<PAGE>
-------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-14925
----------------
STANCORP FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Oregon 93-1253576
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1100 SW Sixth Avenue, Portland, Oregon, 97204
(Address of principal executive offices, including zip code)
(503) 321-7000
(Registrant's telephone number, including area code)
NONE
(Former name, former address, and former fiscal year, if changed since last
report)
----------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of October 30, 2000 there were 31,977,417 shares of the Registrant's
common stock, no par value, outstanding.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
-----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Income and Comprehensive
Income for the three and nine months ended September 30, 2000
and 1999..................................................... 1
Unaudited Consolidated Balance Sheets at September 30, 2000
and December 31, 1999........................................ 2
Unaudited Consolidated Statements of Changes in Shareholders'
Equity for the year ended December 31, 1999 and the nine
months ended September 30, 2000.............................. 3
Unaudited Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999..................... 4
Notes to Unaudited Consolidated Financial Statements.......... 5
Independent Accountants' Report............................... 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................. 23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................... 23
ITEM 3. DEFAULTS UPON SENIOR DEBT..................................... 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 23
ITEM 5. OTHER INFORMATION............................................. 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 23
SIGNATURES............................................................. 24
</TABLE>
i
<PAGE>
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOMEAND COMPREHENSIVE INCOME
(In millions--except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Premiums..................... $ 263.8 $ 223.6 $ 759.6 $ 680.1
Net investment income........ 79.1 73.7 234.9 228.1
Net realized investment gains
(losses).................... (1.0) (0.6) 7.3 2.2
Contribution from closed
block....................... 0.7 5.3 3.6 8.6
Other........................ 1.4 0.9 3.3 2.5
---------- ---------- ---------- ----------
Total...................... 344.0 302.9 1,008.7 921.5
---------- ---------- ---------- ----------
Benefits and expenses:
Policyholder benefits........ 214.2 184.1 613.1 579.1
Interest paid on policyholder
funds....................... 23.2 22.0 66.4 65.1
Operating expenses........... 55.8 48.1 161.9 137.8
Commissions.................. 19.5 18.2 59.2 50.3
Net increase in deferred
policy acquisition costs.... (4.1) (0.9) (7.6) (1.5)
---------- ---------- ---------- ----------
Total...................... 308.6 271.5 893.0 830.8
---------- ---------- ---------- ----------
Income before income taxes and
extraordinary item............ 35.4 31.4 115.7 90.7
Income taxes................... 11.5 10.5 38.6 29.3
---------- ---------- ---------- ----------
Income before extraordinary
item.......................... 23.9 20.9 77.1 61.4
Extraordinary item, net of
tax........................... -- 0.9 -- 4.5
---------- ---------- ---------- ----------
Net income..................... 23.9 20.0 77.1 56.9
---------- ---------- ---------- ----------
Other comprehensive income
(loss), net of tax:
Unrealized gains (losses) on
securities available-for-
sale........................ 14.9 (12.6) 12.7 (84.0)
Adjustment for realized gains
(losses).................... 0.4 (1.0) (0.6) (3.7)
---------- ---------- ---------- ----------
Total...................... 15.3 (13.6) 12.1 (87.7)
---------- ---------- ---------- ----------
Comprehensive income (loss).... $ 39.2 $ 6.4 $ 89.2 $ (30.8)
========== ========== ========== ==========
Net income per share:
Basic........................ $ 0.75 $ 0.59 $ 2.41
Diluted...................... 0.75 0.59 2.40
Weighted-average shares
outstanding:
Basic........................ 31,731,409 33,927,415 31,966,547
Diluted...................... 32,032,568 33,933,811 32,187,184
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
1
<PAGE>
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In millions--except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
ASSETS
------
<S> <C> <C>
Investments:
Investment securities............................. $2,123.5 $2,064.7
Mortgage loans.................................... 1,922.2 1,779.1
Real estate, net.................................. 84.0 98.5
Policy loans...................................... 20.2 20.5
-------- --------
Total investments............................... 4,149.9 3,962.8
Cash and cash equivalents........................... 35.6 38.9
Deferred policy acquisition costs................... 61.2 54.2
Premiums and other receivables...................... 90.2 75.3
Accrued investment income........................... 55.0 53.3
Property and equipment, net......................... 70.1 69.0
Other assets........................................ 22.1 11.5
Separate account assets............................. 1,185.5 992.3
Closed block assets................................. 601.8 599.8
-------- --------
Total........................................... $6,271.4 $5,857.1
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Future policy benefits and claims................. $1,808.3 $1,683.4
Other policyholder funds.......................... 1,524.6 1,538.6
Deferred tax liabilities.......................... 71.8 66.5
Other liabilities................................. 145.5 96.9
Separate account liabilities...................... 1,185.5 992.3
Closed block liabilities.......................... 636.5 639.5
-------- --------
Total liabilities............................... 5,372.2 5,017.2
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, 100,000,000 shares authorized;
none issued...................................... -- --
Common stock, no par, 300,000,000 shares
authorized;
31,982,129 shares issued at September 30, 2000;
32,774,098 shares issued at December 31, 1999... 796.2 819.7
Accumulated other comprehensive loss.............. (25.5) (37.6)
Retained earnings................................. 128.5 57.8
-------- --------
Total shareholders' equity...................... 899.2 839.9
-------- --------
Total........................................... $6,271.4 $5,857.1
======== ========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
2
<PAGE>
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In millions--except share data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
------------------- Comprehensive Retained Shareholders'
Shares Amount Income (Loss) Earnings Equity
----------- ------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999................ -- $ -- $ 74.2 $ 765.1 $ 839.3
Net income.............................. -- -- -- 79.9 79.9
Other comprehensive loss, net of tax.... -- -- (111.8) -- (111.8)
Common stock:
Reorganization........................ 18,718,015 515.3 -- (783.2) (267.9)
Initial public offering............... 15,209,400 336.5 -- -- 336.5
Repurchased........................... (1,277,931) (34.2) -- -- (34.2)
Issued under employee stock plans..... 56,910 1.1 -- -- 1.1
Issued under various incentive plans.. 67,704 1.0 -- -- 1.0
Dividends declared on common stock...... -- -- -- (4.0) (4.0)
----------- ------ ------- ------- -------
Balance, December 31, 1999.............. 32,774,098 $819.7 $ (37.6) $ 57.8 $ 839.9
----------- ------ ------- ------- -------
Net income.............................. -- -- -- 77.1 77.1
Other comprehensive income, net of tax.. -- -- 12.1 -- 12.1
Common stock:
Repurchased........................... (981,700) (24.5) -- -- (24.5)
Issued to directors................... 3,490 0.2 -- -- 0.2
Issued under employee stock plans..... -- (0.7) -- -- (0.7)
Issued under various incentive plans.. 180,000 1.4 -- -- 1.4
Exercise of stock options............. 6,241 0.1 -- -- 0.1
Dividends declared on common stock...... -- -- -- (6.4) (6.4)
----------- ------ ------- ------- -------
Balance, September 30, 2000............. 31,982,129 $796.2 $ (25.5) $ 128.5 $ 899.2
=========== ====== ======= ======= =======
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
Operating:
Net income............................................... $ 77.1 $ 56.9
Adjustments to reconcile net income to net cash provided
by operating activities:
Net realized investment gains.......................... (7.3) (2.1)
Depreciation and amortization.......................... 26.4 20.5
Deferral of policy acquisition costs................... (21.0) (17.0)
Deferred income taxes.................................. (1.5) (14.3)
Changes in other assets and liabilities:
Trading securities................................... (2.0) (34.3)
Receivables and accrued income....................... (16.6) (10.8)
Future policy benefits and claims.................... 124.9 136.8
Closed block, net.................................... (5.0) 6.2
Other, net........................................... 16.9 9.2
-------- --------
Net cash provided by operating activities.......... 191.9 151.1
-------- --------
Investing:
Proceeds of investments sold, matured, or repaid:
Fixed maturity securities--available-for-sale.......... 159.6 275.6
Mortgage loans......................................... 192.4 244.6
Real estate............................................ 19.4 --
Other investments...................................... 8.3 --
Costs of investments acquired:
Fixed maturity securities--available-for-sale.......... (207.9) (387.6)
Mortgage loans......................................... (335.5) (438.9)
Real estate............................................ (1.2) (10.9)
Other investments...................................... -- (1.2)
Property and equipment, net.............................. (7.5) (7.3)
-------- --------
Net cash used in investing activities.............. (172.4) (325.7)
-------- --------
Financing:
Policyholder fund deposits............................... 545.0 372.1
Policyholder fund withdrawals............................ (559.0) (358.6)
Borrowings on line of credit............................. 184.3 --
Repayments on line of credit............................. (163.2) --
Issuance of common stock................................. 1.0 336.5
Repurchase of common stock............................... (24.5) --
Dividends paid on common stock........................... (6.4) (2.0)
Payments to eligible policyholders upon reorganization... -- (176.7)
-------- --------
Net cash provided by (used in) financing
activities........................................ (22.8) 171.3
-------- --------
Decrease in cash and cash equivalents...................... (3.3) (3.3)
Cash and cash equivalents, beginning of period............. 38.9 60.4
-------- --------
Cash and cash equivalents, end of period................... $ 35.6 $ 57.1
======== ========
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest............................................... $ 66.9 $ 65.6
Income taxes........................................... 55.7 8.7
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
StanCorp Financial Group, Inc. ("StanCorp") was incorporated under the laws
of Oregon in 1998. StanCorp was specifically organized as a parent holding
company for its subsidiaries Standard Insurance Company ("The Standard"),
StanCorp Mortgage Investors, LLC, StanCorp Real Estate, LLC, and Standard
Management, Inc. StanCorp is based in Portland, Oregon, and through its
subsidiaries has operations throughout the United States of America.
StanCorp's principal subsidiary, The Standard, underwrites group and
individual disability, life and annuity products, and dental insurance for
groups. The Standard is domiciled in Oregon and licensed in 49 states, the
District of Columbia and the U.S. Territory of Guam. In the state of New York,
The Standard is accredited for reinsurance only.
StanCorp's other subsidiaries are complementary financial and management
service businesses. The largest of StanCorp's other subsidiaries is StanCorp
Mortgage Investors, LLC, which originates and services mortgage loans for
StanCorp's investment portfolio as well as generating fee income from the
origination and servicing of mortgage loans sold to institutional investors.
The consolidated financial statements include StanCorp and its subsidiaries
(collectively with StanCorp, the "Company"). All significant intercompany
balances and transactions have been eliminated.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of StanCorp
and its subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") for
interim financial information and in conformance with the requirements of Form
10-Q. Accordingly, they do not include all of the information and disclosures
required by GAAP for complete financial statements. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
financial statement date, and the reported amounts of revenue and expenses
during the period. Actual results may differ from those estimates. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation of the Company's financial
condition at September 30, 2000 and December 31, 1999 and the results of
operations and cash flows for the three and nine months ended September 30,
2000 and 1999. Interim results for the three and nine month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. This report should be read in
conjunction with the Company's 1999 Annual Report on Form 10-K. Certain prior
period amounts have been reclassified to conform to the current period's
presentation.
3. ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". This statement replaces previously issued SFAS 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS 140 is effective prospectively for transfers and servicing
occurring after March 31, 2001 and for securitizations and recognition and
reclassification of collateral for fiscal years ending after December 31,
2000. StanCorp's current accounting recognition procedures are compliant with
the requirements of SFAS 140.
5
<PAGE>
4. CLOSED BLOCK
The Standard established a closed block for the payment of future benefits,
policyholder dividends and certain expenses and taxes related to certain
classes of policies in conjunction with its reorganization in April 1999. The
Standard allocated to the closed block an amount of assets expected to produce
cash flows which, together with future revenues from the policies included in
the closed block, will be sufficient to support these policies. Such support
includes payment of claims, certain expenses and taxes and continuation of
policyholder dividend scales in effect for 1998 (the period used to determine
the closed block funding) if the experience underlying such dividend scales
including the portfolio interest rate continues.
The contribution to income before income taxes and extraordinary item from
the closed block is reported as a single line item in the consolidated
statements of income and comprehensive income. Accordingly, all components of
revenues, benefits and expenses for the closed block are shown as a net amount
under the caption "Contribution from closed block". Income tax expense
applicable to the closed block is reflected as a component of total tax
expense. Reporting of the contribution from the closed block as a single line
item results in material reductions in the respective line items in the
consolidated statements of income and comprehensive income while having no
effect on net income. All assets allocated to the closed block are combined
and shown as a separate line item in the consolidated balance sheets under the
caption "Closed block assets". All liabilities attributable to the closed
block are treated similarly and disclosed as a separate line item under the
caption "Closed block liabilities".
Summarized balance sheet information for the closed block was as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(In millions)
<S> <C> <C>
ASSETS
------
Investments:
Investment securities.............................. $224.1 $220.3
Mortgage loans..................................... 156.8 147.1
Policy loans....................................... 151.4 158.4
------ ------
Total investments................................ 532.3 525.8
Cash and cash equivalents............................ 3.4 1.8
Deferred policy acquisition costs.................... 61.2 66.0
Premiums and other receivables....................... 1.8 3.3
Accrued investment income............................ 3.1 2.9
------ ------
Closed block assets.............................. $601.8 $599.8
====== ======
LIABILITIES
-----------
Future policy benefits and claims.................... $586.7 $585.0
Other policyholder funds............................. 34.0 33.1
Deferred tax liabilities............................. 12.1 17.8
Other liabilities.................................... 3.7 3.6
------ ------
Closed block liabilities......................... $636.5 $639.5
====== ======
</TABLE>
The excess of closed block liabilities over closed block assets represents
estimated future contribution from the closed block, which will be recognized
in the Company's consolidated statements of income and comprehensive income
over the period the underlying policies and contracts remain in force.
6
<PAGE>
Summarized financial results for the closed block were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
--------- --------- -------- --------
(In millions)
<S> <C> <C> <C> <C>
Revenues:
Premiums.......................... $ 13.1 $ 14.4 $ 42.8 $ 30.1
Net investment income............. 10.2 10.2 30.4 20.9
--------- --------- -------- --------
Total revenues.................. 23.3 24.6 73.2 51.0
--------- --------- -------- --------
Benefits and expenses:
Policyholder benefits............. 20.1 20.4 60.4 38.3
Interest paid on policyholder
funds............................ 0.3 0.2 0.8 0.5
Operating expenses................ 0.7 0.2 2.4 1.5
Commissions....................... 0.3 (1.2) 1.2 1.0
Net decrease (increase) in
deferred policy acquisition
costs............................ 1.2 (0.3) 4.8 1.1
--------- --------- -------- --------
Total benefits and expenses..... 22.6 19.3 69.6 42.4
--------- --------- -------- --------
Contribution from closed
block........................ $ 0.7 $ 5.3 $ 3.6 $ 8.6
========= ========= ======== ========
</TABLE>
Financial results presented for the closed block for the nine months ended
September 30, 1999 include results from the completion of the reorganization
on April 21, 1999 through September 30, 1999. Commissions for the third
quarter of 1999 included the reclass of $1.6 million in charges out of the
closed block. This adjustment had no effect on net income for the Company.
If, over the period the closed block remains in existence, the actual
cumulative contribution is greater than expected, only such expected
contribution will be recognized in the Company's consolidated statements of
income and comprehensive income. The excess will be paid to closed block
policyholders as additional policyholder dividends. Alternatively, if the
actual cumulative contribution is less than expected, only such actual
contribution will be recognized in the Company's consolidated statements of
income and comprehensive income. If such circumstances arise, future
policyholder dividends will be changed to increase actual contributions until
the actual cumulative contributions equal expected cumulative contributions.
5. SEGMENTS
Three reportable segments comprise a substantial majority of the Company's
operations: Employee Benefits--Insurance, Retirement Plans and Individual
Insurance. The Employee Benefits--Insurance segment, previously named the
Group Insurance segment, markets long term and short term disability, life,
accidental death and dismemberment, and dental insurance. 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 net investment income not associated
with product segments, other financial service businesses, and adjustments
made in consolidation. Other financial service businesses are generally non-
insurance related and include StanCorp's mortgage lending and real estate
management subsidiaries.
7
<PAGE>
The following table sets forth selected segment information:
<TABLE>
<CAPTION>
Employee
Benefits- Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(In millions)
<S> <C> <C> <C> <C> <C>
Three months ended
September 30, 2000:
Revenues:
Premiums................. $ 248.8 $ 6.4 $ 8.6 $ -- $ 263.8
Net investment income.... 41.5 12.7 20.4 4.5 79.1
Net realized investment
losses.................. (0.1) -- (0.2) (0.7) (1.0)
Contribution from closed
block................... -- -- 0.7 -- 0.7
Other.................... 1.4 -- 0.1 (0.1) 1.4
-------- -------- -------- ------ --------
Total.................. 291.6 19.1 29.6 3.7 344.0
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits.... 203.6 3.7 6.9 -- 214.2
Interest paid on
policyholder funds...... 1.9 8.8 12.5 -- 23.2
Operating expenses....... 41.5 6.4 5.9 2.0 55.8
Commissions.............. 16.3 0.7 2.5 -- 19.5
Net increase in deferred
policy acquisition
costs................... (1.8) -- (2.3) -- (4.1)
-------- -------- -------- ------ --------
Total.................. 261.5 19.6 25.5 2.0 308.6
-------- -------- -------- ------ --------
Income (loss) before income
taxes and extraordinary
item...................... $ 30.1 $ (0.5) $ 4.1 $ 1.7 $ 35.4
======== ======== ======== ====== ========
<CAPTION>
Employee
Benefits- Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(In millions)
<S> <C> <C> <C> <C> <C>
Nine months ended September
30, 2000:
Revenues:
Premiums................. $ 718.5 $ 18.4 $ 22.7 $ -- $ 759.6
Net investment income.... 121.3 38.7 60.2 14.7 234.9
Net realized investment
gains (losses).......... (0.2) -- (0.3) 7.8 7.3
Contribution from closed
block................... -- -- 3.6 -- 3.6
Other.................... 3.3 -- 0.1 (0.1) 3.3
-------- -------- -------- ------ --------
Total.................. 842.9 57.1 86.3 22.4 1,008.7
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits.... 586.8 9.7 16.6 -- 613.1
Interest paid on
policyholder funds...... 5.3 25.5 35.6 -- 66.4
Operating expenses....... 120.7 18.9 16.9 5.4 161.9
Commissions.............. 48.8 2.3 8.1 -- 59.2
Net increase in deferred
policy acquisition
costs................... (3.3) -- (4.3) -- (7.6)
-------- -------- -------- ------ --------
Total.................. 758.3 56.4 72.9 5.4 893.0
-------- -------- -------- ------ --------
Income before income taxes
and extraordinary item.... $ 84.6 $ 0.7 $ 13.4 $ 17.0 $ 115.7
======== ======== ======== ====== ========
Total assets............... $2,430.1 $1,878.8 $1,736.6 $225.9 $6,271.4
======== ======== ======== ====== ========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Employee
Benefits- Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(In millions)
<S> <C> <C> <C> <C> <C>
Three months ended September
30, 1999:
Revenues:
Premiums.................... $ 213.4 $ 4.4 $ 5.8 $ -- $ 223.6
Net investment income....... 37.9 12.7 19.3 3.8 73.7
Net realized investment
gains (losses)............. (0.3) (0.4) -- 0.1 (0.6)
Contribution from closed
block...................... -- -- 5.3 -- 5.3
Other....................... 0.9 -- -- -- 0.9
-------- -------- -------- ------ --------
Total..................... 251.9 16.7 30.4 3.9 302.9
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits....... 177.8 2.9 3.4 -- 184.1
Interest paid on
policyholder funds......... 1.7 8.3 12.0 -- 22.0
Operating expenses.......... 34.7 6.1 6.2 1.1 48.1
Commissions................. 13.4 0.5 4.3 -- 18.2
Net increase (decrease) in
deferred policy acquisition
costs...................... (1.8) -- 0.9 -- (0.9)
-------- -------- -------- ------ --------
Total..................... 225.8 17.8 26.8 1.1 271.5
-------- -------- -------- ------ --------
Income (loss) before income
taxes and extraordinary
item......................... $ 26.1 $ (1.1) $ 3.6 $ 2.8 $ 31.4
======== ======== ======== ====== ========
<CAPTION>
Employee
Benefits- Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(In millions)
<S> <C> <C> <C> <C> <C>
Nine months ended September
30, 1999:
Revenues:
Premiums.................... $ 632.3 $ 13.0 $ 34.8 $ -- $ 680.1
Net investment income....... 112.3 37.9 68.2 9.7 228.1
Net realized investment
gains (losses)............. 0.9 (0.3) 1.6 -- 2.2
Contribution from closed
block...................... -- -- 8.6 -- 8.6
Other....................... 2.6 -- (0.1) -- 2.5
-------- -------- -------- ------ --------
Total..................... 748.1 50.6 113.1 9.7 921.5
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits....... 531.4 8.0 39.7 -- 579.1
Interest paid on
policyholder funds......... 4.8 24.8 35.5 -- 65.1
Operating expenses.......... 100.9 17.0 17.9 2.0 137.8
Commissions................. 40.8 1.5 8.0 -- 50.3
Net increase (decrease) in
deferred policy acquisition
costs...................... (2.4) -- 0.9 -- (1.5)
-------- -------- -------- ------ --------
Total..................... 675.5 51.3 102.0 2.0 830.8
-------- -------- -------- ------ --------
Income (loss) before income
taxes and extraordinary
item......................... $ 72.6 $ (0.7) $ 11.1 $ 7.7 $ 90.7
======== ======== ======== ====== ========
Total assets.................. $2,073.4 $1,425.8 $1,648.2 $497.1 $5,644.5
======== ======== ======== ====== ========
</TABLE>
9
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
The Company has a $100.0 million unsecured line of credit available through
June 30, 2001. The Company is not required to maintain compensating balances,
but pays a commitment fee. The interest rate is based on current market rates.
Under the credit agreement, the Company is subject to customary covenants,
including limitations on indebtedness, minimum retained earnings and minimum
claims paying ability ratings. At September 30, 2000, the Company was in
compliance with all such covenants. At September 30, 2000, $21.1 million was
outstanding on the line of credit.
In the normal course of its business, the Company is involved in various
legal actions and other state and Federal proceedings. A number of these
actions or proceedings were pending as of September 30, 2000. In some
instances, lawsuits include claims for punitive damages and similar types of
relief in unspecified or substantial amounts, in addition to amounts for
alleged contractual liability or other compensatory damages. In the opinion of
management, the ultimate liability, if any, arising from these actions or
proceedings is not expected to have a material adverse effect on the Company's
business, financial position, results of operations, or cash flows.
10
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of
StanCorp Financial Group, Inc.:
We have reviewed the accompanying consolidated balance sheet of StanCorp
Financial Group, Inc. and subsidiaries (the "Company") as of September 30,
2000, and the related consolidated statements of income and comprehensive
income for the three- and nine-month periods ended September 30, 2000 and
1999, the consolidated statement of changes in shareholders' equity for the
nine-month period ended September 30, 2000, and the consolidated statements of
cash flows for the nine-month periods ended September 30, 2000 and 1999. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States of America, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States
of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
StanCorp Financial Group, Inc. and subsidiaries as of December 31, 1999, and
the related consolidated statements of income and comprehensive income,
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 2, 2000 (February 23, 2000 as to
Note 14), we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1999 and the consolidated
statement of shareholders' equity for the year ended December 31, 1999 is
fairly stated, in all material respects, in relation to the consolidated
balance sheet and the consolidated statement of shareholders' equity from
which it has been derived.
DELOITTE & TOUCHE LLP
Portland, Oregon
October 20, 2000
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis of the consolidated financial condition and results
of operations of StanCorp Financial Group, Inc. ("StanCorp") and its
subsidiaries (collectively with StanCorp, the "Company") should be read in
conjunction with the unaudited consolidated financial statements and related
notes thereto.
Forward-looking Statements
The management of the Company has made in this Form 10-Q, and from time to
time may make in its public filings, press releases and oral presentations and
discussions, certain statements including statements regarding anticipated
development and expansion of the Company's business. Such statements may
relate to regulatory actions, the intent, belief, or current expectations of
the Company's management, the future operating performance of the Company and
other statements regarding matters that are not historical facts. These
statements are "forward-looking" statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. Because such statements are
subject to risks and uncertainties, actual results may differ materially from
those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially from those expressed or
implied by such forward-looking statements include, but are not limited to (i)
deterioration in morbidity, mortality, and persistency, (ii) changes in
interest rates or the condition of the national economy, (iii) changes in the
regulatory environment on the state or Federal level, (iv) competition from
other insurers and financial institutions, (v) achievement of sales or other
growth objectives, (vi) achievement of expense management objectives, (vii)
changes in claims paying ability ratings, (viii) adverse findings in
litigation or other legal proceedings, (ix) deterioration in the experience of
the closed block, and (x) on-going risks associated with dependence on
information technology systems.
Reorganization Plan
In December 1997, the board of directors of Standard Insurance Company
("The Standard") authorized management to proceed with the development of a
plan of reorganization to convert from a mutual life insurance company to a
stock life insurance company, a process known as demutualization. Prior to the
reorganization, StanCorp was a wholly owned subsidiary of The Standard and was
formed for the purpose of becoming an insurance holding company upon
completion of The Standard's reorganization. On April 21, 1999, pursuant to an
order by the Director of the Oregon Department of Consumer and Business
Services approving the Plan of Reorganization, dated September 28, 1998, as
amended on December 14, 1998 (the "Plan"), The Standard converted from a
mutual life insurance company to a stock life insurance company and became a
wholly owned subsidiary of StanCorp. Also, on April 21, 1999, StanCorp
completed an initial public offering of 15.2 million shares of its common
stock in addition to 18.7 million shares of common stock distributed to The
Standard's policyholders, pursuant to the Plan, in exchange for their
membership interests in The Standard. The costs incurred and expensed related
to the reorganization for the three and nine months ended September 30, 1999
were $0.9 million and $4.5 million, respectively. There were no reorganization
costs incurred for the nine months ended September 30, 2000 and no further
reorganization costs are anticipated.
On the completion of its reorganization, The Standard established a closed
block for the payment of future benefits, policyholder dividends and certain
expenses and taxes related to certain classes of policies. The Standard
allocated to the closed block an amount of assets expected to produce cash
flows which, together with future revenues from the policies included in the
closed block, will be sufficient to support these policies. Such support
includes payment of claims, certain expenses and taxes and continuation of
policyholder dividend scales in effect for 1998 (the period used to determine
the closed block funding) if the experience underlying such dividend scales
including the portfolio interest rate continues. These assets totaled $601.8
million at September 30, 2000, and are for the benefit of the policies in the
closed block.
The contribution to income before income taxes and extraordinary item from
the closed block is reported as a single line item in the consolidated
statements of income and comprehensive income. Accordingly, all
12
<PAGE>
components of revenues, benefits and expenses for the closed block are shown
as a net amount under the caption "Contribution from closed block". Income tax
expense applicable to the closed block is reflected as a component of total
tax expense. Reporting of the contribution from the closed block as a single
line item results in material reductions in the respective line items in the
consolidated statements of income and comprehensive income while having no
effect on net income. All assets allocated to the closed block are combined
and shown as a separate line item in the consolidated balance sheets under the
caption "Closed block assets". All liabilities attributable to the closed
block are treated similarly and disclosed as a separate line item under the
caption "Closed block liabilities". Management believes that a better
understanding of the business results when closed block amounts are presented
on a combined basis as if the closed block had not been established. Such
presentation does not affect the Company's reported net income. Accordingly,
the combined presentation set forth below includes revenues and expenses
associated with policies included in the closed block:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- --------
(In millions)
<S> <C> <C> <C> <C>
Revenues:
Premiums...................... $ 276.9 $ 238.0 $ 802.4 $ 710.2
Net investment income......... 89.3 83.9 265.3 249.0
Net realized investment gains
(losses)..................... (1.0) (0.6) 7.3 2.2
Other......................... 1.4 0.9 3.3 2.5
--------- --------- --------- --------
Total revenues.............. 366.6 322.2 1,078.3 963.9
--------- --------- --------- --------
Benefits and expenses:
Policyholder benefits......... 257.8 226.7 740.7 683.0
Operating expenses............ 56.5 48.3 164.3 139.3
Commissions................... 19.8 17.0 60.4 51.3
Net increase in deferred
policy acquisition costs..... (2.9) (1.2) (2.8) (0.4)
--------- --------- --------- --------
Total benefits and
expenses................... 331.2 290.8 962.6 873.2
--------- --------- --------- --------
Income before income taxes and
extraordinary item........... $ 35.4 $ 31.4 $ 115.7 $ 90.7
========= ========= ========= ========
</TABLE>
Consolidated Results of Operations
Premiums
Premiums increased $38.9 million, or 16.3%, for the third quarter of 2000
compared to the third quarter of 1999, and $92.2 million, or 13.0%, for the
nine months ended September 30, 2000 compared to the nine months ended
September 30, 1999. The increases were primarily from growth in the Employee
Benefits--Insurance segment. (See "Selected Segment Information".)
Net Investment Income
Net investment income is affected primarily by changes in the overall
interest rate environment and levels of invested assets. Over time, the impact
of acquiring new investments at higher or lower interest rates is offset, in
part, in policyholder benefits expense due to the practice of using current
interest rate assumptions in discounting newly established reserve
liabilities. The interest rates used in discounting reserve liabilities are
held constant once established. Net investment income increased $5.4 million,
or 6.4%, for the third quarter of 2000 compared to the third quarter of 1999.
The increase was due to an increase in average invested assets of 4.9% and an
increase in income from market value increases in the fixed maturities trading
portfolio of $1.5 million.
For the nine months ended September 30, 2000 net investment income
increased $16.3 million, or 6.5%, compared to the same period in 1999. The
increase was due to an increase in average invested assets of 5.9% and an
increase in income from market value increases in the fixed maturities trading
portfolio of $3.5 million.
13
<PAGE>
Net Realized Investment Gains (Losses)
Net realized investment gains or losses occur primarily as a result of
dispositions of the Company's invested assets in the regular course of
investment management. Sales of real estate resulted in net losses of $0.7
million for the third quarter of 2000 compared to net gains of $0.1 million
for the third quarter of 1999. Sales of real estate resulted in net gains of
$7.9 million for the nine months ended September 30, 2000 compared to net
gains of $0.1 million for the same period in 1999. Dispositions of invested
assets and associated gains or losses may or may not continue into the future.
Policyholder Benefits
Policyholder benefits, including interest paid on policyholder funds,
increased $31.1 million, or 13.7%, for the third quarter of 2000 compared to
the third quarter of 1999, and $57.7 million, or 8.4%, for the nine months
ended September 30, 2000 compared to the same period in 1999. The increases
primarily resulted from business growth in the Employee Benefits--Insurance
segment, as evidenced by the growth in premiums for that segment. The increase
was offset in part by improvements in the benefit ratio (policyholder benefits
as a percentage of premiums) for the Employee Benefits--Insurance segment. The
improvements in the benefit ratios for both comparative periods reflect
favorable claims experience. Because benefit ratios are heavily affected by
actual claims experience, improvements in the benefit ratio may or may not
continue in the future. (See "Selected Segment Information".)
Operating Expenses
Operating expenses increased $8.2 million, or 17.0%, for the third quarter
of 2000 compared to the third quarter of 1999, and $25.0 million, or 17.9%,
for the nine months ended September 30, 2000 compared to the same period in
1999. The majority of the increases related to the Employee Benefits--
Insurance segment which had increased operating expenses of $6.8 million and
$19.8 million for the same periods, respectively, primarily due to business
growth as evidenced by premium growth and accelerated expansion activities.
(See "Selected Segment Information".)
Commissions
Commissions generally fluctuate with premiums, however not directly, as new
sales in some business lines tend to have higher commission rates than renewal
sales. Commissions increased $2.8 million, or 16.5%, for the third quarter of
2000 compared to the third quarter of 1999, and increased $9.1 million, or
17.7%, for the nine months ended September 30, 2000 compared to the same
period in 1999. The increases were primarily due to growth in sales for the
Employee Benefits--Insurance segment. (See "Selected Segment Information".)
Net Increase in Deferred Policy Acquisition Costs
Net deferred policy acquisition costs consist of the deferral of certain
selling costs and amortization of related costs previously deferred. The net
expense for deferred policy acquisition costs decreased $1.7 million for the
third quarter of 2000 compared to the third quarter of 1999, and decreased
$2.4 million for the nine months ended September 30, 2000 compared to the same
period in 1999. The changes for both periods resulted primarily from the
deferral of policy acquisition costs related to increased annuity product
sales in the Individual Insurance segment (see "Selected Segment Information,
Individual Insurance Segment").
Income Before Income Taxes and Extraordinary Item
Income before income taxes and extraordinary item increased $4.0 million,
or 12.7%, for the third quarter of 2000 compared to the third quarter of 1999,
and $25.0 million, or 27.6%, for the nine months ended September 30, 2000
compared to the same period in 1999. The increase resulted primarily from
premium growth and favorable claims experience in the Employee Benefits--
Insurance segment.
14
<PAGE>
Income Taxes
Total income taxes differ from the amount computed by applying the Federal
corporate tax rate of 35% because of the net result of permanent differences
and state and local income taxes, net of the Federal benefit. The combined
Federal and state effective tax rate was 32.5% and 33.4% for the third
quarters of 2000 and 1999, respectively. For the nine months ended September
30, 2000 and 1999, the combined effective tax rate was 33.4% and 32.3%,
respectively. The lower effective rates for the third quarter of 2000 and the
nine months ended September 30, 1999 resulted primarily from adjustments
related to the resolution of uncertainties provided for in prior years.
Selected Segment Information
The following table sets forth selected segment information for the periods
indicated:
<TABLE>
<CAPTION>
At or for the
Three Months Nine Months
Ended Ended September
September 30, 30,
-------------- -----------------
2000 1999 2000 1999
------ ------ -------- --------
(In millions)
<S> <C> <C> <C> <C>
Revenues:
Employee Benefits--Insurance segment.. $291.6 $251.9 $ 842.9 $ 748.1
Retirement Plans segment.............. 19.1 16.7 57.1 50.6
Individual Insurance segment.......... 52.2 49.7 155.9 155.5
Other................................. 3.7 3.9 22.4 9.7
------ ------ -------- --------
Total revenues...................... $366.6 $322.2 $1,078.3 $ 963.9
====== ====== ======== ========
Income (loss) before income taxes and
extraordinary item:
Employee Benefits--Insurance segment.. $ 30.1 $ 26.1 $ 84.6 $ 72.6
Retirement Plans segment.............. (0.5) (1.1) 0.7 (0.7)
Individual Insurance segment.......... 4.1 3.6 13.4 11.1
Other................................. 1.7 2.8 17.0 7.7
------ ------ -------- --------
Total income before income taxes and
extraordinary item................. $ 35.4 $ 31.4 $ 115.7 $ 90.7
====== ====== ======== ========
Reserves(1):
Employee Benefits--Insurance segment.. $1,743.4 $1,546.2
Retirement Plans segment.............. 652.3 635.7
Individual Insurance segment.......... 1,557.9 1,569.7
-------- --------
Total reserves...................... $3,953.6 $3,751.6
======== ========
</TABLE>
--------
(1) Reserves consist of future policy benefits and claims and other
policyholder funds included on the Company's consolidated balance sheets.
Employee Benefits--Insurance Segment
The Employee Benefits--Insurance segment, previously named the Group
Insurance segment, markets long and short term disability, life, accidental
death and dismemberment, and dental insurance. As the largest of the Company's
three segments, Employee Benefits--Insurance premiums accounted for 89.5% and
89.0% of the Company's total premiums for the nine months ended September 30,
2000 and 1999, respectively.
Income before income taxes and extraordinary item for this segment
increased $4.0 million, or 15.3%, for the third quarter of 2000 compared to
the third quarter of 1999, and $12.0 million, or 16.5%, for the nine months
15
<PAGE>
ended September 30, 2000 compared to the same period in 1999. The following
table sets forth selected financial data for this segment:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- --------------
2000 1999 2000 1999
------ ------ ------ ------
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Premiums................................. $248.8 $213.4 $718.5 $632.3
Net investment income.................... 41.5 37.9 121.3 112.3
Net realized investment gains (losses)... (0.1) (0.3) (0.2) 0.9
Other.................................... 1.4 0.9 3.3 2.6
------ ------ ------ ------
Total revenues......................... 291.6 251.9 842.9 748.1
------ ------ ------ ------
Benefits and expenses:
Policyholder benefits.................... 205.5 179.5 592.1 536.2
Operating expenses....................... 41.5 34.7 120.7 100.9
Commissions.............................. 16.3 13.4 48.8 40.8
Net increase in deferred policy
acquisition costs....................... (1.8) (1.8) (3.3) (2.4)
------ ------ ------ ------
Total benefits and expenses............ 261.5 225.8 758.3 675.5
------ ------ ------ ------
Income before income taxes and
extraordinary item........................ $ 30.1 $ 26.1 $ 84.6 $ 72.6
====== ====== ====== ======
Benefit ratio (% of premiums).............. 82.6% 84.1% 82.4% 84.8%
Operating expense ratio (% of premiums).... 16.7 16.3 16.8 16.0
</TABLE>
When adjusted to exclude experience rated refunds of almost $3.2 million
and $7.7 million for the third quarters of 2000 and 1999, respectively,
premiums increased $30.9 million, or 13.9%. When adjusted to exclude
experience rated refunds of $15.8 million and $11.5 million for the nine
months ended September 30, 2000 and 1999, respectively, premiums increased
$90.5 million, or 14.1%. Experience rated refunds are a return of premium for
certain large employee benefits insurance contracts with favorable claims
experience and can fluctuate from period to period. The increases in premiums
were primarily the result of the segment's expansion efforts discussed below.
Net investment income increased $3.6 million, or 9.5%, for the third
quarter of 2000 compared to the third quarter of 1999, and $9.0 million, or
8.0%, for the nine months ended September 30, 2000 compared to the same period
in 1999. The increases for both comparative periods were consistent with
consolidated results (see "Consolidated Results of Operations, Net Investment
Income").
Policyholder benefits increased $26.0 million, or 14.5%, for the third
quarter of 2000 compared to the third quarter of 1999 and $55.9 million, or
10.4%, for the nine months ended September 30, 2000 compared to the same
period for 1999. The increase was primarily a result of business growth, as
evidenced by premium growth, offset in part by improvement in the benefit
ratio to 82.6% for the third quarter of 2000 from 84.1% for the third quarter
of 1999. The benefit ratio improved to 82.4% for the nine months ended
September 30, 2000 from 84.8% for the same period in 1999. The improvements in
the benefit ratios for both comparative periods reflect favorable claims
experience. Because the benefit ratio is heavily affected by actual claims
experience, improvements in the benefit ratio may or may not continue in the
future.
Operating expenses increased $6.8 million, or 19.6%, for the third quarter
of 2000 compared to the third quarter of 1999, and increased $19.8 million, or
19.6%, for the nine months ended September 30, 2000 compared to the same
period in 1999. The increase was due in part to business growth, as evidenced
by premium growth, and the acceleration of growth plans for new offices and
sales representatives in the central and eastern regions of the United States.
For three and nine months ended September 30, 2000, approximately $1.3 million
and $1.6 million, respectively, were directly attributable to expansion
efforts, including the development of a life insurance subsidiary in the state
of New York. Additional expenditures for accelerated expansion are estimated
16
<PAGE>
at $1.8 million for the remainder of 2000. Management anticipates additional
premium growth will result from expansion in the state of New York beginning
in 2001.
Commissions increased $2.9 million, or 21.6%, for the third quarter of 2000
over the third quarter of 1999 and $8.0 million, or 19.6%, for the nine months
ended September 30, 2000 compared to the same period in 1999. Increases for
both periods resulted primarily from related premium growth.
Retirement Plans Segment
The Retirement Plans segment offers full service 401(k) and other pension
plan products and services. Losses before income taxes and extraordinary item
for the third quarter of 2000 decreased $0.6 million compared to the third
quarter of 1999, and income increased $1.4 million for the nine months ended
September 30, 2000 compared to the same period in 1999. Management believes
that profitability in this segment depends upon significant increases in
assets under management in future years to achieve economies of scale. Total
assets under management grew 29.2% since September 30, 1999. In addition the
profitability of the retirement plans segment is, in part, dependent on the
maintenance of targeted interest rate spreads on general account assets under
management. The following table sets forth selected financial data for the
Retirement Plans segment for the periods indicated:
<TABLE>
<CAPTION>
At or for the
Nine Months
Three Months Ended September
Ended September 30, 30,
------------------- ------------------
2000 1999 2000 1999
--------- --------- -------- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Premiums....................... $ 6.4 $ 4.4 $ 18.4 $ 13.0
Net investment income.......... 12.7 12.7 38.7 37.9
Net realized investment
losses........................ -- (0.4) -- (0.3)
--------- --------- -------- --------
Total revenues............... 19.1 16.7 57.1 50.6
--------- --------- -------- --------
Benefits and expenses:
Policyholder benefits.......... 12.5 11.2 35.2 32.8
Operating expenses............. 6.4 6.1 18.9 17.0
Commissions.................... 0.7 0.5 2.3 1.5
--------- --------- -------- --------
Total benefits and expenses.. 19.6 17.8 56.4 51.3
--------- --------- -------- --------
Income (loss) before income taxes
and extraordinary item.......... $ (0.5) $ (1.1) $ 0.7 $ (0.7)
========= ========= ======== ========
Annualized operating expense
ratio (% of average assets under
management)..................... 1.4% 1.7%
Assets under management:
General account................ $ 652.3 $ 635.7
Separate accounts.............. 1,185.5 786.9
-------- --------
Total........................ $1,837.8 $1,422.6
======== ========
</TABLE>
This segment's premiums consist primarily of fees for assets under
management in both the general and separate accounts, as well as premiums on
life contingent annuities. Premiums increased $2.0 million, or 45.5%, for the
third quarter of 2000 compared to the third quarter of 1999, and $5.4 million,
or 41.5%, for the nine months ended September 30, 2000 compared to the same
period in 1999. Fees for assets under management represented $1.4 million and
$4.5 million, respectively, of the increases. Continuing growth in new
deposits and very low terminations fueled an almost 20% increase in assets
under management in the separate account since the beginning of 2000 despite a
2.7% decline in the market value of separate account equities for that same
period. General account assets under management have remained relatively
stable at September 30, 2000 compared to September 30, 1999. Premiums on life
contingent annuities accounted for the remaining increases
17
<PAGE>
of $0.6 million and $0.9 million for the comparative three and nine month
periods ended, September 30, 2000 and 1999, respectively. Premiums for life
contingent annuities are heavily offset by the establishment of related
liability balances, and therefore increased benefits to policyholder,
discussed below.
Net investment income, which includes the return on general account assets
under management, has remained stable at $12.7 million for the third quarters
of 2000 and 1999, and increased $0.8 million, or 2.1%, for the nine months
ended September 30, 2000 compared to the same period in 1999.
Policyholder benefits include interest credited to policyholders for assets
under management in the general account and claim payments and reserve
adjustments for life contingent annuity products. Policyholder benefits
increased $1.3 million, or 11.6%, for the third quarter of 2000 compared to
the third quarter of 1999, and increased $2.4 million, or 7.3%, for the nine
months ended September 30, 2000 compared to the same period in 1999.
Consistent with general account assets under management, interest credited to
policyholders remained relatively stable for the comparative periods.
Policyholder benefits for life contingent annuity products increased $0.8
million and $1.7 million, respectively, for the three and nine month periods
ended September 30, 2000 and 1999, which is consistent with the increase in
premiums for this segment.
Operating expenses increased $0.3 million, or 4.9%, for the third quarter
of 2000 compared to the third quarter of 1999, and $1.9 million, or 11.2%, for
the nine months ended September 30, 2000 compared to the same period in 1999.
Expenses are expected to increase during the remainder of the year due to on-
going growth in field operations. Annualized operating expenses as a
percentage of average assets under management declined to 1.4% for the nine
months ended September 30, 2000 from 1.7% for the same period in 1999.
Individual Insurance Segment
Income before income taxes and extraordinary item for this segment
increased $0.5 million, or 13.9%, for the third quarter of 2000 compared to
the third quarter of 1999, and increased $2.3 million, or 20.7%, for the nine
months ended September 30, 2000 compared to the same period in 1999. The
following table sets forth selected financial data for the Individual
Insurance segment for the periods indicated:
<TABLE>
<CAPTION>
At or for the
Nine Months
Three Months Ended September
Ended September 30, 30,
------------------- ------------------
2000 1999 2000 1999
--------- --------- -------- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Premiums....................... $ 21.7 $ 20.2 $ 65.5 $ 64.9
Net investment income.......... 30.6 29.5 90.6 89.1
Net realized investment gains
(losses)...................... (0.2) -- (0.3) 1.6
Other.......................... 0.1 -- 0.1 (0.1)
--------- --------- -------- --------
Total revenues............... 52.2 49.7 155.9 155.5
--------- --------- -------- --------
Benefits and expenses:
Policyholder benefits.......... 39.8 36.0 113.4 114.0
Operating expenses............. 6.6 6.4 19.3 19.4
Commissions.................... 2.8 3.1 9.3 9.0
Net (increase) decrease in
deferred policy acquisition
costs......................... (1.1) 0.6 0.5 2.0
--------- --------- -------- --------
Total benefits and expenses.. 48.1 46.1 142.5 144.4
--------- --------- -------- --------
Income before income taxes and
extraordinary item.............. $ 4.1 $ 3.6 $ 13.4 $ 11.1
========= ========= ======== ========
Operating expense ratio (% of
premiums)....................... 30.2% 31.3% 29.5% 29.9%
Life insurance in force.......... $7,302.7 $7,772.0
</TABLE>
18
<PAGE>
Management believes the market for the fixed life products offered by The
Standard's Individual Insurance segment has matured and provides limited
growth opportunities. However, management believes potential growth
opportunities exist in other products within this segment. Premiums increased
$1.5 million, or 7.4%, for the third quarter of 2000 compared to the third
quarter of 1999, and increased $0.6 million, or 0.9%, for the nine months
ended September 30, 2000 compared to the same period in 1999. Policyholder
benefits increased $3.8 million, or 10.6%, for the third quarter of 2000
compared to the third quarter of 1999, and decreased $0.6 million, or 0.5%,
for the nine months ended September 30, 2000 compared to the same period in
1999.
Operating expenses increased $0.2 million, or 3.1%, for the third quarter
of 2000 compared to the third quarter of 1999, and decreased $0.1 million, or
0.5%, for the nine months ended September 30, 2000 compared to the same period
in 1999.
Net expense related to deferred acquisition costs decreased $1.7 million
and $1.5 million, respectively, for the comparative third quarters of 2000 and
1999 and the comparative nine months ended September 30, 2000 and 1999. Both
decreases were primarily the result of the deferral of policy acquisition
costs related to increased annuity product sales.
Other
Other businesses primarily include return on capital not allocated to the
business segments, income from StanCorp Mortgage Investors, LLC and net
realized investment gains and losses related to real estate investments owned
by The Standard. Income before income taxes and extraordinary item for other
businesses was $1.7 million and $2.8 million, respectively, for the third
quarters of 2000 and 1999, and $17.0 million and $7.7 million, respectively,
for the nine months ended September 30, 2000 and 1999. Sales of real estate
resulted in net losses of $0.7 million for the third quarter of 2000 compared
to net gains of $0.1 million for the third quarter of 1999. Sales of real
estate resulted in net gains of $7.9 million for the nine months ended
September 30, 2000 compared to net gains of $0.1 million for the same period
in 1999. Disposition of invested assets and associated gains and losses may or
may not continue into the future.
Liquidity and Capital Resources
Operating Cash Flows
Operating cash inflows consist primarily of premiums, annuity deposits and
net investment income. Operating cash outflows consist primarily of benefits
to policyholders and beneficiaries, operating expenses, commissions and taxes.
Investing Cash Flows
Investing cash inflows consist primarily of the proceeds from sales or
maturities of investments. Investing cash outflows consist primarily of
payments for investments acquired. Since future benefit payments are
principally intermediate- and long-term obligations, the Company's investments
are predominantly intermediate-and long-term fixed-rate instruments, such as
fixed maturity securities and mortgage loans. Such investments are expected to
provide sufficient cash flow to cover the future benefit payment obligations.
The nature and quality of various types of investments purchased by The
Standard must comply with statutes and regulations imposed by Oregon and other
states in which The Standard is licensed. The Company does not currently 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, the Company commits to fund mortgage loans generally up to 90
days in advance.
The market values of the Company's investments vary with changing economic
and market conditions and interest rates. The Company is subject to the risk
of default on principal and interest payments by the issuers of the fixed
maturity securities it owns. Although almost all of the fixed maturity
securities are investment-grade and the Company believes it maintains prudent
issuer diversification, a major economic downturn could result in issuer
defaults. Since fixed maturity securities, including those maintained within
the closed block, represent 50.1% of the Company's total general account
invested assets at September 30, 2000, such defaults could materially
adversely affect the Company's business, financial position, results of
operations, or cash flows.
19
<PAGE>
At September 30, 2000, mortgage loans, including those maintained within
the closed block, represented 44.4% of the total general account invested
assets and were collateralized by properties located in the Central region
representing 22.0% of the portfolio, the Eastern region representing 12.9%,
and the Western region representing 65.1%. Of the total mortgage loan
portfolio, 41.0% of the collateralized properties were located in the state of
California. The Company generally does not require earthquake insurance for
properties on which it makes mortgage loans. The most significant types of
collateralized properties in the mortgage loan portfolio include retail
properties, representing 48.4% of the portfolio, industrial properties,
representing 26.1%, and office properties, representing 18.3%. The remaining
7.2% of properties in the portfolio include commercial, apartment,
residential, and agricultural properties. The Company's mortgage loans face
both delinquency and default risk. The delinquency and loss performance of The
Standard's mortgage loan portfolio have consistently outperformed the industry
averages, as reported by the American Council of Life Insurance, by wide
margins. At September 30, 2000, there were no loans delinquent or in process
of foreclosure. The performance of the Company's mortgage loan portfolio,
however, may fluctuate in the future. Should the delinquency rate of the
Company's mortgage loan portfolio increase, the increase could have a material
adverse effect on the Company's business, financial position, results of
operations, or cash flows.
It is management's objective to generally align the cash flow
characteristics of assets and liabilities to ensure that the Company's
financial obligations can be met under a wide variety of economic conditions.
In meeting these objectives, management may choose to liquidate certain
investments and reinvest in alternate investments to better match the cash
flow characteristics of assets to currently existing liabilities. Most of The
Standard's policy liabilities result from long term disability reserves that
have proven to be very stable over time, participating individual life
insurance products and other life insurance and annuity products on which
interest rates can be adjusted periodically, and products associated with the
separate accounts. Policyholders or claimants may not withdraw from The
Standard's large block of disability reserves. Instead, claim payments are
issued monthly over periods that may extend for many years. This holding of
stable long-term reserves makes it possible for The Standard to allocate a
greater portion of its assets to long-term commercial mortgage loans, a
benefit many other insurance companies do not experience.
Annual cash flow scenario testing is used to assess interest rate risk and
to permit The Standard's investment policy to be modified whenever necessary
to address changing economic environments. The Company 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
liabilities are generated under various interest rate scenarios. These
actuarial models include those used to support the statutory Statement of
Actuarial Opinion required annually by insurance regulators. According to
presently accepted actuarial standards of practice, The Standard's reserves
and related items at December 31, 1999 made adequate provision for the
anticipated cash flows required to meet The Standard's contractual obligations
and related expenses. There have been no material changes since that time in
interest rate risks faced by the Company.
At September 30, 2000, the Company had outstanding commitments to fund or
acquire various assets totaling $86.0 million. Such commitments were
principally mortgage loans with interest rates ranging from 6.8% to 9.5%. The
Company's capital expenditures are estimated to be $8.1 million for 2000.
Financing Cash Flows
Financing cash flows consist primarily of policyholder fund deposits and
withdrawals, borrowings and repayments on lines of credit, issuance and
repurchase of common stock, and dividends paid on common stock.
The Company has a $100.0 million unsecured line of credit available through
June 30, 2001. The Company is not required to maintain compensating balances,
but pays a commitment fee. The interest rate is based on current market rates.
Under the credit agreement, the Company is subject to customary covenants,
including limitations on indebtedness, minimum retained earnings and minimum
claims paying ability ratings. At September 30, 2000, the Company was in
compliance with all such covenants. At September 30, 2000, $21.1 million was
outstanding on the line of credit.
20
<PAGE>
There were no shares of common stock repurchased during the third quarter
of 2000. Total shares repurchased during the nine months ended September 30,
2000 were 1.0 million at a total cost of $24.5 million. At September 30, 2000,
1.0 million shares continue to be available under the remaining repurchase
program authorized by StanCorp's board of directors. Execution of the share
repurchase program will be based upon management's assessment of market
conditions for its common stock and other potential growth opportunities. All
repurchases are to be effected in the open market or in negotiated
transactions in compliance with safeharbor provisions of Rule 10b-18 under
regulations of the Securities Exchange Act of 1934.
StanCorp's ability to pay dividends to its shareholders and meet its
obligations substantially depends upon the receipt of dividends from The
Standard. The Standard's ability to pay dividends to StanCorp is regulated
under Oregon law. Under Oregon law, The Standard may pay dividends only from
the earned surplus arising from its business. It also must receive the prior
approval of the Director of the Oregon Department of Consumer and Business
Services (the "Department") to pay a dividend, if such dividend would exceed
certain statutory limitations. The current statutory limitation is the greater
of (a) 10% of The Standard's combined capital and surplus as of December 31st
of the preceding year or (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 31st last preceding. In each
case the limitation must be determined under statutory accounting practices.
Oregon law gives the Department broad discretion to disapprove requests for
dividends in excess of these limits. Based on its statutory results, The
Standard paid dividends totaling $50.6 million to StanCorp during the nine
months ended September 30, 2000, and would be permitted to pay an additional
$65.1 million in dividends to StanCorp in 2000 without obtaining the
Department'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 $4.5 million and $4.6 million for the nine months ended September
30, 2000 and 1999, respectively.
Risk-Based Capital
The National Association of Insurance Commissioners 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, 1999, The Standard's RBC level was significantly in excess of
that which would require corrective action by The Standard or regulatory
agencies.
Insolvency Assessments
Insolvency regulations exist in many of the jurisdictions in which The
Standard is doing business. Such regulations may require life insurance
companies within the jurisdiction to participate in guaranty associations.
These associations levy assessments against their members for the purpose of
paying benefits due to policyholders of impaired or insolvent life insurance
companies. Association assessments levied against The Standard from January 1,
1998 through September 30, 2000 aggregated $1.0 million. At September 30,
2000, The Standard maintained a reserve of $1.1 million for future assessments
in respect of currently impaired, insolvent or failed insurers.
Dependence on Information Technology Systems
The Company is dependent on information technology systems to support its
ability to conduct business. All of these systems are vulnerable to
reliability issues, integration and compatibility concerns, and security-
threatening intrusions. The Company has not yet been subject to a denial of
service or serious interruption from a viral internet incident.
21
<PAGE>
Management believes that its information technology and systems are
adequate to meet the requirements of its business and operations. It continues
to make significant investments of capital for infrastructure, system
development and maintenance, system security and staffing, and staff
development. However, there can be no assurance that future incidents, whether
of an external, malicious nature, or arising from the functioning and
relationships among the Company's information systems, will not result in a
disruption of operations or material adverse effect on the Company's business,
financial position, results of operations, or cash flows.
Litigation
In the normal course of its business, the Company is involved in various
legal actions and other state and Federal proceedings. A number of these
actions or proceedings were pending as of September 30, 2000. In some
instances, lawsuits include claims for punitive damages and similar types of
relief in unspecified or substantial amounts, in addition to amounts for
alleged contractual liability or other compensatory damages. In the opinion of
management, the ultimate liability, if any, arising from these actions or
proceedings is not expected to have a material adverse effect on the Company's
business, financial position, results of operations, or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Investing Cash Flows".
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3: DEFAULTS UPON SENIOR DEBT
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
<TABLE>
<C> <S>
10.7 Standard Insurance Company Home Office Employees' Deferred
Compensation Plan Restatement 2000
15 Letter re: Unaudited interim financial statements
27 Financial Data Schedule
</TABLE>
(b) No reports on Form 8-K were filed during the third quarter of 2000.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 3, 2000 /s/ Eric E. Parsons
By:
----------------------------------
Eric E. Parsons
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: November 3, 2000 /s/ Cindy J. McPike
By:
----------------------------------
Cindy J. McPike
Assistant Vice President
Controller and Treasurer
(Principal Accounting Officer)
24
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
Method of
Number Name Filing
------ ---- --------------
<C> <S> <C>
10.7 Standard Insurance Company Home Office Employees' Filed herewith
Deferred Compensation Plan Restatement 2000
15 Letter re: Unaudited interim financial statements Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
