Adjustments to amounts provided in prior years..... (4,363) (2,921) --
Other.............................................. (1, 699) 323 747
-------- ------- -------
Total Federal income taxes.................... $ 32,975 $31,437 $28,642
======== ======= =======
</TABLE>
Standard Insurance Company's Federal income tax filing status changed
effective for the tax year 1994, when it ceased to qualify as a life insurance
company as provided by the Internal Revenue Code. The amounts provided for
uncertainties and adjustments to amounts provided in prior years reflect
uncertainties related to the use of estimates and the change in filing status,
and the subsequent resolution of those uncertainties. Resolution occurs when
amounts provided on an estimated basis are known or when the tax year closes.
Taxes provided in 1994 related to the change in tax filing status were released
in 1998.
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability were as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- -------
(in thousands)
<S> <C> <C>
Liabilities not currently deductible for tax........... $ 30,054 $42,000
Other.................................................. 3,133 2,825
-------- -------
Total deferred tax assets............................ 33,187 44,825
-------- -------
Future policy benefits and claims...................... 14,364 21,891
Deferred policy acquisition costs...................... 25,932 25,793
Net unrealized capital gains........................... 82,115 34,461
Due and uncollected premium............................ 7,909 6,095
Other.................................................. 8,869 7,920
-------- -------
Total deferred tax liabilities....................... 139,189 96,160
-------- -------
Net deferred tax liability....................... $106,002 $51,335
======== =======
</TABLE>
F-21
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Standard has not established a valuation reserve at December 31, 1998 and
1997 as management believes that all deferred tax assets are fully realizable.
F-22
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Retirement Benefits. Standard has two non-contributory defined benefit
pension plans and a postretirement benefit plan. The following table provides a
reconciliation of the changes in the plans' benefit obligations and fair value
of assets for the years ended December 31 and the funded status at December 31:
<TABLE>
<CAPTION>
Pension Postretirement
Benefits Benefits
------------------ ------------------------
1998 1997 1998 1997
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of
year................................ $82,033 $72,037 $11,054 $ 9,975
Service cost......................... 5,693 4,659 648 568
Interest cost........................ 6,042 5,461 803 754
Actuarial loss....................... 5,922 2,231 8 21
Benefits paid........................ (2,553) (2,355) (264) (264)
------- ------- ------- -------
Benefit obligation at the end
of year............................. 97,137 82,033 12,249 11,054
------- ------- ------- -------
Change in plan assets:
Fair value of plan assets at
beginning of year................... 78,200 69,565 7,415 6,390
Actual return on plan assets......... 5,845 5,484 635 275
Employer contributions............... 7,606 5,506 914 1,014
Benefits paid........................ (2,553) (2,355) (264) (264)
------- ------- ------- -------
Fair value of plan assets at end
of year............................. 89,098 78,200 8,700 7,415
------- ------- ------- -------
Funded status........................ (8,039) (3,833) (3,549) (3,639)
Unrecognized net transition
asset................................ (1,587) (1,778) -- --
Unrecognized net actuarial (gain)
loss................................ 8,740 3,699 (5,919) (6,041)
Unrecognized prior service cost...... 106 129 -- --
------- ------- ------- -------
Accrued benefit cost................. $ (780) $(1,783) $(9,468) $(9,680)
======= ======= ======= =======
</TABLE>
F-23
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net periodic benefit cost was as follows for the years ended December 31:
<TABLE>
<CAPTION>
Pension Postretirement
Benefits Benefits
1998 1997 1996 1998 1997 1996
------- ------- ------- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service cost........................ $ 5,693 $ 4,659 $ 4,142 $ 648 $ 568 $ 522
Interest cost....................... 6,042 5,461 4,916 803 754 684
Expected return on plan assets...... (5,727) (5,430) (4,710) (373) (322) (263)
Amortization of unrecognized net
transition asset................... (191) (191) (191) -- -- --
Recognized net actuarial (gain)
loss............................... 763 336 184 (375) (362) (366)
Amortization of prior service cost.. 23 23 23 -- -- --
------- ------- ------- ----- ----- -----
Net periodic benefit cost........... $ 6,603 $ 4,858 $ 4,364 $ 703 $ 638 $ 577
======= ======= ======= ===== ===== =====
</TABLE>
The assumptions used in the measurement of Standard's benefit obligations
were as follows:
<TABLE>
<CAPTION>
Pension Postretirement
Benefits Benefits
------------------ -----------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Discount rate.................... 6.50% 7.00% 7.25% 6.50% 7.00% 7.25%
Expected return on plan assets... 7.00 7.50 7.50 5.00 5.00 5.00
Rate of compensation increase.... 4.75 5.25 5.50 -- -- --
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 4.96 percent in the first year, 5.96
percent in the second and third years, and ratably declined to 2.75 percent over
the next eleven years. A one-percentage-point change in the assumed health care
cost trend rates would have the following effect:
<TABLE>
<CAPTION>
1% Point 1% Point
Increase Decrease
----------------- ---------------
(in thousands)
<S> <C> <C>
Service and interest costs.......... $ 255 $ (195)
Postretirement benefit obligation... 1,740 (1,369)
</TABLE>
Standard sponsors deferred compensation plans covering substantially all of
its full-time employees under which Standard matches a portion of the employee
contribution. Contributions by Standard to the plans for 1998, 1997 and 1996
were $1,936,000, $1,893,000 and $1,715,000, respectively.
Standard has a non-qualified supplemental retirement plan for eligible
executive officers. The plan is currently unfunded. Expenses related to the plan
were $560,000, $438,000, and $558,000 in 1998, 1997, and 1996, respectively.
Effective December 31, 1998, Standard adopted FAS No. 132, ''Employers'
Disclosures about Pensions and Other Postretirement Benefits'', and has
presented prior periods on a comparative basis.
F-24
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Fair Value of Financial Instruments. Carrying amounts and estimated
fair values for financial instruments were as follows at December 31:
<TABLE>
<CAPTION>
1998
--------------
Carrying Estimated
Amount Fair Value
------------ -------------
(in thousands)
<S> <C> <C>
Assets:
Investment securities................................... $ 2,214,162 $ 2,214,162
Mortgage loans.......................................... 1,708,135 1,887,062
Policy loans............................................ 111,027 111,027
Collateral loans........................................ 71,229 68,037
Liabilities:
Other policyholder funds -- investment-type contracts... $(1,215,180) $(1,209,519)
</TABLE>
<TABLE>
<CAPTION>
1997
--------------
Carrying Estimated
Amount Fair Value
------------ -------------
(in thousands)
<S> <C> <C>
Assets:
Investment securities.................................. $ 2,034,494 $ 2,053,529
Mortgage loans......................................... 1,603,175 1,631,836
Policy loans........................................... 107,041 107,041
Collateral loans....................................... 73,829 69,419
Liabilities:
Other policyholder funds -- investment-type contracts.. $(1,210,008) $(1,201,718)
</TABLE>
Fair values of investment securities were based on quoted market prices,
where available, or on values obtained from independent pricing services.
The fair value of mortgage loans was estimated by discounting expected cash
flows at theoretical treasury spot rates in effect at December 31. The cash
flows were discounted using an average of possible discount rates to provide for
the potential effects of interest rate volatility, and were adjusted to reflect
estimated prepayment and foreclosure.
The carrying value of policy loans approximates fair value. While potentially
financial instruments, policy loans are an integral component of the insurance
contract and have no maturity date.
The fair value of collateral loans was estimated using discounted cash flows,
at the then-prevailing interest rates offered for similar loans with similar
credit ratings.
Fair values for other policyholder funds that are investment-type contracts
were estimated using discounted cash flows at the then-prevailing interest rates
offered for similar contracts or as the amount payable on demand less surrender
charges at the balance sheet date.
F-25
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fair values for insurance contracts not considered to be investment-type
contracts are not required to be disclosed and Standard has elected not to do
so. However, the estimated fair values for liabilities under all insurance
contracts were taken into consideration in Standard's overall management of
interest rate risk, which monitors exposure to changing interest rates through
testing of the matching of anticipated asset cash flows with anticipated amounts
due under insurance contracts.
11. Segments. Effective December 31, 1998, Standard adopted FAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information", which
establishes guidance for reporting information regarding an entity's operating
activities. FAS No. 131 requires that operating segments be defined at the same
level and in a similar manner as management evaluates operating performance.
Prior periods have been presented on a comparative basis.
Three reportable segments comprise a substantial majority of Standard's
operations: Group Insurance, Retirement Plans and Individual Insurance. The
Group Insurance segment sells life insurance, long term and short term
disability insurance, and other accident and health insurance products to
groups. The Retirement Plans segment sells full-service 401(k) and other pension
plan products and services to employers. The Individual Insurance segment sells
life insurance, disability insurance, and annuities to individuals. Performance
assessment and resource allocation are done at this level.
Amounts reported as "Other" include other financial service businesses and
adjustments made in consolidation. Other financial service businesses are
generally non-insurance related and include Standard's mortgage lending and real
estate management subsidiaries and real estate investments.
The following table sets forth selected segment information for the years ended
December 31:
<TABLE>
<CAPTION>
Group Retirement Individual
Insurance Plans Insurance Other Total
---------- ---------- ---------- --------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Revenues:
Premiums........................................ $ 784,515 $ 13,970 $ 92,455 $ --- $ 890,940
Net investment income......................... 143,682 54,032 123,983 1,423 323,120
Net realized investment gains................. 2,489 1,164 1,797 6,156 11,606
Other......................................... 2,427 (21) 4,465 15 6,886
---------- ---------- ---------- -------- ----------
Total..................................... 933,113 69,145 222,700 7,594 1,232,552
---------- ---------- ---------- -------- ----------
Benefits and expenses:
Policyholder benefits......................... 660,360 10,546 90,004 --- 760,910
Interest paid on policyholder funds........... 6,158 36,059 49,299 --- 91,516
Commissions................................... 50,021 1,719 13,820 --- 65,560
Operating expenses............................ 134,416 20,398 28,501 2,244 185,559
Net increase in deferred policy acquisition
costs........................................ (1,471) --- (2,741) --- (4,212)
Policyholder dividends........................ --- --- 24,646 --- 24,646
---------- ---------- ---------- -------- ----------
Total..................................... 849,484 68,722 203,529 2,244 1,123,979
---------- ---------- ---------- -------- ----------
Income before Federal income taxes and
extraordinary item............................. $ 83,629 $ 423 $ 19,171 $ 5,350 $ 108,573
========== ========== ========== ======== ==========
Total assets.............................. $2,012,285 $1,317,959 $1,573,053 $375,549 $5,278,846
========== ========== ========== ======== ==========
Year ended December 31, 1997:
Revenues:
Premiums...................................... $ 717,136 $ 11,178 $ 96,862 $ --- $ 825,176
Net investment income (expense)............... 131,415 54,266 119,825 (2,353) 303,153
Net realized investment gains................. 1,031 862 1,673 8,267 11,833
Other......................................... 2,384 (329) 3,828 163 6,046
---------- ---------- ---------- -------- ----------
Total..................................... 851,966 65,977 222,188 6,077 1,146,208
---------- ---------- ---------- -------- ----------
</TABLE>
F-26
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
Group Retirement Individual
Insurance Plans Insurance Other Total
---------- ---------- ---------- --------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Benefits and expenses:
Policyholder benefits......................... $ 619,494 $ 8,644 $ 86,743 $ --- $ 714,881
Interest paid on policyholder funds........... 6,036 38,315 50,856 --- 95,207
Commissions................................... 47,264 1,423 15,282 --- 63,969
Operating expenses............................ 116,714 16,534 27,538 528 161,314
Net increase in deferred policy acquisition
costs........................................ (2,030) --- (4,602) --- (6,632)
Policyholder dividends........................ --- --- 22,184 --- 22,184
---------- ---------- ---------- -------- ----------
Total..................................... 787,478 64,916 198,001 528 1,050,923
---------- ---------- ---------- -------- ----------
Income before Federal income taxes and
extraordinary item............................. $ 64,488 $ 1,061 $ 24,187 $ 5,549 $ 95,285
========== ========== ========== ======== ==========
Total assets.............................. $1,784,291 $1,140,531 $1,524,700 $276,829 $4,726,351
========== ========== ========== ======== ==========
Year ended December 31, 1996:
Revenues:
Premiums...................................... $ 629,374 $ 10,317 $ 105,450 $ --- $ 745,141
Net investment income (expense)............... 113,886 58,655 117,430 (4,736) 285,235
Net realized investment gains (losses)........ (1,278) 1,614 1,825 13,138 15,299
Other......................................... 1,061 (232) 3,565 --- 4,394
---------- ---------- ---------- -------- ----------
Total..................................... 743,043 70,354 228,270 8,402 1,050,069
---------- ---------- ---------- -------- ----------
Benefits and expenses:
Policyholder benefits......................... 556,942 9,038 96,412 --- 662,392
Interest paid on policyholder funds........... 4,918 41,888 51,055 --- 97,861
Commissions................................... 42,261 1,149 16,350 --- 59,760
Operating expenses............................ 103,351 13,775 25,267 (2,567) 139,826
Net increase in deferred policy acquisition
costs........................................ (3,133) --- (4,337) --- (7,470)
Policyholder dividends........................ --- --- 22,062 --- 22,062
---------- ---------- ---------- -------- ----------
Total..................................... 704,339 65,850 206,809 (2,567) 974,431
---------- ---------- ---------- -------- ----------
Income before Federal income taxes and
extraordinary item............................. $ 38,704 $ 4,504 $ 21,461 $ 10,969 $ 75,638
========== ========== ========== ======== ==========
Total assets.............................. $1,569,133 $ 999,708 $1,480,103 $232,794 $4,281,738
========== ========== ========== ======== ==========
</TABLE>
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies except that total assets for each
segment represent the total of statutory invested assets and separate account
assets. Total consolidated assets for Standard represent all consolidated assets
accounted for under GAAP. The aggregate difference between the two bases of
accounting is included in "Other".
12. Commitments and Contingencies. At December 31, 1998, Standard had
outstanding commitments to fund or acquire various assets, primarily mortgage
loans with fixed-interest rates ranging from 7.25 percent to 9.00 percent
totaling $101,668,000. These commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. They may be
terminated by Standard in the event of deterioration in the financial condition
of the borrower. Certain of these commitments are anticipated to expire without
being drawn upon. Standard evaluates each customer's credit worthiness
individually. Standard also has commitments to contribute equity capital to
third party joint ventures totaling $12,490,000 on or prior to December 31,
2006. The contributions are payable upon
F-27
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
demand. However, to the extent amounts are not previously drawn upon, the future
minimum capital contributions are: 2002, $2,570,000; 2004, $4,970,000 and
thereafter, $4,950,000.
Standard has lines of credit totaling $55,000,000 with various institutions,
of which $10,000,000 is a secured line of credit. Lines of credit totaling
$20,000,000 and $35,000,000 expire February 28, 1999 and April 30, 1999,
respectively. Interest rates are based on current market rates. Standard is not
required to maintain compensating balances, but does pay commitment fees. At
December 31, 1998, there were no outstanding borrowings on the lines of credit.
Because these lines expire in the first half of 1999, Standard is negotiating a
new line of credit totaling $100,000,000.
Standard leases certain buildings and equipment under non-cancelable
operating leases that expire in various years through 2009, with renewal options
for periods ranging from three to five years. Future minimum payments under
these leases are: 1999, $5,650,000; 2000, $6,293,000; 2001, $5,161,000; 2002,
$3,287,000; 2003, $2,199,000; and thereafter, $10,631,000. Total rent expense
was $6,531,000, $5,569,000 and $3,237,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
Standard has certain software maintenance, licensing and telecommunications
commitments that expire in various years through 2003. The telecommunications
commitment may be renewed for a three-year period. Future minimum payments under
these commitments are: 1999, $1,629,000; 2000, $1,629,000; 2001, $869,000; 2002,
$669,000; and 2003, $73,000. Total expense for these agreements was $1,710,000,
$986,000 and $742,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Standard is a defendant in a number of lawsuits that have arisen in the normal
course of its business. In the opinion of management, the ultimate liability, if
any, arising from these lawsuits is not expected to have a material adverse
effect on Standard's consolidated financial position or consolidated operating
results.
13. Regulatory Matters. Standard Insurance Company prepares its statutory
financial statements in accordance with accounting practices prescribed or
permitted by the Department. Prescribed statutory accounting practices include
state laws, regulations, and general administrative rules, as well as accounting
practices set forth in publications of the National Association of Insurance
Commissioners ("NAIC"). Permitted statutory accounting practices encompass all
accounting practices not so prescribed; such accounting practices differ from
state to state, may differ from company to company within a state, and may
change in the future.
The NAIC has issued a codification of statutory accounting practices
("Codification"), which is expected to become effective January 1, 2001. The
result is expected to constitute the only source of prescribed statutory
accounting practices and will change the definitions of what comprises current
statutory accounting practices. Management has not yet determined the impact of
the Codification on Standard Insurance Company's statutory financial statements.
Statutory accounting practices differ in some respects from GAAP. The
principal statutory practices which differ from GAAP are: a) bonds and mortgage
loans are reported principally at amortized cost and preferred stocks
principally at cost; b) asset valuation and interest maintenance reserves are
provided as prescribed by the NAIC; c) certain assets designated as non-
admitted, principally furniture, equipment, and unsecured receivables, are not
recognized; d) premiums are recognized as income when due over the premium
paying period of the policy, annuity and fund considerations are recognized as
income when received; e) reserves for life and disability policies and contracts
are based on statutory requirements; f) commissions, policy acquisition
expenses, and the expenses of originating or acquiring investments are charged
to current operations; and g) Federal income tax expense is based on current
taxable income, without recognition of deferred taxes resulting from temporary
differences in bases of accounting.
F-28
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Standard Insurance Company received written approval from the Department to
include collateral loan balances fully secured by policy cash values as admitted
assets, which differs from prescribed statutory accounting practices. Prescribed
accounting practices generally require amounts in excess of 80 percent of the
market value of the pledged collateral to be designated as non-admitted. As of
December 31, 1998 and 1997, this permitted practice increased statutory surplus
by $14,246,000 and $14,766,000, respectively, over the amount that would have
been permitted under prescribed accounting practices.
State insurance departments require insurance enterprises to adhere to minimum
Risk-Based Capital ("RBC") requirements promulgated by the NAIC. Standard
Insurance Company significantly exceeded the minimum RBC requirements at
December 31, 1998 and 1997.
Standard Insurance Company is subject to statutory restrictions that limit the
maximum amount of dividends it could declare without prior approval of the
Department. The amount available under current law for payment of dividends
during 1999 without the approval of the Department is $93,900,000.
The following table reconciles statutory policyholder surplus as reported to
state insurance regulatory authorities with GAAP equity at December 31:
1998 1997
---------- ----------
(in thousands)
Statutory policyholder surplus.............. $392,925 $302,159
Adjustments to reconcile to GAAP equity:
Future policy benefits and claims........ 242,368 259,391
Deferred policy acquisition costs........ 118,391 114,179
Deferred tax liabilities................. (66,047) (31,721)
Asset valuation reserve.................. 39,919 38,897
Non-admitted assets...................... 21,478 17,949
Accumulated other comprehensive income...... 74,201 36,427
Other, net.................................. 16,047 (5,269)
-------- --------
Equity, GAAP basis.......................... $839,282 $732,012
======== ========
F-29
<PAGE>
STANDARD INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table reconciles statutory gain from operations as reported to
insurance regulatory authorities with GAAP net income for the years ended
December 31:
1998 1997 1996
-------- -------- --------
(in thousands)
Statutory gain from operations..................$ 95,676 $ 40,859 $ 15,651
Adjustments to reconcile to GAAP net income:
Future policy benefits and claims............. (17,023) 18,002 23,728
Deferred policy acquisition costs, net........ 4,212 6,632 7,470
Deferred income taxes......................... (34,326) (2,099) 951
Current income taxes.......................... 14,153 (824) 330
Other, net.................................... 6,804 1,278 (1,134)
-------- -------- --------
Net income, GAAP basis..........................$ 69,496 $ 63,848 $ 46,996
======== ======== ========
F-30
<PAGE>
UNDERWRITING
StanCorp and the underwriters named below (the "Underwriters") have entered
into an underwriting agreement with respect to the shares of common stock being
offered in the offering. Subject to certain conditions, each Underwriter has
severally agreed to purchase the number of shares indicated in the following
table. Goldman, Sachs & Co. and . are the representatives of the Underwriters.
Underwriters Number of Shares
------------ ----------------
Goldman, Sachs & Co.................................... .
Total.................................................. .
----------------
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional
2,211,000 shares from StanCorp to cover such sales. They may exercise that
option for 30 days. If any shares are purchased pursuant to this option, the
Underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the Underwriters by StanCorp. Such amounts are shown
assuming both no exercise and full exercise of the Underwriters' option to
purchase additional shares.
No Exercise Full Exercise
----------- -------------
Per Share............................ $ . $ .
Total................................ $ . $ .
Shares sold by the Underwriters will be offered to the public at the initial
public offering price set forth on the cover page of this prospectus. Any
shares sold by the Underwriters to securities dealers may be sold at a discount
of up to $. per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the Underwriters to
certain other brokers or dealers at a discount of up to $. per share from the
initial public offering price. If all of the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
other selling terms.
StanCorp agreed with the Underwriters not to issue, sell, dispose of or hedge
any common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of Goldman, Sachs & Co. This agreement does not apply to
any of Standard's existing employee benefit plans.
Prior to the offering, there has been no public market for the common stock.
The initial public offering price will be negotiated among Standard and the
representatives. Among the factors to be considered in determining the initial
public offering price of the common stock, in addition to prevailing market
conditions, will be Standard's historical performance, estimates of the business
potential and earnings prospects of StanCorp, an assessment of Standard's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
StanCorp is applying to list the common stock on the New York Stock Exchange
under the symbol "SFG". In order to meet one of the requirements for listing
the common stock on the NYSE, the Underwriters have undertaken to sell lots of
100 or more shares to a minimum of 2,000 beneficial holders.
In connection with the offering, the Underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or
U-1
<PAGE>
purchases made for the purpose of preventing or retarding a decline in the
market price of the common stock while the offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the NYSE, in
the over-the-counter market or otherwise.
The Underwriters may not confirm sales to discretionary accounts without the
prior written approval of the customer.
Standard estimates that the expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $5,000,000.
At the request of Standard, 1,250,000 shares have been reserved for sale to
Directed Share Members. Such shares will be sold at the initial public offering
price and, to the extent sold, will not otherwise be available for sale as a
part of the offering. If any such shares are not sold in this manner they will
be offered as a part of the offering.
Standard has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
U-2
<PAGE>
================================================================================
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circum stances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
TABLE OF CONTENTS
Page
----
Prospectus Summary..................................................... 4
Risk Factors........................................................... 12
Use of Proceeds........................................................ 22
Market for Common Stock................................................ 22
Dividend Policy........................................................ 22
Capitalization......................................................... 24
Selected Consolidated Financial and
Operating Data....................................................... 25
Unaudited Pro Forma Condensed
Consolidated Financial Information................................... 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................................... 34
The Demutualization.................................................... 51
Business............................................................... 57
Management............................................................. 90
Management Compensation................................................ 95
Ownership of Common Stock.............................................. 102
Common Stock Eligible for Future Sale.................................. 103
Restrictions on Acquisitions of Common
Stock................................................................ 104
Description of Capital Stock........................................... 109
Validity of Common Stock............................................... 110
Experts................................................................ 110
Additional Information................................................. 110
Glossary............................................................... G-1
Index to Financial Statements.......................................... F-1
Underwriting........................................................... U-1
--------------------
Through and including . 199. (the 25th day after the date of this
prospectus), all deal ers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
================================================================================
14,740,000 Shares
StanCorp Financial
Group, Inc.
Common Stock
---------------
[LOGO]
---------------
Goldman, Sachs & Co.
Representatives of the Underwriters
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of the common stock registered
hereby, all of which expenses, except for the SEC registration fee, the New York
Stock Exchange listing fee and the NASD filing fee, are estimates:
Description Amount
----------- ------
SEC registration fee.................................... $133,971
New York Stock Exchange listing fee and expenses........ *
NASD filing fee......................................... *
Blue Sky fees and expenses (including legal fees)....... *
Printing and engraving expenses......................... *
Legal fees and expenses (other than Blue Sky)........... *
Accounting fees and expenses............................ *
Transfer Agent and Registrar's fee...................... *
Miscellaneous........................................... *
--------
TOTAL............................................ $ *
========
- ---------------------
* To be furnished by amendment
---------------------
Item 14. Indemnification of Directors and Officers.
Article 6 of StanCorp's Articles of Incorporation (the "Articles"), to be
effective upon completion of the offering, permits indemnification of current or
former directors and officers of StanCorp to the fullest extent not prohibited
by the Oregon Business Corporation Act (the "Oregon Act"). The Act permits or
requires indemnification of current or former directors and officers in certain
circumstances. The effects of the Articles and the Act (the "Indemnification
Provisions") are summarized as follows:
(a) The Indemnification Provisions grant a right of indemnification in
respect of any proceeding (other than an action by or in the right of StanCorp),
if the person concerned acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of StanCorp,
was not adjudged liable on the basis of receipt of an improper personal benefit
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe the conduct was unlawful.
(b) The Indemnification Provisions grant a right of indemnification in
respect of any proceeding by or in the right of StanCorp against the expenses
(including attorney fees) actually and reasonably incurred if the person
concerned acted in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of StanCorp, except that no right of
indemnification will be granted if the person is adjudged to be liable to
StanCorp.
(c) Every person who has been wholly successful, on the merits or
otherwise, in the defense of any proceeding to which the person was a party
because of the person's status as a director or officer of a controversy
described in (a) or (b) above is entitled to indemnification as a matter of
right.
(d) Because the limits of permissible indemnification under Oregon law are
not clearly defined, the Indemnification Provisions may provide indemnification
broader than that described in (a) and (b).
(e) StanCorp may advance to a director or officer the expenses incurred in
defending any proceeding in advance of its final disposition if the director or
officer affirms in writing in good faith that he or she has met the standard of
conduct to be entitled to indemnification as described in (a) or (b) above and
undertakes to repay any amount advanced if it is determined that the person did
not meet the required standard of conduct.
II-1
<PAGE>
StanCorp has entered into indemnification agreements with each of
StanCorp's directors, a form of which is attached as an exhibit hereto and is
incorporated herein by reference.
StanCorp may obtain insurance for the protection of its directors and
officers against any liability asserted against them in their official
capacities. The rights of indemnification described above are not exclusive of
any other rights of indemnification to which the persons indemnified may be
entitled under any bylaw, agreement, vote of shareholders or directors or
otherwise.
Item 15. Recent Sales of Unregistered Securities.
None.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits. See Exhibit Index following the signature pages to this
registration statement.
(b) Financial Statement Schedules. The following consolidated financial
statement schedules are set forth below: Schedule III -- Supplementary Insurance
Information; and Schedule IV -- Valuation and Qualifying Accounts. All other
schedules are omitted because the information is not required or because the
information is included in the Consolidated Financial Statements or Notes
thereto.
Schedule III
Supplementary Insurance Information
<TABLE>
Amortiza-
tion of
Deferred Future Other Benefits, deferred Other
policy policy policy- Net claims, and policy operating
acquisition benefits holder Premium investment interest acquisition expenses
Segment costs and claims funds(1) revenue income expense(2) costs (3)
- ------------ ----------- ------------ ----------- --------- ----------- ----------- ------------ ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998:
Group $ 15,813 $1,329,112 $ 69,333 $784,515 $143,682 $666,518 $ 6,654 $176,312
Retirement - 68,562 582,619 13,970 54,032 46,605 - 22,117
Plans
Individual 99,067 667,487 803,552 92,455 123,983 163,949 6,914 32,666
-------- ---------- ---------- -------- -------- -------- ------- --------
Total $114,880 $2,065,161 $1,455,504 $890,940 $321,697 $877,072 $13,568 $231,095
======== ========== ========== ======== ======== ======== ======= ========
1997:
Group $ 14,342 $1,180,761 $ 70,552 $717,136 $131,415 $625,530 $ 5,786 $156,162
Retirement - 66,185 571,562 11,178 54,266 46,959 - 17,957
Plans
Individual 92,581 631,314 800,365 96,862 119,825 159,783 6,445 31,773
-------- ---------- ---------- -------- -------- -------- ------- --------
Total $106,923 $1,878,260 $1,442,479 $825,176 $305,506 $832,272 $12,231 $205,892
======== ========== ========== ======== ======== ======== ======= ========
1996:
Group $ 12,312 $1,025,331 $ 63,001 $629,374 $113,886 $561,860 $ 4,672 $137,807
Retirement - 65,192 583,741 10,317 58,655 50,926 - 14,924
Plans
Individual 92,298 602,878 785,683 105,450 117,430 169,529 7,745 29,535
-------- ---------- ---------- -------- -------- -------- ------- --------
Total $104,610 $1,693,401 $1,432,425 $745,141 $289,971 $782,315 $12,417 $182,266
======== ========== ========== ======== ======== ======== ======= ========
</TABLE>
- ---------------
(1) Includes pension and annuity funds, dividend accumulation funds,
universal life cash values and unearned and advance premiums.
(2) Includes policyholder benefits, interest paid on policyholder funds and
policyholder dividends.
(3) Includes operating expenses, state and local taxes, commissions and
deferred policy acquisition costs.
II-2
<PAGE>
Schedule IV
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Charged Charged to
Balance at to other Balance at
beginning of costs and accounts - Deductions - end
Description period expenses describe describe of period
- -------------------- ------------ ---------- ------------ ------------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C>
1998:
Mortgage Loans $4,027.0 $269.7 $ - $ - $4,296.7
1997:
Mortgage Loans 3,812.0 215.0 - - 4,027.0
1996:
Mortgage Loans 3,718.0 94.0 - - 3,812.0
</TABLE>
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(a) To provide to the underwriters at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions
described under Item 14 above, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be part of this registration statement as of the time it was declared
effective.
(d) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Portland, Oregon on
February 17, 1999.
STANCORP FINANCIAL GROUP, INC.
By: /s/ Ronald E. Timpe
-----------------------------
Title: Chairman of the Board,
President,
Chief Executive Officer
II-4
<PAGE>
Power of Attorney
Each person whose signature appears below hereby authorizes and appoints
Ronald E. Timpe, Eric E. Parsons and J. Gregory Ness, or any of them, as his or
her attorney-in-fact, with full power of substitution and resubstitution, to
sign and file on his or her behalf individually and in each capacity stated
below any and all amendments (including post-effective amendments) to this
registration statement and any subsequent registration statement filed by
StanCorp Financial Group, Inc. pursuant to Rule 462(b) of the Securities Act of
1933, as fully as such person could do in person, hereby verifying and
confirming all that such attorney-in-fact, or his substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Name Title Date
- ---- ----- ----
/s/ Ronald E. Timpe
- ------------------------- Chairman of the Board, President,
Ronald E. Timpe Chief Executive Officer and
Director (Principal Executive Officer)
/s/ Eric E. Parsons
- ------------------------- Senior Vice President, Chief Financial
Eric E. Parsons Officer (Principal Financial Officer) and
Director
/s/ J. Gregory Ness
- ------------------------- Vice President, Corporate Secretary
J. Gregory Ness and Director
/s/ Patricia J. Brown
- ------------------------- Assistant Vice President and Controller
Patricia J. Brown (Principal Accounting Officer)
II-5
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
1.1 Form of Underwriting Agreement*
2.1 Plan of Reorganization*
3.1 Form of Articles of Incorporation of StanCorp*
3.2 Form of By-Laws of StanCorp*
4.1 Form of Certificate for the Common Stock, no par
value*
5.1 Opinion of Debevoise & Plimpton*
5.2 Opinion of Stoel Rives LLP*
8.1 Opinion of Debevoise & Plimpton*
10.1 Form of Retention Agreement*
10.2 Form of Change of Control Agreement*
10.3 Form of Stock Option Plan*
10.4 Form of Stock Purchase Plan*
10.5 Long Term Incentive Compensation Plan*
10.6 Retirement Plan*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Milliman & Robertson, Inc.*
23.3 Consent of Debevoise & Plimpton (included in
Exhibit 5.1)*
23.4 Consent of Stoel Rives LLP (included in Exhibit
5.2)*
23.5 Consent of Debevoise & Plimpton (included in
Exhibit 8.1)*
23.6 Consent of Virginia L. Anderson*
23.7 Consent of Frederick W. Buckman*
23.8 Consent of John E. Chapoton*
23.9 Consent of Barry J. Galt*
23.10 Consent of Richard Geary*
23.11 Consent of Peter T. Johnson*
23.12 Consent of Peter O. Kohler*
23.13 Consent of Jerome J. Meyer*
23.14 Consent of Ralph R. Peterson*
23.15 Consent of E. Kay Stepp*
23.16 Consent of William Swindells*
23.17 Consent of Michael G. Thorne*
23.18 Consent of Franklin E. Ulf*
23.19 Consent of Benjamin R. Whiteley*
24.1 Powers of Attorney*
____________________________________
* To be filed by amendment.
<PAGE>
EXHIBIT 23.1
------------
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of StanCorp Financial
Group, Inc. on Form S-1 of our reports related to StanCorp Financial Group, Inc.
and Standard Insurance Company, dated January 21, 1999 and February 12, 1999,
respectively, appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 16, 1999
