<PAGE>
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- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
----------------
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 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)
(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 May 10, 2000 there were 31,726,379 shares of the Registrant's common
stock, no par value, outstanding.
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Income and Comprehensive
Income for the three months ended March 31, 2000 and 1999 ...... 1
Unaudited Consolidated Balance Sheets at March 31, 2000 and
December 31, 1999............................................... 2
Unaudited Consolidated Statements of Changes in Shareholders'
Equity for the three months ended March 31, 2000 and 1999 ...... 3
Unaudited Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 ........................... 4
Notes to Unaudited Consolidated Financial Statements............. 5
Independent Accountants' Report.................................. 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .......................................... 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................ 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................ 21
ITEM 3. DEFAULTS UPON SENIOR DEBT........................................ 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 21
ITEM 5. OTHER INFORMATION................................................ 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................. 21
SIGNATURES................................................................ 22
</TABLE>
i
<PAGE>
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(In millions--except share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Premiums........................................... $ 243.8 $ 238.6
Net investment income.............................. 78.2 80.4
Net realized investment gains...................... 6.2 1.1
Contribution from closed block..................... 2.2 --
Other.............................................. 0.7 0.8
----------- -----------
Total............................................ 331.1 320.9
----------- -----------
Benefits and expenses:
Policyholder benefits.............................. 198.9 206.6
Interest paid on policyholder funds................ 21.4 21.3
Operating expenses................................. 52.2 44.6
Commissions........................................ 18.4 16.3
Net increase in deferred policy acquisition costs.. (0.6) (0.1)
----------- -----------
Total............................................ 290.3 288.7
----------- -----------
Income before income taxes and extraordinary item.... 40.8 32.2
Income taxes......................................... 13.7 11.0
----------- -----------
Income before extraordinary item..................... 27.1 21.2
Extraordinary item, net of tax....................... -- 2.3
----------- -----------
Net income........................................... 27.1 18.9
----------- -----------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities available-
for-sale.......................................... 2.0 (31.1)
Adjustment for realized losses..................... (0.4) (2.0)
----------- -----------
Total............................................ 1.6 (33.1)
----------- -----------
Comprehensive income (loss).......................... $ 28.7 $ (14.2)
=========== ===========
Net income per share:
Basic.............................................. $ 0.83
Diluted ........................................... 0.83
Weighted-average shares outstanding:
Basic.............................................. 32,443,768
Diluted ........................................... 32,631,716
</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>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Investments:
Investment securities................................. $2,053.3 $2,064.7
Mortgage loans........................................ 1,823.6 1,779.1
Real estate, net...................................... 95.9 98.5
Policy loans.......................................... 20.7 20.5
-------- --------
Total investments................................... 3,993.5 3,962.8
Cash and cash equivalents............................... 57.1 38.9
Deferred policy acquisition costs....................... 54.7 54.2
Premiums and other receivables.......................... 75.6 75.3
Accrued investment income............................... 53.2 53.3
Property and equipment, net............................. 69.0 69.0
Other assets ........................................... 11.5 11.5
Separate account assets................................. 1,151.8 992.3
Closed block assets..................................... 610.0 599.8
-------- --------
Total............................................... $6,076.4 $5,857.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits and claims..................... $1,723.0 $1,683.4
Other policyholder funds.............................. 1,509.0 1,538.6
Deferred tax liabilities.............................. 88.2 66.5
Other liabilities..................................... 120.4 96.9
Separate account liabilities.......................... 1,151.8 992.3
Closed block liabilities.............................. 641.5 639.5
-------- --------
Total liabilities................................... 5,233.9 5,017.2
-------- --------
Commitments and contingencies
Shareholders' Equity:
Preferred stock, 100,000,000 shares authorized; none
issued or outstanding................................ -- --
Common stock, no par, 300,000,000 shares authorized;
31,898,932 shares issued and 31,726,228 shares
outstanding.......................................... 795.6 819.7
Accumulated other comprehensive loss.................. (36.0) (37.6)
Retained earnings..................................... 82.9 57.8
-------- --------
Total shareholders' equity.......................... 842.5 839.9
-------- --------
Total............................................... $6,076.4 $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
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(In millions--except share data)
<TABLE>
<CAPTION>
Common Stock
------------------
Accumulated
Other Total
Comprehensive Retained Shareholders'
Shares Amount Income (Loss) Earnings Equity
---------- ------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
2000................... 32,706,394 $819.7 $(37.6) $ 57.8 $839.9
Net income.............. -- -- -- 27.1 27.1
Other comprehensive
income, net of tax..... -- -- 1.6 -- 1.6
Common stock:
Repurchased........... (981,700) (24.5) -- -- (24.5)
Granted to directors.. 1,534 0.1 -- -- 0.1
Restricted grant...... -- 0.3 -- -- 0.3
Dividends declared on
common stock........... -- -- -- (2.0) (2.0)
---------- ------ ------ ------ ------
Balance, March 31,
2000................... 31,726,228 $795.6 $(36.0) $ 82.9 $842.5
========== ====== ====== ====== ======
Balance, January 1,
1999................... -- -- $ 74.2 $765.1 $839.3
Net income.............. -- -- -- 18.9 18.9
Other comprehensive
loss, net of tax....... -- -- (33.1) -- (33.1)
---------- ------ ------ ------ ------
Balance, March 31,
1999................... -- -- $ 41.1 $784.0 $825.1
========== ====== ====== ====== ======
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating:
Net income............................................. $ 27.1 $ 18.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized investment gains........................ (6.1) (1.1)
Depreciation and amortization........................ 8.2 9.9
Deferral of policy acquisition costs................. (7.4) (5.4)
Deferred income taxes................................ 22.7 4.4
Changes in other assets and liabilities:
Trading securities.................................. (4.2) (7.2)
Receivables and accrued income...................... (0.2) (4.3)
Future policy benefits and claims................... 39.6 84.0
Closed block, net................................... (8.2) --
Other, net.......................................... 14.2 14.1
--------- ---------
Net cash provided by operating activities.......... 85.7 113.3
--------- ---------
Investing:
Proceeds of investments sold, matured, or repaid:
Fixed maturity securities--available-for-sale........ 46.9 103.6
Mortgage loans....................................... 62.8 89.4
Real estate.......................................... 8.3 0.7
Other investments.................................... 10.2 --
Costs of investments acquired:
Fixed maturity securities--available-for-sale........ (39.4) (193.1)
Mortgage loans....................................... (107.3) (123.0)
Real estate.......................................... (0.4) --
Other investments.................................... (0.2) --
Property and equipment, net............................ -- (1.2)
--------- ---------
Net cash used in investing activities.............. (19.1) (123.6)
--------- ---------
Financing:
Policyholder fund deposits............................. 161.1 118.9
Policyholder fund withdrawals.......................... (190.7) (144.0)
Borrowings on line of credit........................... 26.0 --
Repayments on line of credit........................... (18.7) --
Issuance of common stock............................... 0.4 --
Repurchase of common stock............................. (24.5) --
Dividends paid on common stock......................... (2.0) --
--------- ---------
Net cash used in financing activities.............. (48.4) (25.1)
--------- ---------
Increase (decrease) in cash and cash equivalents......... 18.2 (35.4)
Cash and cash equivalents, beginning of period........... 38.9 60.4
--------- ---------
Cash and cash equivalents, end of period................. $ 57.1 $ 25.0
========= =========
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest............................................. $ 21.7 $ 21.6
Income taxes......................................... (3.8) (13.6)
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
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. The Standard is licensed
only for reinsurance in New York.
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.
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of StanCorp and
its subsidiaries have been prepared in accordance with generally accepted
accounting principles ("GAAP") for interim financial information and in
conformance with the requirements of Form 10-Q. Accordingly, they do not
include all of the information and disclosures required by GAAP for complete
financial statements. The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the financial statement date, and the reported
amounts of revenue and expenses during the period. Actual results may differ
from those estimates. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting of
normal recurring accruals, considered necessary for a fair presentation of the
Company's financial condition at March 31, 2000 and December 31, 1999 and the
results of operations and cash flows for the three months ended March 31, 2000
and 1999. Interim results for the three month period ended March 31, 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. Certain prior period amounts have been
reclassified to conform to the current period's presentation.
2. 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
5
<PAGE>
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". Such presentation does not affect the
Company's reported net income.
Summarized financial information of the closed block at March 31, 2000 and
December 31, 1999 were as follows (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
ASSETS
------
<S> <C> <C>
Investments:
Investment securities............................. $233.6 $220.3
Mortgage loans.................................... 148.8 147.1
Policy loans...................................... 90.4 90.3
Collateral loans.................................. 67.2 68.1
------ ------
Total investments............................... 540.0 525.8
Cash and cash equivalents........................... 1.7 1.8
Deferred policy acquisition costs................... 63.4 66.0
Premiums and other receivables...................... 2.1 3.3
Accrued investment income........................... 2.8 2.9
------ ------
Closed block assets............................. $610.0 $599.8
====== ======
<CAPTION>
LIABILITIES
-----------
<S> <C> <C>
Future policy benefits and claims................... $586.9 $585.0
Other policyholder funds............................ 33.2 33.1
Deferred tax liabilities............................ 12.4 17.8
Other liabilities................................... 9.0 3.6
------ ------
Closed block liabilities........................ $641.5 $639.5
====== ======
</TABLE>
Summarized financial results for the closed block for the three months ended
March 31, 2000 were as follows (in millions):
<TABLE>
<S> <C>
Revenues:
Premiums.......................................................... $15.0
Net investment income............................................. 9.8
-----
Total revenues.................................................. 24.8
-----
Benefits and expenses:
Policyholder benefits............................................. 18.5
Interest paid on policyholder funds............................... 0.3
Operating expenses................................................ 0.6
Commissions....................................................... 0.6
Net decrease in deferred policy acquisition costs................. 2.6
-----
Total benefits and expenses..................................... 22.6
-----
Contribution from closed block................................ $ 2.2
=====
</TABLE>
The excess of closed block liabilities over closed block assets at March 31,
2000 represented estimated future contribution from the closed block, which
will be recognized in the Company's consolidated statements
6
<PAGE>
of income and comprehensive income over the period the underlying policies and
contracts remain in force.
If, over the period the closed block remains in existence, the actual
cumulative contribution is greater than 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.
3. SEGMENTS
Three reportable segments comprise a substantial majority of the Company's
operations: Group Insurance, Retirement Plans and Individual Insurance. The
Group Insurance segment markets long term and short term disability insurance,
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.
The following table sets forth selected segment information:
<TABLE>
<CAPTION>
Group Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(In millions)
<S> <C> <C> <C> <C> <C>
Three months ended March 31,
2000:
Revenues:
Premiums.................... $ 230.9 $ 6.2 $ 6.7 $ -- $ 243.8
Net investment income....... 40.4 13.0 20.0 4.8 78.2
Net realized investment
gains (losses)............. (0.5) (0.1) 0.4 6.4 6.2
Contribution from closed
block...................... -- -- 2.2 -- 2.2
Other....................... 0.7 -- -- -- 0.7
-------- ------- ------- ------ --------
Total..................... 271.5 19.1 29.3 11.2 331.1
-------- ------- ------- ------ --------
Benefits and expenses:
Policyholder benefits....... 190.3 3.4 5.2 -- 198.9
Interest paid on
policyholder funds......... 1.6 8.3 11.5 -- 21.4
Operating expenses.......... 38.2 6.4 5.7 1.9 52.2
Commissions................. 15.7 0.8 1.9 -- 18.4
Net increase in deferred
policy acquisition costs... (0.2) -- (0.4) -- (0.6)
-------- ------- ------- ------ --------
Total..................... 245.6 18.9 23.9 1.9 290.3
-------- ------- ------- ------ --------
Income before income taxes and
extraordinary item........... $ 25.9 $ 0.2 $ 5.4 $ 9.3 $ 40.8
======== ======= ======= ====== ========
Total assets.................. $2,178.6 $1839.4 $1753.5 $304.9 $6,076.4
======== ======= ======= ====== ========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Group Retirement Individual
Insurance Plans Insurance Other Total
--------- ---------- ---------- ------ --------
(In millions)
<S> <C> <C> <C> <C> <C>
Three months ended March 31,
1999:
Revenues:
Premiums.................... $ 211.4 $ 4.8 $ 22.4 $ -- $ 238.6
Net investment income....... 36.0 12.3 29.7 2.4 80.4
Net realized investment
gains...................... 0.5 0.2 0.4 -- 1.1
Other....................... 0.8 -- -- -- 0.8
-------- -------- -------- ------ --------
Total..................... 248.7 17.3 52.5 2.4 320.9
-------- -------- -------- ------ --------
Benefits and expenses:
Policyholder benefits....... 177.2 2.2 27.2 -- 206.6
Interest paid on
policyholder funds......... 1.4 8.3 11.6 -- 21.3
Operating expenses.......... 32.1 5.6 6.5 0.4 44.6
Commissions................. 13.1 0.5 2.7 -- 16.3
Net (increase) decrease in
deferred policy acquisition
costs...................... (0.3) -- 0.2 -- (0.1)
-------- -------- -------- ------ --------
Total..................... 223.5 16.6 48.2 0.4 288.7
-------- -------- -------- ------ --------
Income before income taxes and
extraordinary item........... $ 25.2 $ 0.7 $ 4.3 $ 2.0 $ 32.2
======== ======== ======== ====== ========
Total assets.................. $2,085.5 $1,360.3 $1,594.5 $306.5 $5,346.8
======== ======== ======== ====== ========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company has available lines of credit totaling $110.0 million, including
a $100.0 million unsecured revolving line of credit. The Company is not
required to maintain compensating balances, but pays a commitment fee. The
interest rates are based on current market rates. Under the credit agreements,
the Company is subject to customary covenants, including limitations on
indebtedness, minimum retained earnings and minimum claims paying ability
ratings. On March 31, 2000, the Company was in compliance with all such
covenants. The amount outstanding on the lines of credit at March 31, 2000 was
$7.3 million. These lines will expire in 2000 and are expected to be renewed.
In the normal course of its business, the Company is involved in various
legal actions and other state and Federal proceedings. A number of these
actions or proceedings were pending at March 31, 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 condition or results of operations.
8
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
StanCorp Financial Group, Inc.:
We have reviewed the accompanying consolidated balance sheet of StanCorp
Financial Group, Inc. and subsidiaries (the "Company") as of March 31, 2000,
and the related consolidated statements of income and comprehensive income,
changes in shareholders' equity and cash flows for the three-month periods
ended March 31, 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, comprehensive income and
equity, and of 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 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
DELOITTE & TOUCHE LLP
Portland, Oregon
April 24, 2000
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis of the consolidated financial condition and results
of operations of StanCorp Financial Group, Inc. ("StanCorp") and its
subsidiaries (collectively with StanCorp, the "Company") should be read in
conjunction with the 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 in oral presentations
and discussions, certain statements including statements regarding anticipated
development and expansion of the Company's business. Such statements may
include the effects of regulatory actions, the intent, belief, or current
expectations of the Company's management, the future operating performance of
the Company and other statements regarding matters that are not historical
facts. These statements are "forward-looking" statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. Because such
statements are subject to risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements include, but are not
limited to (i) deterioration in morbidity, mortality, and persistency, (ii)
changes in interest rates or the condition of the national economy, (iii)
changes in the regulatory environment on the state or Federal level, (iv)
competition from other insurers and financial institutions, (v) achievement of
growth in new products, (vi) achievement of operating 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, Standard Insurance Company's ("The Standard") board of
directors authorized management to proceed with the development of a plan of
reorganization to convert from a mutual life insurance company to a stock life
insurance company, 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 policyholders, pursuant to the Plan, in exchange for their membership
interests in The Standard. The costs incurred and expensed in the first
quarter of 1999 related to the reorganization were $2.3 million. There were no
reorganization costs incurred in the first quarter of 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 $610.0
million at March 31, 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 components of
revenues, benefits and expenses for the closed block are shown as a net amount
under the caption
10
<PAGE>
"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 for the three months ended March 31.
<TABLE>
<CAPTION>
2000 1999
------ ------
(In millions)
<S> <C> <C>
Revenues:
Premiums.................................................. $258.8 $238.6
Net investment income..................................... 88.0 80.4
Net realized investment gains............................. 6.2 1.1
Other..................................................... 0.7 0.8
------ ------
Total revenues.......................................... 353.7 320.9
------ ------
Benefits and expenses:
Policyholder benefits..................................... 239.1 227.9
Operating expenses........................................ 52.8 44.6
Commissions............................................... 19.0 16.3
Net decrease (increase) in deferred policy acquisition
costs.................................................... 2.0 (0.1)
------ ------
Total benefits and expenses............................. 312.9 288.7
------ ------
Income before income taxes and extraordinary item ........ $ 40.8 $ 32.2
====== ======
</TABLE>
Consolidated Results of Operations
Premiums
Premiums, adjusted to exclude experience rated refunds, increased $24.4
million, or 10.2%, in the first quarter of 2000 compared to the first quarter
of 1999, primarily from growth in group insurance premiums of $23.7 million.
Experience rated refunds (which are a return of premium for certain large
group insurance contracts with favorable claims experience) were $4.5 million
and $0.3 million for the three months ended March 31, 2000 and 1999,
respectively. (See "--Selected Segment Information".)
Net Investment Income
Net investment income increased $7.6 million, or 9.5%, in the first quarter
of 2000 compared to the first quarter of 1999. The increase was the result of
an increase in average invested assets of 6.4% to $4.51 billion for the first
quarter of 2000, from $4.24 billion for the first quarter of 1999. Also
contributing to this growth was income from market value increases in the
fixed maturities trading portfolio of $2.1 million in the first quarter of
2000. There was no income from the market value increases in the fixed
maturities trading portfolio in the first quarter of 1999.
Net Realized Investment Gains
Net realized gains and losses occur primarily as a result of dispositions of
the Company's invested assets in the regular course of investment management.
In the first quarter of 2000, the sale of real estate holdings contributed net
realized investment gains of $6.3 million. There were no gains or losses from
the sale of real estate holdings in the first quarter of 1999. Dispositions of
invested assets and associated gains or losses may or may not continue into
the future.
11
<PAGE>
Policyholder Benefits
Policyholder benefits, including interest paid on policyholder funds,
increased $11.2 million, or 4.9%, in the first quarter of 2000 compared to the
first quarter of 1999. The increase primarily resulted from business growth in
the group insurance segment, as evidenced by the growth in group insurance
premiums. The increase was offset in part by improvements in the group
insurance benefit ratio. 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 18.4%, in the first quarter of
2000 compared to the first quarter of 1999. The increase in operating expenses
related primarily to investment in growth in business, as evidenced by premium
growth, including expansion of the Company's distribution systems through the
addition of new field offices in the Group and Retirement Plans segments. (See
"--Selected Segment Information".)
Commissions
Commissions increased $2.7 million, or 16.6%, in the first quarter of 2000
compared to the first quarter of 1999 primarily due to growth in sales for the
Group insurance segment. Commissions generally fluctuate with premiums,
however commissions on new sales tend to be at higher rates than for renewals.
Net Decrease (Increase) in Deferred Policy Acquisition Costs
The net expense for deferred policy acquisition costs increased $2.1 million
in the first quarter of 2000 compared to the first quarter of 1999. The
increase resulted primarily from declines in new sales and a slight decrease
in persistency for the Individual Insurance segment. (See "--Selected Segment
Information--Individual Insurance Segment".)
Income Taxes
The effective tax rate for March 31, 2000 was 33.6% compared to 34.2% for
the same period in 1999. Total income taxes, substantially all of which are
Federal, 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.
Income Before Extraordinary Item
Income before extraordinary item increased $5.9 million, or 27.8%, in the
first quarter of 2000 compared to the first quarter of 1999. The increase
resulted primarily from increased net realized investment gains of
$5.1 million for the same periods.
12
<PAGE>
Selected Segment Information
The following table sets forth selected segment information for the periods
indicated:
<TABLE>
<CAPTION>
At or for the
Three Months
Ended March 31,
-----------------
2000 1999
-------- --------
(In millions)
<S> <C> <C>
Revenues:
Group Insurance segment................................ $ 271.5 $ 248.7
Retirement Plans segment............................... 19.1 17.3
Individual Insurance segment........................... 51.9 52.5
Other.................................................. 11.2 2.4
-------- --------
Total revenues....................................... $ 353.7 $ 320.9
======== ========
Income before income taxes and extraordinary item:
Group Insurance segment................................ $ 25.9 $ 25.2
Retirement Plans segment............................... 0.2 0.7
Individual Insurance segment........................... 5.4 4.3
Other.................................................. 9.3 2.0
-------- --------
Total income before income taxes and extraordinary
item................................................ $ 40.8 $ 32.2
======== ========
Reserves (1):
Group Insurance segment................................ $1,660.0 $1,480.1
Retirement Plans segment............................... 630.4 625.0
Individual Insurance segment........................... 1,561.7 1,498.2
-------- --------
Total reserves....................................... $3,852.1 $3,603.3
======== ========
</TABLE>
- --------
(1) Reserves consist of future policy benefits and claims and other
policyholder funds included on the Company's consolidated balance sheets.
Group Insurance Segment
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, Group Insurance premiums accounted for 89.2% and
88.6% of the Company's total premiums for the first quarters ended March 31,
2000 and 1999, respectively.
13
<PAGE>
Income before income taxes and extraordinary item for the Group Insurance
segment increased $0.7 million, or 2.8%, in the first quarter of 2000 compared
to the first quarter of 1999. The increase was primarily the result of
business growth and favorable claims experience, offset by increases in
operating expenses and commissions due to investment in business growth. The
following table sets forth selected financial data for this segment:
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31,
--------------
2000 1999
------ ------
(Dollars in
millions)
<S> <C> <C>
Revenues:
Premiums................................................... $230.9 $211.4
Net investment income...................................... 40.4 36.0
Net realized investment gains (losses)..................... (0.5) 0.5
Other...................................................... 0.7 0.8
------ ------
Total revenues........................................... 271.5 248.7
------ ------
Benefits and expenses:
Policyholder benefits...................................... 191.9 178.6
Operating expenses......................................... 38.2 32.1
Commissions................................................ 15.7 13.1
Net increase in deferred policy acquisition costs.......... (0.2) (0.3)
------ ------
Total benefits and expenses.............................. 245.6 223.5
------ ------
Income before income taxes and extraordinary item............ $ 25.9 $ 25.2
====== ======
Benefit ratio (% of premiums)................................ 83.1% 84.4%
Operating expense ratio (% of premiums)...................... 16.6 15.2
</TABLE>
Premiums, adjusted to exclude experience rated refunds, increased $23.7
million, or 11.2%, in the first quarter of 2000 compared to the first quarter
of 1999. Sales of group long term disability products contributed 62.4% of the
premium growth for first quarter of 2000 compared to the first quarter of
1999. The remaining increase was primarily attributable to increases in group
life insurance premiums. Both increases were primarily the result of improved
persistency and expanded distribution.
Net investment income increased $4.4 million, or 12.2%, in the first quarter
of 2000 compared to the first quarter of 1999. The increase was primarily due
to an increase in average invested assets supporting this segment of 7.5% as
well as $1.5 million of investment income from market value increases in the
segment's fixed maturities trading portfolio (see "--Consolidated Results of
Operations--Net Investment Income").
Policyholder benefits increased $13.3 million, or 7.4%, in the first quarter
of 2000 compared to the first quarter of 1999. The increase was primarily a
result of business growth, as evidenced by growth in premiums. Offsetting the
impact of business growth was an improvement in the benefit ratio to 83.1% in
the first quarter of 2000 from 84.4% in the first quarter of 1999. The
improvement in the benefit ratio reflects favorable claims experience. Because
the benefit ratio is heavily affected by actual claims experience, the
improvements in the benefit ratio may or may not continue in the future.
Operating expenses increased $6.1 million, or 19.0%, in the first quarter of
2000 compared to the first quarter of 1999. The increase was due in part to
business growth as evidenced by the premium growth discussed above, and
expansion of the distribution systems. In 2000, two sales offices were opened
for this segment and three additional sales offices are expected to be opened
before the end of the year.
Commissions increased $2.6 million, or 19.8%, in the first quarter of 2000
over the first quarter of 1999. The increase is due to growth in sales.
14
<PAGE>
Retirement Plans Segment
The Retirement Plans segment offers full-service 401(k) and other pension
plan products and services. Income before income taxes and extraordinary item
in the first quarter of 2000 was $0.2 million, compared to $0.7 million in the
first quarter of 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 32.7% since
the March 31, 1999. The following table sets forth selected financial data for
the Retirement Plans segment for the periods indicated:
<TABLE>
<CAPTION>
At or for the
Three Months
Ended March 31,
------------------
2000 1999
-------- --------
(Dollars in
millions)
<S> <C> <C>
Revenues:
Premiums............................................. $ 6.2 $ 4.8
Net investment income................................ 13.0 12.3
Net realized investment gains (losses)............... (0.1) 0.2
-------- --------
Total revenues..................................... 19.1 17.3
-------- --------
Benefits and expenses:
Policyholder benefits................................ 11.7 10.5
Operating expenses................................... 6.4 5.6
Commissions.......................................... 0.8 0.5
-------- --------
Total benefits and expenses........................ 18.9 16.6
-------- --------
Income before income taxes and extraordinary item...... $ 0.2 $ 0.7
======== ========
Annualized operating expense ratio (% of average assets
under management)..................................... 1.5% 1.7%
Assets under management:
General account........................................ $ 630.4 $ 623.2
Separate accounts...................................... 1,151.8 719.8
-------- --------
Total.............................................. $1,782.2 $1,343.0
======== ========
</TABLE>
Premiums increased $1.4 million, or 29.2%, in the first quarter of 2000
compared to the first quarter of 1999. Fees for administrative services on
assets managed in both the general account and separate accounts accounted for
85.7%, or $1.2 million, of the increase. The remainder of the increase was due
to sales of life contingent annuities, which were 11.4% greater than the first
quarter of 1999.
Net investment income increased $0.7 million, or 5.7%, in the first quarter
of 2000 compared to the first quarter of 1999 primarily due to an increase in
average general account assets of 5.7% for the same periods. The profitability
of the Retirement Plans segment is, in part, dependent on the maintenance of
targeted interest rate spreads. Therefore, policyholder benefits (which
include interest credited to policyholders) should generally trend with net
investment income. Policyholder benefits increased $1.2 million, or 11.4%, in
the first quarter of 2000 compared to the first quarter of 1999. The increase
in policyholder benefits for the stated period was greater than the related
increase in net investment income due to increased reserves to support the
sales of life contingent annuities.
Operating expenses increased $0.8 million, or 14.3%, in the first quarter of
2000 compared to the first quarter of 1999, primarily to support increased
assets under management. Annualized operating expenses as a percentage of
average assets under management declined to 1.5% from 1.7% for the same
periods. In addition, a new field office was opened for this segment in the
first quarter of 2000.
Individual Insurance Segment
The Individual Insurance segment sells life insurance, disability insurance,
and annuities to individuals. In the individual insurance market, a growing
percentage of consumers are now reaching 45 years of age or older and are
shifting their focus from loss avoidance to asset accumulation. Moreover, the
strong stock market has
15
<PAGE>
increased competition from non-traditional individual life insurance and
annuities such as variable life and variable annuity products.
Income before income taxes and extraordinary item for this segment increased
$1.1 million in the first quarter of 2000 compared to the first quarter of
1999. Favorable claims experience and careful expense management contributed
to the increase. The following table sets forth selected financial data for
the Individual Insurance segment for the periods indicated:
<TABLE>
<CAPTION>
At or for the
Three Months
Ended March 31,
------------------
2000 1999
-------- --------
(Dollars in
millions)
<S> <C> <C>
Revenues:
Premiums............................................... $ 21.7 $ 22.4
Net investment income.................................. 29.8 29.7
Net realized investment gains.......................... 0.4 0.4
-------- --------
Total revenues....................................... 51.9 52.5
-------- --------
Benefits and expenses:
Policyholder benefits.................................. 35.5 38.8
Operating expenses..................................... 6.3 6.6
Commissions............................................ 2.5 2.6
Net decrease in deferred policy acquisition costs...... 2.2 0.2
-------- --------
Total benefits and expenses.......................... 46.5 48.2
-------- --------
Income before income taxes and extraordinary item........ $ 5.4 $ 4.3
======== ========
Operating expense ratio (% of premiums).................. 29.0% 29.5%
Life insurance in force.................................. $7,537.9 $7,932.2
</TABLE>
Premiums decreased $0.7 million, or 3.1%, in the first quarter of 2000
compared to the first quarter of 1999 and policyholder benefits decreased $3.3
million, or 8.5%, in the first quarter of 2000 compared to the first quarter
of 1999. Both decreases resulted primarily from declining demand for life
insurance due to the maturing individual insurance market.
Operating expenses decreased $0.3 million, or 4.5%, in the first quarter of
2000 compared to the first quarter of 1999. When taken as a percent of
premiums, operating expenses were 29.0% and 29.5% in the first quarters of
2000 and 1999, respectively. Declines in new sales and a slight decrease in
persistency for the segment resulted in an increase in net expense related to
deferred policy acquisition costs of $2.0 million in the first quarter of 2000
compared to the first quarter of 1999.
Other
Other businesses primarily include return on capital not allocated to the
business segments, income from StanCorp Mortgage Investors, LLC and gains and
losses related to real estate investments owned by The Standard. Income before
income taxes and extraordinary item for the first quarter ended March 31, 2000
and 1999 was $9.3 million and $2.0 million, respectively. This segment also
included net realized investment gains of $6.4 million, primarily from the
sale of real estate holdings, in the first quarter of 2000. No gains or losses
were realized on the sale of real estate in the first quarter of 1999.
Dispositions of invested assets and associated gains and losses may or may not
continue into the future.
16
<PAGE>
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 60
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 50.4% of the Company's total general account
invested assets at March 31, 2000, such defaults could materially adversely
affect the Company's business, financial condition and results of operations.
At March 31, 2000, mortgage loans, including those maintained within the
closed block, represented 43.5% of the total general account invested assets
and were collateralized by properties located in the Central region
representing 22.2% of the portfolio, the Eastern region representing 11.7%,
and the Western region representing 66.1%. Of the total mortgage loan
portfolio, 41.9% of the collateralized properties were located in the state of
California. The Standard 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 48.5% of the portfolio, industrial properties,
representing 26.7%, and office properties, representing 17.3%. The remaining
7.5% 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 consistently outperformed the industry
averages, as reported by the American Council of Life Insurance, by wide
margins. At March 31, 2000, there were no loans either 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 condition and
results of operations.
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.
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
17
<PAGE>
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 by insurance regulators. According to
presently accepted actuarial standards of practice, The Standard's current
reserves and related items make adequate provision for the anticipated cash
flows required to meet The Standard's contractual obligations and related
expenses. There have been no material changes in reported interest rate risks
faced by the Company since the end of the most recent fiscal year.
At March 31, 2000, the Company had outstanding commitments to fund or
acquire various assets totaling $78.4 million. Such commitments were
principally mortgage loans with interest rates ranging from 7.50% to 9.38%.
The Company's capital expenditures are estimated to be $8.4 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 available lines of credit totaling $110.0 million, including
a $100.0 million unsecured revolving line of credit. The Company is not
required to maintain compensating balances, but pays a commitment fee. The
interest rates are based on current market rates. Under the credit agreements,
the Company is subject to customary covenants, including limitations on
indebtedness, minimum retained earnings and minimum claims paying ability
ratings. At March 31, 2000, the Company was in compliance with all such
covenants. The amount outstanding on the lines of credit at March 31, 2000 was
$7.3 million. These lines will expire in 2000 and are expected to be renewed.
During the first quarter of 2000, 1.0 million shares of common stock were
repurchased at a total cost of $24.5 million. The repurchases were effected in
accordance with share repurchase programs authorized by StanCorp's board of
directors. At March 31, 2000 1.0 million shares continue to be available for
repurchase under these programs. All repurchases are to be effected in the
open market or in negotiated transactions in compliance with the safeharbor
provisions of Rule 10b-18 under regulations of the Securities Exchange Act of
1934.
On May 1, 2000 the board of directors of StanCorp declared a quarterly
dividend of $0.07 per share of common stock. The dividend is payable on June
2, 2000 to shareholders of record at the close of business on May 12, 2000.
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 totalling $50.6 million to StanCorp during the first
quarter of 2000, and will 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
18
<PAGE>
any dividends to StanCorp from the non-insurance subsidiaries. Combined net
income of the non-insurance subsidiaries, before elimination of intercompany
amounts, was $1.4 million for each of the first quarters of 2000 and 1999.
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,
1997 through March 31, 2000 aggregated $2.3 million. At March 31, 2000, The
Standard maintained a reserve of $1.0 million for future assessments in
respect of currently impaired, insolvent or failed insurers.
Dependence on Information Technology Systems
In recent years the Company has become increasingly dependent on information
technology systems to support its ability to conduct business in the ordinary
course. These resources include mainframe and legacy data processing systems,
local and wide area networks dependent on distributed computing power and
supported by servers, and internet applications
All of these systems are vulnerable to reliability issues, integration and
compatability concerns, and security-threatening intrusions. The Company
prepared extensively for the Year 2000 issue and did not experience any
significant interruptions from the Year 2000 issue. It was affected by and
recovered from the "I Love You" virus. The Company has not yet been the
subject of a denial of service or similar internet incident.
The Company 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 condition or results of operations.
Litigation
In the normal course of its business, the Company is involved in various
legal actions and other state and Federal proceedings. A number of these
actions or proceedings were pending as of March 31, 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 condition or results of operation.
19
<PAGE>
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".
20
<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
At the Annual Meeting of Shareholders, held May, 1, 2000, two matters were
submitted to a vote: the election of directors for three year terms expiring
in 2003 as listed in the proxy statement and the ratification of the
appointment of Deloitte & Touche LLP as Independent Auditors for the current
year. The results of the voting on these matters follow:
1. Election of Directors:
<TABLE>
<CAPTION>
Votes
Votes For Withheld
---------- --------
<S> <C> <C>
Barry J. Galt ........................................... 18,686,089 118,511
Richard Geary ........................................... 18,692,542 112,058
Peter T. Johnson ........................................ 18,689,213 115,387
William Swindells ....................................... 18,690,700 113,900
</TABLE>
The following directors are continuing in office with terms expiring in
subsequent years: Virginia L. Anderson; Frederick W. Buckman; John E.
Chapoton; Peter O. Kohler, MD; Jerome J. Meyer; Ralph R. Peterson; E. Kay
Stepp; Ronald E. Timpe; Michael G. Thorne; Franklin E. Ulf.
<TABLE>
<CAPTION>
Votes
Votes For Against Abstentions
---------- ------- -----------
<S> <C> <C> <C>
2. Ratification of the Appointment
of Independent Auditors .................... 18,629,104 57,913 117,583
</TABLE>
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibit Index
15. Letter re: Unaudited interim financial statements
27. Financial Data Schedule
(b) No reports on Form 8-K were filed during the first quarter of 2000.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 2000
<TABLE>
<C> <S>
/s/ Eric E. Parsons
By: _____________________________
Eric E. Parsons
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
</TABLE>
Date: May 12, 2000
<TABLE>
<C> <S>
/s/ Cindy J. McPike
By: ______________________________
Cindy J. McPike
Assistant Vice President
Controller and Treasurer
(Principal Accounting Officer)
</TABLE>
22
<PAGE>
Exhibit 15
StanCorp Financial Group, Inc.
Portland, Oregon
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of StanCorp Financial Group, Inc. and subsidiaries for the periods
ended March 31, 2000 and 1999, as indicated in our report dated April 24, 2000;
because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, is
incorporated by reference in Registration Statement Nos. 333-78379 and 333-35484
on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Portland, Oregon
April 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 2,053,300
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 1,823,600
<REAL-ESTATE> 95,900
<TOTAL-INVEST> 3,993,500
<CASH> 57,100
<RECOVER-REINSURE> 2,500
<DEFERRED-ACQUISITION> 54,700
<TOTAL-ASSETS> 6,076,400
<POLICY-LOSSES> 1,723,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,509,000
<NOTES-PAYABLE> 0
0
0
<COMMON> 795,600
<OTHER-SE> 46,900
<TOTAL-LIABILITY-AND-EQUITY> 6,076,400
243,800
<INVESTMENT-INCOME> 78,200
<INVESTMENT-GAINS> 6,200
<OTHER-INCOME> 2,900<F1>
<BENEFITS> 198,900
<UNDERWRITING-AMORTIZATION> (600)<F2>
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 40,800
<INCOME-TAX> 13,700
<INCOME-CONTINUING> 27,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,100
<EPS-BASIC> 0.83
<EPS-DILUTED> 0.83
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes contribution from Closed Block.
<F2>Contains deferred policy acquisition costs and related amortization.
</FN>
</TABLE>
