UNITED STATES
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, 2012
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)
Oregon | 93-1253576 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1100 SW Sixth Avenue, Portland, Oregon, 97204
(Address of principal executive offices, including zip code)
(971) 321-7000
(Registrants 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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
Large Accelerated filer x |
Accelerated filer ¨ |
Non-accelerated filer ¨ |
Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
As of October 26, 2012, there were 44,240,008 shares of the registrants common stock, no par value, outstanding.
PART I. FINANCIAL INFORMATION | ||||||
ITEM 1. |
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1 | ||||||
2 | ||||||
Unaudited Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011 |
3 | |||||
4 | ||||||
5 | ||||||
Notes to Unaudited Condensed Consolidated Financial Statements |
6 | |||||
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
36 | ||||
ITEM 3. |
73 | |||||
ITEM 4. |
73 | |||||
PART II. OTHER INFORMATION | ||||||
ITEM 1. |
74 | |||||
ITEM 1A. |
74 | |||||
ITEM 2. |
78 | |||||
ITEM 3. |
78 | |||||
ITEM 4. |
78 | |||||
ITEM 5. |
78 | |||||
ITEM 6. |
79 | |||||
80 |
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millionsexcept share data)
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenues: |
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Premiums |
$ | 528.7 | $ | 539.8 | $ | 1,630.1 | $ | 1,610.6 | ||||||||
Administrative fees |
27.8 | 28.5 | 86.2 | 87.4 | ||||||||||||
Net investment income |
159.8 | 147.3 | 470.9 | 456.9 | ||||||||||||
Net capital gains (losses): |
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Total other-than-temporary impairment losses on fixed maturity securitiesavailable-for-sale |
(0.7 | ) | (0.3 | ) | (3.2 | ) | (1.7 | ) | ||||||||
All other net capital gains (losses) |
(1.9 | ) | 8.0 | (3.6 | ) | (6.2 | ) | |||||||||
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Total net capital gains (losses) |
(2.6 | ) | 7.7 | (6.8 | ) | (7.9 | ) | |||||||||
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Total revenues |
713.7 | 723.3 | 2,180.4 | 2,147.0 | ||||||||||||
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Benefits and expenses: |
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Benefits to policyholders |
422.4 | 432.2 | 1,348.3 | 1,324.7 | ||||||||||||
Interest credited |
43.9 | 36.7 | 130.3 | 117.1 | ||||||||||||
Operating expenses |
115.3 | 120.7 | 355.9 | 357.1 | ||||||||||||
Commissions and bonuses |
49.6 | 53.1 | 156.3 | 166.1 | ||||||||||||
Premium taxes |
9.1 | 9.1 | 28.6 | 27.4 | ||||||||||||
Interest expense |
11.8 | 9.7 | 31.3 | 29.2 | ||||||||||||
Net decrease (increase) in deferred acquisition costs, value of business acquired and other intangible assets |
0.3 | (4.2 | ) | (1.9 | ) | (14.6 | ) | |||||||||
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Total benefits and expenses |
652.4 | 657.3 | 2,048.8 | 2,007.0 | ||||||||||||
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Income before income taxes |
61.3 | 66.0 | 131.6 | 140.0 | ||||||||||||
Income taxes |
16.4 | 19.0 | 31.5 | 41.9 | ||||||||||||
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Net income |
$ | 44.9 | $ | 47.0 | $ | 100.1 | $ | 98.1 | ||||||||
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Net income per common share: |
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Basic |
$ | 1.02 | $ | 1.06 | $ | 2.26 | $ | 2.18 | ||||||||
Diluted |
1.01 | 1.05 | 2.26 | 2.17 | ||||||||||||
Weighted-average common shares outstanding: |
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Basic |
44,197,164 | 44,521,757 | 44,263,445 | 45,102,716 | ||||||||||||
Diluted |
44,238,372 | 44,577,667 | 44,349,725 | 45,256,407 |
See Notes to Unaudited Condensed Consolidated Financial Statements.
1
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
(In millions)
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Net income |
$ | 44.9 | $ | 47.0 | $ | 100.1 | $ | 98.1 | ||||||||
Other comprehensive income, net of tax: |
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Unrealized gains on securitiesavailable-for-sale: |
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Net unrealized capital gains on securitiesavailable-for-sale(1) |
36.0 | 73.5 | 76.6 | 99.5 | ||||||||||||
Reclassification adjustment for net capital gains included in net income(2) |
(1.5 | ) | (0.7 | ) | (2.9 | ) | (4.7 | ) | ||||||||
Employee benefit plans: |
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Prior service credit and net losses arising during the period, net(3) |
| | 0.4 | 1.5 | ||||||||||||
Reclassification adjustment for amortization to net periodic pension cost, net(4) |
1.6 | 0.9 | 4.8 | 2.5 | ||||||||||||
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Total other comprehensive income, net of tax |
36.1 | 73.7 | 78.9 | 98.8 | ||||||||||||
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Comprehensive income |
$ | 81.0 | $ | 120.7 | $ | 179.0 | $ | 196.9 | ||||||||
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(1) | Net of taxes of $19.5 million and $40.1 million for the three months ended September 30, 2012 and 2011, respectively; and $40.6 million and $53.2 million for the nine months ended September 30, 2012 and 2011, respectively. |
(2) | Net of tax benefits of $1.0 million and $0.1 million for the three months ended September 30, 2012 and 2011, respectively; and $1.8 million and $2.6 million for the nine months ended September 30, 2012 and 2011, respectively. |
(3) | Net of taxes of $0.2 million and $0.8 million for the nine months ended September 30, 2012 and 2011, respectively. |
(4) | Net of taxes of $0.9 million and $0.5 million for the three months ended September 30, 2012 and 2011, respectively; and $2.6 million and $1.3 million for the nine months ended September 30, 2012 and 2011, respectively. |
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
September 30, 2012 |
December 31, 2011 |
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A S S E T S | ||||||||
Investments: |
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Fixed maturity securitiesavailable-for-sale (amortized cost of $6,418.5 and $6,209.9) |
$ | 7,120.4 | $ | 6,769.5 | ||||
Commercial mortgage loans, net |
5,149.0 | 4,902.3 | ||||||
Real estate, net |
101.5 | 92.7 | ||||||
Other invested assets |
179.7 | 130.9 | ||||||
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Total investments |
12,550.6 | 11,895.4 | ||||||
Cash and cash equivalents |
172.4 | 138.4 | ||||||
Premiums and other receivables |
129.0 | 118.8 | ||||||
Accrued investment income |
113.6 | 111.7 | ||||||
Amounts recoverable from reinsurers |
962.2 | 949.3 | ||||||
Deferred acquisition costs, value of business acquired and other intangible assets, net |
344.0 | 344.9 | ||||||
Goodwill |
36.0 | 36.0 | ||||||
Property and equipment, net |
95.1 | 101.3 | ||||||
Other assets |
146.6 | 113.9 | ||||||
Separate account assets |
5,071.8 | 4,593.5 | ||||||
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Total assets |
$ | 19,621.3 | $ | 18,403.2 | ||||
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L I A B I L I T I E S A N D S H A R E H O L D E R S E Q U I T Y |
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Liabilities: |
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Future policy benefits and claims |
$ | 5,821.5 | $ | 5,683.6 | ||||
Other policyholder funds |
5,324.5 | 5,078.1 | ||||||
Deferred tax liabilities, net |
152.8 | 103.0 | ||||||
Short-term debt |
1.1 | 251.2 | ||||||
Long-term debt |
551.5 | 300.9 | ||||||
Other liabilities |
527.0 | 402.5 | ||||||
Separate account liabilities |
5,071.8 | 4,593.5 | ||||||
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Total liabilities |
17,450.2 | 16,412.8 | ||||||
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Commitments and contingencies (See Note 10) |
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Shareholders equity: |
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Preferred stock, 100,000,000 shares authorized; none issued |
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Common stock, no par, 300,000,000 shares authorized; 44,239,608 and 44,268,859 shares issued at September 30, 2012 and December 31, 2011, respectively |
84.1 | 82.4 | ||||||
Accumulated other comprehensive income |
314.0 | 235.1 | ||||||
Retained earnings |
1,773.0 | 1,672.9 | ||||||
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Total shareholders equity |
2,171.1 | 1,990.4 | ||||||
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Total liabilities and shareholders equity |
$ | 19,621.3 | $ | 18,403.2 | ||||
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See Notes to Unaudited Condensed Consolidated Financial Statements.
3
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY
(Dollars in millions)
Accumulated Other Comprehensive Income |
Retained Earnings |
Total Shareholders Equity |
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Common Stock | ||||||||||||||||||||
Shares | Amount | |||||||||||||||||||
Balance, January 1, 2011 |
46,159,387 | $ | 158.2 | $ | 160.9 | $ | 1,575.5 | $ | 1,894.6 | |||||||||||
Net income |
| | | 136.7 | 136.7 | |||||||||||||||
Other comprehensive income, net of tax |
| | 74.2 | | 74.2 | |||||||||||||||
Common stock: |
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Repurchased |
(2,180,100 | ) | (90.3 | ) | | | (90.3 | ) | ||||||||||||
Issued under share-based compensation plans, net |
289,572 | 14.5 | | | 14.5 | |||||||||||||||
Dividends declared on common stock |
| | | (39.3 | ) | (39.3 | ) | |||||||||||||
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Balance, December 31, 2011 |
44,268,859 | 82.4 | 235.1 | 1,672.9 | 1,990.4 | |||||||||||||||
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Net income |
| | | 100.1 | 100.1 | |||||||||||||||
Other comprehensive income, net of tax |
| | 78.9 | | 78.9 | |||||||||||||||
Common stock: |
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Repurchased |
(279,700 | ) | (10.0 | ) | | | (10.0 | ) | ||||||||||||
Issued under share-based compensation plans, net |
250,449 | 11.7 | | | 11.7 | |||||||||||||||
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Balance, September 30, 2012 |
44,239,608 | $ | 84.1 | $ | 314.0 | $ | 1,773.0 | $ | 2,171.1 | |||||||||||
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See Notes to Unaudited Condensed Consolidated Financial Statements.
4
STANCORP FINANCIAL GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Operating: |
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Net income |
$ | 100.1 | $ | 98.1 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Net realized capital losses |
6.8 | 7.9 | ||||||
Depreciation and amortization |
87.8 | 90.2 | ||||||
Deferral of acquisition costs, value of business acquired and other intangible assets, net |
(55.3 | ) | (64.6 | ) | ||||
Deferred income taxes |
8.5 | (2.9 | ) | |||||
Changes in other assets and liabilities: |
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Receivables and accrued income |
(24.7 | ) | (26.7 | ) | ||||
Future policy benefits and claims |
111.1 | 114.0 | ||||||
Other, net |
84.0 | 29.8 | ||||||
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Net cash provided by operating activities |
318.3 | 245.8 | ||||||
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Investing: |
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Proceeds from sale, maturity, or repayment of fixed maturity securitiesavailable-for-sale |
638.6 | 694.2 | ||||||
Proceeds from sale or repayment of commercial mortgage loans |
588.1 | 424.5 | ||||||
Proceeds from sale of real estate |
7.0 | 53.4 | ||||||
Acquisition of fixed maturity securitiesavailable-for-sale |
(846.8 | ) | (847.5 | ) | ||||
Acquisition or origination of commercial mortgage loans |
(861.6 | ) | (752.9 | ) | ||||
Acquisition of real estate |
(0.9 | ) | (3.8 | ) | ||||
Acquisition of other invested assets |
(37.2 | ) | (36.6 | ) | ||||
Acquisition of property and equipment, net |
(11.8 | ) | (12.6 | ) | ||||
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Net cash used in investing activities |
(524.6 | ) | (481.3 | ) | ||||
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Financing: |
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Policyholder fund deposits |
1,401.8 | 1,395.2 | ||||||
Policyholder fund withdrawals |
(1,155.4 | ) | (1,053.8 | ) | ||||
Repayment of debt |
(250.0 | ) | | |||||
Issuance of debt, net of issuance costs |
246.7 | | ||||||
Issuance of common stock |
6.7 | 6.3 | ||||||
Repurchases of common stock |
(10.0 | ) | (90.0 | ) | ||||
Other, net |
0.5 | (2.0 | ) | |||||
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Net cash provided by financing activities |
240.3 | 255.7 | ||||||
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Increase in cash and cash equivalents |
34.0 | 20.2 | ||||||
Cash and cash equivalents, beginning of period |
138.4 | 152.0 | ||||||
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Cash and cash equivalents, end of period |
$ | 172.4 | $ | 172.2 | ||||
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for: |
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Interest |
$ | 151.4 | $ | 147.7 | ||||
Income taxes |
0.9 | 59.6 | ||||||
Non-cash transactions: |
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Real estate acquired through commercial mortgage loan foreclosure |
14.3 | 13.0 | ||||||
Commercial mortgage loans originated on real estate sold |
0.8 | 27.8 |
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As used in this Form 10-Q, the terms StanCorp, Company, we, us and our refer to StanCorp Financial Group, Inc. and its subsidiaries, unless the context otherwise requires.
1. | ORGANIZATION, PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION |
StanCorp, headquartered in Portland, Oregon, is a holding company and conducts business through wholly-owned operating subsidiaries throughout the United States (U.S.). Through its subsidiaries, StanCorp has the authority to underwrite insurance products in all 50 states. StanCorp operates through two segments: Insurance Services and Asset Management as well as an Other category. See Note 5Segments.
StanCorp has the following wholly-owned operating subsidiaries: Standard Insurance Company (Standard), The Standard Life Insurance Company of New York, Standard Retirement Services, Inc. (Standard Retirement Services), StanCorp Equities, Inc. (StanCorp Equities), StanCorp Mortgage Investors, LLC (StanCorp Mortgage Investors), StanCorp Investment Advisers, Inc. (StanCorp Investment Advisers), StanCorp Real Estate, LLC (StanCorp Real Estate), Standard Management, Inc. (Standard Management) and Adaptu, LLC (Adaptu).
Standard, the Companys largest subsidiary, underwrites group and individual disability insurance and annuity products, group life and accidental death and dismemberment (AD&D) insurance, and provides group dental and group vision insurance, absence management services and retirement plan products. Founded in 1906, Standard is domiciled in Oregon, licensed in all states except New York, and licensed in the District of Columbia and the U.S. territories of Guam and the Virgin Islands.
The Standard Life Insurance Company of New York was organized in 2000 and is licensed to provide group long term and short term disability insurance, individual disability insurance, group life and AD&D insurance and group dental insurance in New York.
The Standard is a service mark of StanCorp and its subsidiaries and is used as a brand mark and marketing name by Standard and The Standard Life Insurance Company of New York.
Standard Retirement Services administers and services StanCorps retirement plans group annuity contracts and trust products. Retirement plan products are offered in all 50 states through Standard or Standard Retirement Services.
StanCorp Equities is a limited broker-dealer and member of the Financial Industry Regulatory Authority. StanCorp Equities serves as principal underwriter and distributor for group variable annuity contracts issued by Standard and as the broker of record for certain retirement plans using the trust platform. StanCorp Equities carries no customer accounts but provides supervision and oversight for the distribution of group variable annuity contracts and of the sales activities of all registered representatives employed by StanCorp Equities and its affiliates.
StanCorp Mortgage Investors originates and services fixed-rate commercial mortgage loans for the investment portfolios of the Companys insurance subsidiaries. StanCorp Mortgage Investors also generates additional fee income from the origination and servicing of commercial mortgage loans participated to institutional investors.
StanCorp Investment Advisers is a Securities and Exchange Commission (SEC) registered investment adviser providing performance analysis, fund selection support, model portfolios and other investment advisory, financial planning, and investment management services to its retirement plan clients, individual investors and subsidiaries of StanCorp.
StanCorp Real Estate is a property management company that owns and manages the Hillsboro, Oregon home office properties and other properties held for investment and held for sale. StanCorp Real Estate also manages the Portland, Oregon home office properties.
Standard Management owns and manages certain real estate properties held for sale from time-to-time in conjunction with our real estate business.
Adaptu provides an online service to help users plan and manage their financial lives.
Standard holds interests in tax-advantaged investments. These interests do not meet the requirements for consolidation under existing accounting standards, and thus the Companys interests in the tax-advantaged investments are accounted for under the equity method of accounting. The total investment in these interests was $177.1 million and $128.0 million at September 30, 2012 and December 31, 2011, respectively.
In October 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU No. 2010-26 amends the codification guidance for insurance entities to eliminate the diversity of accounting treatment related to deferred acquisition costs (DAC). The Company has adopted this standard retrospectively as of January 1, 2012, and comparative financial statements of prior periods have been adjusted.
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 pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. Intercompany balances and transactions have been eliminated on a consolidated basis. 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 revenues 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
6
adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the Companys financial condition at September 30, 2012, and for the results of operations for the three and nine months ended September 30, 2012 and 2011, and cash flows for the nine months ended September 30, 2012 and 2011. Interim results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. This report should be read in conjunction with the Companys 2011 annual report on Form 10-K and the Companys current report on Form 8-K dated July 18, 2012 which updated certain items in the Companys annual report on Form 10-K for the retrospective adoption of ASU No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.
2. | NET INCOME PER COMMON SHARE |
Net income per basic common share was calculated by dividing net income by the weighted-average number of common shares outstanding. Net income per diluted common share, as calculated using the treasury stock method, reflects the potential dilutive effects of stock award grants and exercises of dilutive outstanding stock options. The computation of diluted weighted-average earnings per share does not include stock options with an option exercise price greater than the average market price because they are antidilutive and inclusion would increase earnings per share.
The following table sets forth the calculation of net income per basic and diluted weighted-average common shares outstanding:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Net income (in millions) |
$ | 44.9 | $ | 47.0 | $ | 100.1 | $ | 98.1 | ||||||||
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Basic weighted-average common shares outstanding |
44,197,164 | 44,521,757 | 44,263,445 | 45,102,716 | ||||||||||||
Stock options |
41,208 | 55,910 | 83,759 | 152,368 | ||||||||||||
Stock awards |
| | 2,521 | 1,323 | ||||||||||||
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Diluted weighted-average common shares outstanding |
44,238,372 | 44,577,667 | 44,349,725 | 45,256,407 | ||||||||||||
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Net income per common share: |
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Net income per basic common share |
$ | 1.02 | $ | 1.06 | $ | 2.26 | $ | 2.18 | ||||||||
Net income per diluted common share |
1.01 | 1.05 | 2.26 | 2.17 | ||||||||||||
Antidilutive shares not included in net income per diluted common share calculation |
2,479,470 | 2,264,262 | 2,199,795 | 1,903,674 |
3. | SHARE-BASED COMPENSATION |
The Company has two active share-based compensation plans: the 2002 Stock Incentive Plan (2002 Plan) and the 1999 Employee Share Purchase Plan (ESPP). The 2002 Plan authorizes the Board of Directors to grant incentive or non-statutory stock options and stock awards to eligible employees and certain related parties. Of the 4.8 million shares of common stock authorized for the 2002 Plan, 0.8 million shares or options for shares remain available for grant at September 30, 2012. The Companys ESPP allows eligible employees to purchase StanCorp common stock at a discount. Of the 3.5 million shares authorized for the ESPP, 1.5 million shares remain available for issuance at September 30, 2012.
The following table sets forth the total compensation cost and related income tax benefit under the Companys share-based compensation plans:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Compensation cost |
$ | 1.4 | $ | 1.4 | $ | 5.3 | $ | 4.5 | ||||||||
Related income tax benefit |
0.5 | 0.5 | 1.8 | 1.6 |
The Company has provided three types of share-based compensation pursuant to the 2002 Plan: option grants, stock award grants and director stock grants.
Option Grants
Options are granted to officers and certain non-officer employees. Options are granted with an exercise price equal to the closing market price of StanCorp common stock on the grant date. Options generally vest in equal installments on the first four anniversaries of the vesting reference date.
7
The Company granted 268,033 and 236,785 options for the first nine months of 2012 and 2011, respectively, at a weighted-average exercise price of $38.09 and $45.46, respectively. The fair value of each option award granted was estimated using the Black-Scholes option pricing model as of the grant date. The weighted-average grant date fair value of options granted for the first nine months of 2012 and 2011 was $13.73 and $17.48, respectively.
The compensation cost of stock options is recognized over the vesting period, which is also the period over which the grantee must provide services to the Company. At September 30, 2012, the total compensation cost related to unvested option awards that had not yet been recognized in the financial statements was $6.5 million. This compensation cost will be recognized over a weighted-average period of 2.6 years.
Stock Award Grants
The Company grants performance-based stock awards (Performance Shares) to designated senior officers. The payout for these awards is based on the Companys financial performance over a three-year period. Performance Share grants represent the maximum number of shares of StanCorp common stock issuable to the designated senior officers. The actual number of shares issued at the end of the performance period is based on satisfaction of employment and Company financial performance conditions, with a portion of the shares withheld to cover required tax withholding. Under the 2002 Plan, the Company had 0.6 million shares available for issuance as stock award grants at September 30, 2012.
The Company granted 179,818 and 116,978 Performance Shares for the first nine months of 2012 and 2011, respectively.
The Company issued 9,899 and 4,906 shares of StanCorp common stock for the first nine months of 2012 and 2011, respectively, to redeem Performance Shares that vested following the 2011 and 2010 performance periods, net of Performance Shares withheld to cover the required taxes.
The fair value of the Performance Shares is determined based on the closing market price of StanCorp common stock on the grant date.
The compensation cost that the Company will ultimately recognize as a result of these stock awards is dependent on the Companys financial performance. Assuming that the maximum performance is achieved for each performance goal, $15.3 million in additional compensation cost would be recognized through 2014. Assuming that the target performance is achieved for each performance goal, $8.1 million in additional compensation cost would be recognized through 2014. Assuming that the maximum performance is achieved, this cost would be recognized over a weighted-average period of 1.6 years.
Director Stock Grants
Effective May 7, 2012, each director who is not an employee of the Company receives annual stock grants with a fair value equal to $100,000 based on the closing market price of StanCorp common stock on the day of the annual shareholders meeting. The stock grants generally vest after one year.
The Company issued 9,489 and 10,399 shares of StanCorp common stock for the first nine months of 2012 and 2011, respectively, related to the annual Director stock grant.
Employee Share Purchase Plan
The Companys ESPP allows eligible employees to purchase StanCorp common stock at a 15% discount of the lesser of the closing market price of StanCorp common stock on either the commencement date or the final date of each six-month offering period. Under the terms of the plan, each eligible employee may elect to have up to 10% of the employees gross total cash compensation for the period withheld to purchase StanCorp common stock. No employee may purchase StanCorp common stock having a fair market value in excess of $25,000 in any calendar year.
The following table sets forth the compensation cost and related income tax benefit under the Companys ESPP:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Compensation cost |
$ | 0.3 | $ | 0.3 | $ | 1.2 | $ | 1.1 | ||||||||
Related income tax benefit |
0.1 | 0.1 | 0.4 | 0.4 |
4. | RETIREMENT BENEFITS |
Pension Benefits
The Company has two non-contributory defined benefit pension plans: the employee pension plan and the agent pension plan. The employee pension plan is for all eligible employees of the Company, and the agent pension plan is for former field employees and agents. The defined benefit pension plans provide benefits based on years of service and final average pay. Both plans are sponsored by Standard and administered by Standard Retirement Services and are closed to new participants. Participation in the defined benefit pension plans is generally limited to eligible employees whose date of employment began before 2003.
Under the employee pension plan, a participant is entitled to a normal retirement benefit once the participant reaches age 65. A participant can also receive a normal, unreduced retirement benefit once the sum of his or her age plus years of service is at least 90.
8
The Company recognizes the funded status of the pension plans as an asset or liability on the balance sheet. The funded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation as of the year-end balance sheet date. While the Company is not obligated to make any contributions to its pension plans for 2012, it does evaluate the funding status of these plans annually in the fourth quarter.
The following table sets forth the components of net periodic benefit cost and other changes in plan assets and benefit obligations recognized in other comprehensive income for pension benefits:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Components of net periodic benefit cost: |
||||||||||||||||
Service cost |
$ | 2.5 | $ | 2.4 | $ | 7.4 | $ | 7.4 | ||||||||
Interest cost |
4.1 | 4.5 | 12.4 | 13.6 | ||||||||||||
Expected return on plan assets |
(6.6 | ) | (5.6 | ) | (19.9 | ) | (16.8 | ) | ||||||||
Amortization of prior service cost |
0.2 | 0.2 | 0.5 | 0.5 | ||||||||||||
Amortization of net actuarial loss |
2.1 | 1.0 | 6.5 | 2.9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit cost |
2.3 | 2.5 | 6.9 | 7.6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other changes in plan assets and benefit obligation recognized in other comprehensive income: |
||||||||||||||||
Amortization of prior service cost |
(0.2 | ) | (0.2 | ) | (0.5 | ) | (0.5 | ) | ||||||||
Amortization of net actuarial loss |
(2.1 | ) | (1.0 | ) | (6.5 | ) | (2.9 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total recognized in other comprehensive income |
(2.3 | ) | (1.2 | ) | (7.0 | ) | (3.4 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total recognized in net periodic benefit cost and other comprehensive income |
$ | | $ | 1.3 | $ | (0.1 | ) | $ | 4.2 | |||||||
|
|
|
|
|
|
|
|
Postretirement Benefits Other Than Pensions
Standard sponsors and administers a postretirement benefit plan that includes medical and prescription drug benefits. A group term life insurance benefit was curtailed as of December 31, 2011. Eligible retirees are required to contribute specified amounts for medical and prescription drug benefits that are determined periodically and are based on retirees length of service and age at retirement. Participation in the postretirement benefit plan is limited to employees who had reached the age of 40, or whose combined age and length of service was equal to or greater than 45 years as of January 1, 2006. This plan is closed to new participants.
The Company recognizes the funded status of the postretirement benefit plan as an asset or liability on the balance sheet. The funded status is measured as the difference between the fair value of the plan assets and the accumulated benefit obligation.
9
The following table sets forth the components of net periodic benefit cost and other amounts recognized in other comprehensive income for postretirement benefits:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Components of net periodic benefit cost: |
||||||||||||||||
Service cost |
$ | 0.3 | $ | 0.4 | $ | 0.7 | $ | 0.8 | ||||||||
Interest cost |
0.4 | 0.6 | 1.3 | 1.6 | ||||||||||||
Expected return on plan assets |
(0.2 | ) | (0.2 | ) | (0.6 | ) | (0.6 | ) | ||||||||
Amortization of prior service credit |
(0.1 | ) | (0.1 | ) | (0.3 | ) | (0.2 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit cost |
0.4 | 0.7 | 1.1 | 1.6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other changes in plan assets and benefit obligation recognized in other comprehensive income: |
||||||||||||||||
Net gain |
| | (0.7 | ) | (2.3 | ) | ||||||||||
Amortization of prior service cost |
0.1 | 0.1 | 0.3 | 0.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total recognized in other comprehensive income |
0.1 | 0.1 | (0.4 | ) | (2.1 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total recognized in net periodic benefit cost and other comprehensive income |
$ | 0.5 | $ | 0.8 | $ | 0.7 | $ | (0.5 | ) | |||||||
|
|
|
|
|
|
|
|
Deferred Compensation Plans
Eligible employees are covered by a qualified deferred compensation plan sponsored by Standard under which a portion of the employee contribution is matched. Employees not eligible for the employee pension plan are eligible for an additional non-elective employer contribution. Contributions to the plan were $2.5 million and $2.4 million for the third quarters of 2012 and 2011, respectively, and $7.9 million and $8.2 million for the first nine months of 2012 and 2011, respectively.
Eligible executive officers, directors, agents and group producers may participate in one of several non-qualified deferred compensation plans under which a portion of the deferred compensation for participating executive officers, agents and group producers is matched. The liability for the plans was $10.4 million at September 30, 2012 and $10.7 million at December 31, 2011.
Non-Qualified Supplemental Retirement Plan
Eligible executive officers are covered by a non-qualified supplemental retirement plan (non-qualified plan). Under the non-qualified plan, a participant is entitled to a normal retirement benefit once the participant reaches age 65. A participant can also receive a normal, unreduced retirement benefit once the sum of his or her age plus years of service is at least 90. The Company recognizes the unfunded status of the non-qualified plan in other liabilities on the balance sheet. The unfunded status was $28.9 million and $28.5 million at September 30, 2012 and December 31, 2011, respectively. Expenses were $0.6 million and $0.7 million for the third quarters of 2012 and 2011, respectively, and were $1.9 million and $2.1 million for the first nine months of 2012 and 2011, respectively. The net loss and prior service cost, net of tax, excluded from the net periodic benefit cost and reported as a component of accumulated other comprehensive income was $5.3 million and $5.7 million at September 30, 2012 and December 31, 2011, respectively.
10
5. | SEGMENTS |
StanCorp operates through two reportable segments: Insurance Services and Asset Management, as well as an Other category. Subsidiaries, or operating segments, have been aggregated to form the Companys reportable segments. Resources are allocated and performance is evaluated at the segment level. The Insurance Services segment offers group and individual disability insurance, group life and AD&D insurance, group dental and group vision insurance, and absence management services. The Asset Management segment offers full-service 401(k) plans, 403(b) plans, 457 plans, defined benefit plans, money purchase pension plans, profit sharing plans and non-qualified deferred compensation products and services. This segment also offers investment advisory and management services, financial planning services, commercial mortgage loan origination and servicing, individual fixed-rate annuity products, group annuity contracts and retirement plan trust products. The Other category includes return on capital not allocated to the product segments, holding company expenses, operations of certain unallocated subsidiaries, interest on debt, unallocated expenses, net capital gains and losses related to the impairment or the disposition of the Companys invested assets and adjustments made in consolidation.
Intersegment revenues are comprised of administrative fee revenues charged by the Asset Management segment to manage the fixed maturity securitiesavailable-for-sale (fixed maturity securities) and commercial mortgage loan portfolios for the Companys insurance subsidiaries.
The following table sets forth intersegment revenues:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Intersegment administrative fee revenues |
$ | 4.5 | $ | 4.2 | $ | 13.3 | $ | 12.4 |
11
The following table sets forth premiums, administrative fee revenues and net investment income by major product line or category within each of the Companys segments:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Premiums: |
||||||||||||||||
Insurance Services: |
||||||||||||||||
Group life and AD&D |
$ | 218.3 | $ | 224.7 | $ | 667.0 | $ | 670.8 | ||||||||
Group long term disability |
199.1 | 200.5 | 603.5 | 602.0 | ||||||||||||
Group short term disability |
52.5 | 52.4 | 160.3 | 156.3 | ||||||||||||
Group other |
19.7 | 20.5 | 59.2 | 60.5 | ||||||||||||
Experience rated refunds |
(6.5 | ) | (4.0 | ) | 4.7 | (14.2 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total group insurance |
483.1 | 494.1 | 1,494.7 | 1,475.4 | ||||||||||||
Individual disability insurance |
44.4 | 44.2 | 130.4 | 129.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Insurance Services premiums |
527.5 | 538.3 | 1,625.1 | 1,604.4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Asset Management: |
||||||||||||||||
Retirement plans |
0.1 | 0.7 | 1.3 | 1.4 | ||||||||||||
Individual annuities |
1.1 | 0.8 | 3.7 | 4.8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Asset Management premiums |
1.2 | 1.5 | 5.0 | 6.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total premiums |
$ | 528.7 | $ | 539.8 | $ | 1,630.1 | $ | 1,610.6 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Administrative fees: |
||||||||||||||||
Insurance Services: |
||||||||||||||||
Group insurance |
$ | 3.0 | $ | 2.9 | $ | 10.2 | $ | 8.4 | ||||||||
Individual disability insurance |
0.1 | 0.1 | 0.2 | 0.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Insurance Services administrative fees |
3.1 | 3.0 | 10.4 | 8.6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Asset Management: |
||||||||||||||||
Retirement plans |
21.5 | 22.3 | 66.0 | 68.5 | ||||||||||||
Other financial services businesses |
7.7 | 7.4 | 23.1 | 22.7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Asset Management administrative fees |
29.2 | 29.7 | 89.1 | 91.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other administrative fees |
(4.5 | ) | (4.2 | ) | (13.3 | ) | (12.4 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total administrative fees |
$ | 27.8 | $ | 28.5 | $ | 86.2 | $ | 87.4 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net investment income: |
||||||||||||||||
Insurance Services: |
||||||||||||||||
Group insurance |
$ | 72.2 | $ | 72.7 | $ | 214.0 | $ | 216.0 | ||||||||
Individual disability insurance |
13.8 | 13.1 | 40.2 | 39.6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Insurance Services net investment income |
86.0 | 85.8 | 254.2 | 255.6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Asset Management: |
||||||||||||||||
Retirement plans |
24.2 | 22.5 | 71.0 | 66.9 | ||||||||||||
Individual annuities |
44.4 | 33.4 | 129.0 | 117.2 | ||||||||||||
Other financial services businesses |
3.7 | 3.1 | 10.0 | 9.4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Asset Management net investment income |
72.3 | 59.0 | 210.0 | 193.5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other net investment income |
1.5 | 2.5 | 6.7 | 7.8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total net investment income |
$ | 159.8 | $ | 147.3 | $ | 470.9 | $ | 456.9 | ||||||||
|
|
|
|
|
|
|
|
12
The following tables set forth select segment information:
Insurance Services |
Asset Management |
Other | Total | |||||||||||||
(In millions) | ||||||||||||||||
Three Months Ended September 30, 2012 |
||||||||||||||||
Revenues: |
||||||||||||||||
Premiums |
$ | 527.5 | $ | 1.2 | $ | | $ | 528.7 | ||||||||
Administrative fees |
3.1 | 29.2 | (4.5 | ) | 27.8 | |||||||||||
Net investment income |
86.0 | 72.3 | 1.5 | 159.8 | ||||||||||||
Net capital losses |
| | (2.6 | ) | (2.6 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
616.6 | 102.7 | (5.6 | ) | 713.7 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Benefits and expenses: |
||||||||||||||||
Benefits to policyholders |
417.6 | 4.8 | | 422.4 | ||||||||||||
Interest credited |
1.0 | 42.9 | | 43.9 | ||||||||||||
Operating expenses |
85.4 | 28.7 | 1.2 | 115.3 | ||||||||||||
Commissions and bonuses |
43.2 | 6.4 | | 49.6 | ||||||||||||
Premium taxes |
9.1 | | | 9.1 | ||||||||||||
Interest expense |
| | 11.8 | 11.8 | ||||||||||||
Net (increase) decrease in deferred acquisition costs, value of business acquired and other intangible assets |
(2.1 | ) | 2.4 | | 0.3 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total benefits and expenses |
554.2 | 85.2 | 13.0 | 652.4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
$ | 62.4 | $ | 17.5 | $ | (18.6 | ) | $ | 61.3 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Insurance Services |
Asset Management |
Other | Total | |||||||||||||
(In millions) | ||||||||||||||||
Three Months Ended September 30, 2011 |
||||||||||||||||
Revenues: |
||||||||||||||||
Premiums |
$ | 538.3 | $ | 1.5 | $ | | $ | 539.8 | ||||||||
Administrative fees |
3.0 | 29.7 | (4.2 | ) | 28.5 | |||||||||||
Net investment income |
85.8 | 59.0 | 2.5 | 147.3 | ||||||||||||
Net capital gains |
| | 7.7 | 7.7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
627.1 | 90.2 | 6.0 | 723.3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Benefits and expenses: |
||||||||||||||||
Benefits to policyholders |
427.1 | 5.1 | | 432.2 | ||||||||||||
Interest credited |
0.9 | 35.8 | | 36.7 | ||||||||||||
Operating expenses |
84.2 | 28.9 | 7.6 | 120.7 | ||||||||||||
Commissions and bonuses |
46.1 | 7.0 | | 53.1 | ||||||||||||
Premium taxes |
9.1 | | | 9.1 | ||||||||||||
Interest expense |
| | 9.7 | 9.7 | ||||||||||||
Net (increase) decrease in deferred acquisition costs, value of business acquired and other intangible assets |
(5.3 | ) | 1.1 | | (4.2 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total benefits and expenses |
562.1 | 77.9 | 17.3 | 657.3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
$ | 65.0 | $ | 12.3 | $ | (11.3 | ) | $ | 66.0 | |||||||
|
|
|
|
|
|
|
|
13
Insurance Services |
Asset Management |
Other | Total | |||||||||||||
(In millions) | ||||||||||||||||
Nine Months Ended September 30, 2012 |
||||||||||||||||
Revenues: |
||||||||||||||||
Premiums |
$ | 1,625.1 | $ | 5.0 | $ | | $ | 1,630.1 | ||||||||
Administrative fees |
10.4 | 89.1 | (13.3 | ) | 86.2 | |||||||||||
Net investment income |
254.2 | 210.0 | 6.7 | 470.9 | ||||||||||||
Net capital losses |
| | (6.8 | ) | (6.8 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
1,889.7 | 304.1 | (13.4 | ) | 2,180.4 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Benefits and expenses: |
||||||||||||||||
Benefits to policyholders |
1,333.3 | 15.0 | | 1,348.3 | ||||||||||||
Interest credited |
3.6 | 126.7 | | 130.3 | ||||||||||||
Operating expenses |
264.5 | 88.2 | 3.2 | 355.9 | ||||||||||||
Commissions and bonuses |
133.9 | 22.4 | | 156.3 | ||||||||||||
Premium taxes |
28.6 | | | 28.6 | ||||||||||||
Interest expense |
| | 31.3 | 31.3 | ||||||||||||
Net (increase) decrease in deferred acquisition costs, value of business acquired and other intangible assets |
(6.0 | ) | 4.1 | | (1.9 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total benefits and expenses |
1,757.9 | 256.4 | 34.5 | 2,048.8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
$ | 131.8 | $ | 47.7 | $ | (47.9 | ) | $ | 131.6 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 8,347.5 | $ | 10,888.7 | $ | 385.1 | $ | 19,621.3 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Insurance Services |
Asset Management |
Other | Total | |||||||||||||
(In millions) | ||||||||||||||||
Nine Months Ended September 30, 2011 |
||||||||||||||||
Revenues: |
||||||||||||||||
Premiums |
$ | 1,604.4 | $ | 6.2 | $ | | $ | 1,610.6 | ||||||||
Administrative fees |
8.6 | 91.2 | (12.4 | ) | 87.4 | |||||||||||
Net investment income |
255.6 | 193.5 | 7.8 | 456.9 | ||||||||||||
Net capital losses |
| | (7.9 | ) | (7.9 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
1,868.6 | 290.9 | (12.5 | ) | 2,147.0 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Benefits and expenses: |
||||||||||||||||
Benefits to policyholders |
1,309.5 | 15.2 | | 1,324.7 | ||||||||||||
Interest credited |
3.5 | 113.6 | | 117.1 | ||||||||||||
Operating expenses |
256.4 | 87.2 | 13.5 | 357.1 | ||||||||||||
Commissions and bonuses |
140.3 | 25.8 | | 166.1 | ||||||||||||
Premium taxes |
27.3 | 0.1 | | 27.4 | ||||||||||||
Interest expense |
| | 29.2 | 29.2 | ||||||||||||
Net (increase) decrease in deferred acquisition costs, value of business acquired and other intangible assets |
(16.3 | ) | 1.7 | | (14.6 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total benefits and expenses |
1,720.7 | 243.6 | 42.7 | 2,007.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
$ | 147.9 | $ | 47.3 | $ | (55.2 | ) | $ | 140.0 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 8,109.5 | $ | 9,492.9 | $ | 285.5 | $ | 17,887.9 | ||||||||
|
|
|
|
|
|
|
|
6. | FAIR VALUE |
Assets and liabilities recorded at fair value are disclosed using a three-level hierarchy. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources while unobservable inputs reflect the Companys estimates about market data.
14
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels: Level 1 inputs are based upon quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date. Level 2 inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 inputs are generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Companys estimates of assumptions that market participants would use in pricing the asset or liability.
There are three types of valuation techniques used to measure assets and liabilities recorded at fair value:
| The market approach, which uses prices or other relevant information generated by market transactions involving identical or comparable assets or liabilities. |
| The income approach, which uses the present value of cash flows or earnings. |
| The cost approach, which uses replacement costs more readily adaptable for valuing physical assets. |
The Company uses both the market and income approach in its fair value measurements. These measurements are discussed in more detail below.
The following tables set forth the estimated fair value and the carrying value of each financial instrument:
September 30, 2012 | ||||||||||||||||||||
Carrying Value | Fair Value |
Level 1 | Level 2 | Level 3 | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Assets: |
||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||
Corporate bonds |
$ | 6,427.5 | $ | 6,427.5 | $ | | $ | 6,360.8 | $ | 66.7 | ||||||||||
U.S. government and agency bonds |
430.3 | 430.3 | | 430.3 | | |||||||||||||||
U.S. state and political subdivision bonds |
176.5 | 176.5 | | 174.8 | 1.7 | |||||||||||||||
Foreign government bonds |
72.3 | 72.3 | | 72.3 | | |||||||||||||||
S&P 500 Index options |
13.8 | 13.8 | | | 13.8 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total fixed maturity securities |
$ | 7,120.4 | $ | 7,120.4 | $ | | $ | 7,038.2 | $ | 82.2 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial mortgage loans, net |
$ | 5,149.0 | $ | 5,838.5 | $ | | $ | | $ | 5,838.5 | ||||||||||
Policy loans |
2.5 | 2.5 | | | 2.5 | |||||||||||||||
Separate account assets |
5,071.8 | 5,071.8 | 4,926.5 | 145.3 | | |||||||||||||||
Liabilities: |
||||||||||||||||||||
Total other policyholder funds, investment |
$ | 4,700.4 | $ | 5,088.7 | $ | | $ | | $ | 5,088.7 | ||||||||||
Index-based interest guarantees |
58.6 | 58.6 | | | 58.6 | |||||||||||||||
Short-term debt |
1.1 | 0.7 | | 0.7 | | |||||||||||||||
Long-term debt |
551.5 | 568.7 | | 568.7 | |
15
December 31, 2011 | ||||||||||||||||||||
Carrying Value |
Fair Value |
Level 1 | Level 2 | Level 3 | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Assets: |
||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||
Corporate bonds |
$ | 6,059.3 | $ | 6,059.3 | $ | | $ | 5,995.3 | $ | 64.0 | ||||||||||
U.S. government and agency bonds |
452.1 | 452.1 | | 451.6 | 0.5 | |||||||||||||||
U.S. state and political subdivision bonds |
178.8 | 178.8 | | 177.4 | 1.4 | |||||||||||||||
Foreign government bonds |
72.1 | 72.1 | | 72.1 | | |||||||||||||||
S&P 500 Index options |
7.2 | 7.2 | | | 7.2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total fixed maturity securities |
$ | 6,769.5 | $ | 6,769.5 | $ | | $ | 6,696.4 | $ | 73.1 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Commercial mortgage loans, net |
$ | 4,902.3 | $ | 5,450.9 | $ | | $ | | $ | 5,450.9 | ||||||||||
Policy loans |
2.9 | 2.9 | | | 2.9 | |||||||||||||||
Separate account assets |
4,593.5 | 4,593.5 | 4,444.4 | 149.1 | | |||||||||||||||
Liabilities: |
||||||||||||||||||||
Total other policyholder funds, investment type contracts |
$ | 4,449.2 | $ | 4,804.8 | $ | | $ | | $ | 4,804.8 | ||||||||||
Index-based interest guarantees |
49.5 | 49.5 | | | 49.5 | |||||||||||||||
Short-term debt |
251.2 | 263.7 | | 263.7 | | |||||||||||||||
Long-term debt |
300.9 | 272.0 | | 272.0 | |
Financial Instruments Not Recorded at Fair Value
The Company did not elect to measure and record commercial mortgage loans, policy loans, other policyholders funds that are investment-type contracts, short-term debt, or long-term debt at fair value on the consolidated balance sheets.
For disclosure purposes, the fair values of commercial mortgage loans were estimated using an option-adjusted discounted cash flow valuation. The valuation includes both observable market inputs and estimated model parameters.
Significant observable inputs to the valuation include:
| Indicative quarter-end pricing for a package of loans similar to those originated by the Company near quarter-end. |
| U.S. Government treasury yields. |
| Indicative yields from industrial bond issues. |
| The contractual terms of nearly every mortgage subject to valuation. |
Significant estimated parameters include:
| A liquidity premium that is estimated from historical loan sales and is applied over and above base yields. |
| Adjustments in interest rate spread based on an aggregate portfolio loan-to-value ratio, estimated from historical differential yields with respect to loan-to-value ratios. |
| Projected prepayment activity. |
For policy loans, the carrying value represents historical cost but approximates fair value. While potentially financial instruments, policy loans are an integral component of the insurance contract and have no maturity date.
The fair value of other policyholder funds that are investment-type contracts was calculated using the income approach in conjunction with the cost of capital method. The parameters used for discounting in the calculation were estimated using the perspective of the principal market for the contracts under consideration. The principal market consists of other insurance carriers with similar contracts on their books.
The fair value for short-term and long-term debt was predominantly based on quoted market prices as of September 30, 2012 and December 31, 2011, and trades occurring close to September 30, 2012 and December 31, 2011.
Financial Instruments Measured and Recorded at Fair Value
Fixed maturity securities, Standard & Poors (S&P) 500 Index call options (S&P 500 Index options) and index-based interest guarantees embedded in indexed annuities (index-based interest guarantees) are recorded at fair value on a recurring basis. In the Companys consolidated statements of income and comprehensive income, unrealized gains and losses are reported in other comprehensive income for fixed maturity securities, in net investment income for S&P 500 Index options and in interest credited for index-based interest guarantees.
Separate account assets represent segregated funds held for the exclusive benefit of contract holders. The activities of the account primarily relate to participant-directed 401(k) contracts. Separate account assets are recorded at fair value on a recurring basis, with changes in fair value recorded in separate account liabilities. Separate account assets consist of mutual funds. The mutual funds fair value is determined through Level 1 and Level 2 inputs. The majority of the separate account assets are valued using quoted prices in an active market with the remainder of the assets valued using quoted prices from an independent pricing service. The Company reviews the values obtained from the pricing service for reasonableness through analytical procedures and performance reviews.
16
Fixed maturity securities are comprised of the following classes:
| Corporate bonds |
| U.S. government and agency bonds. |
| U.S. state and political subdivision bonds. |
| Foreign government bonds. |
| S&P 500 Index options. |
The fixed maturity securities are diversified across industries, issuers and maturities. The Company calculates fair values for all classes of fixed maturity securities using valuation techniques described below. They are placed into three levels depending on the valuation technique used to determine the fair value of the securities.
The Company uses an independent pricing service to assist management in determining the fair value of these assets. The pricing service incorporates a variety of information observable in the market in its valuation techniques, including:
| Reported trading prices. |
| Benchmark yields. |
| Broker-dealer quotes. |
| Benchmark securities. |
| Bids and offers. |
| Credit ratings. |
| Relative credit information. |
| Other reference data. |
The pricing service also takes into account perceived market movements and sector news, as well as a bonds terms and conditions, including any features specific to that issue that may influence risk, and thus marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. The Company generally obtains one value from its primary external pricing service. On a case-by-case basis, the Company may obtain further quotes or prices from additional parties as needed.
The pricing service provides quoted market prices when available. Quoted prices are not always available due to bond market inactivity. The pricing service obtains a broker quote when sufficient information, such as security structure or other market information, is not available to produce a valuation. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes on which one may execute the disposition of the assets.
The significant unobservable inputs used in the fair value measurement of the reporting entitys bonds are valuations and quotes received from secondary pricing service, analytical reviews and broker quotes. Significant increases or decreases in any of those inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, a change in the assumption used for the pricing evaluation is accompanied by a directionally similar change in the assumption used for the methodologies.
The Company performs control procedures over the external valuations at least quarterly through a combination of procedures that include an evaluation of methodologies used by the pricing service, analytical reviews and performance analysis of the prices against statistics and trends, back testing of sales activity and maintenance of a securities watch list. As necessary, the Company compares prices received from the pricing service to prices independently estimated by the Company utilizing discounted cash flow models or through performing independent valuations of inputs and assumptions similar to those used by the pricing service in order to ensure prices represent a reasonable estimate of fair value. Although the Company does identify differences from time to time as a result of these validation procedures, the Company did not make any significant adjustments as of September 30, 2012 or December 31, 2011.
S&P 500 Index options and certain fixed maturity securities were valued using Level 3 inputs. The Level 3 fixed maturity securities were valued using matrix pricing, independent broker quotes and other standard market valuation methodologies. The fair value was determined using inputs that were not observable or could not be derived principally from, or corroborated by, observable market data. These inputs included assumptions regarding liquidity, estimated future cash flows and discount rates. Unobservable inputs to these valuations are based on managements judgment or estimation obtained from the best sources available. The Companys valuations maximize the use of observable inputs, which include an analysis of securities in similar sectors with comparable maturity dates and bond ratings. Broker quotes are validated by management for reasonableness in conjunction with information obtained from matrix pricing and other sources.
The Company calculates the fair value for its S&P 500 Index options using the Black-Scholes option pricing model and parameters derived from market sources. The Companys valuations maximize the use of observable inputs, which include direct price quotes from the Chicago Board Options Exchange (CBOE) and values for on-the-run treasury securities and London Interbank Offered Rate (LIBOR) as reported by Bloomberg. Unobservable inputs are estimated from the best sources available to the Company and include estimates of future gross dividends to be paid on the stocks underlying the S&P 500 Index, estimates of bid-ask spreads, and estimates of implied volatilities on options. Valuation parameters are calibrated to replicate the actual end-of-day market quotes for options trading on the CBOE. The Company performs additional validation procedures such as the daily observation of market activity and conditions and the tracking and analyzing of actual quotes provided by banking counterparties each time the Company purchases options from them. Additionally, in order to help validate the values derived through the procedures noted above, the Company obtains indicators of value from representative investment banks.
17
The Company uses the income approach valuation technique to determine the fair value of index-based interest guarantees. The liability is the present value of future cash flows attributable to the projected index growth in excess of cash flows driven by fixed interest rate guarantees for the indexed annuity product. Level 3 assumptions for policyholder behavior and future index interest rate declarations significantly influence the calculation. Index-based interest guarantees are included in the other policyholder funds line on the Companys consolidated balance sheet.
While valuations for the S&P 500 Index options are sensitive to a number of variables, valuations for S&P 500 Index options purchased are most sensitive to changes in the estimates of bid ask spreads, or the S&P 500 Index value, and the implied volatilities of this index. Significant fluctuations in any of those inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, an increase or decrease used in the assumption for the implied volatilities and in the S&P 500 Index value would result in a directionally similar change in the fair value of the asset.
Valuations for the index-based interest guarantees are sensitive to a number of variables, but are most sensitive to the S&P 500 Index value, the implied volatilities of this index, and LIBOR as reported by Bloomberg. Generally, a significant increase or decrease used in the assumption for the implied volatilities and in the S&P 500 Index value would result in a directionally similar change, while an increase or decrease in LIBOR would result in a directionally opposite change in the fair value of the liability.
Valuations for commercial mortgage loans measured at fair value on a nonrecurring basis using significant unobservable Level 3 inputs are sensitive to a number of variables, but are most sensitive to net operating income and the applied capitalization rate. Generally, an increase or decrease resulting from a change in the stabilized net operating income from the collateralized property would result in a directionally similar change in the fair value of the asset. An increase or decrease in the assumption for the capitalization rate would result in a directionally opposite change in the fair value of the asset.
Valuations for real estate owned measured at fair value on a nonrecurring basis using significant unobservable Level 3 inputs are sensitive to a number of variables, but are most sensitive to the reductions taken on appraisals obtained, which may result in a fair value and carrying value below the appraised value. Generally, an increase in the reductions taken on appraisals obtained would result in a reduction in the fair value of the asset.
Quantitative information regarding significant unobservable inputs used in Level 3 valuation of assets and liabilities measured and recorded at fair value is as follows:
September 30, 2012 (Dollars in millions) | ||||||||||
Fair Value | Valuation Technique |
Unobservable Input |
Range of inputs | |||||||
S&P 500 Index options |
$ | 13.8 | Black-Scholes option pricing model |
Various assumptions |
(a) | |||||
| ||||||||||
Index-based interest guarantees |
58.6 | Discounted cash flow |
Expected future option purchase |
1%-5% | ||||||
Various assumptions |
(b) | |||||||||
| ||||||||||
Black-Scholes option pricing model |
Various assumptions |
(a) | ||||||||
| ||||||||||
Commercial mortgage loans |
55.1 | Appraisals |
Reduction on appraisal |
0%-43% | ||||||
Cash flows |
Capitalization rate (c) |
7%-14% | ||||||||
| ||||||||||
Real estate owned |
32.9 | Appraisals |
Reduction on appraisal |
0%-44% |
(a) | Represents various assumptions derived from market data, which include estimates of bid ask spreads and the implied volatilities for the S&P 500 index. |
(b) | Represents various actuarial assumptions which include combined lapse, mortality and withdrawal decrement rates which generally have a range of inputs from 5%-36%. |
(c) | Capitalization rates are used as an internal analysis in converting the underlying propertys income to an estimated property value. |
18
The following tables set forth the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable Level 3 inputs:
Three Months Ended September 30, 2012 | ||||||||||||||||||||||||
Assets | Liabilities | |||||||||||||||||||||||
U.S. Government and Agency Bonds |
U.S. State and Political Subdivision Bonds |
Corporate Bonds |
S&P 500 Index Options |
Total Assets |
Index- Based Interest Guarantees |
|||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Beginning balance |
$ | | $ | 1.8 | $ | 58.6 | $ | 12.4 | $ | 72.8 | $ | 56.0 | ||||||||||||
Total realized/unrealized gains (losses): |
||||||||||||||||||||||||
Included in net income |
| | | 2.9 | 2.9 | 2.5 | ||||||||||||||||||
Included in other comprehensive income (loss) |
| (0.1 | ) | 0.4 | | 0.3 | | |||||||||||||||||
Purchases, issuances, sales and settlements: |
||||||||||||||||||||||||
Purchases |
| | 8.2 | 2.1 | 10.3 | | ||||||||||||||||||
Issuances |
| | | | | 0.9 | ||||||||||||||||||
Sales |
| | (0.1 | ) | | (0.1 | ) | | ||||||||||||||||
Settlements |
| | | (3.6 | ) | (3.6 | ) | (0.8 | ) | |||||||||||||||
Transfers into level 3 |
| | (0.4 | ) | | (0.4 | ) | | ||||||||||||||||
Transfers out of level 3 |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | | $ | 1.7 | $ | 66.7 | $ | 13.8 | $ | 82.2 | $ | 58.6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Three Months Ended September 30, 2011 | ||||||||||||||||||||||||
Assets | Liabilities | |||||||||||||||||||||||
U.S. Government and Agency Bonds |
U.S. State and Political Subdivision Bonds |
Corporate Bonds |
S&P 500 Index Options |
Total Assets |
Index- Based Interest Guarantees |
|||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Beginning balance |
$ | 0.7 | $ | 1.4 | $ | 55.2 | $ | 12.8 | $ | 70.1 | $ | 51.1 | ||||||||||||
Total realized/unrealized gains (losses): |
||||||||||||||||||||||||
Included in net income |
| | | (6.8 | ) | (6.8 | ) | (3.8 | ) | |||||||||||||||
Included in other comprehensive income (loss) |
(0.1 | ) | | 0.6 | | 0.5 | | |||||||||||||||||
Purchases, issuances, sales and settlements: |
||||||||||||||||||||||||
Purchases |
| | | 2.2 | 2.2 | | ||||||||||||||||||
Issuances |
| | | | | 0.4 | ||||||||||||||||||
Sales |
| | (0.2 | ) | | (0.2 | ) | | ||||||||||||||||
Settlements |
| | | (3.8 | ) | (3.8 | ) | (0.5 | ) | |||||||||||||||
Transfers into level 3 |
| | 6.1 | | 6.1 | | ||||||||||||||||||
Transfers out of level 3 |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 0.6 | $ | 1.4 | $ | 61.7 | $ | 4.4 | $ | 68.1 | $ | 47.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
19
Nine Months Ended September 30, 2012 | ||||||||||||||||||||||||
Assets | Liabilities | |||||||||||||||||||||||
U.S. Government and Agency Bonds |
U.S. State and Political Subdivision Bonds |
Corporate Bonds |
S&P 500 Index Options |
Total Assets |
Index- Based Interest Guarantees |
|||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Beginning balance |
$ | 0.5 | $ | 1.4 | $ | 64.0 | $ | 7.2 | $ | 73.1 | $ | 49.5 | ||||||||||||
Total realized/unrealized gains (losses): |
||||||||||||||||||||||||
Included in net income |
| | | 7.3 | 7.3 | 7.2 | ||||||||||||||||||
Included in other comprehensive income (loss) |
| (0.1 | ) | (1.0 | ) | | (1.1 | ) | | |||||||||||||||
Purchases, issuances, sales and settlements: |
||||||||||||||||||||||||
Purchases |
| | 8.2 | 6.9 | 15.1 | | ||||||||||||||||||
Issuances |
| | | | | 4.1 | ||||||||||||||||||
Sales |
| | (0.1 | ) | | (0.1 | ) | | ||||||||||||||||
Settlements |
| | | (7.6 | ) | (7.6 | ) | (2.2 | ) | |||||||||||||||
Transfers into level 3 |
| 0.4 | 5.1 | | 5.5 | | ||||||||||||||||||
Transfers out of level 3 |
(0.5 | ) | | (9.5 | ) | | (10.0 | ) | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | | $ | 1.7 | $ | 66.7 | $ | 13.8 | $ | 82.2 | $ | 58.6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Nine Months Ended September 30, 2011 | ||||||||||||||||||||||||
Assets | Liabilities | |||||||||||||||||||||||
U.S. Government and Agency Bonds |
U.S. State and Political Subdivision Bonds |
Corporate Bonds |
S&P 500 Index Options |
Total Assets |
Index- Based Interest Guarantees |
|||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Beginning balance |
$ | 0.9 | $ | 1.7 | $ | 59.0 | $ | 13.3 | $ | 74.9 | $ | 48.5 | ||||||||||||
Total realized/unrealized gains (losses): |
||||||||||||||||||||||||
Included in net income |
| | | (3.0 | ) | (3.0 | ) | (1.7 | ) | |||||||||||||||
Included in other comprehensive income (loss) |
(0.3 | ) | 0.1 | (1.5 | ) | | (1.7 | ) | | |||||||||||||||
Purchases, issuances, sales and settlements: |
||||||||||||||||||||||||
Purchases |
| | | 6.9 | 6.9 | | ||||||||||||||||||
Issuances |
| | | | | 1.6 | ||||||||||||||||||
Sales |
| | (1.9 | ) | | (1.9 | ) | | ||||||||||||||||
Settlements |
| | | (12.8 | ) | (12.8 | ) | (1.2 | ) | |||||||||||||||
Transfers into level 3 |
| | 6.1 | | 6.1 | | ||||||||||||||||||
Transfers out of level 3 |
| (0.4 | ) | | | (0.4 | ) | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 0.6 | $ | 1.4 | $ | 61.7 | $ | 4.4 | $ | 68.1 | $ | 47.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For all periods disclosed above, fixed maturity securities transferred into Level 3 from Level 2 are the result of the Company being unable to obtain observable assumptions for these investments in the market. Fixed maturity securities transferred out of Level 3 into Level 2 are the result of the Company being able to obtain observable assumptions for these investments in the market. There were no transfers between Level 1 and Level 2 for the third quarters and first nine months of 2012 and 2011.
20
The following table sets forth the changes in unrealized gains (losses) included in net income relating to positions that the Company continued to hold:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Assets: |
||||||||||||||||
S&P 500 Index options |
$ | 2.7 | $ | (7.0 | ) | $ | 4.0 | $ | (5.9 | ) | ||||||
Liabilities: |
||||||||||||||||
Index-based interest guarantees |
$ | (5.4 | ) | $ | 3.0 | $ | (11.8 | ) | $ | (1.4 | ) |
Changes to the fair value of fixed maturity securities, excluding S&P 500 Index options, were recorded in other comprehensive income. Changes to the fair value of the S&P 500 Index options were recorded to net investment income. Changes to the fair value of the index-based interest guarantees were recorded to interest credited. The interest credited amount included negative interest on policyholder funds due to changes in the Level 3 actuarial assumptions of $1.1 million and $0.2 million for the third quarters of 2012 and 2011, respectively, and $2.2 million and $1.7 million for the first nine months of 2012 and 2011, respectively.
Certain assets and liabilities are measured at fair value on a nonrecurring basis such as impaired commercial mortgage loans with specific allowances for losses and real estate acquired in satisfaction of debt through foreclosure or the acceptance of deeds in lieu of foreclosure on commercial mortgage loans (real estate owned). The impaired commercial mortgage loans and real estate owned are valued using Level 3 measurements. These Level 3 inputs are reviewed for reasonableness by management and evaluated on a quarterly basis. The commercial mortgage loan measurements include valuation of the market value of the asset using general underwriting procedures and appraisals. Real estate owned is initially recorded at estimated net realizable value, which includes an estimate for disposal costs. These amounts may be adjusted in a subsequent period as independent appraisals are received.
The following table sets forth the assets measured at fair value on a nonrecurring basis as of September 30, 2012 that the Company continued to hold:
September 30, 2012 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(In millions) | ||||||||||||||||
Commercial mortgage loans |
$ | 55.1 | $ | | $ | | $ | 55.1 | ||||||||
Real estate owned |
32.9 | | | 32.9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets measured at fair value on a nonrecurring basis |
$ | 88.0 | $ | | $ | | $ | 88.0 | ||||||||
|
|
|
|
|
|
|
|
Commercial mortgage loans measured on a nonrecurring basis with a carrying amount of $74.6 million were written down to their fair value of $55.1 million, less selling costs, at September 30, 2012. The specific commercial mortgage loan loss allowance related to these commercial mortgage loans was $25.0 million at September 30, 2012. The real estate owned measured on a nonrecurring basis as of September 30, 2012, and still held at September 30, 2012 had capital losses totaling $1.3 million for the first nine months of 2012. Real estate owned measured on a nonrecurring basis represents newly acquired properties or properties whose value has been adjusted based on pending sale or other market information.
The following table sets forth the assets measured at fair value on a nonrecurring basis as of December 31, 2011 that the Company continued to hold:
December 31, 2011 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(In millions) | ||||||||||||||||
Commercial mortgage loans |
$ | 49.2 | $ | | $ | | $ | 49.2 | ||||||||
Real estate owned |
50.1 | | | 50.1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets measured at fair value on a nonrecurring basis |
$ | 99.3 | $ | | $ | | $ | 99.3 | ||||||||
|
|
|
|
|
|
|
|
Commercial mortgage loans measured on a nonrecurring basis with a carrying amount of $75.8 million were written down to their fair value of $49.2 million, less selling costs, at December 31, 2011. The specific commercial mortgage loan loss allowance related to these commercial mortgage loans was $26.6 million at December 31, 2011. The real estate owned measured on a nonrecurring basis as of December 31, 2011, and still held at December 31, 2011 had capital losses totaling $3.5 million for 2011. See Note 7InvestmentsCommercial Mortgage Loans for further disclosures regarding the commercial mortgage loan loss allowance.
21
7. | INVESTMENTS |
Fixed Maturity Securities
The following tables set forth amortized costs, gross unrealized gains and losses and fair values of the Companys fixed maturity securities:
September 30, 2012 | ||||||||||||||||
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
|||||||||||||
(In millions) | ||||||||||||||||
Corporate bonds |
$ | 5,819.0 | $ | 611.3 | $ | (2.8 | ) | $ | 6,427.5 | |||||||
U.S. government and agency bonds |
365.6 | 64.7 | | 430.3 | ||||||||||||
U.S. state and political subdivision bonds |
158.7 | 17.8 | | 176.5 | ||||||||||||
Foreign government bonds |
61.4 | 10.9 | | 72.3 | ||||||||||||
S&P 500 Index options |
13.8 | | | 13.8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
$ | 6,418.5 | $ | 704.7 | $ | (2.8 | ) | $ | 7,120.4 | |||||||
|
|
|
|
|
|
|
|
December 31, 2011 | ||||||||||||||||
Amortized Cost |
Unrealized Gains |
Unrealized Losses | Fair Value |
|||||||||||||
(In millions) | ||||||||||||||||
Corporate bonds |
$ | 5,588.4 | $ | 491.8 | $ | (20.9 | ) | $ | 6,059.3 | |||||||
U.S. government and agency bonds |
387.8 | 64.3 | | 452.1 | ||||||||||||
U.S. state and political subdivision bonds |
164.8 | 14.0 | | 178.8 | ||||||||||||
Foreign government bonds |
61.7 | 10.4 | | 72.1 | ||||||||||||
S&P 500 Index options |
7.2 | | | 7.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
$ | 6,209.9 | $ | 580.5 | $ | (20.9 | ) | $ | 6,769.5 | |||||||
|
|
|
|
|
|
|
|
The following table sets forth the amortized costs and fair values of the Companys fixed maturity securities by contractual maturity:
September 30, 2012 | December 31, 2011 | |||||||||||||||
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
|||||||||||||
(In millions) | ||||||||||||||||
Due in one year or less |
$ | 803.0 | $ | 818.6 | $ | 632.7 | $ | 645.0 | ||||||||
Due after one year through five years |
2,697.1 | 2,915.8 | 2,534.6 | 2,693.6 | ||||||||||||
Due after five years through ten years |
2,076.6 | 2,343.5 | 2,173.9 | 2,392.5 | ||||||||||||
Due after ten years |
841.8 | 1,042.5 | 868.7 | 1,038.4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
$ | 6,418.5 | $ | 7,120.4 | $ | 6,209.9 | $ | 6,769.5 | ||||||||
|
|
|
|
|
|
|
|
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Callable bonds without make-whole provisions represented 8.3%, or $592.4 million, of the Companys fixed maturity securities portfolio at September 30, 2012. At September 30, 2012, the Company did not have any direct exposure to sub-prime or Alt-A mortgages in its fixed maturity securities portfolio. At September 30, 2012, the Company did not have any direct exposure to euro zone government issued debt or debt issued by investment and commercial banks headquartered in Portugal, Ireland, Italy, Greece or Spain. At September 30, 2012, fixed maturity securities issued by investment and commercial banks headquartered in other euro zone countries represented 0.8%, or $54.7 million, of the Companys fixed maturity security portfolio. There were no impairments on fixed maturity securities related to euro zone exposure during the first nine months of 2012.
22
Gross Unrealized Losses
The following tables set forth the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
September 30, 2012 | ||||||||||||||||||||||||
Total | Less than 12 months | 12 or more months | ||||||||||||||||||||||
Number | Amount | Number | Amount | Number | Amount | |||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Unrealized losses: |
||||||||||||||||||||||||
Corporate bonds |
98 | $ | 2.8 | 82 | $ | 1.6 | 16 | $ | 1.2 | |||||||||||||||
Fair market value of securities with unrealized losses: |
||||||||||||||||||||||||
Corporate bonds |
98 | $ | 87.0 | 82 | $ | 71.4 | 16 | $ | 15.6 | |||||||||||||||
December 31, 2011 | ||||||||||||||||||||||||
Total | Less than 12 months | 12 or more months | ||||||||||||||||||||||
Number | Amount | Number | Amount | Number | Amount | |||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Unrealized losses: |
||||||||||||||||||||||||
Corporate bonds |
360 | $ | 20.9 | 334 | $ | 17.4 | 26 | $ | 3.5 | |||||||||||||||
Fair market value of securities with unrealized losses: |
||||||||||||||||||||||||
Corporate bonds |
360 | $ | 425.3 | 334 | $ | 398.0 | 26 | $ | 27.3 |
The unrealized losses on the investment securities set forth above were partly due to increases in market interest rates subsequent to their purchase by the Company and have also been affected by overall economic factors. The Company expects the fair value of these investment securities to recover as the investment securities approach their maturity dates or sooner if market yields for such investment securities decline. The Company does not believe that any of the investment securities are impaired due to credit quality or due to any company or industry specific event. Based on managements evaluation of the securities and the Companys intent to hold the securities, and as it is unlikely that the Company will be required to sell the securities, none of the unrealized losses summarized in this table are considered other-than-temporary.
Commercial Mortgage Loans
The Company underwrites mortgage loans on commercial property throughout the United States. In addition to real estate collateral, the Company requires either partial or full recourse on most loans. At September 30, 2012, the Company did not have any direct exposure to sub-prime or Alt-A mortgages in its commercial mortgage loan portfolio.
23
The following table sets forth the commercial mortgage loan portfolio by property type, by geographic region within the U.S. and by U.S. state:
September 30, 2012 | December 31, 2011 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Property type: |
||||||||||||||||
Retail |
$ | 2,492.2 | 48.4 | % | $ | 2,457.8 | 50.1 | % | ||||||||
Industrial |
967.4 | 18.8 | 900.4 | 18.4 | ||||||||||||
Office |
944.7 | 18.3 | 911.1 | 18.6 | ||||||||||||
Hotel/motel |
297.5 | 5.8 | 241.9 | 4.9 | ||||||||||||
Commercial |
199.4 | 3.9 | 187.1 | 3.8 | ||||||||||||
Apartment and other |
247.8 | 4.8 | 204.0 | 4.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial mortgage loans |
$ | 5,149.0 | 100.0 | % | $ | 4,902.3 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Geographic region*: |
||||||||||||||||
Pacific |
$ | 1,811.2 | 35.2 | % | $ | 1,699.3 | 34.7 | % | ||||||||
South Atlantic |
1,028.9 | 20.0 | 953.8 | 19.5 | ||||||||||||
West South Central |
629.6 | 12.2 | 605.3 | 12.3 | ||||||||||||
Mountain |
609.1 | 11.8 | 585.8 | 11.9 | ||||||||||||
East North Central |
420.3 | 8.2 | 393.4 | 8.0 | ||||||||||||
Middle Atlantic |
241.8 | 4.7 | 243.8 | 5.0 | ||||||||||||
West North Central |
183.9 | 3.6 | 184.8 | 3.8 | ||||||||||||
East South Central |
131.7 | 2.5 | 129.9 | 2.6 | ||||||||||||
New England |
92.5 | 1.8 | 106.2 | 2.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial mortgage loans |
$ | 5,149.0 | 100.0 | % | $ | 4,902.3 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
U.S. state: |
||||||||||||||||
California |
$ | 1,418.4 | 27.5 | % | $ | 1,332.0 | 27.2 | % | ||||||||
Texas |
574.0 | 11.1 | 550.8 | 11.2 | ||||||||||||
Florida |
316.0 | 6.2 | 305.3 | 6.2 | ||||||||||||
Georgia |
304.3 | 5.9 | 270.1 | 5.5 | ||||||||||||
Other states |
2,536.3 | 49.3 | 2,444.1 | 49.9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial mortgage loans |
$ | 5,149.0 | 100.0 | % | $ | 4,902.3 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
* | Geographic regions obtained from the American Council of Life Insurers Mortgage Loan Portfolio Profile. |
Through its concentration of commercial mortgage loans in California, the Company is exposed to potential losses from an economic downturn in California as well as certain catastrophes, such as earthquakes and fires that may affect certain areas of the western region. Borrowers are required to maintain fire insurance coverage to provide reimbursement for any losses due to fire. Management diversifies the commercial mortgage loan portfolio within California by both location and type of property in an effort to reduce certain catastrophe and economic exposure. However, diversification may not always eliminate the risk of such losses. Historically, the delinquency rate of the California-based commercial mortgage loans has been substantially below the industry average and consistent with the Companys experience in other states. The Company does not require earthquake insurance for the properties when it underwrites new loans. However, management does consider the potential for earthquake loss based upon seismic surveys and structural information specific to each property. The Company does not expect a catastrophe or earthquake damage in the western region to have a material adverse effect on its business, financial position, results of operations or cash flows. Currently, the Companys California exposure is primarily in Los Angeles County, Orange County, San Diego County and the Bay Area Counties. There is a smaller concentration of commercial mortgage loans in the Inland Empire and the San Joaquin Valley where there has been greater economic decline. Due to the concentration of commercial mortgage loans in California, a continued economic decline in California could have a material adverse effect on the Companys business, financial position, results of operations or cash flows.
The carrying value of commercial mortgage loans represents the outstanding principal balance less a loan loss allowance for probable uncollectible amounts. The commercial mortgage loan loss allowance is estimated based on evaluating known and inherent risks in the loan portfolio and consists of a general and a specific loan loss allowance.
24
Impairment Evaluation
The Company continuously monitors its commercial mortgage loan portfolio for potential nonperformance by evaluating the portfolio and individual loans. Key factors that are monitored are as follows:
| Loan loss experience. |
| Delinquency history. |
| Debt coverage ratio. |
| Loan to value ratio. |
| Refinancing and restructuring history. |
| Request for forbearance history. |
If the analysis above indicates a loan might be impaired, it is further analyzed for impairment through the consideration of the following additional factors:
| Delinquency status. |
| Foreclosure status. |
| Restructuring status. |
| Borrower history. |
If it is determined a loan is impaired, a specific allowance is recorded, if necessary.
General Loan Loss Allowance
The general loan loss allowance is based on the Companys analysis of factors including changes in the size and composition of the loan portfolio, debt coverage ratios, loan to value ratios, actual loan loss experience and individual loan analysis.
Specific Loan Loss Allowance
An impaired commercial mortgage loan is a loan that is not performing to the contractual terms of the loan agreement. A specific allowance for losses is recorded when a loan is considered to be impaired and it is probable that all amounts due will not be collected. The Company also holds specific loan loss allowances on certain performing commercial mortgage loans that it continues to monitor and evaluate. Impaired commercial mortgage loans without specific allowances for losses are those for which the Company has determined that it remains probable that all amounts due will be collected although the timing or nature may be outside the original contractual terms. In addition, for impaired commercial mortgage loans, the Company evaluates the cost to dispose of the underlying collateral, any significant out of pocket expenses the loan may incur and other quantitative information management has concerning the loan. Portions of loans that are deemed uncollectible are written off against the allowance, and recoveries, if any, are credited to the allowance.
The following table sets forth changes in the commercial mortgage loan loss allowance:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Commercial mortgage loan loss allowance: |
||||||||||||||||
Beginning balance |
$ | 45.6 | $ | 43.5 | $ | 48.1 | $ | 36.1 | ||||||||
Provision |
5.0 | 7.5 | 11.4 | 25.5 | ||||||||||||
Charge-offs, net |
(2.6 | ) | (3.9 | ) | (11.5 | ) | (14.5 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 48.0 | $ | 47.1 | $ | 48.0 | $ | 47.1 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Specific loan loss allowance |
$ | 25.0 | $ | 26.8 | $ | 25.0 | $ | 26.8 | ||||||||
General loan loss allowance |
23.0 | 20.3 | 23.0 | 20.3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial mortgage loan loss allowance |
$ | 48.0 | $ | 47.1 | $ | 48.0 | $ | 47.1 | ||||||||
|
|
|
|
|
|
|
|
The higher commercial mortgage loan loss allowance as of September 30, 2012 compared to September 30, 2011 was primarily due to the increase in the general loan loss allowance as of September 30, 2012 compared to September 30, 2011. The decrease in the provision and charge-offs for the third quarter and first nine months of 2012 compared to the same periods of 2011 were primarily related to lower losses associated with foreclosures, accepted deeds in lieu of foreclosure on commercial mortgage loans and other related charges associated with commercial mortgage loans leaving the portfolio during the third quarter and first nine months of 2012.
25
The following table sets forth the recorded investment in commercial mortgage loans:
September 30, 2012 | December 31, 2011 | |||||||
(In millions) | ||||||||
Commercial mortgage loans collectively evaluated for impairment |
$ | 5,098.4 | $ | 4,845.7 | ||||
Commercial mortgage loans individually evaluated for impairment |
98.6 | 104.7 | ||||||
Commercial mortgage loan loss allowance |
(48.0 | ) | (48.1 | ) | ||||
|
|
|
|
|||||
Total commercial mortgage loans |
$ | 5,149.0 | $ | 4,902.3 | ||||
|
|
|
|
The Company assesses the credit quality of its commercial mortgage loan portfolio quarterly by reviewing the performance of its portfolio which includes evaluating its performing and nonperforming commercial mortgage loans. Nonperforming commercial mortgage loans include all commercial mortgage loans that are 60 days or more past due and commercial mortgage loans that are not 60 days past due but are not substantially performing to other original contractual terms.
The following tables set forth performing and nonperforming commercial mortgage loans by property type:
September 30, 2012 | ||||||||||||||||||||||||||||
Retail | Office | Industrial | Hotel/ Motel |
Commercial | Apartment and Other |
Total | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Performing commercial mortgage loans |
$ | 2,487.5 | $ | 941.5 | $ | 965.5 | $ | 297.5 | $ | 198.8 | $ | 247.8 | $ | 5,138.6 | ||||||||||||||
Nonperforming commercial mortgage loans |
4.7 | 3.2 | 1.9 | | 0.6 | | 10.4 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial mortgage loans |
$ | 2,492.2 | $ | 944.7 | $ | 967.4 | $ | 297.5 | $ | 199.4 | $ | 247.8 | $ | 5,149.0 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 | ||||||||||||||||||||||||||||
Retail | Office | Industrial | Hotel/ Motel |
Commercial | Apartment and Other |
Total | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Performing commercial mortgage loans |
$ | 2,442.3 | $ | 898.4 | $ | 895.2 | $ | 241.9 | $ | 182.0 | $ | 201.3 | $ | 4,861.1 | ||||||||||||||
Nonperforming commercial mortgage loans |
15.5 | 12.7 | 5.2 | | 5.1 | 2.7 | 41.2 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial mortgage loans |
$ | 2,457.8 | $ | 911.1 | $ | 900.4 | $ | 241.9 | $ | 187.1 | $ | 204.0 | $ | 4,902.3 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
The following tables set forth impaired commercial mortgage loans identified in managements specific review of probable loan losses and the related allowance:
September 30, 2012 | ||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Amount on Nonaccrual Status |
|||||||||||||
(In millions) | ||||||||||||||||
Impaired commercial mortgage loans: |
||||||||||||||||
Without specific loan loss allowances: |
||||||||||||||||
Retail |
$ | 12.5 | $ | 12.5 | $ | | $ | 2.9 | ||||||||
Office |
6.3 | 6.3 | | 5.1 | ||||||||||||
Industrial |
3.3 | 3.3 | | | ||||||||||||
Apartment and other |
1.9 | 1.9 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total impaired commercial mortgage loans without specific loan loss allowances |
24.0 | 24.0 | | 8.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
With specific loan loss allowances: |
||||||||||||||||
Retail |
35.7 | 35.7 | 13.8 | 6.3 | ||||||||||||
Office |
11.4 | 11.4 | 2.7 | 1.8 | ||||||||||||
Industrial |
10.8 | 10.8 | 3.3 | 0.9 | ||||||||||||
Hotel/motel |
5.9 | 5.9 | 0.4 | | ||||||||||||
Commercial |
7.7 | 7.7 | 4.7 | 3.0 | ||||||||||||
Apartment and other |
3.1 | 3.1 | 0.1 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total impaired commercial mortgage loans with specific loan loss allowances |
74.6 | 74.6 | 25.0 | 12.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total impaired commercial mortgage loans |
$ | 98.6 | $ | 98.6 | $ | 25.0 | $ | 20.0 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2011 | ||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Amount on Nonaccrual Status |
|||||||||||||
(In millions) | ||||||||||||||||
Impaired commercial mortgage loans: |
||||||||||||||||
Without specific loan loss allowances: |
||||||||||||||||
Retail |
$ | 8.6 | $ | 8.6 | $ | | $ | 2.1 | ||||||||
Office |
5.8 | 5.8 | | 4.3 | ||||||||||||
Industrial |
5.8 | 5.8 | | 0.9 | ||||||||||||
Hotel/motel |
5.9 | 5.9 | | | ||||||||||||
Apartment and other |
2.8 | 2.8 | | 1.1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total impaired commercial mortgage loans without specific loan loss allowances |
28.9 | 28.9 | | 8.4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
With specific loan loss allowances: |
||||||||||||||||
Retail |
31.7 | 31.7 | 10.7 | 10.2 | ||||||||||||
Office |
18.3 | 18.3 | 5.2 | 10.1 | ||||||||||||
Industrial |
11.5 | 11.5 | 5.0 | 7.5 | ||||||||||||
Commercial |
11.1 | 11.1 | 5.3 | 11.1 | ||||||||||||
Apartment and other |
3.2 | 3.2 | 0.4 | 1.9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total impaired commercial mortgage loans with specific loan loss allowances |
75.8 | 75.8 | 26.6 | 40.8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total impaired commercial mortgage loans |
$ | 104.7 | $ | 104.7 | $ | 26.6 | $ | 49.2 | ||||||||
|
|
|
|
|
|
|
|
The decrease in impaired commercial mortgage loans at September 30, 2012 compared to December 31, 2011 was primarily due to loan repayments and foreclosures during the first nine months of 2012. As of September 30, 2012 and December 31, 2011, the Company did not have any commercial mortgage loans greater than 90 days delinquent that were accruing interest.
27
A restructuring is considered to be a troubled debt restructuring when the debtor is experiencing financial difficulties and the restructured terms constitute a concession. The Company evaluates all restructured commercial mortgage loans for indications of troubled debt restructurings and the potential losses related to these restructurings. If a loan is considered a troubled debt restructuring, the Company impairs the loan and records a specific allowance for estimated losses. In some cases, the recorded investment in the loan may increase post-restructuring. As a result of adopting the amendments in ASU No. 2011-02, A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring, the Company assessed all restructurings that occurred during the period for identification as troubled debt restructurings. The Company did not identify any troubled debt restructurings that were not already considered impaired.
The following table sets forth information related to the troubled debt restructurings of financing receivables:
Three Months Ended September 30, 2012 |
Nine Months Ended September 30, 2012 |
|||||||||||||||||||||||
Number of Loans |
Pre- Restructuring Recorded Investment |
Post- Restructuring Recorded Investment |
Number of Loans |
Pre- Restructuring Recorded Investment |
Post- Restructuring Recorded Investment |
|||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Troubled debt restructurings: |
||||||||||||||||||||||||
Retail |
3 | $ | 2.6 | $ | 3.9 | 7 | $ | 6.0 | $ | 7.2 | ||||||||||||||
Industrial |
| | | 3 | 2.4 | 2.4 | ||||||||||||||||||
Apartment and other |
| | | 1 | 1.8 | 1.8 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total troubled debt restructurings |
3 | $ | 2.6 | $ | 3.9 | 11 | $ | 10.2 | $ | 11.4 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth information related to the troubled debt restructurings identified in the previous 12 months that subsequently defaulted during the periods presented:
Three Months Ended September 30, 2012 |
Nine Months Ended September 30, 2012 |
|||||||||||||||
Number of Loans |
Recorded Investment |
Number of Loans |
Recorded Investment |
|||||||||||||
(Dollars in millions) | ||||||||||||||||
Troubled debt restructurings that subsequently defaulted: |
||||||||||||||||
Retail |
| $ | | 1 | $ | 0.8 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total troubled debt restructurings |
| $ | | 1 | $ | 0.8 | ||||||||||
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At September 30, 2012, subsequently defaulted troubled debt restructurings identified during the previous twelve months were reinstated and current.
28
The following table sets forth the average recorded investment in impaired commercial mortgage loans before specific allowances for losses:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Average recorded investment |
$ | 99.0 | $ | 91.9 | $ | 101.7 | $ | 89.2 |
Interest Income
The Company records interest income in net investment income and continues to recognize interest income on delinquent commercial mortgage loans until the loans are more than 90 days delinquent. Interest income and accrued interest receivable are reversed when a loan is put on non-accrual status. For loans that are less than 90 days delinquent, management may reverse interest income and the accrued interest receivable if there is a question on the collectability of the interest. Interest income on loans in the 90-day delinquent category is recognized in the period the cash is collected. The Company resumes the recognition of interest income when the loan becomes less than 90 days delinquent and management determines it is probable that the loan will remain performing.
The amount of interest income recognized on impaired commercial mortgage loans was $1.0 million and $0.7 million for the third quarters of 2012 and 2011, respectively, and was $3.1 million and $2.8 million for the first nine months of 2012 and 2011, respectively. The cash received by the Company in payment of interest on impaired commercial mortgage loans was $1.0 million and $0.7 million for the third quarters of 2012 and 2011, respectively, and was $3.0 million and $2.1 million for the first nine months of 2012 and 2011, respectively.
The following tables set forth the aging of commercial mortgage loans by property type:
September 30, 2012 | ||||||||||||||||||||||||||||
30 Days Past Due |
60 Days Past Due |
Greater Than 90 Days Past Due |
Total Past Due |
Allowance Related to Past Due |
Current, net | Total Commercial Mortgage Loans |
||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Commercial mortgage loans: |
||||||||||||||||||||||||||||
Retail |
$ | 11.1 | $ | 0.3 | $ | 7.6 | $ | 19.0 | $ | (3.2 | ) | $ | 2,476.4 | $ | 2,492.2 | |||||||||||||
Office |
1.8 | | 3.7 | 5.5 | (0.5 | ) | 939.7 | 944.7 | ||||||||||||||||||||
Industrial |
0.8 | 1.3 | 1.3 | 3.4 | (0.8 | ) | 964.8 | 967.4 | ||||||||||||||||||||
Hotel/motel |
| | | | | 297.5 | 297.5 | |||||||||||||||||||||
Commercial |
| | 1.4 | 1.4 | (0.8 | ) | 198.8 | 199.4 | ||||||||||||||||||||
Apartment and other |
| | | | | 247.8 | 247.8 | |||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial mortgage loans |
$ | 13.7 | $ | 1.6 | $ | 14.0 | $ | 29.3 | $ | (5.3 | ) | $ | 5,125.0 | $ | 5,149.0 | |||||||||||||
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|||||||||||||||
December 31, 2011 | ||||||||||||||||||||||||||||
30 Days Past Due |
60 Days Past Due |
Greater Than 90 Days Past Due |
Total Past Due |
Allowance Related to Past Due |
Current, net | Total Commercial Mortgage Loans |
||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Commercial mortgage loans: |
||||||||||||||||||||||||||||
Retail |
$ | 3.1 | $ | 7.1 | $ | 3.0 | $ | 13.2 | $ | (1.3 | ) | $ | 2,445.9 | $ | 2,457.8 | |||||||||||||
Office |
0.8 | 1.5 | 1.6 | 3.9 | (0.4 | ) | 907.6 | 911.1 | ||||||||||||||||||||
Industrial |
1.4 | 0.4 | 2.3 | 4.1 | (0.7 | ) | 897.0 | 900.4 | ||||||||||||||||||||
Hotel/motel |
| | | | | 241.9 | 241.9 | |||||||||||||||||||||
Commercial |
| | 1.2 | 1.2 | (0.8 | ) | 186.7 | 187.1 | ||||||||||||||||||||
Apartment and other |
0.2 | | | 0.2 | | 203.8 | 204.0 | |||||||||||||||||||||
|
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|
|
|
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|
|
|||||||||||||||
Total commercial mortgage loans |
$ | 5.5 | $ | 9.0 | $ | 8.1 | $ | 22.6 | $ | (3.2 | ) | $ | 4,882.9 | $ | 4,902.3 | |||||||||||||
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The Company closely monitors all past due commercial mortgage loans. Additional attention is given to those loans at least 60 days past due. Commercial mortgage loans that were at least 60 days past due totaled $15.6 million and $17.1 million at September 30, 2012 and December 31, 2011, respectively. Overall, commercial mortgage loans at least 60 days past due were 0.30% and 0.34% of the commercial mortgage loan portfolio at September 30, 2012 and December 31, 2011.
29
Net Investment Income
The following table sets forth net investment income summarized by investment type:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
Bonds |
$ | 77.8 | $ | 79.2 | $ | 235.2 | $ | 243.1 | ||||||||
S&P 500 Index options |
2.9 | (6.8 | ) | 7.3 | (3.0 | ) | ||||||||||
|
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|
|
|
|
|
|||||||||
Total fixed maturity securities |
80.7 | 72.4 | 242.5 | 240.1 | ||||||||||||
Commercial mortgage loans |
87.2 | 79.6 | 248.3 | 229.9 | ||||||||||||
Real estate |
| 0.1 | 0.1 | 0.8 | ||||||||||||
Other |
(2.5 | ) | 0.7 | (3.2 | ) | 2.7 | ||||||||||
|
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|
|
|
|
|
|||||||||
Gross investment income |
165.4 | 152.8 | 487.7 | 473.5 | ||||||||||||
Investment expenses |
(5.6 | ) | (5.5 | ) | (16.8 | ) | (16.6 | ) | ||||||||
|
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|
|||||||||
Net investment income |
$ | 159.8 | $ | 147.3 | $ | 470.9 | $ | 456.9 | ||||||||
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Realized Gross Capital Gains and Losses
The following table sets forth gross capital gains and losses by investment type:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Gains: |
||||||||||||||||
Fixed maturity securities |
$ | 3.5 | $ | 1.3 | $ | 9.3 | $ | 9.4 | ||||||||
Commercial mortgage loans |
0.6 | 0.3 | 1.2 | 0.7 | ||||||||||||
Real estate investments |
| 19.4 | | 28.1 | ||||||||||||
Real estate owned |
0.7 | 0.2 | 1.0 | 0.6 | ||||||||||||
Other |
| | 0.1 | | ||||||||||||
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|||||||||
Gross capital gains |
4.8 | 21.2 | 11.6 | 38.8 | ||||||||||||
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|||||||||
Losses: |
||||||||||||||||
Fixed maturity securities |
(1.0 | ) | (0.6 | ) | (4.6 | ) | (2.2 | ) | ||||||||
Provision for commercial mortgage loan losses |
(5.0 | ) | (7.5 | ) | (11.4 | ) | (25.5 | ) | ||||||||
Real estate investments |
| | | (0.2 | ) | |||||||||||
Real estate owned |
(0.9 | ) | (3.8 | ) | (1.9 | ) | (17.0 | ) | ||||||||
Other |
(0.5 | ) | (1.6 | ) | (0.5 | ) | (1.8 | ) | ||||||||
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|||||||||
Gross capital losses |
(7.4 | ) | (13.5 | ) | (18.4 | ) | (46.7 | ) | ||||||||
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|
|||||||||
Net capital (losses) gains |
$ | (2.6 | ) | $ | 7.7 | $ | (6.8 | ) | $ | (7.9 | ) | |||||
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Securities Deposited as Collateral
Securities deposited for the benefit of policyholders in various states, in accordance with state regulations, amounted to $8.0 million and $6.7 million at September 30, 2012 and December 31, 2011, respectively.
8. | DERIVATIVE FINANCIAL INSTRUMENTS |
The Company sells indexed annuities, which permit the holder to elect a fixed interest rate return or an indexed return, where interest credited to the contracts is based on the performance of the S&P 500 Index, subject to an upper limit or cap and minimum guarantees. Policyholders may elect to rebalance between interest crediting options at renewal dates annually. At each renewal date, the Company has the opportunity to re-price the indexed component by changing the cap, subject to minimum guarantees. The Company estimates the fair value of the index-based interest guarantees for the current period and for all future reset periods until
30
contract maturity. Changes in the fair value of the index-based interest guarantees are recorded as interest credited. The liability represents an estimate of the cost of the options to be purchased in the future to manage the risk related to the index-based interest guarantees. The liability for index-based interest guarantees is the present value of future cash flows attributable to the projected index growth that is in excess of cash flows attributable to fixed interest rates guarantees. The excess cash flows are discounted back to the date of the balance sheet using current market indicators for future interest rates and option costs. Cash flows depend on actuarial estimates for policyholder lapse behavior and managements discretion in setting renewal index-based interest guarantees.
The Company purchases S&P 500 Index options for its interest crediting strategy used in its indexed annuity product. The S&P 500 Index options are purchased from investment banks and are selected in a manner that supports the amount of interest that is expected to be credited in the current year to annuity policyholder accounts that are dependent on the performance of the S&P 500 Index. The purchase of S&P 500 Index options is a pivotal part of the Companys risk management strategy for indexed annuity products. The S&P 500 Index options are exclusively used for risk management. While valuations of the S&P 500 Index options are sensitive to a number of variables, valuations for S&P 500 Index options purchased are most sensitive to changes in the S&P 500 Index value and the implied volatilities of this index. The Company generally purchases one S&P 500 Index option contract per month, which has an expiry date of one year from the date of purchase.
The notional amount of the Companys S&P 500 index options at September 30, 2012 and December 31, 2011 was $313.2 million and $303.1 million, respectively. Option premiums paid for the Companys index option contracts were $2.1 million and $2.2 million for the third quarters of 2012 and 2011, respectively, and were $6.9 million for the first nine months of 2012 and 2011. The Company received $3.6 million and $3.8 million for options exercised for the third quarters of 2012 and 2011, respectively, and $7.6 million and $12.8 million for the first nine months of 2012 and 2011, respectively.
The Company recognizes all derivative instruments as assets or liabilities on the balance sheet at fair value. The Company does not designate its derivatives as hedging instruments and thus does not use hedge accounting. As such, any change in the fair value of the derivative assets and derivative liabilities is recognized as income or loss in the period of change. See Note 6Fair Value for additional information regarding the fair value of the Companys derivative assets and liabilities.
The following table sets forth the fair value of the Companys derivative assets and liabilities:
Derivatives Not Designated as Hedging Instruments | September 30, 2012 |
December 31, 2011 |
||||||
(In millions) | ||||||||
Assets: |
||||||||
Fixed maturity securities: |
||||||||
S&P 500 Index options |
$ | 13.8 | $ | 7.2 | ||||
Liabilities: |
||||||||
Other policyholder funds: |
||||||||
Index-based interest guarantees |
$ | 58.6 | $ | 49.5 |
The following table sets forth the amount of gain or loss recognized in earnings from the change in fair value of the Companys derivative assets and liabilities:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Derivatives Not Designated as Hedging Instruments | 2012 | 2011 | 2012 | 2011 | ||||||||||||
(In millions) | ||||||||||||||||
Net investment income: |
||||||||||||||||
S&P 500 Index options |
$ | 2.9 | $ | (6.8 | ) | $ | 7.3 | $ | (3.0 | ) | ||||||
Interest credited: |
||||||||||||||||
Index-based interest guarantees |
(2.5 | ) | 3.8 | (7.2 | ) | 1.7 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net gain (loss) |
$ | 0.4 | $ | (3.0 | ) | $ | 0.1 | $ | (1.3 | ) | ||||||
|
|
|
|
|
|
|
|
Changes in the fair value of the S&P 500 Index options and index-based interest guarantees are primarily the result of fluctuations in the S&P 500 Index and are recorded to net investment income and interest credited, respectively. As a result of the Companys annual update of the key assumptions used to value index-based interest guarantees, a process known as unlocking, interest credited increased $1.1 million and $0.2 million for the third quarters of 2012 and 2011, respectively, and $2.2 million and $1.7 million for the first nine months of 2012 and 2011, respectively.
The Company does not bear derivative-related risk that would require it to post collateral with another institution, and its index option contracts do not contain counterparty credit-risk-related contingent features. The Company is exposed to the credit worthiness of the counterparties from which it purchases its S&P 500 Index options and these counterparties continued abilities to perform
31
according to the terms of the contracts. The current values for the credit exposure have been affected by fluctuations in the S&P 500 Index. The Companys maximum credit exposure would require an increase of approximately 8.1% in the value of the S&P 500 Index. The maximum credit risk is calculated using the cap strike price of the Companys S&P 500 Index options less the floor price, multiplied by the notional amount of the S&P 500 Index options.
The following table sets forth the fair value of the Companys derivative assets and its maximum credit risk exposure related to its derivatives:
September 30, 2012 | ||||||||
Assets
at Fair Value |
Maximum Credit Risk |
|||||||
(In millions) | ||||||||
Counterparty: |
||||||||
The Bank of New York Mellon |
$ | 12.9 | $ | 17.8 | ||||
Goldman Sachs |
0.9 | 1.5 | ||||||
|
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|
|
|||||
Total |
$ | 13.8 | $ | 19.3 | ||||
|
|
|
|
9. | DEFERRED ACQUISITION COSTS (DAC), VALUE OF BUSINESS ACQUIRED (VOBA) AND OTHER INTANGIBLE ASSETS |
DAC, VOBA and other acquisition related intangible assets are generally originated through the issuance of new business or the purchase of existing business, either by purchasing blocks of insurance policies from other insurers or by the outright purchase of other companies. The Companys other intangible assets are subject to impairment tests on an annual basis or more frequently if circumstances indicate that carrying values may not be recoverable.
In October 2010, the FASB issued ASU No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU No. 2010-26 amends the codification guidance for insurance entities to eliminate the diversity of accounting treatment related to deferred acquisition costs. The Company adopted this standard retrospectively as of January 1, 2012 and comparative financial statements of prior periods have been adjusted.
The following table sets forth activity for DAC, VOBA and other intangible assets:
Nine Months Ended September 30, 2012 |
Year Ended December 31, 2011 |
|||||||
(In millions) | ||||||||
Carrying value at beginning of period: |
||||||||
DAC |
$ | 274.4 | $ | 250.1 | ||||
VOBA |
26.4 | 28.4 | ||||||
Other intangible assets |
44.1 | 51.7 | ||||||
|
|
|
|
|||||
Total balance at beginning of period |
344.9 | 330.2 | ||||||
|
|
|
|
|||||
Deferred or acquired: |
||||||||
DAC |
55.3 | 81.7 | ||||||
|
|
|
|
|||||
Total deferred or acquired during period |
55.3 | 81.7 | ||||||
|
|
|
|
|||||
Amortized during period: |
||||||||
DAC |
(49.2 | ) | (57.4 | ) | ||||
VOBA |
(2.6 | ) | (2.0 | ) | ||||
Other intangible assets |
(4.4 | ) | (7.6 | ) | ||||
|
|
|
|
|||||
Total amortized during period |
(56.2 | ) | (67.0 | ) | ||||
|
|
|
|
|||||
Carrying value at end of period, net: |
||||||||
DAC |
280.5 | 274.4 | ||||||
VOBA |
23.8 | 26.4 | ||||||
Other intangible assets |
39.7 | 44.1 | ||||||
|
|
|
|
|||||
Total carrying value at end of period |
$ | 344.0 | $ | 344.9 | ||||
|
|
|
|
32
The Company defers certain acquisition costs that vary with and are directly related to the origination of new business. Certain costs related to obtaining new business and acquiring business through reinsurance agreements have been deferred and will be amortized to accomplish matching against related future premiums or gross profits as appropriate. The Company normally defers certain acquisition-related commissions and incentive payments, certain costs of policy issuance and underwriting, and certain printing costs. Assumptions used in developing DAC and amortization amounts each period include the amount of business in force, expected future persistency, withdrawals, interest rates and profitability. These assumptions are modified to reflect actual experience when appropriate. Additional amortization of DAC is charged to current earnings to the extent it is determined that future premiums or gross profits are not adequate to cover the remaining amounts deferred. Changes in actual persistency are reflected in the calculated DAC balance. Costs that are not directly associated with the acquisition of new business are not deferred as DAC and are charged to expense as incurred. Generally, annual commissions are considered expenses and are not deferred.
DAC for group and individual disability insurance products and group life insurance products is amortized over the life of related policies in proportion to future premiums. The Company amortizes DAC for group disability and life insurance products over the initial premium rate guarantee period, which averages 2.5 years. DAC for individual disability insurance products is amortized in proportion to future premiums over the life of the contract, averaging 20 to 25 years.
The Companys individual deferred annuities and group annuity products are classified as investment contracts. DAC related to these products is amortized over the life of related policies in proportion to expected gross profits. For the Companys individual deferred annuities, DAC is amortized over 30 years. DAC for group annuity products is amortized over 10 years.
VOBA primarily represents the discounted future profits of business assumed through reinsurance agreements. The Company has established VOBA for a block of individual disability business assumed from Minnesota Life Insurance Company (Minnesota Life) and a block of group disability and group life business assumed from Teachers Insurance and Annuity Association of America (TIAA). VOBA is generally amortized in proportion to future premiums for group and individual disability insurance products and group life products. However, the VOBA related to the TIAA transaction associated with an in force block of group long term disability claims for which no ongoing premium is received is amortized in proportion to expected gross profits. If actual premiums or future profitability are inconsistent with the Companys assumptions, the Company could be required to make adjustments to VOBA and related amortization. During the first nine months of 2012, the Company recorded a $0.8 million impairment to VOBA due to experience related to the block of claims assumed. The Company did not record a similar impairment for the first nine months of 2011. The VOBA associated with the TIAA transaction is amortized in proportion to expected gross profits with an amortization period of up to 20 years. For the VOBA associated with the Minnesota Life block of business assumed, the amortization period is up to 30 years and is amortized in proportion to future premiums. The accumulated amortization of VOBA was $65.0 million and $62.4 million at September 30, 2012 and December 31, 2011, respectively.
The following table sets forth the amount of DAC and VOBA balances amortized in proportion to expected gross profits and the percentage of the total balance of DAC and VOBA amortized in proportion to expected gross profits:
September 30, 2012 | December 31, 2011 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
(Dollars in millions) | ||||||||||||||||
DAC |
$ | 57.1 | 20.4 | % | $ | 60.7 | 22.1 | % | ||||||||
VOBA |
6.0 | 25.2 | 7.1 | 26.9 |
Key assumptions, which will affect the determination of expected gross profits for determining DAC and VOBA balances, are:
| Persistency. |
| Interest rates, which affect both investment income and interest credited. |
| Stock market performance. |
| Capital gains and losses. |
| Claim termination rates. |
| Amount of business in force. |
These assumptions are modified to reflect actual experience when appropriate. Although a change in a single assumption may have an impact on the calculated amortization of DAC or VOBA for balances associated with investment contracts, it is the relationship of that change to the changes in other key assumptions that determines the ultimate impact on DAC or VOBA amortization. Because actual results and trends related to these assumptions vary from those assumed, the Company revises these assumptions annually to reflect its current best estimate of expected gross profits. As a result of this process, known as unlocking, the cumulative balances of DAC and VOBA are adjusted with an offsetting benefit or charge to income to reflect changes in the period of the revision. An unlocking event generally occurs as a result of actual experience or future expectations differing from previous estimates. As a result of unlocking, the amortization schedule for future periods is also adjusted.
33
The following table sets forth the impact of unlocking on DAC and VOBA balances:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Decrease to DAC and VOBA |
$ | 0.3 | $ | 0.2 | $ | 1.4 | $ | 0.8 |
Significant, unanticipated changes in key assumptions, which affect the determination of expected gross profits, may result in a large unlocking event that could have a material adverse effect on the Companys financial position or results of operations. However, future changes in DAC and VOBA balances due to changes in underlying assumptions are not expected to be material.
The Companys other intangible assets are subject to amortization and consist of certain customer lists from Asset Management business acquired and an individual disability marketing agreement. Customer lists have a combined estimated weighted-average remaining life of approximately 7.6 years. The marketing agreement accompanied the Minnesota Life transaction and provides access to Minnesota Life agents, some of whom now market Standards individual disability insurance products. The Minnesota Life marketing agreement will be fully amortized by the end of 2023. The accumulated amortization of other intangible assets was $35.0 million and $30.6 million at September 30, 2012 and December 31, 2011, respectively.
The following table sets forth the estimated net amortization of VOBA and other intangible assets for the remainder of 2012 and for each of the next five years:
Amount | ||||
(In millions) | ||||
2012 |
$ | 2.1 | ||
2013 |
8.5 | |||
2014 |
7.3 | |||
2015 |
7.3 | |||
2016 |
5.8 | |||
2017 |
4.4 |
10. | COMMITMENTS AND CONTINGENCIES |
Litigation Contingencies
In the normal course of business, the Company is involved in various legal actions and other state and federal proceedings. A number of actions or proceedings were pending at September 30, 2012. 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 the actions or proceedings is not expected to have a material adverse effect on the Companys business, financial position, results of operations or cash flows.
Senior Unsecured Revolving Credit Facility (Facility) Contingencies
On June 22, 2012, StanCorp entered into an agreement for a four-year, $250 million Facility. Additionally, upon the request of StanCorp and with the consent of the lenders under the Facility, the Facility can be increased to $350 million. The termination date of the Facility is June 22, 2016, though, at the option of StanCorp and with the consent of the lenders under the Facility, the termination date can be extended for two additional one year periods. Borrowings from the Facility will be used to provide for the working capital and general corporate purposes of the Company and its subsidiaries and for the issuance of letters of credit.
Under the agreement, StanCorp is subject to two financial covenants that are based on the Companys ratio of total debt to total capitalization and consolidated net worth. StanCorp is also subject to covenants that limit subsidiary indebtedness. The Facility is subject to performance pricing based upon the Companys publicly announced debt ratings and includes an interest rate option at the election of the borrower of a base rate plus the applicable margin or the LIBOR rate plus the applicable margin, plus facility and utilization fees. At September 30, 2012, StanCorp was in compliance with all financial covenants under the Facility and had no outstanding balance on the Facility.
Other Financing Obligations
On August 10, 2012, the Company issued $250 million of 5.00%, 10-year senior notes (2022 Senior Notes), which mature on August 15, 2022. Interest will be paid semi-annually on February 15 and August 15, beginning on February 15, 2013. The Company used the net proceeds from the issuance of the 2022 Senior Notes to repay the $250 million of 6.875%, 10-year senior notes (2012 Senior Notes), on September 28, 2012.
The Company has $300 million of 6.90%, junior subordinated debentures (Subordinated Debt), which matures on June 1, 2067, is non-callable for the first 10 years (prior to June 1, 2017). The principal amount of the Subordinated Debt is payable at final maturity. Interest is payable semi-annually on June 1 and December 1 for the first 10 years up to June 1, 2017, and quarterly
34
thereafter at a floating rate equal to three-month LIBOR plus 2.51%. StanCorp has the option to defer interest payments for up to five years. The declaration and payment of dividends to shareholders would be restricted if the Company elected to defer interest payments on its Subordinated Debt. If elected, the restriction would be in place during the interest deferral period. StanCorp is currently not deferring interest on the Subordinated Debt.
In the normal course of business, the Company commits to fund commercial mortgage loans generally up to 90 days in advance. At September 30, 2012, the Company had outstanding commitments to fund commercial mortgage loans totaling $128.3 million, with fixed interest rates ranging from 4.500% to 5.875%. These commitments generally have fixed expiration dates. A small percentage of commitments expire due to the borrowers failure to deliver the requirements of the commitment by the expiration date. In these cases, the Company will retain the commitment fee and good faith deposit. Alternatively, if the Company terminates a commitment due to the disapproval of a commitment requirement, the commitment fee and good faith deposit may be refunded to the borrower, less an administrative fee.
11. | ACCOUNTING PRONOUNCEMENTS |
ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The main objective of ASU No. 2011-11 is to enhance disclosures for financial instruments and derivative instruments which have right of setoff conditions. Under the guidance provided in this ASU, entities will be required to disclose the amount of both the recognized asset and the recognized liability subject to setoff under the same arrangement.
ASU No. 2011-11 is effective for interim and annual periods beginning on or after January 1, 2013. The Company does not currently have exposure to hedges, derivatives or master netting arrangements that would be subject to these additional disclosures. Therefore, the Company does not expect this ASU to have a material effect on its asset and liability disclosures in the financial statements.
12. INCOME TAXES
Income taxes may differ from the amount computed by applying the federal corporate tax rate of 35% to pre-tax income because of the net results of permanent differences between book and taxable income and because of the inclusion of state and local income taxes, net of the federal tax benefit.
The following table sets forth the combined federal and state effective income tax rates:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Combined federal and state effective income tax rates |
26.8 | % | 28.8 | % | 23.9 | % | 29.9 | % |
During the first half of 2012, and throughout 2011, the Company purchased tax-advantaged investments, contributing to a decrease in the effective tax rate. In addition, the effective income tax rate was also reduced by favorable book-to-tax differences relative to a lower level of income for 2012. These investments, along with lower pre-tax net income, were the primary drivers of the decreases in the effective income tax rate for the third quarter and first nine months of 2012 compared to the same periods for 2011.
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ITEM 2: | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
As used in this Form 10-Q, the terms StanCorp, Company, we, us and our refer to StanCorp Financial Group, Inc. and its subsidiaries, unless the context otherwise requires. The following analysis of the consolidated financial condition and results of operations of StanCorp should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto. See Item 1, Financial Statements.
Our filings with the Securities and Exchange Commission (SEC) include our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, registration statements and amendments to those reports. Access to all filed reports is available free of charge on our website at www.stancorpfinancial.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC also maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
The following management assessment of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto in our 2011 Form 10-K and our current report on Form 8-K dated July 18, 2012, which modified certain items in our annual report on Form 10-K for the retrospective adoption of Accounting Standards Update (ASU) No. 2012-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. Those consolidated financial statements and certain disclosures made in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and require us to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent assets and contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during each reporting period. The estimates most susceptible to material changes due to significant judgment are identified as critical accounting policies. The results of these estimates are critical because they affect our profitability and may affect key indicators used to measure our performance. See Critical Accounting Policies and Estimates.
Financial measures that exclude after-tax net capital gains and losses are non-GAAP measures. To provide investors with a broader understanding of earnings, we provide net income per diluted share excluding after-tax net capital gains and losses, along with the GAAP measure of net income per diluted share, because capital gains and losses are not likely to occur in a stable pattern.
We have made in this Form 10-Q, and from time to time may make in our public filings, news releases and oral presentations and discussions, certain statements, which are predictive in nature and not based on historical facts. These statements are forward-looking and, accordingly, involve risks and uncertainties that could cause actual results to differ materially from those discussed or implied. Although such forward-looking statements have been made in good faith and are based on reasonable assumptions, there is no assurance that the expected results will be achieved. See Forward-looking Statements.
Executive Summary
Financial Results Overview
The following table sets forth selected consolidated financial results:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
(Dollars in millions except share data) | ||||||||||||||||
Net income |
$ | 44.9 | $ | 47.0 | $ | 100.1 | $ | 98.1 | ||||||||
After-tax net capital (losses) gains |
(1.7 | ) | 4.8 | (4.3 | ) | (5.2 | ) | |||||||||
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Net income excluding after-tax net capital (losses) gains |
$ | 46.6 | $ | 42.2 | $ | 104.4 | $ | 103.3 | ||||||||
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Diluted earnings per common share: |
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Net income |
$ | 1.01 | $ | 1.05 | $ | 2.26 | $ | 2.17 | ||||||||
After-tax net capital (losses) gains |
(0.04 | ) | 0.11 | (0.09 | ) | (0.11 | ) | |||||||||
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Net income excluding after-tax net capital (losses) gains |
$ | 1.05 | $ | 0.94 | $ | 2.35 | $ | 2.28 | ||||||||
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Diluted weighted-average common shares outstanding |
44,238,372 | 44,577,667 | 44,349,725 | 45,256,407 |
The increase in net income excluding after-tax net capital gains and losses for the third quarter of 2012 compared to the third quarter of 2011 was primarily due to more favorable claims experience in the group insurance business, lower operating expenses and an increase in net investment income in our Asset Management segment. The comparatively lower benefit ratio in our group insurance business was partially offset by less favorable claims experience in the individual disability business and a 100 basis point decrease in our discount rate used for newly established group long term disability claim reserves. The increase in net income excluding after-tax net capital gains and losses for the first nine months of 2012 compared to the first nine months of 2011 was primarily due to an increase in net investment income in our Asset Management segment and a lower effective income tax rate. See Consolidated Results of OperationsIncome Taxes.
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Outlook
We manage for long-term profitability by focusing on business diversification, disciplined product pricing, sound underwriting, effective claims management and high-quality customer service. We will continue to address challenges that arise with financial discipline.
Net income excluding after-tax net capital gains and losses for the third quarter of 2012 was favorable compared to the same period of 2011, which reflected comparatively favorable claims experience in the third quarter of 2012 in our group long term disability business, an increase in net investment income, and lower operating expenses. The lower benefit ratio for the third quarter of 2012, compared to the third quarter of 2011, was primarily due to more favorable claim recoveries and improvement in claims incidence within our group long term disability business. While claims incidence improved for the third quarter of 2012 compared to the third quarter of 2011, it remains elevated compared to historical levels. We are making progress on our pricing actions to address the effects of the elevated group long term disability claims incidence and historically low interest rates in this challenging economic environment.
As we stated in our 2012 second quarter Form 10-Q, and based on the results for the first nine months of 2012, we expect that the 2012 annual benefit ratio for the group insurance business will exceed the annual guidance range of 80% to 82% that we provided earlier this year. We expect the benefit ratio to remain elevated due to the economy and the effects of the continued low interest rates putting pressure on the discount rate. As a result, we expect to be below our 2012 annual guidance range of $3.60 to $3.90 for net income per diluted share, excluding after-tax net capital gains and losses, and below the annual guidance range of 9% to 10% for return on average equity, excluding after-tax net capital gains and losses from net income and accumulated other comprehensive income (AOCI) from equity. Additionally, we expect our effective income tax rate for 2012 will be below our annual guidance range of 26% to 27%.
We remain focused on continuing to provide excellent products and services to our customers, enhancing our financial strength and increasing value to our shareholders. We will continue to focus on optimizing shareholder value through sustainable profitability by investing in new product and service capabilities and through the strategic use of capital, as we believe these actions position us well for growth when the economy recovers.
Primary Drivers of 2012 Results
The primary drivers of our results continue to be the group insurance benefit ratio and group insurance premium growth. Our group insurance benefit ratio for the first nine months of 2012 was 84.0%, compared to 83.2% for the same period for 2011, reflecting comparatively higher claims severity and continued high claims incidence for the first half of 2012, with improvements in claim recoveries and incidence rates for the third quarter of 2012. Claims experience can fluctuate widely from quarter to quarter and tends to be more stable when measured over a longer period of time. The benefit ratio is primarily affected by reserves established based on growth of our in force block of business, claims experience and assumptions used to establish related reserves, such as our discount rate.
The interest rate environment and its effect on our discount rate is a major driver in our reserve levels. The average discount rate used for the first nine months of 2012 for newly established long term disability claim reserves was 4.25%, compared to 5.25% used for the first nine months of 2011. A 25 basis point change in the discount rate results in a corresponding change in quarterly pre-tax income of $1.8 million. The decrease in the discount rate from the third quarter of 2011 was primarily the result of a continued low interest rate environment. We expect that the continued low yield on U.S Treasuries, together with additional spread compression, will continue to place pressure on interest rates leading to potentially lower discount rates and therefore higher claim reserves across the industry. We will maintain our disciplined approach to interest rate management given the uncertainty of the future interest rate environment and the corresponding impact on new investment yields and the discount rates used to establish claim reserves.
Premiums for our Insurance Services segment increased 1.3% to $1.63 billion for the first nine months of 2012, compared to $1.60 billion for the first nine months of 2011 primarily due to the favorable impact of experience rated refunds (ERRs). Premium growth continues to be affected by the economic environment, which has caused lower wage rate and job growth for our group insurance customers. Sales for the group insurance businesses, reported as annualized new premiums, were $171.6 million and $261.7 million for the first nine months of 2012 and 2011, respectively. The decrease in group insurance sales was primarily due to pricing competition.
Consolidated Results of Operations
Revenues
Revenues consist of premiums, administrative fees, net investment income and net capital gains and losses. Historically, premium growth in our Insurance Services segment and administrative fee revenue growth in our Asset Management segment have been the primary drivers of consolidated revenue growth.
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The following table sets forth consolidated revenues:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
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(Dollars in millions) | ||||||||||||||||||||||||
Revenues: |
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Premiums |
$ | 528.7 | $ | 539.8 | (2.1 | )% | $ | 1,630.1 | $ | 1,610.6 | 1.2 | % | ||||||||||||
Administrative fees |
27.8 | 28.5 | (2.5 | ) | 86.2 | 87.4 | (1.4 | ) | ||||||||||||||||
Net investment income |
159.8 | 147.3 | 8.5 | 470.9 | 456.9 | 3.1 | ||||||||||||||||||
Net capital (losses) gains |
(2.6 | ) | 7.7 | 133.8 | (6.8 | ) | (7.9 | ) | (13.9 | ) | ||||||||||||||
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Total revenues |
$ | 713.7 | $ | 723.3 | (1.3 | ) | $ | 2,180.4 | $ | 2,147.0 | 1.6 | |||||||||||||
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The decrease in consolidated revenues for the third quarter of 2012 compared to third quarter of 2011 was primarily due to a decrease in premiums from our Insurance Services segment and an increase in net capital losses, partially offset by an increase in net investment income. See Business SegmentsOtherNet Capital Gains (Losses).
The increase in consolidated revenues for the first nine months of 2012 compared to the same period of 2011 was primarily due to an increase in premiums from our Insurance Services segment and an increase in net investment income. See Consolidated Results of OperationsRevenuesNet Investment Income.
Premiums
Insurance Services segment premiums are the primary driver of consolidated premiums and are affected by the following factors:
| Sales. |
| Customer retention. |
| Organic growth in our group insurance businesses, which is derived from existing policyholders employment and wage growth. |
| Experience rated refunds (ERRs), which represent cost sharing arrangements with certain group contract holders that provide refunds to the contract holders when claims experience is more favorable than contractual benchmarks, and provide for additional premiums to be paid when claims experience is less favorable than contractual benchmarks. ERRs can fluctuate widely from quarter to quarter depending on the underlying experience of specific contracts. |
The following table sets forth premiums by segment:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
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(Dollars in millions) | ||||||||||||||||||||||||
Premiums: |
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Insurance Services |
$ | 527.5 | $ | 538.3 | (2.0 | )% | $ | 1,625.1 | $ | 1,604.4 | 1.3 | % | ||||||||||||
Asset Management |
1.2 | 1.5 | (20.0 | ) | 5.0 | 6.2 | (19.4 | ) | ||||||||||||||||
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Total premiums |
$ | 528.7 | $ | 539.8 | (2.1 | ) | $ | 1,630.1 | $ | 1,610.6 | 1.2 | |||||||||||||
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The decrease in premiums from our Insurance Services segment for the third quarter of 2012 compared to the same period of 2011 was primarily due to lower group insurance sales for the first nine months of 2012 and a decrease in ERRs for the third quarter of 2012 compared to the third quarter of 2011. ERRs decreased premiums by $6.5 million for the third quarter of 2012, and decreased premiums by $4.0 million for the same period of 2011.
The increase in premiums from our Insurance Services segment for the first nine months of 2012 compared to the same period of 2011 was primarily driven by ERR activity. ERRs for the first nine months of 2012 increased premiums by $4.7 million, while ERRs for the first nine months of 2011 decreased premiums by $14.2 million. See Business SegmentsInsurance Services Segment.
Premiums from our Asset Management segment are generated from sales of life-contingent annuities, which are a single-premium product. Due to the competitive nature of single-premium products, premiums in the Asset Management segment can fluctuate widely from quarter to quarter. See Business SegmentsAsset Management Segment.
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Administrative Fee Revenues
The primary driver for administrative fee revenues is the level of assets under administration in our Asset Management segment, which is largely driven by equity market performance and net customer deposits. Administrative fee revenues from our Insurance Services segment are primarily derived from insurance products for which we provide only administrative services and absence management services.
The following table sets forth administrative fee revenues by segment:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
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(Dollars in millions) | ||||||||||||||||||||||||
Administrative fee revenues: |
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Insurance Services |
$ | 3.1 | $ | 3.0 | 3.3 | % | $ | 10.4 | $ | 8.6 | 20.9 | % | ||||||||||||
Asset Management |
29.2 | 29.7 | (1.7 | ) | 89.1 | 91.2 | (2.3 | ) | ||||||||||||||||
Other |
(4.5 | ) | (4.2 | ) | (7.1 | ) | (13.3 | ) | (12.4 | ) | (7.3 | ) | ||||||||||||
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Total administrative fee revenues |
$ | 27.8 | $ | 28.5 | (2.5 | ) | $ | 86.2 | $ | 87.4 | (1.4 | ) | ||||||||||||
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The decrease in administrative fee revenues in our Asset Management segment for the third quarter of 2012 compared to the same period for 2011 was primarily related to non-recurring adjustments of $0.7 million recorded in the third quarter of 2012. The decrease in administrative fee revenues in our Asset Management segment for the first nine months of 2012 compared to the same period for 2011 was primarily due to lower average retirement plan trust assets under administration for the first nine months of 2012 compared to the first nine months of 2011. See Business SegmentsAsset Management Segment.
The increases in administrative fee revenues in our Insurance Services segment for the third quarter and first nine months of 2012 compared to the same periods of 2011 were primarily due to an increase in administrative and absence management service fees.
Net Investment Income
Net investment income is affected by changes in levels of invested assets, interest rates, fluctuations in the fair value of our Standard & Poors (S&P) 500 Index call spread options (S&P 500 Index options) related to our indexed annuity product, commercial mortgage loan prepayment fees and bond call premiums.
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The following tables set forth net investment income by segment and associated key indicators:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | Change | 2012 | 2011 | Change | |||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Net investment income: |
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Insurance Services |
$ | 86.0 | $ | 85.8 | 0.2 | % | $ | 254.2 | $ | 255.6 | (0.5 | )% | ||||||||||||
Asset Management |
72.3 | 59.0 | 22.5 | 210.0 | 193.5 | 8.5 | ||||||||||||||||||
Other |
1.5 | 2.5 | (40.0 | ) | 6.7 | 7.8 | (14.1 | ) | ||||||||||||||||
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Total net investment income |
$ | 159.8 | $ | 147.3 | 8.5 | $ | 470.9 | $ | 456.9 | 3.1 | ||||||||||||||
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Key indicators of net investment income: |
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Contribution from the change in fair value of the S&P 500 Index options |
$ | 2.9 | $ | (6.8 | ) | $ | 9.7 | $ | 7.3 | $ | (3.0 | ) | $ | 10.3 | ||||||||||
Commercial mortgage loan prepayment fees |
6.8 | 2.7 | 4.1 | 9.8 | 4.9 | 4.9 | ||||||||||||||||||
Average invested assets |
12,457.5 | 11,667.9 | 6.8 | % | 12,223.0 | 11,465.8 | 6.6 | % | ||||||||||||||||
Tax-advantaged investment operating losses |
(4.6 | ) | (1.2 | ) | $ | (3.4 | ) | (9.5 | ) | (3.4 | ) | $ | (6.1 | ) |
At September 30, | ||||||||
2012 | 2011 | |||||||
Consolidated portfolio yields: |
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Fixed maturity securities |
4.80 | % | 5.14 | % | ||||
Commercial mortgage loans |
6.16 | 6.38 |
The increases in net investment income for the third quarter and first nine months of 2012 compared to the same periods for 2011 were primarily due to favorable changes in fair value of our S&P 500 Index options and an increase in commercial mortgage loan prepayment fees. Partially offsetting the increased net investment income were higher accrued operating losses related to our tax-advantaged investments. The benefits from these investments are recorded as either a reduction to income taxes or a reduction of state premium taxes. See Critical Accounting Policies and EstimatesAll Other Investments.
We may continue to experience lower new money investment rates in the future if credit spreads continue to tighten and interest rates remain low. New money investment rates are also affected by the current volume and mix of commercial mortgage loan originations, the purchases of fixed maturity securities, tax-advantaged investments and other investments.
We seek investments containing call or prepayment protection to ensure our expected cash flow is not adversely affected by unexpected prepayments. Callable bonds without make-whole provisions represented 8.3% of our fixed maturity security portfolio at September 30, 2012. We also originate commercial mortgage loans containing a make-whole prepayment provision requiring the borrower to pay a prepayment fee. As interest rates decrease, potential prepayment fees increase. These larger prepayment fees deter borrowers from refinancing during a low interest rate environment. Approximately 97% of our commercial mortgage loan portfolio contains this prepayment provision. Almost all of the remaining commercial mortgage loans without a make-whole prepayment provision generally contain fixed percentage prepayment fees that mitigate prepayments but may not fully protect our expected cash flows in the event of prepayment. The increases in commercial mortgage loan prepayment fees were primarily the result of a continued low interest rate environment and the improvement in the commercial real estate sales market.
Net Capital Gains (Losses)
Net capital gains and losses are reported in the Other category and are not likely to occur in a stable pattern. Net capital gains and losses primarily occur as a result of sales of our assets for more or less than carrying value, other-than-temporary impairments (OTTI) of assets in our bond portfolio, provisions to our commercial mortgage loan loss allowance, losses recognized due to impairment of real estate and impairments of tax-advantaged investments.
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The following table sets forth net capital gains and losses and associated key components:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | Dollar Change |
2012 | 2011 | Dollar Change |
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(In millions) | ||||||||||||||||||||||||
Net capital (losses) gains |
$ | (2.6 | ) | $ | 7.7 | $ | (10.3 | ) | $ | (6.8 | ) | $ | (7.9 | ) | $ | 1.1 | ||||||||
Key components of net capital gains (losses): |
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Fixed maturity securities |
$ | 2.5 | $ | 0.7 | $ | 1.8 | $ | 4.7 | $ | 7.2 | $ | (2.5 | ) | |||||||||||
Real estate investments |
| 19.4 | (19.4 | ) | | 27.9 | (27.9 | ) | ||||||||||||||||
Real estate owned |
(0.2 | ) | (3.6 | ) | 3.4 | (0.9 | ) | (16.4 | ) | 15.5 | ||||||||||||||
Commercial mortgage loan loss allowance provision |
(5.0 | ) | (7.5 | ) | 2.5 | (11.4 | ) | (25.5 | ) | 14.1 |
Net capital losses for the third quarter of 2012 were primarily related to our commercial mortgage loan loss allowance provision. These losses were partially offset by net capital gains related to the sale of certain fixed maturity securities. The sale of real estate investments were the primary driver of the net capital gains in the third quarter of 2011.
Net capital losses for the first nine months of 2012 were primarily related to our commercial mortgage loan loss allowance provision, which were partially offset by net capital gains related to the sale of certain fixed maturity securities. The higher net capital losses for the first nine months of 2011 were primarily due to a higher commercial mortgage loan loss allowance provision, partially offset by capital gains from the sale of real estate investments. See Liquidity and Capital ResourcesInvesting Cash FlowsCommercial Mortgage Loans and Business SegmentsOtherNet Capital Gains (Losses).
Benefits and Expenses
Benefits to Policyholders
Consolidated benefits to policyholders is primarily affected by the following factors:
| Reserves that are established in part based on premium levels. |
| Claims experiencethe predominant factors affecting claims experience are: claims incidence, measured by the number of claims, and claims severity, measured by the magnitude of the claim and the length of time a disability claim is paid. |
| Reserve assumptionsthe assumptions used to establish the related reserves reflect expected incidence and severity, and the discount rate. The discount rate is affected by new money investment interest rates and the overall portfolio yield. See Critical Accounting Policies and EstimatesReserves for Future Policy Benefits and Claims. |
| Current estimates for future benefits on life-contingent annuities. |
The following table sets forth benefits to policyholders by segment:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
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(Dollars in millions) | ||||||||||||||||||||||||
Benefits to policyholders: |
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Insurance Services |
$ | 417.6 | $ | 427.1 | (2.2 | )% | $ | 1,333.3 | $ | 1,309.5 | 1.8 | % | ||||||||||||
Asset Management |
4.8 | 5.1 | (5.9 | ) | 15.0 | 15.2 | (1.3 | ) | ||||||||||||||||
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Total benefits to policyholders |
$ | 422.4 | $ | 432.2 | (2.3 | ) | $ | 1,348.3 | $ | 1,324.7 | 1.8 | |||||||||||||
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The decrease in benefits to policyholders for the third quarter of 2012 compared to the same period of 2011 was primarily due to more favorable claim recoveries and an improvement in claims incidence in the group long term disability insurance business, partially offset by a 100 basis point decrease in the discount rate used for newly established long term disability claim reserves to 4.00% for the third quarter of 2012 from 5.00% for the third quarter of 2011. The lower discount rate for the third quarter of 2012 resulted in a corresponding increase in benefits to policyholders of $7.2 million. See Business SegmentsInsurance Services SegmentBenefits and ExpensesBenefits to Policyholders (including interest credited).
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The increase in benefits to policyholders for the first nine months of 2012 compared to the same periods of 2011 was primarily due to continued high claims incidence and claims severity in our group long term disability business in the first half of 2012, in addition to a decrease in the discount rate used for newly established long term disability claim reserves. While we continue to see improvement in claims incidence, the levels remain high when compared to historical averages.
Interest Credited
Interest credited represents interest paid to policyholders on retirement plan general account assets, individual fixed-rate annuity deposits and index-based interest guarantees embedded in indexed annuities (index-based interest guarantees) in the Asset Management segment and interest paid on life insurance proceeds on deposit in the Insurance Services segment.
Interest credited is primarily affected by the following factors:
| Growth in general account assets under management. |
| Growth in individual fixed-rate annuity liabilities. |
| Changes in new investment interest rates and overall portfolio yield, which influence our interest-crediting rate for our customers. |
| Changes in customer retention. |
| Changes in the fair value of the index-based interest guarantees. These changes may fluctuate from quarter to quarter due to changes in interest rates and equity market volatility. See Business SegmentsAsset Management SegmentBenefits and ExpensesInterest Credited for information regarding the interest credited on our indexed annuity product. |
The following table sets forth interest credited and associated key components for the periods presented:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | Change | 2012 | 2011 | Change | |||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Interest credited |
$ | 43.9 | $ | 36.7 | $ | 7.2 | $ | 130.3 | $ | 117.1 | $ | 13.2 | ||||||||||||
Key components of interest credited: |
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Contribution from the change in fair value of index-based interest guarantees |
$ | 2.5 | $ | (3.8 | ) | $ | 6.3 | $ | 7.2 | $ | (1.7 | ) | $ | 8.9 | ||||||||||
Average individual annuity assets under administration |
3,132.8 | 2,907.8 | 7.7 | % | 3,062.4 | 2,802.4 | 9.3 | % |
The increases in interest credited for the third quarter and first nine months of 2012 compared to the same periods for 2011 were primarily due to the change in fair value of our index-based interest guarantees, and an increase in our average individual fixed-rate annuity assets under administration.
Operating Expenses
The following table sets forth operating expenses:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
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(Dollars in millions) | ||||||||||||||||||||||||
Operating expenses |
$ | 115.3 | $ | 120.7 | (4.5 | )% | $ | 355.9 | $ | 357.1 | (0.3 | )% |
The lower operating expenses for the third quarter and first nine months of 2012 were due to costs associated with information technology operations initiatives and service changes in 2011, which did not recur in 2012. These costs were recorded in our Other category. See Business Segments.
Commissions and Bonuses
Commissions and bonuses primarily represent sales-based compensation, which can vary depending on the product, the structure of the commission program and other factors such as customer retention, sales, growth in assets under administration and the profitability of business in each of our segments.
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The following table sets forth commissions and bonuses:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
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(Dollars in millions) | ||||||||||||||||||||||||
Commissions and bonuses |
$ | 49.6 | $ | 53.1 | (6.6 | )% | $ | 156.3 | $ | 166.1 | (5.9 | )% |
The decrease in commissions and bonuses for the third quarter of 2012 compared to the third quarter of 2011 was primarily due to lower group insurance sales.
The decrease in commissions and bonuses for the first nine months of 2012 compared to the first nine months of 2011 was primarily due to lower group insurance and individual annuity business sales.
Net Change in Deferred Acquisition Costs (DAC), Value of Business Acquired (VOBA) and Other Intangible Assets
We normally defer certain acquisition costs that vary and are directly related to the origination of new business. Certain costs related to obtaining new business and acquiring business through reinsurance agreements have been deferred and will be amortized to accomplish matching against related future premiums or gross profits as appropriate. We normally defer certain acquisition-related commissions and incentive payments, certain costs of policy issuance and underwriting, and certain printing costs. These costs are then amortized into expenses over a period not to exceed the life of the related policies, which for group insurance contracts is the initial premium rate guarantee period and averages 2.5 years. VOBA primarily represents the discounted future profits of business assumed through reinsurance agreements. A portion of VOBA is amortized each year to achieve matching against expected gross profits. Our other intangible assets, consisting of customer lists and marketing agreements, are also subject to amortization. Customer lists were obtained through acquisitions of Asset Management businesses and have a combined estimated weighted-average remaining life of approximately 7.6 years. The intangible asset associated with the individual disability marketing agreement with the Minnesota Life Insurance Company (Minnesota Life) will be fully amortized by 2023. See Critical Accounting Policies and EstimatesDAC, VOBA and Other Intangible Assets.
The following table sets forth the operating impact resulting in a net decrease (increase) in DAC, VOBA and other intangible assets:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
2012 | 2011 | Dollar Change |
2012 | 2011 | Dollar Change |
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(In millions) | ||||||||||||||||||||||||
Deferral of acquisition costs |
$ | (16.9 | ) | $ | (20.1 | ) | $ | 3.2 | $ | (55.3 | ) | $ | (64.5 | ) | $ | 9.2 | ||||||||
Amortization of DAC, VOBA and other intangible assets |
17.2 | 15.9 | 1.3 | 53.4 | 49.9 | 3.5 | ||||||||||||||||||
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Net decrease (increase) in DAC, VOBA and other intangible assets |
$ | 0.3 | $ | (4.2 | ) | $ | 4.5 | $ | (1.9 | ) | $ | (14.6 | ) | $ | 12.7 | |||||||||
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The decrease in deferrals for the third quarter and first nine months of 2012 compared to the same periods for 2011, was primarily due to lower group insurance sales. The increase in the amortization of DAC for the third quarter and first nine months of 2012 compared to the same periods for 2011, was primarily due to higher Asset Management earnings, as amortization fluctuates with changes in estimated gross profit. These changes resulted in an overall net decrease in DAC, VOBA and other intangible assets for the third quarter and first nine months of 2012 compared to the same periods for 2011.
Income Taxes
Income taxes may differ from the amount computed by applying the federal corporate tax rate of 35% to pre-tax income because of the net result of permanent differences between book and taxable income and because of the inclusion of state and local income taxes, net of the federal tax benefit.
43
The following table sets forth the combined federal and state effective income tax rates:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Combined federal and state effective income tax rates |
26.8 | % | 28.8 | % | 23.9 | % | 29.9 | % |
During the first half of 2012, and throughout 2011, we purchased tax-advantaged investments, contributing to a decrease in our effective tax rate. In addition, the effective tax rate was also reduced by favorable book-to-tax differences relative to a lower level of income in 2012. These investments, along with lower pre-tax net income, were the primary drivers of the decreases in our effective tax rate for the third quarter and first nine months of 2012 compared to the same periods for 2011.
Business Segments
We operate through two reportable segments: Insurance Services and Asset Management, as well as an Other category. Resources are allocated and performance is evaluated at the segment level. The Insurance Services segment offers group and individual disability insurance, group life and accidental death and dismemberment (AD&D) insurance, group dental and group vision insurance, and absence management services. The Asset Management segment offers full-service 401(k) plans, 403(b) plans, 457 plans, defined benefit plans, money purchase pension plans, profit sharing plans and non-qualified deferred compensation products and services. The Asset Management segment also offers investment advisory and management services, financial planning services, commercial mortgage loan origination and servicing, individual fixed-rate annuity products, group annuity contracts and retirement plan trust products. The Other category includes return on capital not allocated to the product segments, holding company expenses, operations of certain unallocated subsidiaries, interest on debt, unallocated expenses, net capital gains and losses and adjustments made in consolidation.
The following table sets forth segment revenues measured as a percentage of total revenues, excluding revenues from the Other category:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Insurance Services |
85.7 | % | 87.4 | % | 86.1 | % | 86.5 | % | ||||||||
Asset Management |
14.3 | 12.6 | 13.9 | 13.5 |
Insurance Services Segment
The Insurance Services segment is our largest segment and substantially influences our consolidated financial results.
The following table sets forth key indicators that we use to manage and assess the performance of the Insurance Services segment:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
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(Dollars in millions) | ||||||||||||||||||||||||
Premiums |
$ | 527.5 | $ | 538.3 | (2.0 | )% | $ | 1,625.1 | $ | 1,604.4 | 1.3 | % | ||||||||||||
Total revenues |
616.6 | 627.1 | (1.7 | ) | 1,889.7 | 1,868.6 | 1.1 | |||||||||||||||||
Income before income taxes |
62.4 | 65.0 | (4.0 | ) | 131.8 | 147.9 | (10.9 | ) | ||||||||||||||||
Sales (annualized new premiums) reported at contract effective date |
27.1 | 70.5 | (61.6 | ) | 187.6 | 279.1 | (32.8 | ) | ||||||||||||||||
Benefit ratios, including interest credited (% of premiums): |
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Insurance Services |
79.4 | % | 79.5 | % | 82.3 | % | 81.8 | % | ||||||||||||||||
Group insurance |
79.7 | 80.7 | 84.0 | 83.2 | ||||||||||||||||||||
Individual disability |
75.7 | 66.3 | 63.0 | 66.0 | ||||||||||||||||||||
Operating expense ratio (% of premiums) |
16.2 | % | 15.6 | % | 16.3 | % | 16.0 | % |
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Income before income taxes decreased for the third quarter of 2012 compared to the third quarter of 2011 primarily due to lower group insurance premiums and less favorable claims experience in the individual disability business, partially offset by more favorable claims experience in the group insurance business during the third quarter of 2012. In addition, commercial mortgage loan prepayment fee revenues and bond call premiums added $4.9 million of income before income taxes for the third quarter of 2012, compared to $1.5 million for the third quarter of 2011.
Income before income taxes decreased for the first nine months of 2012 compared to the first nine months of 2011 primarily due to continued high claims incidence, an increased level of claims severity in our group long term disability business and a decrease in the discount rate used for newly established long term disability claim reserves. The decrease to income before income taxes was partially offset by higher group insurance premiums for the first nine months of 2012 compared to the first nine months of 2011.
Revenues
Revenues for the Insurance Services segment are driven primarily by growth in Insurance Services premiums. The decrease in revenues for the third quarter of 2012 compared to third quarter of 2011 was primarily due to lower premiums in our group insurance business and lower group insurance sales for the first nine months of 2012. The increase in revenues for the first nine months of 2012 compared to first nine months of 2011 was primarily driven by ERRs, which increased revenue for the first nine months of 2012 by $4.7 million, while decreasing revenue by $14.2 million for the same period of 2011.
Premiums
The primary factors that affect premiums for the Insurance Services segment are sales and customer retention for our insurance products and organic growth in our group insurance businesses derived from existing group policyholders employment and wage growth. Premium levels can also be influenced by ERRs, which represent cost sharing arrangements with certain group contract holders that provide refunds to the contract holders when claims experience is more favorable than contractual benchmarks, and provide for additional premiums to be paid when claims experience is less favorable than contractual benchmarks. ERRs can fluctuate widely from quarter to quarter depending on the underlying claims experience of specific contracts.
The following table sets forth premiums and sales by line of business for the Insurance Services segment:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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2012 | 2011 | Dollar Change |
2012 | 2011 | Dollar Change |
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(Dollars in millions) | ||||||||||||||||||||||||
Premiums: |
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Group life and AD&D |
$ | 218.3 | $ | 224.7 | $ | (6.4 | ) | $ | 667.0 | $ | 670.8 | $ | (3.8 | ) | ||||||||||
Group long term disability |
199.1 | 200.5 | (1.4 | ) | 603.5 | 602.0 | 1.5 | |||||||||||||||||
Group short term disability |
52.5 | 52.4 | 0.1 | 160.3 | 156.3 | 4.0 | ||||||||||||||||||
Group other |
19.7 | 20.5 | (0.8 | ) | 59.2 | 60.5 | (1.3 | ) | ||||||||||||||||
Experience rated refunds |
(6.5 | ) | (4.0 | ) | (2.5 | ) | 4.7 | (14.2 | ) | 18.9 | ||||||||||||||
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Total group insurance |
483.1 | 494.1 | (11.0 | ) | 1,494.7 | 1,475.4 | 19.3 | |||||||||||||||||
Individual disability |
44.4 | 44.2 | 0.2 | 130.4 | 129.0 | 1.4 | ||||||||||||||||||
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Total premiums |
$ | 527.5 | $ | 538.3 | $ | (10.8 | ) | $ | 1,625.1 | $ | 1,604.4 | $ | 20.7 | |||||||||||
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Key indicators of premiums: |
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Total premiums excluding ERRs |
$ | 534.0 | $ | 542.3 | $ | (8.3 | ) | $ | 1,620.4 | $ | 1,618.6 | $ | 1.8 | |||||||||||
Group insurance sales (annualized new premiums) reported at contract effective date |
20.5 | 63.7 | (43.2 | ) | 171.6 | 261.7 | (90.1 | ) | ||||||||||||||||
Individual disability sales (annualized new premiums) |
6.6 | 6.8 | (0.2 | ) | 16.0 | 17.4 | (1.4 | ) |
The decrease in group insurance premiums for the third quarter of 2012 compared to the third quarter of 2011 was primarily due to lower group insurance sales for the first nine months of 2012 and a decrease in ERRs for the third quarter of 2012 compared to the third quarter of 2011.
The increase in group insurance premiums for the first nine months of 2012 compared to the first nine months of 2011 was primarily driven by ERR activity. ERRs increased premiums by $4.7 million for the first nine months of 2012, while ERRs decreased premiums by $14.2 million for the same period of 2011. Group insurance premiums for the first nine months of 2012 reflected a decline in our group insurance sales.
Sales. Sales of our group insurance products reported as annualized new premiums decreased for the first nine months of 2012 compared to the first nine months of 2011. The market remains competitive and our pricing increases have put pressure on new sales.
45
Persistency. Persistency is reported annually. Premium growth is affected by customer retention levels from 2012 and 2011. Due to our pricing actions and a continued competitive market place, we do not anticipate achieving the persistency levels we have experienced over the last two years.
Organic Growth. Premium growth in our group insurance in force business is affected by employment and wage growth in our existing customer base, changes in price per insured and the average age of employees. The economy has continued to negatively affect wage rate and employment levels in a significant portion of our customer base, and therefore has put negative pressure on our premiums.
We continue to make progress with the implementation of our pricing actions that began in 2011 related to higher claims incidence. Our pricing reflects our long-term expectations of claims experience, demographic changes, return objectives and interest rates. As of the end of our January 2012 renewal season we have had the opportunity to re-price approximately one-third of our long term disability business, and as of the end of the third quarter we have re-priced approximately one-half. By the end of the January 2013 renewal season we will have had the opportunity to re-price about three-fourths of our long term disability business. In the second quarter of 2012, we announced a low single-digit price increase on our group insurance business due to the continued low interest rate environment. Our sales force is communicating and selling our unique value proposition, while the rest of our employees are delivering the quality service on which we have based our reputation in the employee benefits marketplace.
Net Investment Income
The following table sets forth net investment income for the Insurance Services segment:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
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(Dollars in millions) | ||||||||||||||||||||||||
Net investment income |
$ | 86.0 | $ | 85.8 | 0.2 | % | $ | 254.2 | $ | 255.6 | (0.5 | )% |
Net investment income is primarily affected by changes in levels of invested assets and interest rates. See Consolidated Results of OperationsRevenuesNet Investment Income.
Benefits and Expenses
Benefits to Policyholders (including interest credited)
Benefits to policyholders is primarily affected by the following factors:
| Reserves that are established in part based on premium levels. |
| Claims experience the predominant factors affecting claims experience are: claims incidence, measured by the number of claims, and claims severity, measured by the magnitude of the claim and the length of time a disability claim is paid. |
| Reserve assumptions the assumptions used to establish the related reserves reflect claims incidence and severity, and the discount rate. The discount rate is affected by the new money investment interest rates and the overall portfolio yield. See Critical Accounting Policies and EstimatesReserves for Future Policy Benefits and Claims. |
The benefit ratio, calculated as benefits to policyholders and interest credited as a percentage of premiums, is utilized to provide a measurement of claims normalized for growth in our in force block.
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The following table sets forth benefits to policyholders (including interest credited) and the benefit ratios for the Insurance Services segment:
Three Months Ended September 30, |
Nine Months
Ended September 30, |
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2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
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(Dollars in millions) | ||||||||||||||||||||||||
Benefits to policyholders, including interest credited |
$ | 418.6 | $ | 428.0 | (2.2 | )% | $ | 1,336.9 | $ | 1,313.0 | 1.8 | % | ||||||||||||
Benefit ratios, including interest credited (% of premiums): |
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Insurance Services segment |
79.4 | % | 79.5 | % | 82.3 | % | 81.8 | % | ||||||||||||||||
Group insurance |
79.7 | 80.7 | 84.0 | 83.2 | ||||||||||||||||||||
Individual disability |
75.7 | 66.3 | 63.0 | 66.0 |
The decrease in Insurance Services benefits to policyholders (including interest credited) for the third quarter of 2012 compared to the third quarter of 2011 was primarily due to more favorable claim recoveries and an improvement in claims incidence in the group long term disability insurance business. Partially offsetting the favorable claim recoveries and an improvement in claims incidence was the 100 basis point decrease in the discount rate used for newly established long term disability claim reserves. In addition, during the third quarter of 2012 we recorded a net increase in group long term disability reserves of $3.7 million, and a net increase in individual disability reserves of $3.8 million as part of our regular annual assessments of the adequacy of reserves. During the third quarter of 2011 we recorded a net increase in individual disability claims reserves of $3.6 million. There were no similar adjustments made to group long term disability reserves during the first nine months of 2011.
The increase in Insurance Services benefits to policyholders (including interest credited) for the first nine months of 2012 compared to first nine months of 2011 was primarily due to the decrease in the discount rate used for newly established long term disability claim reserves, continued high claims incidence, and an increased level of claims severity in our group long term disability business.
The group insurance benefit ratio for the first nine months of 2012 was outside our estimated annual range for 2012 of 80% to 82%. We expect the benefit ratio to remain elevated during continuing uncertainty in the economy and the effects of our pricing actions take hold. Claims experience can fluctuate widely from quarter to quarter and tends to be more stable when measured over a longer period of time.
The benefit ratio for individual disability insurance increased for the third quarter of 2012 and decreased for the first nine months of 2012, compared to the same periods of 2011. We generally expect the individual disability benefit ratio to trend down over the long term to reflect growth in the business outside of the large block of individual disability business assumed in 2000 from Minnesota Life, and we expect there to be a corresponding shift in revenues from net investment income to premiums. The anticipated general increase or decrease in the expected benefit ratio does not necessarily indicate a corresponding shift in profitability; rather it reflects a change in the mix of revenues from the business from investment income to premiums.
We evaluate the claim termination rate assumptions for the reserves on a small Minnesota Life block of individual disability claims annually. These assumptions were refined in the third quarter of 2012, resulting in an increase in reserves of $4.9 million. Our block of business is relatively small, and as a result, we view a blend of established industry tables and our own experience as a more appropriate method for establishing reserve levels compared solely to our own experience. We will continue to monitor the credibility of our developing experience and the use of available industry tables, and if necessary, will adjust reserves accordingly. We also refined our reserve calculation for certain other individual disability reserves in the third quarter of 2012, which resulted in a net decrease in our individual disability reserves of $1.1 million. The combination of these adjustments resulted in a net increase to individual disability reserves of $3.8 million. Reserve adjustments made in the third quarter of 2011 totaled $3.6 million. For a complete discussion of our reserve methodology, see Critical Accounting Policies and EstimatesReserves for Future Policy Benefits and Claims.
The following table sets forth the discount rate used for newly incurred long term disability claim reserves and life waiver reserves:
Three Months Ended | ||||||||||||||||
September 30, 2012 |
June 30, 2012 |
September 30, 2011 |
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Discount rate |
4.00 | % | 4.00 | % | 5.00 | % |
The discount rate is based on the average rate we receive on newly invested assets during the previous 12 months, less a margin. We also consider our average investment yield and average discount rate on our entire block of claims when deciding whether to
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increase or decrease the discount rate. The discount rate used for newly established long term disability claim reserves decreased 100 basis points to 4.00% for the third quarter of 2012, from 5.00% for the third quarter of 2011 resulting in a corresponding increase in benefits to policyholders of $7.2 million for the quarter. The lower discount rate for the third quarter of 2012 compared to the third quarter of 2011 was primarily the result of the continued low interest rate environment. A 25 basis point increase or decrease in the discount rate results in a corresponding increase or decrease in quarterly pre-tax income of $1.8 million. Any offsetting adjustments of group insurance premium rates due to sustained changes in investment yields can take from one to three years given that most new contracts have rate guarantees in place.
If investment rates prove to be lower than provided for in the margin between the new money investment rate and the reserve discount rate, we could be required to increase reserves, which could cause expense for benefits to policyholders to increase. Given the movement of future interest rates, this may result in significantly higher or lower discount rates. A sustained low interest rate environment and lower commercial mortgage loan originations and tax-advantaged investments utilization in future quarters could result in future reductions to the discount rate. The margin in our overall block of business for group insurance between the invested asset yield and the weighted-average reserve discount rate at September 30, 2012 and 2011 was 41 and 40 basis points, respectively. See Liquidity and Capital ResourcesAsset-Liability Matching and Interest Rate Risk Management, for additional information regarding our investments and corresponding interest rate risks.
Operating Expenses
The following table sets forth operating expenses for the Insurance Services segment:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
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(Dollars in millions) | ||||||||||||||||||||||||
Operating expenses |
$ | 85.4 | $ | 84.2 | 1.4 | % | $ | 264.5 | $ | 256.4 | 3.2 | % |
The increases in Insurance Services operating expenses for the third quarter and first nine months of 2012 compared to the same periods of 2011 were primarily related to project costs and increased compensation related costs.
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Asset Management Segment
The following tables set forth key indicators that we use to manage and assess the performance of the Asset Management segment:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
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(Dollars in millions) | ||||||||||||||||||||||||
Revenues: |
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Premiums |
$ | 1.2 | $ | 1.5 | (20.0 | )% | $ | 5.0 | $ | 6.2 | (19.4 | )% | ||||||||||||
Administrative fees |
29.2 | 29.7 | (1.7 | ) | 89.1 | 91.2 | (2.3 | ) | ||||||||||||||||
Net investment income |
72.3 | 59.0 | 22.5 | 210.0 | 193.5 | 8.5 | ||||||||||||||||||
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Total revenues |
$ | 102.7 | $ | 90.2 | 13.9 | $ | 304.1 | $ | 290.9 | 4.5 | ||||||||||||||
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Income before income taxes |
$ | 17.5 | $ | 12.3 | 42.3 | % | $ | 47.7 | $ | 47.3 | 0.8 | % | ||||||||||||
Sales (Individual annuity deposits) |
63.0 | 60.2 | 4.7 | 263.1 | 325.8 | (19.2 | ) | |||||||||||||||||
Interest credited (% of net investment income): |
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Retirement plans |
53.3 | % | 56.0 | % | 53.2 | % | 55.0 | % | ||||||||||||||||
Individual annuities |
67.6 | 69.5 | 68.9 | 65.5 | ||||||||||||||||||||
Retirement plans annualized operating expenses (% of average assets under administration) |
0.57 | % | 0.58 | % | 0.60 | % | 0.59 | % |
At September 30, | ||||||||||||
2012 | 2011 | Percent Change |
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(Dollars in millions) | ||||||||||||
Assets under administration: |
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Retirement plans general account |
$ | 1,812.6 | $ | 1,675.2 | 8.2 | % | ||||||
Retirement plans separate account |
5,071.8 | 4,205.6 | 20.6 | |||||||||
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Total retirement plans insurance products |
6,884.4 | 5,880.8 | 17.1 | |||||||||
Retirement plans trust products |
7,852.3 | 7,699.6 | 2.0 | |||||||||
Individual annuities |
3,149.0 | 2,920.5 | 7.8 | |||||||||
Commercial mortgage loans for other investors |
2,781.8 | 2,699.2 | 3.1 | |||||||||
Private client wealth management |
985.7 | 965.8 | 2.1 | |||||||||
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Total assets under administration |
$ | 21,653.2 | $ | 20,165.9 | 7.4 | |||||||
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Income before income taxes in the Asset Management segment increased for the third quarter and first nine months of 2012 compared to the same periods of 2011 primarily due to higher net investment income from commercial mortgage loan prepayment fee revenues and bond call premiums and the contribution from the change in fair value of the S&P 500 Index and the change in fair value adjustment of index-based guarantees. See Item 1, Financial StatementsNotes to Unaudited Condensed Consolidated Financial StatementsNote 8Derivative Financial Instruments for further derivatives disclosure.
Revenues
Revenues for the Asset Management segment include retirement plan administration fees, fees on investments held in separate account assets and private client wealth management assets under administration, and investment income on general account assets under administration. Premiums and benefits to policyholders reflect both the sale of life-contingent annuities by our individual annuity business and the conversion of retirement plan assets into life-contingent annuities. Most of the sales for this segment are recorded as deposits and are therefore not reflected as premiums. Individual fixed-rate annuity deposits earn investment income, a portion of which is credited to policyholders.
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The increases in revenue for the third quarter and first nine months of 2012 compared to the same periods for 2011 were primarily due to an increase in net investment income due to higher commercial mortgage loan prepayment fee revenues and bond call premiums, and the contribution from the change in fair value of our S&P 500 Index options. See Business SegmentsAsset Management SegmentNet Investment Income.
Premiums
Premiums for the Asset Management segment are generated from the sale of life-contingent annuities, which are primarily a single-premium product. Premiums and benefits to policyholders reflect both the sale of immediate annuities by our individual annuity business and the conversion of retirement plan assets into life-contingent annuities, which can be selected by plan participants at the time of retirement. Premiums for the segment can vary significantly from quarter to quarter due to low sales volume of life-contingent annuities and the varying size of single premiums. Increases or decreases in premiums for life-contingent annuities generally correlate with corresponding increases or decreases in benefits to policyholders.
The following table sets forth premiums by line of business for the Asset Management segment:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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2012 | 2011 | Dollar Change |
2012 | 2011 | Dollar Change |
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(In millions) | ||||||||||||||||||||||||
Premiums: |
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Retirement plans |
$ | 0.1 | $ | 0.7 | $ | (0.6 | ) | $ | 1.3 | $ | 1.4 | $ | (0.1 | ) | ||||||||||
Individual annuities |
1.1 | 0.8 | 0.3 | 3.7 | 4.8 | (1.1 | ) | |||||||||||||||||
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Total premiums |
$ | 1.2 | $ | 1.5 | $ | (0.3 | ) | $ | 5.0 | $ | 6.2 | $ | (1.2 | ) | ||||||||||
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The decreases in premiums for the third quarter and first nine months of 2012 compared to the same periods for 2011 were primarily due to the decrease in sales of life-contingent annuities.
Administrative Fee Revenues
Administrative fee revenues for the Asset Management segment include asset-based and plan-based fees related to our retirement plans and private client wealth management businesses, and fees related to the origination and servicing of commercial mortgage loans. The primary driver for administrative fee revenues is the level of assets under administration for retirement plans, which is driven by equity market performance and net customer deposits. Assets under administration that produce administrative fee revenues include retirement plan separate account, retirement plan trust products, private client wealth management and commercial mortgage loans under administration for other investors.
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The following tables set forth administrative fee revenues by line of business and associated key indicators for the Asset Management segment:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
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(Dollars in millions) | ||||||||||||||||||||||||
Administrative fee revenues: |
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Retirement plans |
$ | 21.5 | $ | 22.3 | (3.6 | ) % | $ | 66.0 | $ | 68.5 | (3.6 | ) % | ||||||||||||
Other financial services business |
7.7 | 7.4 | 4.1 | 23.1 | 22.7 | 1.8 | ||||||||||||||||||
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Total administrative fee revenues |
$ | 29.2 | $ | 29.7 | (1.7 | ) | $ | 89.1 | $ | 91.2 | (2.3 | ) | ||||||||||||
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|
|
|
|
|
At September 30, | ||||||||||||
2012 | 2011 | Percent Change |
||||||||||
(Dollars in millions) | ||||||||||||
Key indicators of administrative fee revenues: |
||||||||||||
Assets under administration: |
||||||||||||
Retirement plan separate account |
$ | 5,071.8 | $ | 4,205.6 | 20.6 | % | ||||||
Retirement plan trust products |
7,852.3 | 7,699.6 | 2.0 | |||||||||
Commercial mortgage loans for other investors |
2,781.8 | 2,699.2 | 3.1 | |||||||||
Private client wealth management |
985.7 | 965.8 | 2.1 |
The decrease in administrative fee revenues in our Asset Management segment for the third quarter of 2012 compared to the same period for 2011 was primarily related to non-recurring adjustments of $0.7 million recorded in the third quarter of 2012.
The decrease in administrative fee revenues in our Asset Management segment for the first nine months of 2012 compared to the same period of 2011 was primarily due to lower average retirement plan trust assets under administration for the first nine months of 2012 compared to the first nine months of 2011.
51
Net Investment Income
The following tables set forth net investment income and associated key indicators for the Asset Management segment:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
2012 | 2011 | Change | 2012 | 2011 | Change | |||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Net investment income: |
||||||||||||||||||||||||
Retirement plans |
$ | 24.2 | $ | 22.5 | 7.6 | % | $ | 71.0 | $ | 66.9 | 6.1 | % | ||||||||||||
Individual annuities |
44.4 | 33.4 | 32.9 | 129.0 | 117.2 | 10.1 | ||||||||||||||||||
Other financial services business |
3.7 | 3.1 | 19.4 | 10.0 | 9.4 | 6.4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total net investment income |
$ | 72.3 | $ | 59.0 | 22.5 | $ | 210.0 | $ | 193.5 | 8.5 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Key indicators of net investment income: |
||||||||||||||||||||||||
Average assets under administration: |
||||||||||||||||||||||||
Retirement plan general account |
$ | 1,800.9 | $ | 1,651.3 | 9.1 | % | $ | 1,771.4 | $ | 1,631.2 | 8.6 | % | ||||||||||||
Individual annuities |
3,132.8 | 2,907.8 | 7.7 | 3,062.4 | 2,802.4 | 9.3 | ||||||||||||||||||
Contribution from the change in fair value of the S&P 500 Index options |
$ | 2.9 | $ | (6.8 | ) | $ | 9.7 | $ | 7.3 | $ | (3.0 | ) | $ | 10.3 | ||||||||||
Commercial mortgage loan prepayment fees |
2.3 | 1.4 | 0.9 | 3.5 | 2.3 | 1.2 | ||||||||||||||||||
Commercial mortgage loan originations |
347.3 | 271.7 | 27.8 | % | 857.0 | 770.7 | 11.2 | % |
At September 30, | ||||||||
2012 | 2011 | |||||||
Consolidated portfolio yields: |
||||||||
Fixed maturity securities |
4.80 | % | 5.14 | % | ||||
Commercial mortgage loans |
6.16 | 6.38 |
The increases in net investment income for the third quarter and first nine months of 2012 compared to the same periods of 2011 were primarily due to a change in fair value of our S&P 500 Index options in our individual annuities business and higher bond call premiums and prepayment fees received on commercial mortgage loans. Net investment income also increased due to an increase in average individual annuity assets under administration and an increase in average retirement plan general account assets under administration. These increases were partially offset by lower portfolio yields for fixed maturity securities and commercial mortgage loans. See Item 1, Financial StatementsNotes to Unaudited Condensed Consolidated Financial StatementsNote 8Derivative Financial Instruments for further derivatives disclosure.
Benefits and Expenses
Benefits to Policyholders
Benefits to policyholders for the Asset Management segment primarily represent current and future benefits on life-contingent annuities. Changes in the level of benefits to policyholders will generally correlate to changes in premium levels because these annuities are primarily single-premium life-contingent annuity products with a significant portion of all premium payments established as reserves.
The following table sets forth benefits to policyholders for the Asset Management segment:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||||||||||
2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
|||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Benefits to policyholders |
$ | 4.8 | $ | 5.1 | (5.9 | )% | $ | 15.0 | $ | 15.2 | (1.3 | )% |
52
Interest Credited
Interest credited represents interest paid to policyholders on retirement plan general account assets, individual fixed-rate annuity deposits and index-based interest guarantees.
The following table sets forth interest credited and associated key indicators for the Asset Management segment for the periods presented:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||||||||||
2012 | 2011 | Dollar Change |
2012 | 2011 | Dollar Change |
|||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Interest credited |
$ | 42.9 | $ | 35.8 | $ | 7.1 | $ | 126.7 | $ | 113.6 | $ | 13.1 | ||||||||||||
Key indicators of interest credited: |
||||||||||||||||||||||||
Contribution from the change in fair value of index-based interest guarantees |
$ | 2.5 | $ | (3.7 | ) | $ | 6.2 | $ | 7.2 | $ | (1.7 | ) | $ | 8.9 |
The increases in interest credited for the third quarter and first nine months of 2012 compared to the same periods for 2011 were primarily due to the change in fair value of our index-based interest guarantees, and an increase in our average individual fixed-rate annuity assets under administration. See Item 1, Financial StatementsNotes to Unaudited Condensed Consolidated Financial StatementsNote 8Derivative Financial Instruments for further derivatives disclosure.
Operating Expenses
The following table sets forth operating expenses for the Asset Management segment:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||||||||||
2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
|||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Operating expenses |
$ | 28.7 | $ | 28.9 | (0.7 | ) % | $ | 88.2 | $ | 87.2 | 1.1 | % |
The increase in Asset Management operating expenses for the first nine months of 2012 compared to first nine months of 2011 was primarily due to increased administrative and service costs.
Other
In addition to our two segments, we report our holding company and corporate activities in the Other category. This category includes return on capital not allocated to the product segments, holding company expenses, operations of certain unallocated subsidiaries, interest on debt, unallocated expenses, net capital gains and losses and adjustments made in consolidation.
The following table sets forth results for the Other category:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||||||||||
2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
|||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Loss before income taxes |
$ | 18.6 | $ | 11.3 | 64.6 | % | $ | 47.9 | $ | 55.2 | (13.2 | )% |
The increase in loss before income taxes for the third quarter of 2012 compared to the third quarter of 2011 was primarily due to capital gains recorded on the sales of real estate investments during the third quarter of 2011, which did not recur in the third quarter of 2012.
The decrease in loss before income taxes for the first nine months of 2012 compared to the first nine months of 2011 was primarily due to an increase in operating expenses during the first nine months of 2011 related to increased project costs for information technology service changes.
53
Net Capital Gains (Losses)
Net capital gains and losses are reported in the Other category and are not likely to occur in a stable pattern. Net capital gains and losses primarily occur as a result of sales of our assets for more or less than carrying value, OTTI of assets in our bond portfolio, provisions to our commercial mortgage loan loss allowance, losses recognized due to impairment of real estate and impairments of tax-advantaged investments.
The following table sets forth net capital gains and losses and associated key components:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Net capital gains (losses): |
||||||||||||||||
Fixed maturity securities |
$ | 2.5 | $ | 0.7 | $ | 4.7 | $ | 7.2 | ||||||||
Commercial mortgage loans |
(4.4 | ) | (7.2 | ) | (10.2 | ) | (24.8 | ) | ||||||||
Real estate investments |
| 19.4 | | 27.9 | ||||||||||||
Real estate owned |
(0.2 | ) | (3.6 | ) | (0.9 | ) | (16.4 | ) | ||||||||
Other |
(0.5 | ) | (1.6 | ) | (0.4 | ) | (1.8 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total net capital (losses) gains |
$ | (2.6 | ) | $ | 7.7 | $ | (6.8 | ) | $ | (7.9 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Key components of net capital (losses) gains: |
||||||||||||||||
Commercial mortgage loan loss allowance provision |
$ | (5.0 | ) | $ | (7.5 | ) | $ | (11.4 | ) | $ | (25.5 | ) | ||||
OTTI on fixed maturity securities |
(0.7 | ) | (0.3 | ) | (3.2 | ) | (1.7 | ) | ||||||||
Impairments on real estate owned |
(0.8 | ) | (3.6 | ) | (1.7 | ) | (15.3 | ) |
Net capital losses for the third quarter and the first nine months of 2012 were primarily related to our commercial mortgage loan loss allowance provision. These losses were partially offset by net capital gains related to the sale of certain fixed maturity securities.
Liquidity and Capital Resources
Asset-Liability Matching and Interest Rate Risk Management
Asset-liability management is a part of our risk management structure. The risks we assume related to asset-liability mismatches vary with economic conditions. The primary sources of economic risk are interest rate related and include changes in interest rate term risk, credit risk and liquidity risk. It is generally managements objective to align the characteristics of assets and liabilities so that our financial obligations can be met under a wide variety of economic conditions. From time to time, management may choose to liquidate certain investments and reinvest in different investments so that the likelihood of meeting our financial obligations is increased. See Investing Cash Flows.
We manage interest rate risk, in part, through asset-liability analyses. In accordance with presently accepted actuarial standards, we have made adequate provisions for the anticipated cash flows required to meet contractual obligations and related expenses through the use of statutory reserves and related items at September 30, 2012.
Our interest rate risk analysis reflects the influence of call and prepayment rights present in our fixed maturity securities and commercial mortgage loans. The majority of these investments have contractual provisions that require the borrower to compensate us in part or in full for reinvestment losses if the security or loan is retired before maturity. Callable bonds without make-whole provisions represented 8.3% of our fixed maturity security portfolio at September 30, 2012. We also originate commercial mortgage loans containing a make-whole prepayment provision requiring the borrower to pay a prepayment fee. As interest rates decrease, potential prepayment fees increase. These larger prepayment fees deter borrowers from refinancing during a low interest rate environment. Approximately 97% of our commercial mortgage loan portfolio contains this prepayment provision. Almost all of the remaining commercial mortgage loans without a make-whole prepayment provision generally contain fixed percentage prepayment fees that mitigate prepayments but may not fully protect our expected cash flows in the event of prepayment.
Operating Cash Flows
Net cash provided by operating activities is net income adjusted for non-cash items and accruals, and was $318.3 million for the first nine months of 2012, compared to $245.8 million for the first nine months of 2011. This increase was driven by an $8.5 million increase in our deferred tax liability, in addition to a $124.5 million increase in other liabilities, partially offset by a $32.7 million increase in other assets, mainly attributable to timing differences.
54
Investing Cash Flows
We maintain a diversified investment portfolio primarily consisting of fixed maturity securities and fixed-rate commercial mortgage loans. Investing cash inflows primarily consist of the proceeds of investments sold, matured or repaid. Investing cash outflows primarily consist of payments for investments acquired or originated.
Net cash used in investing activities was $524.6 million and $481.3 million for the first nine months of 2012 and 2011, respectively. The increase in net cash used in investing activities for the first nine months of 2012 compared to the first nine months of 2011 was primarily due to an increase in net purchases of fixed maturity securities during the first nine months of 2012.
Our target investment portfolio allocation is approximately 60% fixed maturity securities and 40% commercial mortgage loans with a maximum allocation of 45% to commercial mortgage loans. At September 30, 2012, our portfolio consisted of 56.7% fixed maturity securities, 41.0% commercial mortgage loans, 1.5% other invested assets and 0.8% real estate.
Fixed Maturity Securities
We maintain prudent diversification across industries, issuers and maturities. We have avoided the types of structured products that do not meet an adequate level of transparency for good decision making. Our corporate bond industry diversification targets are based on the Bank of America Merrill Lynch U.S. Corporate Master Index, which is reasonably reflective of the mix of issuers broadly available in the market. Our fixed maturity securities below investment grade are primarily managed by a third party.
Our fixed maturity securities portfolio generates unrealized gains or losses primarily resulting from market interest rates that are lower or higher relative to our book yield at the reporting date. In addition, changes in the spread between the risk-free rate and market rates for any given issuer can fluctuate based on the demand for the instrument, the near-term prospects of the issuer and the overall economic climate.
The following tables set forth the composition of our fixed maturity securities portfolio by industry category with the associated unrealized gains and losses:
September 30, 2012 | ||||||||||||||||
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
|||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
Corporate bonds: |
||||||||||||||||
Basic industry |
$ | 375.2 | $ | 34.5 | $ | (0.8 | ) | $ | 408.9 | |||||||
Capital goods |
721.4 | 72.7 | (0.2 | ) | 793.9 | |||||||||||
Communications |
302.7 | 36.1 | | 338.8 | ||||||||||||
Consumer cyclical |
412.7 | 39.5 | (0.1 | ) | 452.1 | |||||||||||
Consumer non cyclical |
920.9 | 122.8 | (0.3 | ) | 1,043.4 | |||||||||||
Energy |
449.8 | 52.4 | (0.2 | ) | 502.0 | |||||||||||
Finance |
1,502.8 | 109.4 | (0.9 | ) | 1,611.3 | |||||||||||
Utility |
929.3 | 119.2 | (0.3 | ) | 1,048.2 | |||||||||||
Transportation and other |
204.2 | 24.7 | | 228.9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total corporate bonds |
5,819.0 | 611.3 | (2.8 | ) | 6,427.5 | |||||||||||
U.S. government and agency bonds |
365.6 | 64.7 | | 430.3 | ||||||||||||
U.S. state and political subdivision bonds |
158.7 | 17.8 | | 176.5 | ||||||||||||
Foreign government bonds |
61.4 | 10.9 | | 72.3 | ||||||||||||
S&P 500 Index options |
13.8 | | | 13.8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
$ | 6,418.5 | $ | 704.7 | $ | (2.8 | ) | $ | 7,120.4 | |||||||
|
|
|
|
|
|
|
|
55
December 31, 2011 | ||||||||||||||||
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
|||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
Corporate bonds: |
||||||||||||||||
Basic industry |
$ | 378.6 | $ | 30.4 | $ | (1.4 | ) | $ | 407.6 | |||||||
Capital goods |
734.2 | 64.9 | (1.1 | ) | 798.0 | |||||||||||
Communications |
304.2 | 27.1 | (1.8 | ) | 329.5 | |||||||||||
Consumer cyclical |
392.7 | 33.1 | (1.2 | ) | 424.6 | |||||||||||
Consumer non cyclical |
922.9 | 108.9 | (0.2 | ) | 1,031.6 | |||||||||||
Energy |
435.6 | 45.0 | (0.7 | ) | 479.9 | |||||||||||
Finance |
1,287.1 | 53.2 | (13.9 | ) | 1,326.4 | |||||||||||
Utility |
931.9 | 106.2 | (0.6 | ) | 1,037.5 | |||||||||||
Transportation and other |
201.2 | 23.0 | | 224.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total corporate bonds |
5,588.4 | 491.8 | (20.9 | ) | 6,059.3 | |||||||||||
U.S. government and agency bonds |
387.8 | 64.3 | | 452.1 | ||||||||||||
U.S. state and political subdivision bonds |
164.8 | 14.0 | | 178.8 | ||||||||||||
Foreign government bonds |
61.7 | 10.4 | | 72.1 | ||||||||||||
S&P 500 Index options |
7.2 | | | 7.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
$ | 6,209.9 | $ | 580.5 | $ | (20.9 | ) | $ | 6,769.5 | |||||||
|
|
|
|
|
|
|
|
The following table sets forth key indicators of our fixed maturity securities portfolio:
September 30, 2012 |
December 31, 2011 |
Change | ||||||||||
(Dollars in millions) | ||||||||||||
Fixed maturity securities |
$ | 7,120.4 | $ | 6,769.5 | 5.2 | % | ||||||
Weighted-average credit quality of our fixed maturity securities portfolio (S&P) |
A | A | ||||||||||
Fixed maturity securities below investment grade: |
||||||||||||
As a percent of total fixed maturity securities |
5.6 | % | 5.2 | % | ||||||||
Managed by a third party |
$ | 351.6 | $ | 311.3 | 12.9 | % | ||||||
Fixed maturity securities on our watch list: |
||||||||||||
Fair value |
5.3 | 8.9 | $ | (3.6 | ) | |||||||
Amortized cost after OTTI |
5.5 | 12.2 | (6.7 | ) | ||||||||
Gross unrealized capital gains in our fixed maturity securities portfolio |
704.7 | 580.5 | 21.4 | % | ||||||||
Gross unrealized capital losses in our fixed maturity securities portfolio |
(2.8 | ) | (20.9 | ) | 86.6 |
We recorded OTTI of $0.7 million and $3.2 million, and $0.3 million and $1.7 million for the third quarter and first nine months of 2012 and 2011, respectively. See Critical Accounting Policies and EstimatesInvestment ValuationsFixed Maturity Securities. We did not have any direct exposure to sub-prime or Alt-A mortgages in our fixed maturity securities portfolio at September 30, 2012. At September 30, 2012, we did not have any direct exposure to euro zone government issued debt or debt issued by investment and commercial banks headquartered in Portugal, Ireland, Italy, Greece or Spain. At September 30, 2012, fixed maturity securities issued by investment and commercial banks headquartered in other euro zone countries represented 0.8%, or $54.7 million, of our fixed maturity securities portfolio. There were no impairments on fixed maturity securities related to euro zone exposure during the first nine months of 2012.
Commercial Mortgage Loans
StanCorp Mortgage Investors, LLC originates and services fixed-rate commercial mortgage loans for the investment portfolios of our insurance subsidiaries and generates additional fee income from the origination and servicing of commercial mortgage loans participated to institutional investors. The level of commercial mortgage loan originations in any period is influenced by market conditions as we respond to changes in interest rates, available spreads and borrower demand.
56
The following table sets forth commercial mortgage loan originations:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||||||||||
2012 | 2011 | Percent Change |
2012 | 2011 | Percent Change |
|||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Commercial mortgage loan originations |
$ | 347.3 | $ | 271.7 | 27.8 | % | $ | 857.0 | $ | 770.7 | 11.2 | % |
The increase in commercial mortgage loan originations for the third quarter and first nine months of 2012 compared to the same periods for 2011 were primarily due to increased activity in the commercial real estate market during 2012.
The following table sets forth commercial mortgage loan servicing data:
September 30, 2012 |
December 31, 2011 |
Percent Change |
||||||||||
(Dollars in millions) | ||||||||||||
Commercial mortgage loans serviced: |
||||||||||||
For subsidiaries of StanCorp |
$ | 5,148.4 | $ | 4,901.0 | 5.0 | % | ||||||
For other institutional investors |
2,781.8 | 2,691.6 | 3.4 | |||||||||
Capitalized commercial mortgage loan servicing rights associated with commercial mortgage loans serviced for other institutional investors |
7.4 | 7.2 | 2.8 |
The estimated average loan to value ratio for the overall portfolio was less than 70% at September 30, 2012. The average loan balance of our commercial mortgage loan portfolio was approximately $0.8 million at September 30, 2012. We have the contractual ability to pursue personal recourse on approximately 74% of our loans and partial personal recourse on a majority of the remaining loans. The weighted average capitalization rate for the portfolio at September 30, 2012 was approximately 9%. Capitalization rates are used internally to value our commercial mortgage loan portfolio annually.
At September 30, 2012, we did not have any direct exposure to sub-prime or Alt-A mortgages in our commercial mortgage loan portfolio. When we undertake mortgage risk, we do so directly through loans that we originate ourselves rather than in packaged products such as commercial mortgage-backed securities. Given that we service the vast majority of loans in our portfolios, we are prepared to deal with them promptly and proactively. Should the delinquency rate or loss performance of our commercial mortgage loan portfolio increase significantly, the increase could have a material adverse effect on our business, financial position, results of operations or cash flows.
57
The following table sets forth our commercial mortgage loan portfolio by property type, by geographic region within the U.S., and by U.S. state:
September 30, 2012 | December 31, 2011 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Property type: |
||||||||||||||||
Retail |
$ | 2,492.2 | 48.4 | % | $ | 2,457.8 | 50.1 | % | ||||||||
Industrial |
967.4 | 18.8 | 900.4 | 18.4 | ||||||||||||
Office |
944.7 | 18.3 | 911.1 | 18.6 | ||||||||||||
Hotel/motel |
297.5 | 5.8 | 241.9 | 4.9 | ||||||||||||
Commercial |
199.4 | 3.9 | 187.1 | 3.8 | ||||||||||||
Apartment and other |
247.8 | 4.8 | 204.0 | 4.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial mortgage loans |
$ | 5,149.0 | 100.0 | % | $ | 4,902.3 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Geographic region*: |
||||||||||||||||
Pacific |
$ | 1,811.2 | 35.2 | % | $ | 1,699.3 | 34.7 | % | ||||||||
South Atlantic |
1,028.9 | 20.0 | 953.8 | 19.5 | ||||||||||||
West South Central |
629.6 | 12.2 | 605.3 | 12.3 | ||||||||||||
Mountain |
609.1 | 11.8 | 585.8 | 11.9 | ||||||||||||
East North Central |
420.3 | 8.2 | 393.4 | 8.0 | ||||||||||||
Middle Atlantic |
241.8 | 4.7 | 243.8 | 5.0 | ||||||||||||
West North Central |
183.9 | 3.6 | 184.8 | 3.8 | ||||||||||||
East South Central |
131.7 | 2.5 | 129.9 | 2.6 | ||||||||||||
New England |
92.5 | 1.8 | 106.2 | 2.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial mortgage loans |
$ | 5,149.0 | 100.0 | % | $ | 4,902.3 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
U.S. state: |
||||||||||||||||
California |
$ | 1,418.4 | 27.5 | % | $ | 1,332.0 | 27.2 | % | ||||||||
Texas |
574.0 | 11.1 | 550.8 | 11.2 | ||||||||||||
Florida |
316.0 | 6.2 | 305.3 | 6.2 | ||||||||||||
Georgia |
304.3 | 5.9 | 270.1 | 5.5 | ||||||||||||
Other states |
2,536.3 | 49.3 | 2,444.1 | 49.9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial mortgage loans |
$ | 5,149.0 | 100.0 | % | $ | 4,902.3 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
* | Geographic regions obtained from the American Council of Life Insurers Mortgage Loan Portfolio Profile. |
Our largest concentration of commercial mortgage loan property type was retail properties and primarily consisted of convenience related properties in strip malls, convenience stores and restaurants. Our exposure to retail properties is diversified among various borrowers, properties and geographic regions. In addition, retail commercial lending represents an area of experience and expertise, where careful underwriting and consistent surveillance mitigate risks surrounding our commercial mortgage lending in this area.
At September 30, 2012, our ten largest borrowers represented less than 8% of our total commercial mortgage loan portfolio balance. Our largest borrower concentrations within our commercial mortgage loan portfolio consisted of one borrower that comprised less than 2% of our total commercial mortgage loan portfolio balance. The second largest borrower comprised less than 1% of our total commercial mortgage loan portfolio balance.
Through our concentration of commercial mortgage loans in California, we are exposed to potential losses from an economic downturn in California as well as to certain catastrophes, such as earthquakes and fires that may affect certain areas of the western region. We require borrowers to maintain fire insurance coverage. We diversify our commercial mortgage loan portfolio within California by both location and type of property in an effort to reduce certain catastrophe and economic exposure. However, diversification may not always eliminate the risk of such losses. Historically, the delinquency rate of our California-based commercial mortgage loans has been substantially below the industry average and is consistent with our experience in other states. We do not require earthquake insurance for the properties when we underwrite new loans. However, we consider the potential for earthquake loss based upon seismic surveys and structural information specific to each property. We do not expect a catastrophe or earthquake damage in the western region to have a material adverse effect on our business, financial position, results of operations or cash flows. Currently, our California exposure is primarily in Los Angeles County, Orange County, San Diego County and the Bay Area
58
Counties. We have a smaller concentration of commercial mortgage loans in the Inland Empire and the San Joaquin Valley where there has been greater economic decline. Due to the concentration of commercial mortgage loans in California, a continued economic decline in California could have a material effect on our business, financial position, results of operations or cash flows. See Part II, Item 1A, Risk Factors.
Under the laws of certain states, environmental contamination of a property may result in a lien on the property to secure recovery of the costs of cleanup. In some states, such a lien has priority over the lien of an existing mortgage against such property. As a commercial mortgage lender, we customarily conduct environmental assessments prior to making commercial mortgage loans secured by real estate and before taking title through foreclosure on real estate collateralizing delinquent commercial mortgage loans held by us. Based on our environmental assessments, we believe that any compliance costs associated with environmental laws and regulations or any remediation of affected properties would not have a material effect on our business, financial position, results of operations or cash flows. However, we cannot provide assurance that material compliance costs will not be incurred by us.
In the normal course of business, we commit to fund commercial mortgage loans generally up to 90 days in advance. At September 30, 2012, we had outstanding commitments to fund commercial mortgage loans totaling $128.3 million, with fixed interest rates ranging from 4.500% to 5.875%. These commitments generally have fixed expiration dates. A small percentage of commitments expire due to the borrowers failure to deliver the requirements of the commitment by the expiration date. In these cases, we will retain the commitment fee and good faith deposit. Alternatively, if we terminate a commitment due to the disapproval of a commitment requirement, the commitment fee and good faith deposit may be refunded to the borrower, less an administrative fee.
The following table sets forth key commercial mortgage loan statistics:
September 30, 2012 |
December 31, 2011 |
Percent Change |
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(Dollars in millions) | ||||||||||||
Commercial mortgage loans sixty-day delinquencies: |
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Book value |
$ | 15.6 | $ | 17.1 | (8.8 | ) % | ||||||
Delinquency rate |
0.30 | % | 0.34 | % | ||||||||
In process of foreclosure |
$ | 9.9 | $ | 5.1 | 94.1 | |||||||
Restructured commercial mortgage loans on a statutory basis |
82.4 | 93.7 | (12.1 | ) |
The performance of our commercial mortgage loan portfolio may fluctuate in the future. However, based on our business approach of diligently underwriting high-quality loans, we believe our delinquency rate will remain contained. We have steadfastly avoided the types of structured products that do not meet an adequate level of transparency for good decision making.
The following table sets forth details of our commercial mortgage loans foreclosed or accepted as deeds in lieu of foreclosure:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | Change | 2012 | 2011 | Change | |||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Number of loans |
4 | 10 | (6 | ) | 26 | 31 | (5 | ) | ||||||||||||||||
Book value |
$ | 1.9 | $ | 7.0 | $ | (5.1 | ) | $ | 18.8 | $ | 26.0 | $ | (7.2 | ) | ||||||||||
Number of properties foreclosed and |
3 | 8 | (5 | ) | 22 | 30 | (8 | ) | ||||||||||||||||
Real estate acquired |
$ | 1.0 | $ | 2.9 | $ | (1.9 | ) | $ | 14.3 | $ | 13.0 | $ | 1.3 |
Commercial mortgage loan foreclosures may result in the sale of the property to a third party at the time of foreclosure, resulting in fewer properties transferred to real estate owned than the number of loans foreclosed during the period. Commercial mortgage loans may have multiple properties as collateral, resulting in more properties transferred to real estate owned than the number of loans foreclosed during the period. Real estate acquired through foreclosure or accepted as deeds in lieu of foreclosure is initially recorded at the lower of cost or estimated net realizable value, which includes an estimate for disposal costs. These amounts may be adjusted in a subsequent period as additional market information is received. The book value of real estate acquired during the third quarter of 2012 compared to the third quarter of 2011 decreased primarily due to fewer properties being acquired in the third quarter of 2012. The book value of real estate acquired during the first nine months of 2012 increased compared to the same period of 2011 primarily due to the properties acquired having higher average net realizable values in the first nine months of 2012. See Critical Accounting Policies and EstimatesInvestment ValuationsCommercial Mortgage Loans for our commercial mortgage loan loss allowance policy.
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The following table sets forth changes in the commercial mortgage loan loss allowance:
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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2012 | 2011 | Dollar Change |
2012 | 2011 | Dollar Change |
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(In millions) | ||||||||||||||||||||||||
Commercial mortgage loan loss allowance: |
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Beginning balance |
$ | 45.6 | $ | 43.5 | $ | 2.1 | $ | 48.1 | $ | 36.1 | $ | 12.0 | ||||||||||||
Provision |
5.0 | 7.5 | (2.5 | ) | 11.4 | 25.5 | (14.1 | ) | ||||||||||||||||
Charge-offs, net |
(2.6 | ) | (3.9 | ) | 1.3 | (11.5 | ) | (14.5 | ) | 3.0 | ||||||||||||||
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Ending balance |
$ | 48.0 | $ | 47.1 | $ | 0.9 | $ | 48.0 | $ | 47.1 | $ | 0.9 | ||||||||||||
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The higher commercial mortgage loan loss allowance as of September 30, 2012 compared to September 30, 2011 was primarily due to the increase in the general loan loss allowance as of September 30, 2012 compared to September 30, 2011. The decrease in the provision and charge-offs for the third quarter and first nine months of 2012 compared to the same periods of 2011 were primarily related to lower losses associated with foreclosures, accepted deeds in lieu of foreclosure on commercial mortgage loans and other related charges associated with commercial mortgage loans leaving the portfolio during the third quarter and first nine months of 2012.
The following table sets forth impaired commercial mortgage loans identified in managements specific review of probable loan losses and the related allowance:
September 30, 2012 |
December 31, 2011 |
Dollar Change |
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(In millions) | ||||||||||||
Impaired commercial mortgage loans with specific allowances for losses |
$ | 74.6 | $ | 75.8 | $ | (1.2 | ) | |||||
Impaired commercial mortgage loans without specific allowances for losses |
24.0 | 28.9 | (4.9 | ) | ||||||||
Specific allowance for losses on impaired commercial mortgage loans, end of the period |
(25.0 | ) | (26.6 | ) | 1.6 | |||||||
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Net carrying value of impaired commercial mortgage loans |
$ | 73.6 | $ | 78.1 | $ | (4.5 | ) | |||||
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An impaired commercial mortgage loan is a loan where we do not expect to receive contractual principal and interest in accordance with the terms of the loan agreement. A specific allowance for losses is recorded when a loan is considered to be impaired and it is probable that all amounts due will not be collected. We also hold specific allowances for losses on certain performing loans that we continue to monitor and evaluate. Impaired commercial mortgage loans without specific allowances for losses are those for which we have determined that it remains probable that we will collect all amounts due. The decrease in the impaired commercial mortgage loans balance at September 30, 2012 compared to December 31, 2011 was primarily due to loan repayments and foreclosures during the first nine months of 2012.
The following table sets forth the average recorded investment in impaired commercial mortgage loans before specific allowance for losses:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | Dollar Change |
2012 | 2011 | Dollar Change |
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(In millions) | ||||||||||||||||||||||||
Average recorded investment |
$ | 99.0 | $ | 91.9 | $ | 7.1 | $ | 101.7 | $ | 89.2 | $ | 12.5 |
Interest income is recorded in net investment income. We continue to recognize interest income on delinquent commercial mortgage loans until the loans are more than 90 days delinquent. Interest income and accrued interest receivable are reversed when a loan is put on non-accrual status. For loans that are less than 90 days delinquent, we may reverse interest income and the accrued interest receivable if there is a question on the collectability of the interest. Interest income on loans in the 90-day delinquent category is recognized in the period the cash is collected. We resume the recognition of interest income when the loan becomes less than 90 days delinquent and we determine it is probable that the loan will remain performing.
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The amount of interest income recognized on impaired commercial mortgage loans was $1.0 million and $0.7 million for the third quarters of 2012 and 2011, respectively, and was $3.1 million and $2.8 million for the first nine months of 2012 and 2011, respectively. The cash received by us in payment of interest on impaired commercial mortgage loans was $1.0 million and $0.7 million for the third quarters of 2012 and 2011, respectively, and was $3.0 million and $2.1 million for the first nine months of 2012 and 2011, respectively.
Financing Cash Flows
Financing cash flows primarily consist of policyholder fund deposits and withdrawals, borrowings and repayments on the line of credit, borrowings and repayments on long-term debt, repurchases of common stock and dividends paid on common stock. Net cash provided by financing activities was $240.3 million and $255.7 million for the first nine months of 2012 and 2011, respectively. The decrease in funds provided by financing cash flows for the comparative periods was primarily due to a decrease in the level of policyholder funds, net of withdrawals, partially offset by a decrease in repurchases of common stock. See Capital ManagementShare Repurchases for further discussion on share repurchases.
On June 22, 2012, we entered into an agreement for a four-year, $250 million credit facility (the Facility). Additionally, upon our request and with consent of the lenders under the Facility, the Facility can be increased to $350 million. The termination date of the Facility is June 22, 2016 though, at our option and with the consent of the lenders under the Facility, the termination date can be extended for two additional one year periods. Borrowings under the Facility will be used to provide for working capital, for issuance of letters of credit and for our general corporate purposes.
Under the agreement, we are subject to customary covenants that take into consideration the impact of material transactions, changes to the business, compliance with legal requirements and financial performance. The two financial covenants are based on our total debt to total capitalization ratio and consolidated net worth. Under the two financial covenants, we are required to maintain a total debt to capitalization ratio that does not exceed 35% and a consolidated net worth that is equal to at least $1.24 billion. The financial covenants exclude the unrealized gains and losses related to fixed maturity securities that are held in accumulated other comprehensive income (loss). At September 30, 2012, we had a total debt to total capitalization ratio of 23.7% and consolidated net worth of $1.78 billion as defined by the financial covenants. The Facility is subject to performance pricing based upon the Companys publicly announced debt ratings and includes an interest rate option at the election of the borrower of a base rate plus the applicable margin or the LIBOR rate plus the applicable margin, plus facility and utilization fees. At September 30, 2012, we were in compliance with all covenants under the Facility and had no outstanding balance on the Facility. We believe we will continue to meet the financial covenants throughout the life of the Facility.
On August 10, 2012, we issued $250 million of 5.00%, 10-year senior notes (2022 Senior Notes) which mature on August 15, 2022. Interest will be paid semi-annually on February 15 and August 15, beginning on February 15, 2013. We used the net proceeds from the issuance of the 2022 Senior Notes to repay the $250 million of 6.875%, 10-year senior notes (2012 Senior Notes), on September 28, 2012.
We have $300 million of 6.90%, junior subordinated debentures (Subordinated Debt). The Subordinated Debt has a final maturity on June 1, 2067, is non-callable for the first 10 years (prior to June 1, 2017). The principal amount of the Subordinated Debt is payable at final maturity. Interest is payable semi-annually at 6.90% in June and December for the first 10 years up to June 1, 2017, and quarterly thereafter at a floating rate equal to three-month London Interbank Offered Rate plus 2.51%. We have the option to defer interest payments for up to five years. We have not deferred interest on the Subordinated Debt.
Capital Management
State insurance departments require insurance enterprises to maintain minimum levels of capital and surplus. The target for our insurance subsidiaries is generally to maintain statutory capital at 300% of the Company Action Level of Risk-based Capital (RBC) required by regulators, which is 600% of the Authorized Control Level RBC required by our states of domicile. The insurance subsidiaries held estimated statutory capital of 364% of the Company Action Level RBC at September 30, 2012. At September 30, 2012, statutory capital, adjusted to exclude asset valuation reserves, for our regulated insurance subsidiaries totaled $1.37 billion.
Statutory capital growth from our insurance subsidiaries is generally a result of generated income, less a charge for business growth, measured by insurance premium growth, which includes individual annuity sales. The level of capital in excess of targeted RBC we generate varies inversely in relation to the level of our premium growth. As premium growth increases, capital is utilized to fund additional reserve requirements, meet increased regulatory capital requirements based on premium and cover certain acquisition costs associated with policy issuance, leaving less available capital beyond our target level. Higher levels of premium growth can result in increased utilization of capital beyond that which is generated by the business, and at very high levels of premium growth, we could generate the need for capital infusions. At lower levels of premium growth, additional capital produced by the business exceeds the capital utilized to meet these requirements, which can result in additional capital above our targeted RBC level. In assessing our capital position, we also consider cash and capital at the holding company and non-insurance subsidiaries.
In the third quarter of 2012 we amended our Yearly Renewable Term reinsurance agreement with Canada Life Assurance Company (Canada Life). The amendment increased the amount of group life insurance risk to be ceded to Canada Life. The amended agreement limits our exposure to losses in the event of a catastrophe. This amendment to our reinsurance agreement released approximately $100 million of additional net capital, for a total release of approximately $170 million. This release of capital can fluctuate based on a percentage of our in-force business. The agreement is periodically subject to termination by both parties.
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Investments
The insurance laws of the states of domicile and other states in which the insurance subsidiaries conduct business regulate the investment portfolios of the insurance subsidiaries. Relevant laws and regulations generally limit the admissibility of investments to bonds and other fixed maturity securities, commercial mortgage loans, common and preferred stock and real estate. Decisions to acquire and dispose of investments are made in accordance with guidelines adopted and modified from time to time by the Boards of Directors of our insurance subsidiaries. Each investment transaction requires the approval of one or more members of senior investment staff, with increasingly higher approval authorities required for transactions that are more significant. Transactions are reported quarterly to the Audit Committee of the Board of Directors for Standard Insurance Company (Standard) and to the Board of Directors for The Standard Life Insurance Company of New York.
Dividends from Standard
Our ability to pay dividends to our shareholders, repurchase our shares and meet our obligations substantially depends upon the receipt of distributions from our subsidiary Standard. Standards ability to pay dividends to StanCorp is affected by factors deemed relevant by Standards Board of Directors. One factor considered by the Board is the ability to maintain adequate capital according to Oregon statute. Under Oregon law, Standard may pay dividends and other distributions only from the earned surplus arising from its business. If the proposed dividend or other distribution exceeds certain statutory limitations, Standard must receive the prior approval of the Director of the Oregon Department of Consumer and Business ServicesInsurance Division (Oregon Insurance Division). The current statutory limitations are the greater of (a) 10% of Standards combined capital and surplus as of December 31 of the preceding year, or (b) the net gain from operations after dividends to policyholders and federal income taxes and before realized capital gains or losses for the 12-month period ended on the preceding December 31. In each case, the limitation must be determined under statutory accounting practices. Oregon law gives the Oregon Insurance Division broad discretion to approve or decline requests for dividends and other distributions in excess of these limits. With the exception of StanCorp Equities, Inc., a limited broker-dealer and member of the Financial Industry Regulatory Authority, there are no regulatory restrictions on dividends from our non-insurance subsidiaries.
As of December 31, 2011, Standards net gain from operations after dividends to policyholders and federal income taxes and before capital gains or losses for the 12-month period then ended was $144.0 million and capital and surplus was $1.14 billion. Based upon Standards results for 2011, the amount of ordinary dividends and other distributions available in 2012, without additional approval from the Oregon Insurance Division is $144.0 million. As of September 30, 2012 Standard had issued, upon approval of the Oregon Insurance Division, dividends in excess of $144.0 million. Therefore, future dividends will require the approval from the Oregon Insurance Division through August 14, 2013.
In August 2012, Standard paid an extraordinary cash distribution of $250.0 million to StanCorp from its paid-in and contributed surplus. Concurrently with the distribution, Standard issued a $250.0 million subordinated surplus note (Surplus Note), payable to StanCorp. The Surplus Note matures in 2027 and bears an interest rate of 5.25%, with interest payments due September 30, December 31, March 31 and June 30 of each year. Standard has the right to prepay the principal balance of the Surplus Note, in whole or in part, at any time or from time to time, without penalty. In accordance with the requirements of the National Association of Insurance Commissioners (NAIC), the Surplus Note provides that no interest or principal payments may be made by Standard without the prior approval of the Oregon Insurance Division, interest will not be represented as an addition to the instrument, interest will not accrue additional interest and any payments with respect to the Surplus Note will be subordinate to Standards other obligations to policyholders, lenders and creditors. Any cash dividends paid by Standard to StanCorp through August 14, 2013 will be considered extraordinary.
Dividends paid from Standard to StanCorp will be based on levels of available capital and needs at the holding company, which are driven by the financial results of Standard and the Company as a whole. Standard paid $30.0 million of extraordinary cash dividends to StanCorp during the third quarter of 2012 in addition to the $250.0 million discussed above. Standard did not pay any dividends to StanCorp during the third quarter of 2011. Standard paid ordinary cash dividends to StanCorp of $10.0 million and extraordinary cash dividends to StanCorp of $280.0 million for the first nine months of 2012. Standard paid ordinary cash dividends to StanCorp of $57.8 million for the first nine months of 2011.
Dividends to Shareholders
The declaration and payment of dividends to shareholders in the future is subject to the discretion of our Board of Directors. It is anticipated that annual dividends to shareholders will be paid in December of each year depending on our financial condition, results of operations, cash requirements, future prospects, regulatory restrictions on dividends from the insurance subsidiaries, the ability of the insurance subsidiaries to maintain adequate capital and other factors deemed relevant by our Board of Directors. In addition, the declaration and payment of dividends would be restricted if we elect to defer interest payments on our Subordinated Debt dated as of May 21, 2007. If elected, the restriction would be in place during the interest deferral period, which cannot exceed five years. We have not deferred interest on the Subordinated Debt, and have paid dividends each year since our initial public offering in 1999. In the fourth quarter of 2011, StanCorp paid an annual cash dividend of $0.89 per share, totaling $39.3 million.
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Share Repurchases
On May 16, 2011, our Board of Directors authorized an additional 3.0 million shares of StanCorp common stock for its share repurchase program. The May 2011 authorization took effect upon the expiration of the February 2010 authorization and expires on December 31, 2012. Share repurchases under the repurchase program are made in the open market or in negotiated transactions in compliance with the safe harbor provisions of Rule 10b-18 under regulations of the Securities Exchange Act of 1934 (Exchange Act). Execution of the share repurchase program is based upon managements assessment of market conditions for its common stock, capital levels, our assessment of the overall economy and other potential growth opportunities or priorities for capital use. Repurchases are made at market prices on the transaction date.
The following table sets forth share repurchases activity:
Three Months Ended September 30, |
Nine Months
Ended September 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
(Dollars in millions except per share data) | ||||||||||||||||
Share repurchases: |
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Shares repurchased |
| 357,000 | 279,700 | 2,170,000 | ||||||||||||
Cost of share repurchases |
$ | | $ | 9.7 | $ | 10.0 | $ | 90.0 | ||||||||
Weighted-average price per common share |
N/A | 27.16 | 35.68 | 41.46 | ||||||||||||
Shares remaining under repurchase authorizations |
2,720,300 | 3,138,900 | 2,720,300 | 3,138,900 |
Financial Strength and Credit Ratings
Financial strength ratings are gauges of our claims paying ability and are an important factor in establishing the competitive position of insurance companies. In addition, ratings are important for maintaining public confidence in our company and in our ability to market our products. Rating organizations regularly review the financial performance and condition of insurance companies. In addition, credit ratings on our Senior Notes and Subordinated Debt are tied to our financial strength ratings. A ratings downgrade could increase surrender levels for our annuity products, adversely affect our ability to market our products and increase costs of future debt issuances.
S&P, Moodys Investors Service, Inc. (Moodys) and A.M. Best Company (A.M. Best) provide financial strength ratings on Standard.
Standards financial strength ratings as of October 2012 were:
S&P |
Moodys |
A.M. Best | ||
A+ (Strong) | A2 (Good) | A (Excellent)(1) | ||
5th of 20 ratings | 6th of 21 ratings | 3rd of 13 ratings | ||
Outlook: Negative | Outlook: Negative | Outlook: Stable |
(1) | Also includes Standard Life Insurance Company of New York |
Credit ratings assess credit quality and the likelihood of issuer default. S&P, Moodys and A.M. Best provide ratings on StanCorps Senior Notes and Subordinated Debt. S&P and A.M. Best also provide issuer credit ratings for both Standard and StanCorp.
Our debt ratings and issuer credit ratings as of October 2012, which we believe are indicators of our liquidity and ability to make payments, were:
S&P | Moodys | A.M. Best | ||||
StanCorp debt ratings: |
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2022 Senior Notes |
BBB+ | Baa2 | bbb | |||
Subordinated Debt |
BBB- | Baa3 | bb+ | |||
Issuer credit ratings: |
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Standard |
A+ | | a(1) | |||
StanCorp |
BBB+ | | bbb | |||
Outlook |
Negative | Negative | Stable(1) |
(1) | Also includes Standard Life Insurance Company of New York |
In April 2012, Moodys lowered the financial strength rating for Standard and the debt and issuer credit ratings for StanCorp. Moodys downgraded the insurance financial strength rating of Standard to A2, our senior unsecured debt to Baa2 and our subordinated debt to Baa3.
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In July 2012, both Moodys and S&P changed their outlook for the ratings of Standard and StanCorp to Negative from Stable.
In August 2012, A.M. Best affirmed the financial strength rating of A for Standard and Standard Life Insurance Company of New York with a Stable outlook. A.M. Best lowered the issuer credit ratings for Standard and Standard Life Insurance Company of New York to a from a+ and StanCorp to bbb from bbb+. A.M. Best also lowered the debt ratings on StanCorps Subordinated Debt to bb+ from bbb-. A.M. Best also changed their outlook for the credit and debt ratings of Standard, Standard Life Insurance Company of New York and StanCorp to Stable from Negative.
These changes in ratings and outlook were primarily due to less favorable claims experience in our group long term disability business, which lowered earnings and capital generation for the first half of 2012. Our ratings continue to be high quality investment grade, and we are well positioned within the insurance industry.
We believe our well-managed underwriting and claims operations, high-quality invested asset portfolios, enterprise risk management processes and strong capital position will continue to support our financial strength ratings and strong credit standing. See Liquidity and Capital ResourcesAsset-Liability Matching and Interest Rate Risk Management, and Capital Management. In addition, we remain well within our line of credit financial covenants. See Liquidity and Capital ResourcesFinancing Cash Flows.
Contingencies and Litigation
See Item 1, Financial StatementsNotes to Unaudited Condensed Consolidated Financial StatementsNote 10Commitments and Contingencies.
Off-Balance Sheet Arrangements
See discussion of loan commitments, Liquidity and Capital ResourcesInvesting Cash FlowsCommercial Mortgage Loans.
Insolvency Assessments
Insolvency regulations exist in many of the jurisdictions in which our subsidiaries do business. Such regulations may require insurance companies operating within the jurisdiction to participate in guaranty associations. The associations levy assessments against their members for the purpose of paying benefits due to policyholders of impaired or insolvent insurance companies. Association assessments levied against us from January 1, 2010 through September 30, 2012 aggregated $1.2 million. At September 30, 2012, we maintained a reserve of $0.5 million for future assessments with respect to currently impaired, insolvent or failed insurers.
Statutory Financial Accounting
Standard and The Standard Life Insurance Company of New York prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by their states of domicile. Prescribed statutory accounting practices include state laws, regulations and general administrative rules, as well as the Statements of Statutory Accounting Principles set forth in publications of the National Association of Insurance Commissioners.
The following table sets forth the difference between the statutory net gains from insurance operations before federal income taxes and net capital gains and losses (Statutory Results) and GAAP income before income taxes excluding net capital gains and losses (Adjusted GAAP Results):
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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2012 | 2011 | Dollar Change |
2012 | 2011 | Dollar Change |
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(In millions) | ||||||||||||||||||||||||
Statutory Results |
$ | 76.5 | $ | 68.1 | $ | 8.4 | $ | 149.6 | $ | 144.4 | $ | 5.2 | ||||||||||||
Adjusted GAAP Results |
63.9 | 58.3 | 5.6 | 138.4 | 147.9 | (9.5 | ) | |||||||||||||||||
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Difference |
$ | 12.6 | $ | 9.8 | $ | 2.8 | $ | 11.2 | $ | (3.5 | ) | $ | 14.7 | |||||||||||
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The increases in Statutory Results for the third quarter and first nine months of 2012 compared to the same periods of 2011 were primarily due to more favorable claim recoveries and an improvement in claims incidence in the group long term disability insurance business. Partially offsetting the favorable claim recoveries and improved claims incidence was the 75 basis point decrease in the statutory discount rate used for newly established long term disability claim reserves from 4.00% for the third quarter of 2011, to 3.25% for the third quarter of 2012.
The increases in the difference between the Statutory Results and Adjusted GAAP Results for the third quarter and first nine months of 2012 compared to the same periods of 2011 were primarily due to differences in the prescribed accounting treatments between GAAP and Statutory for the changes in the fair value of our S&P 500 Index Options, reinsurance ceding commission, the discount rate used for newly established long term disability claim reserves, net income or loss from the holding company and non-insurance subsidiaries, and DAC.
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The following table sets forth statutory capital and the associated asset valuation reserve:
September 30, 2012 |
December 31, 2011 |
Percent Change |
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(Dollars in millions) | ||||||||||||
Statutory capital adjusted to exclude asset valuation reserves for our regulated insurance subsidiaries |
$ | 1,374.0 | $ | 1,300.3 | 5.7 | % | ||||||
Asset valuation reserve |
116.7 | 107.2 | 8.9 |
Accounting Pronouncements
See Item 1, Financial StatementsNotes to Unaudited Condensed Consolidated Financial StatementsNote 11Accounting Pronouncements.
Critical Accounting Policies and Estimates
Our consolidated financial statements and certain disclosures made in this Form 10-Q have been prepared in accordance with GAAP and require us to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent assets and contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The estimates most susceptible to material changes due to significant judgment (identified as the critical accounting policies) are those used in determining investment valuations, DAC, VOBA and other intangible assets, the reserves for future policy benefits and claims, pension and postretirement benefit plans and the provision for income taxes. The results of these estimates are critical because they affect our profitability and may affect key indicators used to measure our performance. These estimates have a material effect on our results of operations and financial condition.
Investment Valuations
Fixed Maturity Securities
Fixed maturity security capital gains and losses are recognized using the specific identification method. If a debt securitys fair value declines below its amortized cost, we must assess the securitys impairment to determine if the impairment is other than temporary.
In our quarterly fixed maturity security impairment analysis, we evaluate whether a decline in value of the fixed maturity security is other than temporary by considering the following factors:
| The nature of the fixed maturity security. |
| The duration until maturity. |
| The duration and extent the fair value has been below amortized cost. |
| The financial quality of the issuer. |
| Estimates regarding the issuers ability to make the scheduled payments associated with the fixed maturity security. |
| Our intent to sell or whether it is more likely than not we will be required to sell a fixed maturity security before recovery of the securitys cost basis through the evaluation of facts and circumstances including, but not limited to, decisions to rebalance our portfolio, current cash flow needs and sales of securities to capitalize on favorable pricing. |
If it is determined an OTTI exists, we separate the OTTI of debt securities into an OTTI related to credit loss and an OTTI related to noncredit loss. The OTTI related to credit loss represents the portion of losses equal to the difference between the present value of expected cash flows, discounted using the pre-impairment yields, and the amortized cost basis. All other changes in value represent the OTTI related to noncredit loss. The OTTI related to credit loss is recognized in earnings in the current period, while the OTTI related to noncredit loss is deemed recoverable and is recognized in other comprehensive income. The cost basis of the fixed maturity security is permanently adjusted to reflect the credit related impairment. Once an impairment charge has been recorded, we continue to review the OTTI securities for further potential impairment.
We maintain an internally identified list of securities with characteristics that could indicate potential impairment (watch list). At September 30, 2012, our fixed maturity securities watch list totaled $5.3 million at fair value and $6.2 million at amortized cost. We recorded $0.7 million and $3.2 million of OTTI related to credit loss due to impairments for the third quarter and first nine months of 2012, compared to credit losses of $0.3 million and $1.7 million of OTTI for the third quarter and first nine months of 2011, respectively. We recorded no OTTI related to noncredit loss for the third quarter and first nine months of 2012 and 2011. See Item 1, Financial StatementsNotes to Unaudited Consolidated Financial StatementsNote 7Investments for further disclosures.
We will continue to evaluate our holdings; however, we currently expect the fair values of our investments to recover either prior to their maturity dates or upon maturity. Should the credit quality of our fixed maturity securities significantly decline, there could be a material adverse effect on our business, financial position, results of operations or cash flows.
In conjunction with determining the extent of credit losses associated with debt securities, we utilize certain information in order to determine the present value of expected cash flows discounted using pre-impairment yields. Some of these input factors include, but are not limited to, original scheduled contractual cash flows, current market spread information, risk-free rates, fundamentals of the industry and sector in which the issuer operates, and general market information.
Fixed maturity securities are classified as available-for-sale and are carried at fair value on the consolidated balance sheet. See Item 1, Financial StatementsNotes to Unaudited Consolidated Financial StatementsNote 6Fair Value for a detailed explanation of the valuation methods we use to calculate the fair value of our financial instruments. Valuation adjustments for fixed maturity securities not accounted for as OTTI are reported as net increases or decreases to other comprehensive income (loss), net of tax, on the consolidated statements of comprehensive income.
65
Commercial Mortgage Loans
The carrying value of commercial mortgage loans represents the outstanding principal balance less a loan loss allowance for probable uncollectible amounts. The commercial mortgage loan loss allowance is estimated based on evaluating known and inherent risks in the loan portfolio and consists of a general loan loss allowance and a specific loan loss allowance. The general loan loss allowance is based on our analysis of factors including changes in the size and composition of the loan portfolio, actual loan loss experience and individual loan analysis. An impaired commercial mortgage loan is a loan that is not performing to the contractual terms of the loan agreement. A specific allowance for losses is recorded when a loan is considered to be impaired. We also hold specific allowances for losses on certain performing loans that we continue to monitor and evaluate. Impaired commercial mortgage loans without specific allowances for losses are those for which we have determined that it remains probable that we will collect all amounts due. In addition, for impaired commercial mortgage loans, we evaluate the loss to dispose of the underlying collateral, any significant out of pocket expenses the loan may incur, the loan-to-value ratio and other quantitative information we have concerning the loan. Portions of loans that are deemed uncollectible are generally written off against the allowance, and recoveries, if any, are credited to the allowance. See Liquidity and Capital ResourcesInvesting Cash FlowsCommercial Mortgage Loans.
Real Estate
Real estate is comprised of two components: real estate investments and real estate owned.
Our real estate investments are stated at cost less accumulated depreciation. Generally, we depreciate this real estate using the straight-line depreciation method with property lives varying from 30 to 40 years.
We record impairments when it is determined that the decline in fair value of an investment below its carrying value is other than temporary. The impairment loss is charged to net capital losses, and the cost basis of the investment is permanently adjusted to reflect the impairment.
Real estate owned is initially recorded at the lower of cost or estimated net realizable value, which includes an estimate for disposal costs. This amount may be adjusted in a subsequent period as additional information is received. Our real estate owned is initially considered an investment held for sale and is expected to be sold within one year from acquisition. For any real estate expected to be sold, an impairment charge is recorded if we do not expect the investment to recover its carrying value prior to the expected date of sale. Once an impairment charge has been recorded, we continue to review the investment for further potential impairment.
Total real estate was $101.5 million at September 30, 2012, compared to $92.7 million at December 31, 2011. The $8.8 million increase in total real estate during the first nine months of 2012 was primarily due to a $9.5 million net increase in real estate owned that was acquired in satisfaction of debt through foreclosure or the acceptance of deeds in lieu of foreclosure on commercial mortgage loans.
All Other Investments
All other investments include tax-advantaged investments, derivative financial instruments and policy loans. Valuation adjustments for these investments are recognized using the specific identification method.
Tax-advantaged investments are accounted for under the equity method of accounting. These investments are structured as limited partnerships for the purpose of investing in the construction and rehabilitation of low-income housing and to provide favorable returns to investors. We have invested in tax-advantaged investments due to the attractive returns associated with these investments relative to their perceived risk. The primary sources of investment return are tax credits and the tax benefits derived from passive losses on the investments, both of which may exhibit variability over the life of the investment. Tax credits received from these investments are reported in our consolidated statements of income as either a reduction of state premium taxes, or a reduction of income tax. Our share of the operating losses of the limited partnerships decrease our basis in the investments and are reported as a component of net investment income.
If the net present value of expected future cash flows of the investments is less than the current book value of the investments, we evaluate whether a decline in value is other than temporary. If it is determined an OTTI exists, the investment is written down to the net present value of expected future cash flows and the OTTI is recognized in net capital losses.
Derivative financial instruments are carried at fair value, and valuation adjustments are reported as a component of net investment income. See Note 8Derivative Financial Instruments.
Policy loans are stated at their aggregate unpaid principal balances and are secured by policy cash values.
Net investment income and capital gains and losses related to separate account assets and liabilities are included in the separate account assets and liabilities.
DAC, VOBA and Other Intangible Assets
DAC, VOBA and other acquisition related intangible assets are generally originated through the issuance of new business or the purchase of existing business, either by purchasing blocks of insurance policies from other insurers or by the outright purchase of other companies. Our intangible assets are subject to impairment tests on an annual basis or more frequently if circumstances indicate that carrying values may not be recoverable.
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In October 2010, the FASB issued ASU No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU No. 2010-26 amends the codification guidance for insurance entities to eliminate the diversity of accounting treatment related to deferred acquisition costs. We have adopted this standard retrospectively as of January 1, 2012, and comparative financial statements of prior periods have been adjusted.
The following table sets forth the balances of DAC, VOBA and other intangible assets:
September 30,
2012 |
December 31, 2011 |
Percent
Change |
||||||||||
(Dollars in millions) | ||||||||||||
DAC |
$ | 280.5 | $ | 274.4 | 2.2 | % | ||||||
VOBA |
23.8 | 26.4 | (9.8 | ) | ||||||||
Other intangible assets |
39.7 | 44.1 | (10.0 | ) | ||||||||
|
|
|
|
|||||||||
Total DAC, VOBA and other intangible assets |
$ | 344.0 | $ | 344.9 | (0.3 | ) | ||||||
|
|
|
|
We defer certain acquisition costs that vary with and are directly related to the origination of new business and placing that business in force. Certain costs related to obtaining new business and acquiring business through reinsurance agreements have been deferred and will be amortized to accomplish matching against related future premiums or gross profits as appropriate. The Company normally defers certain acquisition-related commissions and incentive payments, certain costs of policy issuance and underwriting, and certain printing costs. Assumptions used in developing DAC and amortization amounts each period include the amount of business in force, expected future persistency, withdrawals, interest rates and profitability. These assumptions are modified to reflect actual experience when appropriate. Additional amortization of DAC is charged to current earnings to the extent it is determined that future premiums or gross profits are not adequate to cover the remaining amounts deferred. Changes in actual persistency are reflected in the calculated DAC balance. Costs that are not directly associated with the acquisition of new business are not deferred as DAC and are charged to expense as incurred. Generally, annual commissions are considered expenses and are not deferred.
DAC for group and individual disability insurance products and group life insurance products is amortized over the life of related policies in proportion to future premiums. We amortize DAC for group disability and life insurance products over the initial premium rate guarantee period, which averages 2.5 years. DAC for individual disability insurance products is amortized in proportion to future premiums over the life of the contract, averaging 20 to 25 years with approximately 50% and 75% expected to be amortized by years 10 and 15, respectively.
Our individual deferred annuities and group annuity products are classified as investment contracts. DAC related to these products is amortized over the life of related policies in proportion to expected gross profits. For our individual deferred annuities, DAC is generally amortized over 30 years with approximately 55% and 95% expected to be amortized by years 5 and 15, respectively. DAC for group annuity products is amortized over 10 years with approximately 80% expected to be amortized by year five.
VOBA primarily represents the discounted future profits of business assumed through reinsurance agreements. We have established VOBA for a block of individual disability business assumed from Minnesota Life and a block of group disability and group life business assumed from Teachers Insurance and Annuity Association of America (TIAA). VOBA is generally amortized in proportion to future premiums for group and individual disability insurance products and group life products. However, the VOBA related to the TIAA transaction associated with an in force block of group long term disability claims for which no ongoing premium is received is amortized in proportion to expected gross profits. If actual premiums or future profitability are inconsistent with our assumptions, we could be required to make adjustments to VOBA and related amortization. During the first quarter of 2012, we recorded a $0.8 million impairment to VOBA due to experience related to the block of claims assumed from TIAA. The VOBA associated with the TIAA transaction is amortized in proportion to expected gross profits with an amortization period of up to 20 years. For the VOBA associated with the Minnesota Life block of business assumed, the amortization period is up to 30 years and is amortized in proportion to future premiums. The accumulated amortization of VOBA was $65.0 million and $62.4 million at September 30, 2012 and December 31, 2011, respectively.
The following table sets forth the amount of DAC and VOBA balances amortized in proportion to expected gross profits and the percentage of the total balance of DAC and VOBA amortized in proportion to expected gross profits:
September 30, 2012 | December 31, 2011 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
(Dollars in millions) | ||||||||||||||||
DAC |
$ | 57.1 | 20.4 | % | $ | 60.7 | 22.1 | % | ||||||||
VOBA |
6.0 | 25.2 | 7.1 | 26.9 |
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Key assumptions, which will affect the determination of expected gross profits for determining DAC and VOBA balances, are:
| Persistency. |
| Interest rates, which affect both investment income and interest credited. |
| Stock market performance. |
| Capital gains and losses. |
| Claim termination rates. |
| Amount of business in force. |
These assumptions are modified to reflect actual experience when appropriate. Although a change in a single assumption may have an impact on the calculated amortization of DAC or VOBA for balances associated with investment contracts, it is the relationship of that change to the changes in other key assumptions that determines the ultimate impact on DAC or VOBA amortization. Because actual results and trends related to these assumptions vary from those assumed, we revise these assumptions annually to reflect our current best estimate of expected gross profits. As a result of this process, known as unlocking, the cumulative balances of DAC and VOBA are adjusted with an offsetting benefit or charge to income to reflect changes in the period of the revision. An unlocking event that results in an after-tax benefit generally occurs as a result of actual experience or future expectations being favorable compared to previous estimates. An unlocking event that results in an after-tax charge generally occurs as a result of actual experience or future expectations being unfavorable compared to previous estimates. As a result of unlocking, the amortization schedule for future periods is also adjusted.
The following table sets forth the impact of unlocking on DAC and VOBA balances:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(In millions) | ||||||||||||||||
Decrease to DAC and VOBA |
$ | 0.3 | $ | 0.2 | $ | 1.4 | $ | 0.8 |
Significant, unanticipated changes in key assumptions, which affect the determination of expected gross profits, may result in a large unlocking event that could have a material adverse effect on our financial position or results of operations. However, future changes in DAC and VOBA balances due to changes in underlying assumptions are not expected to be material.
Our other intangible assets are subject to amortization and consist of certain customer lists from Asset Management business acquired and an individual disability marketing agreement. Customer lists have a combined estimated weighted-average remaining life of approximately 7.6 years. The marketing agreement accompanied the Minnesota Life transaction and provides access to Minnesota Life agents, some of whom now market Standards individual disability insurance products. The Minnesota Life marketing agreement will be fully amortized by the end of 2023. The accumulated amortization of other intangible assets was $35.0 million and $30.6 million at September 30, 2012 and December 31, 2011, respectively.
Reserves for Future Policy Benefits and Claims
Reserves include policy reserve liabilities and claim reserve liabilities and represent amounts to pay future benefits and claims. Claim reserve liabilities are for claims that have been incurred or are estimated to have been incurred but not yet reported to us. Policy reserve liabilities reflect our best estimate of assumptions at the time of policy issuance including adjustments for adverse deviations in actual experience.
The following table sets forth total reserve balances by reserve type:
September 30,
2012 |
December 31,
2011 |
|||||||
(In millions) | ||||||||
Reserves: |
||||||||
Policy reserves |
$ | 1,072.2 | $ | 1,061.2 | ||||
Claim reserves |
4,749.3 | 4,622.4 | ||||||
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|
|
|
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Total reserves |
$ | 5,821.5 | $ | 5,683.6 | ||||
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Developing the estimates for reserves, and thus the resulting impact on earnings, requires varying degrees of subjectivity and judgment, depending upon the nature of the reserve. For most of our reserves, the reserve calculation methodology is prescribed by various accounting and actuarial standards, although judgment is required in the determination of assumptions used in the calculation. We also hold reserves that lack a prescribed methodology but instead are determined by a formula that we have developed based on our own experience. Because this type of reserve requires a higher level of subjective judgment, we closely monitor its adequacy. These reserves are primarily incurred but not reported (IBNR) claim reserves associated with our disability products. Finally, a small amount of reserves is held based entirely upon subjective judgment. These reserves are generally set up as a result of unique circumstances that are not expected to continue far into the future and are released according to pre-established conditions and timelines.
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The following table sets forth total reserve balances by calculation methodology:
September 30, 2012 |
Percent of Total |
December 31, 2011 |
Percent of Total |
|||||||||||||
(Dollars in millions) | ||||||||||||||||
Reserves: |
||||||||||||||||
Reserves determined through prescribed methodology |
$ | 5,170.8 | 88.8 | % | $ | 5,056.6 | 89.0 | % | ||||||||
Reserves determined by internally-developed formulas |
641.6 | 11.0 | 620.7 | 10.9 | ||||||||||||
Reserves based on subjective judgment |
9.1 | 0.2 | 6.3 | 0.1 | ||||||||||||
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|
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|
|||||||||
Total reserves |
$ | 5,821.5 | 100.0 | % | $ | 5,683.6 | 100.0 | % | ||||||||
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Policy Reserves
Policy reserves include reserves established for individual disability insurance, individual and group immediate annuity businesses and individual life insurance. Policy reserves are calculated using our best estimates of assumptions and considerations at the time the policy was issued, adjusted for the effect of adverse deviations in actual experience. These assumptions are not subsequently modified unless policy reserves become inadequate, at which time we may need to change assumptions to increase reserves. We maintain a policy reserve for as long as a policy is in force, even after a separate claim reserve is established.
The following table sets forth policy reserves by block of business:
September 30,
2012 |
December 31,
2011 |
|||||||
(In millions) | ||||||||
Policy reserves: |
||||||||
Individual disability insurance |
$ | 229.2 | $ | 219.8 | ||||
Individual and group immediate annuity businesses |
241.2 | 244.2 | ||||||
Individual life insurance |
601.8 | 597.2 | ||||||
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|
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Total policy reserves |
$ | 1,072.2 | $ | 1,061.2 | ||||
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Individual disability insurance. Policy reserves for our individual disability block of business are established at the time of policy issuance using the net level premium method as prescribed by GAAP and represent the current value of projected future benefits including expenses less projected future premium. Assumptions used to calculate individual disability policy reserves may vary by the age, gender and occupation class of the insured, the year of policy issue and specific contract provisions and limitations.
Individual disability policy reserves are sensitive to assumptions and considerations regarding:
| Claim incidence rates. |
| Claim termination rates. |
| Discount rates used to value expected future claim payments and premiums. |
| Persistency rates. |
| The amount of monthly benefit paid to the insured less reinsurance recoveries and other offsets. |
| Expense rates including inflation. |
Individual and group immediate annuity businesses. Policy reserves for our individual and group immediate annuity blocks of business are established at the time of policy issue and represent the present value of future payments due under the annuity contracts. The contracts are single premium contracts, and, therefore, there is no projected future premium. Assumptions used to calculate immediate annuity policy reserves may vary by the age and gender of the annuitant and year of policy issue.
Immediate annuity policy reserves are sensitive to assumptions and considerations regarding:
| Annuitant mortality rates. |
| Discount rates used to value expected future annuity payments. |
Individual life insurance. Effective January 1, 2001, substantially all of our individual life policies and the associated reserves were ceded to Protective Life Insurance Company (Protective Life) under a reinsurance agreement. If Protective Life were to become unable to meet its obligations, Standard would retain the reinsured liabilities. Therefore, the associated reserves remain on Standards consolidated balance sheets and an equal amount is recorded as a recoverable from the reinsurer. We also retain a small number of individual policies arising out of individual conversions from our group life policies.
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Claim Reserves
Claim reserves are established when a claim is incurred or is estimated to have been incurred but not yet reported to us and, as prescribed by GAAP, equal our best estimate of the present value of the liability of future unpaid claims and claim adjustment expenses. Reserves for IBNR claims are determined using our experience and consider actual historical incidence rates, claim-reporting patterns and the average cost of claims. The IBNR claim reserves are calculated using a company derived formula based primarily upon premiums, which is validated through a close examination of reserve run-out experience. The claim reserves are related to group and individual disability insurance and group life insurance products offered by our Insurance Services segment.
Claim reserves are subject to revision based on credible changes in claim experience and expectations of future factors that may influence claim experience. During each quarter, we monitor our emerging claim experience to ensure that the claim reserves remain appropriate. We make adjustments to our assumptions based on emerging trends that are credible and are expected to persist, and expectations of future factors that may influence our claim experience. Assumptions used to calculate claim reserves may vary by the age, gender and occupation class of the claimant, the year the claim was incurred, time elapsed since disablement, and specific contract provisions and limitations.
The following table sets forth total claim reserves by block of business:
September 30,
2012 |
December 31,
2011 |
|||||||
(In millions) | ||||||||
Claim reserves: |
||||||||
Group disability insurance |
$ | 3,238.2 | $ | 3,135.2 | ||||
Individual disability insurance |
740.4 | 721.8 | ||||||
Group life insurance |
770.7 | 765.4 | ||||||
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|
|
|||||
Total claim reserves |
$ | 4,749.3 | $ | 4,622.4 | ||||
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|
Group and individual disability insurance. Claim reserves for our disability products are sensitive to assumptions and considerations regarding:
| Claim incidence rates for IBNR claim reserves. |
| Claim termination rates. |
| Discount rates used to value expected future claim payments. |
| The amount of monthly benefit paid to the insured less reinsurance recoveries and other offsets. |
| Expense rates including inflation. |
| Historical delay in reporting of claims incurred. |
Certain of these factors could be materially affected by changes in social perceptions about work ethics, emerging medical perceptions and legal interpretations regarding physiological or psychological causes of disability, emerging or changing health issues and changes in industry regulation. If there are changes in one or more of these factors or if actual claims experience is materially inconsistent with our assumptions, we could be required to change our reserves.
Group life insurance. Claim reserves for our group life products are established for death claims reported but not yet paid, IBNR for death and waiver claims and waiver of premium benefits. The death claim reserve is based on the actual amount to be paid. The IBNR claim reserves are calculated using historical information, and the waiver of premium benefit is calculated using a tabular reserve method that takes into account company experience and published industry tables.
Trends in Key Assumptions
Key assumptions affecting our reserve calculations are:
| The discount rate. |
| The claim termination rate. |
| The claim incidence rate for policy reserves and IBNR claim reserves. |
The following table sets forth the discount rate used for newly incurred long term disability claim reserves and life waiver reserves:
Three Months Ended | ||||||||||||
September 30, 2012 |
June 30,
2012 |
September 30, 2011 |
||||||||||
Discount rate |
4.00 | % | 4.00 | % | 5.00 | % |
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Reserve discount rates for newly incurred claims are reviewed quarterly and, if necessary, are adjusted to reflect our current and expected new investment yields. The discount rate is based on the average rate we received on newly invested assets during the previous 12 months, less a margin. We also consider our average investment yield and average discount rate on our entire block of claims when deciding whether to increase or decrease the discount rate. The 100 basis point decrease in the discount rate for the third quarter of 2012 compared to the third quarter of 2011 was primarily the result of a continued low interest rate environment and fewer investments in high yielding tax-advantage investments. A 25 basis point decrease in the discount rate for newly incurred claims results in a corresponding decrease in quarterly pre-tax income of $1.8 million. We do not adjust group insurance premium rates based on short-term fluctuations in investment yields. Any offsetting adjustments of group insurance premium rates due to sustained changes in investment yields can take from one to three years given that most new contracts have rate guarantees in place.
Claim termination rates can vary widely from quarter to quarter. The claim termination assumptions used in determining our reserves represent our expectation for claim terminations over the life of our block of business and will vary from actual experience in any one quarter. While we have experienced some variation in our claim termination experience, we did not see any prolonged or systemic change in the third quarter of 2012 that would indicate a sustained underlying trend that would affect the claim termination rates used in the calculation of reserves.
The claims incidence rate for policy reserves and IBNR claim reserves can also fluctuate widely from quarter to quarter and tends to be more stable when measured over a longer period of time. While we continue to see improvement in claims incidence, the levels remain high when compared to historical levels.
As a result of studies of our long-term trends compared to reserving assumptions for our group long term disability insurance, we increased IBNR claim reserves totaling $3.7 million during the third quarter of 2012. We did not release any IBNR claim reserves during the third quarter of 2011.
We evaluate the claim termination rate assumptions for the reserves on a small Minnesota Life block of individual disability claims annually. These assumptions were refined in the third quarter of 2012, resulting in an increase in reserves of $4.9 million. Our block of business is relatively small, and as a result, we view a blend of established industry tables and our own experience as a more appropriate method for establishing reserve levels compared solely to our own experience. We will continue to monitor the credibility of our developing experience and the use of available industry tables, and if necessary, will adjust reserves accordingly. We also refined our reserve calculation for certain other individual disability reserves in the third quarter of 2012, which resulted in a net decrease in our individual disability reserves of $1.1 million. The combination of these adjustments resulted in a net increase to individual disability reserves of $3.8 million. Reserve adjustments made in the third quarter of 2011 totaled $3.6 million.
We monitor the adequacy of our reserves relative to our key assumptions. In our estimation, scenarios based on reasonably possible variations in claim termination assumptions could produce a percentage change in reserves for our group insurance lines of business of approximately +/-0.2% or $8.0 million. However, given that claims experience can fluctuate widely from quarter to quarter, significant unanticipated changes in claim termination rates over time could produce a change in reserves for our group insurance lines outside of this range.
Pension and Postretirement Benefit Plans
We have two non-contributory defined benefit pension plans: the employee pension plan and the agent pension plan. The employee pension plan is for all eligible employees and the agent pension plan is for former field employees and agents. The defined benefit pension plans provide benefits based on years of service and final average pay. Participation in the defined benefit pension plans is generally limited to eligible employees whose date of employment began before 2003. These plans are sponsored by Standard and administered by Standard Retirement Services, Inc. and are closed for new participants.
We also have a postretirement benefit plan that includes medical and prescription drug benefits. A group term life insurance benefit was curtailed as of December 31, 2011. Eligible retirees are required to contribute specified amounts for medical and prescription drug benefits that are determined periodically and are based on retirees length of service and age at retirement. Participation in the postretirement benefit plan is limited to employees who had reached the age of 40 or whose combined age and length of service was equal to or greater than 45 years as of January 1, 2006. This plan is sponsored and administered by Standard and is closed for new participants.
In addition, eligible executive officers are covered by a non-qualified supplemental retirement plan.
We are required to recognize the funded status of our pension and postretirement benefit plans as an asset or liability on the balance sheet. For pension plans, this is measured as the difference between the plan assets at fair value and the projected benefit obligation as of the year-end balance sheet date. For our postretirement plan, this is measured as the difference between the plan assets at fair value and the accumulated benefit obligation as of the year-end balance sheet date. Unrecognized actuarial gains or losses, prior service costs or credits, and transition assets are amortized, net of tax, out of accumulated other comprehensive income or loss as components of net periodic benefit cost.
In accordance with the accounting principles related to our pension and other postretirement plans, we are required to make a significant number of assumptions in order to calculate the related liabilities and expenses each period. The major assumptions that affect net periodic benefit cost and the funded status of the plans include the weighted-average discount rate, the expected return on plan assets, and the rate of compensation increase.
The weighted-average discount rate is an interest assumption used to convert the benefit payment stream to present value. The discount rate is selected based on the yield of a portfolio of high quality corporate bonds with durations that are similar to the expected distributions from the employee benefit plan.
The expected return on plan assets assumption is the best long-term estimate of the average annual return that will be produced from the pension trust assets until current benefits are paid. Our expectations for the future investment returns of the asset categories are based on a combination of historical and projected market performance. The expected return for the total portfolio is calculated based on each plans strategic asset allocation.
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The long-term rate of return for the employee pension plan portfolio is derived by calculating the average return for the portfolio monthly, from 1971 to the present, using the average mutual fund manager returns in each asset category, weighted by the target allocation to each category.
The rate of compensation increase is a long-term assumption that is based on an estimated inflation rate in addition to merit and promotion-related compensation increase components.
For the postretirement benefit plan, the assumed health care cost trend rates are also major assumptions that affect expenses and liabilities. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1% Point Increase |
1% Point Decrease |
|||||||
(In millions) | ||||||||
Effect on total of service and interest cost |
$ | 0.5 | $ | (0.4 | ) | |||
Effect on postretirement benefit obligation |
7.1 | (5.6 | ) |
Our discount rate assumption is reviewed annually, and we use a December 31 measurement date for each of our plans. For more information concerning our pension and postretirement plans, see Item 1, Financial StatementsNotes to Unaudited Condensed Consolidated Financial StatementsNote 4Retirement Benefits.
Income Taxes
We file a U.S. consolidated income tax return that includes all subsidiaries. Our U.S. income tax is calculated using regular corporate income tax rates on a tax base determined by laws and regulations administered by the Internal Revenue Service (IRS). We also file corporate income tax returns in various states. The provision for income taxes includes amounts currently payable and deferred amounts that result from temporary differences between financial reporting and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply when the temporary differences are expected to reverse.
GAAP requires management to use a more likely than not standard to evaluate whether, based on available evidence, each deferred tax asset will be realized. A valuation allowance is recorded to reduce a deferred tax asset to the amount expected to be realized. We have recorded a deferred tax asset for certain loss carry forwards. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets without a valuation allowance will be realized. The amount of the deferred tax asset considered realizable is evaluated at least annually and could be reduced if estimates of future taxable income during the carryforward period are reduced.
Management is required to determine whether tax return positions are more likely than not to be sustained upon audit by taxing authorities. Tax benefits of uncertain tax positions, as determined and measured by this interpretation, cannot be recognized in our financial statements.
We record income tax interest and penalties in the income tax provision according to our accounting policy.
Currently, years 2009 through 2011 are open for audit by the IRS.
Forward-looking Statements
Some of the statements contained in this Form 10-Q, including those relating to our strategy, growth prospects and other statements that are predictive in nature, that depend on or refer to future events or conditions or that include words such as expects, anticipates, intends, plans, believes, estimates, seeks and similar expressions, are forward-looking statements within the meaning of Section 21E of the Exchange Act, as amended. These statements are not historical facts but instead represent only managements expectations, estimates and projections regarding future events. Similarly, these statements are not guarantees of future performance and involve uncertainties that are difficult to predict, which may include, but are not limited to, the factors discussed below. As a provider of financial products and services, our results of operations may vary significantly in response to economic trends, interest rate changes, investment performance and claims experience. Caution should be used when extrapolating historical results or conditions to future periods.
Our actual results and financial condition may differ, perhaps materially, from the anticipated results and financial condition in any such forward-looking statements. Because such statements are subject to risks and uncertainties, actual results in future periods may differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties or circumstances, readers are cautioned not to place undue reliance on such statements. We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The following factors could cause results to differ materially from management expectations as suggested by such forward-looking statements:
| Growth of sales, premiums, annuity deposits, cash flows, assets under administration including performance of equity investments in the separate account, gross profits and profitability. |
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| Availability of capital required to support business growth and the effective utilization of capital, including our ability to achieve financing through debt or equity. |
| Changes in our liquidity needs and the liquidity of assets in our investment portfolios. |
| Integration and performance of business acquired through reinsurance or acquisition. |
| Changes in financial strength and credit ratings. |
| Changes in the regulatory environment at the state or federal level including changes in income tax rates and regulations or changes in U.S. GAAP accounting principles, practices or policies. |
| Findings in litigation or other legal proceedings. |
| Intent and ability to hold investments consistent with our investment strategy. |
| Receipt of dividends from, or contributions to, our subsidiaries. |
| Adequacy of the diversification of risk by product offerings and customer industry, geography and size, including concentration of risk, especially inherent in group life products. |
| Adequacy of asset-liability management. |
| Events of terrorism, natural disasters or other catastrophic events, including losses from a disease pandemic. |
| Benefit ratios, including changes in claims incidence, severity and recovery. |
| Levels of persistency. |
| Adequacy of reserves established for future policy benefits. |
| The effect of changes in interest rates on reserves, policyholder funds, investment income and commercial mortgage loan prepayment fees. |
| Levels of employment and wage growth and the impact of rising benefit costs on employer budgets for employee benefits. |
| Competition from other insurers and financial services companies, including the ability to competitively price our products. |
| Ability of reinsurers to meet their obligations. |
| Availability, adequacy and pricing of reinsurance and catastrophe reinsurance coverage and potential charges incurred. |
| Achievement of anticipated levels of operating expenses. |
| Adequacy of diversification of risk within our fixed maturity securities portfolio by industries, issuers and maturities. |
| Adequacy of diversification of risk within our commercial mortgage loan portfolio by borrower type, property type and geographic region. |
| Credit quality of the holdings in our investment portfolios. |
| The condition of the economy and expectations for interest rate changes. |
| The effect of changing levels of commercial mortgage loan prepayment fees and participation levels on cash flows. |
| Experience in delinquency rates or loss experience in our commercial mortgage loan portfolio. |
| Adequacy of commercial mortgage loan loss allowance. |
| Concentration of commercial mortgage loan assets collateralized in certain states such as California. |
| Concentration of commercial mortgage loan assets by borrower. |
| Environmental liability exposure resulting from commercial mortgage loan and real estate investments. |
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in market risks faced by StanCorp Financial Group, Inc. since those reported in the Companys annual report on Form 10-K for the year ended December 31, 2011.
ITEM 4: CONTROLS AND PROCEDURES |
Management of StanCorp Financial Group, Inc. has evaluated, under the supervision and with the participation of the Companys chief executive officer and chief financial officer, the effectiveness of the design and operation of the Companys disclosure controls and procedures, (as defined by the Securities Exchange Act of 1934 Rules 13a-15(c) and 15-d-15(c)) as of the end of the period covered by this report. Based on this evaluation, the chief executive officer and chief financial officer have concluded that the Companys disclosure controls and procedures were effective at September 30, 2012, and designed to provide reasonable assurance that material information relating to the Company and the Companys consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and is accumulated and communicated to management, including the Companys chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
There were no changes in the Companys internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to affect materially, the Companys internal control over financial reporting.
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PART II. | OTHER INFORMATION |
As used in this Form 10-Q, the terms StanCorp, Company, we, us and our refer to StanCorp Financial Group, Inc. and its subsidiaries, unless the context otherwise requires.
ITEM 1: | LEGAL PROCEEDINGS |
See Part 1, Item 1, Financial StatementsNotes to Unaudited Condensed Consolidated Financial StatementsNote 10Commitments and Contingencies.
ITEM 1A: | RISK FACTORS |
Risk factors that may affect our business are as follows:
| Our reserves for future policy benefits and claims related to our current and future business, may prove to be inadequateFor certain of our product lines, we establish and carry, as a liability, actuarially determined reserves to meet our obligations for future policy benefits and claims. These reserves do not represent an exact calculation of our future benefit liabilities but instead are estimates based on assumptions, which can be materially affected by changes in the economy, changes in social perceptions about work ethics, emerging medical perceptions regarding physiological or psychological causes of disability, emerging or changing health issues and changes in industry regulation. Claims experience on our products can fluctuate widely from period to period. If actual events vary materially from our assumptions used when establishing the reserves to meet our obligations for future policy benefits and claims, we may be required to increase our reserves, which could have a material adverse effect on our business, financial position, results of operations or cash flows. |
| Differences between actual claims experience and underwriting and reserving assumptions may adversely affect our financial resultsOur long term disability products provide coverage for claims incurred during the policy period. Generally, group policies offer rate guarantees for periods from one to three years. While we can prospectively re-price and re-underwrite coverages at the end of these guarantee periods, we must pay benefits with respect to claims incurred during these periods without being able to increase guaranteed premium rates during these periods. Historically, approximately 50% of all claims filed under our long term disability policies close within 24 months. However, claims caused by more severe disabling conditions may be paid over much longer periods, including, in some cases, up to normal retirement age or longer. Longer duration claims, in addition to a higher volume of claims than we expect, expose us to the possibility that we may pay benefits in excess of the amount that we anticipated when the policy was underwritten. The profitability of our long term disability products is thus subject to volatility resulting from the difference between our actual claims experience and our assumptions at the time of underwriting. |
| We are exposed to concentration risk on our group life insurance businessDue to the nature of group life insurance coverage, we are subject to geographical concentration risk from the occurrence of a catastrophe. |
| Catastrophe losses from a disease pandemic could have an adverse effect on usOur life insurance operations are exposed to the risk of loss from an occurrence of catastrophic mortality caused by a disease pandemic, which could have a material adverse effect on our business, financial position, results of operations or cash flows. |
| Catastrophe losses from terrorism or other factors could have an adverse effect on usAn occurrence of a significant catastrophic event, including terrorism, natural or other disasters, or a change in the nature and availability of or continuation of existing reinsurance and catastrophe reinsurance, could have a material adverse effect on our business, financial position, results of operations, cash flows or capital levels. |
| We may be exposed to disintermediation risk during periods of increasing interest ratesIn periods of increasing interest rates, withdrawals of annuity contracts may increase as policyholders seek investments with higher perceived returns. This process, referred to as disintermediation, may lead to net cash outflows. These outflows may require investment assets to be sold at a time when the prices of those assets are adversely affected by the increase in interest rates, which may result in realized investment losses. A significant portion of our investment portfolio consists of commercial mortgage loans, which are relatively illiquid, thus increasing our liquidity risk in the event of disintermediation during a period of rising interest rates. |
| Our profitability may be adversely affected by declining or low interest ratesDuring periods of declining or low interest rates, annuity products may be relatively more attractive investments, resulting in increases in the percentage of policies remaining in force from year to year during a period when our new investments carry lower returns. During these periods, actual returns on our investments could prove inadequate for us to meet contractually guaranteed minimum payments to holders of our annuity products. In addition, the profitability of our life and disability insurance products can be affected by declining or low interest rates. A factor in pricing our insurance products is prevailing interest rates. Longer duration claims and premium rate guarantees can expose us to interest rate risk when portfolio yields are less than those assumed when pricing these products. Mortgages and bonds in our investment portfolio are more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates, and we may be required to reinvest those funds in lower interest-bearing investments. |
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| Our investment portfolio is subject to risks of market value fluctuations, defaults, delinquencies and liquidityOur general account investments primarily consist of fixed maturity securitiesavailable-for-sale (fixed maturity securities), commercial mortgage loans and real estate. The fair values of our investments vary with changing economic and market conditions and interest rates. In addition, we are subject to default risk on our fixed maturity securities portfolio and its corresponding impact on credit spreads. Our commercial mortgage loan portfolio is subject to delinquency, default and borrower concentration risks. Related declines in market activity due to overall declining values of fixed maturity securities may result in our fixed maturity securities portfolio becoming less liquid. Also, our commercial mortgage loans are relatively illiquid and the demand for our real estate owned may remain low due to macroeconomic conditions. We may have difficulty selling our fixed maturity securities, commercial mortgage loans and real estate owned at attractive prices, in a timely manner, or both if we require significant amounts of cash on short notice. |
| Our business is subject to significant competitionEach of our business segments faces competition from other insurers and financial services companies, such as banks, broker-dealers, mutual funds, and managed care providers for employer groups, individual consumers and distributors. Since many of our competitors have greater financial resources, offer a broader array of products and, with respect to other insurers, may have higher financial strength ratings than we do, the possibility exists that any one of our business segments could be adversely affected by competition, which in turn could have a material adverse effect on our business, financial position, results of operations or cash flows. |
| A downgrade in our financial strength ratings may negatively affect our businessFinancial strength ratings, which are an indicator of our claims paying ability, are an important factor in establishing the competitive position of insurance companies. Ratings are important to maintaining public confidence in our company and in our ability to market our products. Rating organizations regularly review the financial performance and condition of insurance companies, including our company. A ratings downgrade could increase our surrender levels for our annuity products, could adversely affect our ability to market our products, could increase costs of future debt issuances, and could thereby have a material adverse effect on our business, financial position, results of operations or cash flows. |
| Our profitability may be affected by changes in state and federal regulationOur business is subject to comprehensive regulation and supervision throughout the United States (U.S.) including rules and regulations relating to income taxes and accounting principles generally accepted in the U.S. While we cannot predict the impact of potential or future state or federal legislation or regulation on our business, future laws and regulations, or the interpretation thereof, could have a material adverse effect on our business, financial position, results of operations or cash flows. |
| Our deferred tax asset includes net operating losses which depend on future taxable income to be realized and may be limited or impaired by future ownership changesOur deferred tax assets include federal, state and local net operating losses. Certain of our subsidiaries as a group have generated losses in recent years. Net operating losses can be available to reduce income taxes that might otherwise be incurred on future taxable income. There can be no assurance that we will generate the future taxable income necessary to utilize our net operating losses. Furthermore, the availability of these losses to be utilized in the future can become limited if certain changes in company structure or income levels occur. In such a circumstance, we may be unable to utilize the losses even in the event the company generates future taxable income. |
| Our business is subject to litigation riskIn the normal course of business, we are a plaintiff or defendant in actions arising out of our insurance business and investment operations. We are from time to time involved in various governmental and administrative proceedings. While the outcome of any pending or future litigation cannot be predicted, as of the date hereof, we do not believe that any pending litigation will have a material adverse effect on our results of operations or financial condition. However, no assurances can be given that such litigation would not materially and adversely affect our business, financial position, results of operations or cash flows. |
| Certain concentrations in our commercial mortgage loan investments may subject us to losses resulting from an economic downturnWhile isolated to a small number of borrowers, the concentration of our commercial mortgage loan portfolio assets by individual borrower may expose us to potential losses resulting from an economic downturn. Although we diversify our commercial mortgage loan portfolio by location, type of property and individual borrower, such diversification may not eliminate the risk of such losses, which could have a material adverse effect on our business, financial position, results of operations or cash flows. |
| The concentration of our investments in California may subject us to losses resulting from the economic downturnOur commercial mortgage loans are concentrated in the western region of the U.S., particularly in California. Currently, our California exposure is primarily in Los Angeles County, Orange County, San Diego County and the Bay Area Counties. We have a smaller concentration of commercial mortgage loans in the Inland Empire and the San Joaquin Valley where there has been greater economic decline. A continued decline in economic conditions in California could have a material adverse effect on our business, financial position, results of operations or cash flows. |
| The concentration of our investments in the western region of the U.S. may subject us to losses resulting from certain natural catastrophes in this areaDue to our commercial mortgage loan concentration in the western region of the U.S., particularly in California, we are exposed to potential losses resulting from certain natural catastrophes, such as earthquakes and fires, which may affect the region. Although we diversify our commercial mortgage loan portfolio within the western region by both location and type of property in an effort to reduce earthquake exposure, such diversification may not eliminate the risk of such losses, which could have a material adverse effect on our business, financial position, results of operations or cash flows. |
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| We may be exposed to environmental liability from our commercial mortgage loan and real estate investmentsAs a commercial mortgage lender, we customarily conduct environmental assessments prior to making commercial mortgage loans secured by real estate and before taking title through foreclosure or deeds in lieu of foreclosure to real estate collateralizing delinquent commercial mortgage loans held by us. Compliance costs associated with environmental laws and regulations or any remediation of affected properties could have a material adverse effect on our results of operations or financial condition. |
| As a holding company, we depend on the ability of our subsidiaries to transfer funds to us in sufficient amounts to pay dividends to shareholders, make payments on debt securities and meet our other obligationsWe are a holding company for our insurance and asset management subsidiaries as well as for the subsidiaries that comprise our Other category and do not have any significant operations of our own. Dividends and permitted payments from our subsidiaries are our principal source of cash to pay dividends to shareholders, make payments on debt securities and meet our other obligations. As a result, our ability to pay dividends to shareholders and interest payments on debt securities will primarily depend upon the receipt of dividends and other distributions from our subsidiaries. |
Many of our subsidiaries are non-insurance businesses and have no regulatory restrictions on dividends. Our insurance subsidiaries, however, are regulated by insurance laws and regulations that limit the maximum amount of dividends, distributions and other payments that they could declare and pay to us without prior approval of the states in which the subsidiaries are domiciled. Under Oregon law, Standard Insurance Company may pay dividends only from the earned surplus arising from its business. Oregon law gives the Director of the Oregon Department of Consumer and Business ServicesInsurances Division (Oregon Insurance Division) broad discretion regarding the approval of dividends in excess of certain statutory limitations. Oregon law requires us to receive the prior approval of the Oregon Insurance Division to pay such a dividend. See Part I, Item 2, Managements Discussion and Analysis of Financial Condition and Results of OperationsCapital ManagementDividends from Standard.
| Our ability to refinance debt and raise capital in future years depends not only on contributions from our subsidiaries but also on market conditions and availability of credit in the market Our 10-year senior notes of $250 million will mature in August 2022, and our junior subordinated debentures of $300 million will mature in 2067 with a call option in 2017. We maintain a $250 million senior unsecured revolving credit facility (Facility) for general corporate purposes. Upon our request and with consent of the lenders under the Facility, the Facility can be increased to $350 million. The termination date of the Facility is June 22, 2016, though, at our option and with the consent of the lenders under the Facility, the termination date can be extended for two additional one year periods. We had no outstanding balance on the Facility at September 30, 2012. The Facility is composed of a syndication of seven banks. Commitments from the banks toward the available line of credit range from $15.0 million to $60.0 million per bank. Should a bank from this syndication default, the available line of credit would be reduced by that banks commitment toward the line. |
| Our portfolio of investments, including U.S. government and agency bonds and U.S. state and political subdivision bonds could be negatively impacted by U.S. credit and financial market conditionsA potential ratings downgrade of U.S. government securities could lead to future deterioration in the U.S. and global credit and financial markets. As a result, these events may materially adversely affect our business, financial condition and results of operations. |
| Our business continues to be affected by employment and wage levelsFactors influencing the growth of our group insurance and retirement plans businesses include the employment levels, benefit offerings, and salary and wage growth of our employer groups. Current economic conditions have caused our employer groups to experience lower levels of insured employees, to limit benefit offerings, to reduce work hours, or to reduce or slow the growth of wage levels. If economic conditions worsen, it could have a material adverse effect on premium levels for our group businesses and revenues for our retirement plans business. |
| Our profitability may be adversely affected by declining equity marketsU.S. and global equity markets heavily influence the value of our retirement plan assets under administration, which are a significant component from which our administrative fee revenues are derived. Sustained equity market declines could result in decreases in the value of the assets under administration in our retirement plans, which could reduce our ability to earn administrative fee revenues derived from the value of those assets. |
| Declining equity markets and low interest rates could affect the funding status of Company sponsored pension plansOur estimates of liabilities and expenses for pension and other postretirement benefits incorporate significant assumptions including the rate used to discount the estimated future liability, the long-term rate of return on plan assets and the employee work force. Declines in the discount rate or the rate of return on plan assets resulting from the current economic downturn could increase our required cash contributions or pension-related expenses in future periods. The funding status of the Companys pension plans is evaluated annually during the fourth quarter. |
| Our ability to conduct business may be compromised if we are unable to maintain the availability of our systems and safeguard the security of our data in the event of a disaster or other unanticipated eventsWe use computer systems to store, retrieve, evaluate and utilize customer and company data and information. Our business is highly dependent on our ability to access these systems to perform necessary business functions. System failures, system outages, outsourcing risk or the failure or unwillingness of a service provider to perform could compromise our ability to perform these functions in a timely manner and could hurt our relationships with our business partners and customers. In the event of a disaster such as a |
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natural catastrophe, fire, a blackout, a computer virus, a terrorist attack or war, these systems may be inaccessible to our employees, customers or business partners for an extended period of time. These systems could also be subject to physical and electronic break-ins and subject to similar disruptions from unauthorized tampering. This may impede or interrupt our business operations and could have a material adverse effect on our business, financial position, results of operations or cash flows. |
| The U.S. economic downturn and disruption in global financial markets could continue to adversely affect us in the near termThe U.S. economic downturn and disruption in the global financial market present risks and uncertainties. In the current economic downturn, we face the following risks: |
| Declines in revenues or profitability as a result of lost wages or lower levels of insured employees by our customers due to reductions in workforce. |
| Increases in pricing pressure and competition resulting in a loss of customers or new business as customers seek to reduce benefit costs and competitors seek to protect market share. |
| Increases in commercial mortgage loan foreclosures. |
| Increases in holdings of real estate owned properties due to a decline in demand for these properties and the decline in value of these properties during our holding period. |
| Continued pressure on budgets for public institutions could impact our customer groups in this sector, which represents a significant customer group for our employee benefits business. |
| If the U.S. economy and global financial markets do not continue to recover, it could have a lasting adverse effect on usIn addition to the risks we noted above that we are currently facing, if the U.S. economy and global financial markets do not continue to recover, we could be adversely affected in the following ways: |
| Increases in corporate tax rates to finance government-spending programs. |
| Reductions in the number of our potential lenders or to our committed credit availability due to combinations or failures of financial institutions. |
| Loss of employer groups due to business acquisitions, bankruptcy or failure. |
| Declines in the financial health of reinsurers. |
| Reduction in the value of our general account investment portfolio. |
| Declines in revenues and profitability as a result of lower levels of assets under administration. |
| Continued pressure on budgets for public institutions could impact our customer groups in this sector, which represents a significant customer group for our employee benefits business. |
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ITEM 2: | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table sets forth share repurchase information for the periods indicated:
(a) Total Number of Shares Purchased |
(b) Average Price Paid per Share |
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
|||||||||||||
Period: |
||||||||||||||||
July 1-31, 2012 |
| $ | | | 2,720,300 | |||||||||||
August 1-31, 2012 |
| | | 2,720,300 | ||||||||||||
September 1-30, 2012 |
| | | 2,720,300 | ||||||||||||
|
|
|
|
|||||||||||||
Total third quarter |
| | | 2,720,300 | ||||||||||||
|
|
|
|
On May 16, 2011, our Board of Directors authorized an additional 3.0 million shares of StanCorp common stock for its share repurchase program. The May 2011 authorization took effect upon the expiration of the February 2010 authorization and expires on December 31, 2012. Share repurchases under the repurchase program are made in the open market or in negotiated transactions in compliance with the safe harbor provisions of Rule 10b-18 under regulations of the Securities Exchange Act of 1934 (Exchange Act). Execution of the share repurchase program is based upon managements assessment of market conditions for its common stock, capital levels, our assessment of the overall economy and other potential growth opportunities or priorities for capital use. Repurchases are made at market prices on the transaction date. We will evaluate share repurchases opportunistically based on equity markets, capital levels and our assessment of the direction of the overall economy.
The following table sets forth share repurchase activity:
Three Months
Ended September 30, |
||||||||
2012 | 2011 | |||||||
(Dollars in millions except per share data) |
||||||||
Share repurchases: |
||||||||
Shares repurchased |
| 357,000 | ||||||
Cost of share repurchases |
$ | | $ | 9.7 | ||||
Weighted-average price per common share |
| 27.16 | ||||||
Shares remaining under repurchase authorizations |
2,720,300 | 3,138,900 |
The declaration and payment of dividends would be restricted if StanCorp elects to defer interest payments on its junior subordinated debentures. If the Company elected to defer interest payments, the dividend restriction would be in place during the interest deferral period, which cannot exceed five years. See Part I, Item 2, Managements Discussion and Analysis of Financial Conditions and Results of OperationsCapital ManagementDividends to Shareholders.
ITEM 3: | DEFAULTS UPON SENIOR SECURITIES |
None
ITEM 4: | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5: | OTHER INFORMATION |
At the Annual Meeting of Shareholders, held on May 7, 2012, Shareholders approved the amended 1999 Employee Share Purchase Plan. The amendment increased the number of shares authorized to be issued under the 1999 Employee Share Purchase Plan to 3.5 million from 2.0 million. The additional shares were registered with the Securities and Exchange Commission through a Form S-8 filing dated August 1, 2012. A copy of the amended plan is attached hereto and filed herewith as Exhibit 10.1.
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ITEM 6: | EXHIBITS |
Exhibit Index |
||
Exhibit 4.1 | Second Supplemental Indenture dated August 10, 2012 between StanCorp Financial Group, Inc. and U.S. Bank National Association (including form of 5.00% Senior Note due 2022). | |
Exhibit 4.2 | Underwriting Agreement dated August 3, 2012 between StanCorp Financial Group, Inc. and the several underwriters named therein, for whom Barclays Capital Inc.; Goldman, Sachs & Co.; and J.P. Morgan Securities LLC act as representatives. | |
Exhibit 10.1 | 1999 Employee Share Repurchase Plan, as amended | |
Exhibit 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 101.INS | XBRL Instance Document | |
Exhibit 101.SCH | XBRL Taxonomy Extension Schema Document | |
Exhibit 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
Exhibit 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
Exhibit 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
Exhibit 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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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 6, 2012 |
By: | /s/ FLOYD F. CHADEE | ||
Floyd F. Chadee Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
EXHIBITS INDEX
Number |
Name |
Method of Filing | ||
4.1 | Second Supplemental Indenture dated August 10, 2012 between StanCorp Financial Group, Inc. and U.S. Bank National Association (including form of 5.00% Senior Note due 2022). | Filed herewith | ||
4.2 | Underwriting Agreement dated August 3, 2012 between StanCorp Financial Group, Inc. and the several underwriters named therein, for whom Barclays Capital Inc.; Goldman, Sachs & Co.; and J.P. Morgan Securities LLC act as representatives. | Filed herewith | ||
10.1 | 1999 Employee Share Repurchase Plan, as amended |
Filed herewith | ||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
101.INS | XBRL Instance Document | * | ||
101.SCH | XBRL Taxonomy Extension Schema Document | * | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | * | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | * | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | * | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | * |
* | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities and Exchange Act of 1934, as amended and otherwise are not subject to liability under those sections. |
Exhibit 4.1
STANCORP FINANCIAL GROUP, INC.
and
U.S. BANK NATIONAL ASSOCIATION,
as Trustee
SECOND SUPPLEMENTAL INDENTURE
Dated as of August 10, 2012
to
INDENTURE
Dated as of September 25, 2002
5.00% Senior Notes due 2022
SECOND SUPPLEMENTAL INDENTURE, dated as of the 10th day of August, 2012 (this Second Supplemental Indenture), between StanCorp Financial Group, Inc., a corporation duly organized and existing under the laws of the State of Oregon (hereinafter sometimes referred to as the Company), and U.S. Bank National Association, a national banking association as trustee (hereinafter sometimes referred to as the Trustee) under the Indenture dated as of September 25, 2002 between the Company and the Trustee, as previously supplemented (the Indenture).
WHEREAS, the Company executed and delivered the Indenture to the Trustee to provide for the future issuance of its debt securities (the Securities), which Securities are to be issued from time to time in such series as may be determined by the Company under the Indenture, in an unlimited aggregate principal amount which may be authenticated and delivered thereunder as in the Indenture provided; and
WHEREAS, the Indenture is incorporated herein by this reference; and
WHEREAS, pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a new series of its Securities to be known as its 5.00% Senior Notes due 2022 (such series being hereinafter referred to as the 5.00% Senior Notes), the form and substance of such 5.00% Senior Notes and the terms, provisions and conditions thereof to be set forth as provided in the Indenture and this Second Supplemental Indenture; and
WHEREAS, the Company desires and has requested the Trustee to join with it in the execution and delivery of this Second Supplemental Indenture, and all requirements necessary to make this Second Supplemental Indenture a valid instrument, in accordance with its terms, and to make the 5.00% Senior Notes, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company, have been performed and fulfilled, and the execution and delivery hereof have been in all respects duly authorized;
NOW, THEREFORE, in consideration of the purchase and acceptance of the 5.00% Senior Notes by the holders thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of the 5.00% Senior Notes and the terms, provisions and conditions thereof, the Company covenants and agrees with the Trustee as follows:
Article One
Additional Definitions
Section 1.01. For all purposes of this Second Supplemental Indenture, capitalized terms used herein without definition shall have the meanings specified in the Indenture.
Section 1.02. The terms defined in this Section, for all purposes of this Second Supplemental Indenture, shall have the respective meanings specified in this Section.
Adjusted Treasury Rate means, with respect to any date of redemption, the rate per year equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for that date of redemption.
Comparable Treasury Issue means the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the remaining term of the Securities to be redeemed that would be used, at the time of selection and under customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the 5.00% Senior Notes.
Comparable Treasury Price means, with respect to any date of redemption, the average of the Reference Treasury Dealer Quotations for the date of redemption, after excluding the highest and lowest Reference Treasury Dealer Quotations, or if the Trustee obtains fewer than three Reference Treasury Dealer Quotations, the average of all Reference Treasury Dealer Quotations.
Quotation Agent means Barclays Capital Inc., Goldman, Sachs & Co. and J.P. Morgan Securities LLC, or another Reference Treasury Dealer appointed by the Company.
Reference Treasury Dealer means Barclays Capital Inc., Goldman, Sachs & Co. and J.P. Morgan Securities LLC, and their respective successors and, at the Companys option, other nationally recognized investment banking firms that are primary dealers of U.S. government securities in New York City. If any of the foregoing ceases to be a primary dealer of U.S. government securities in New York City, the Company must substitute another primary dealer of U.S. government securities.
Reference Treasury Dealer Quotations means, with respect to each Reference Treasury Dealer and any date of redemption, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by the Reference Treasury Dealer at 5:00 p.m., New York City time, on the third business day before the date of redemption.
Stated Maturity means August 15, 2022.
Article Two
General Terms and Conditions of
the 5.00% Senior Notes
Section 2.01. There is hereby established, and authenticated and delivered by the Trustee on the date hereof, a series of Securities designated the 5.00% Senior Notes limited in initial aggregate principal amount to $250,000,000; provided, however, that the aggregate principal amount of the 5.00% Senior Notes may be increased in the future, without the consent of the holders of the 5.00% Senior Notes, on the same terms and with the same CUSIP and ISIN numbers as the 5.00% Senior Notes; provided further, however, that if the additional notes are not fungible with the 5.00% Senior Notes for U.S. federal income tax purposes, the additional notes will have a separate CUSIP number. The 5.00% Senior Notes shall mature and the principal shall be due and payable, together with all accrued and unpaid interest thereon, on the Stated Maturity, subject to the provisions of the Indenture relating to the acceleration of maturity. The 5.00% Senior Notes shall be issued in fully registered form without coupons in denominations of $2,000 and integral multiples of $1,000 in excess thereof. The 5.00% Senior Notes shall be issued in the form set forth in Exhibit A hereto.
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Section 2.02. The 5.00% Senior Notes shall be issued in the form of one or more Global Securities and registered in the name of the Depository (which shall be The Depository Trust Company) or its nominee. 5.00% Senior Notes represented by a Global Security will not be exchangeable for, and will not otherwise be issuable as, 5.00% Senior Notes in certificated form, except as provided in Section 2.11 of the Indenture and except if there shall have occurred and be continuing an Event of Default and the holders of a majority in aggregate principal amount of 5.00% Senior Notes determine to discontinue the system of book-entry transfers through the Depository. Any Global Security that is exchangeable pursuant to the preceding sentence shall be exchangeable for 5.00% Senior Notes registered in such names as the Depository shall direct.
Section 2.03. The Global Securities described above may not be transferred except by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or to a successor Depository or its nominee.
Owners of beneficial interests in such Global Securities will not be considered the holders thereof for any purpose under the Indenture, and no Global Security representing a 5.00% Senior Note shall be exchangeable, except for another Global Security of like denomination and tenor to be registered in the name of the Depository or its nominee or to a successor Depository or its nominee. The rights of holders of such Global Securities shall be exercised only through the Depository.
Section 2.04. Each 5.00% Senior Note will bear interest at the rate of 5.00% per annum from and including the date of original issuance or from the most recent Interest Payment Date (as defined below) to which interest has been paid or duly provided for until the principal thereof becomes due and payable, and on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum. Interest shall be paid semiannually in arrears on February 15 and August 15 of each year (each, an Interest Payment Date), commencing on February 15, 2013 to the person in whose name such 5.00% Senior Note or any predecessor 5.00% Senior Note is registered at the close of business on the last day of the month preceding the month in which such Interest Payment Date occurs (the Record Date), provided that the interest payable at the Stated Maturity will be paid to the person to whom principal is payable. Any such interest installment not punctually paid or duly provided for on any Interest Payment Date shall forthwith cease to be payable to the registered holder on the relevant Record Date, and may be paid to the person in whose name the 5.00% Senior Note (or one or more predecessor Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of the 5.00% Senior Notes not less than 10 days prior to such special record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the 5.00% Senior Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.
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The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months and, for any period shorter than a full calendar month, on the basis of the actual number of days elapsed in such period. In the event that any date on which interest is payable on the 5.00% Senior Notes is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day (and without any reduction in interest or other payment in respect of any such early payment), in each case with the same force and effect as if made on the date such payment was originally payable.
Payment of the principal and interest due at the Stated Maturity of the 5.00% Senior Notes shall be made upon surrender of the 5.00% Senior Notes at the Corporate Trust Office. The principal of and interest on the 5.00% Senior Notes shall be paid in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Payments of interest (including interest on any Interest Payment Date) will be made, subject to such surrender where applicable, at the option of the Company, (i) by check mailed to the address of the person entitled thereto as such address shall appear in the Security Register or (ii) by wire transfer in immediately available funds at such place and to such account at a banking institution in the United States as may be designated in writing to the Trustee at least 14 days prior to the date for payment by the person entitled thereto.
Section 2.05. The 5.00% Senior Notes will be senior unsecured obligations of the Company and will rank equally in right of payment with all of the other senior unsecured, unguaranteed and unsubordinated indebtedness of the Company from time to time outstanding. The 5.00% Senior Notes will rank senior to any subordinated indebtedness of the Company.
Article Three
Redemption of the 5.00% Senior Notes
Section 3.01. Subject to the terms of Article Three of the Indenture, the Company shall have the right to redeem the 5.00% Senior Notes, in whole, at any time, or in part, from time to time, at a redemption price (the Redemption Price) equal to the greater of (i) 100% of the principal amount of the 5.00% Senior Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the 5.00% Senior Notes to be redeemed (not including any portion of such payments of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate, plus 50 basis points; plus, in each case, any accrued and unpaid interest thereon to the date of such redemption. If the 5.00% Senior Notes are only partially redeemed pursuant to this Section 3.01, the 5.00% Senior Notes will be redeemed pro rata by the Trustee. The Company may not redeem the 5.00% Senior Notes in part unless all accrued and unpaid interest has been paid in full on all outstanding 5.00% Senior Notes for all interest periods terminating on or prior to the date of redemption.
Notwithstanding Section 3.02 of the Indenture, the notice of redemption with respect to the foregoing redemption need not set forth the Redemption Price but only the manner of calculation thereof.
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The Company shall notify the Trustee of the Redemption Price with respect to the foregoing redemption promptly after the calculation thereof. The Trustee shall not be responsible for calculating said Redemption Price.
Article Four
Form of 5.00% Senior Notes
The 5.00% Senior Notes and the Trustees Certificate of Authentication to be endorsed thereon are to be substantially in the forms set forth in Exhibit A attached hereto.
Article Five
Original Issue of 5.00% Senior Notes
5.00% Senior Notes in the aggregate principal amount of $250,000,000 may, upon execution of this Second Supplemental Indenture, or from time to time thereafter, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver such Notes to or upon the written order of the Company, signed by its Chairman, Chief Executive Officer or President and its Treasurer or an Assistant Treasurer, Controller or Assistant Controller, without any further action by the Company.
Article Six
Miscellaneous Provisions
Section 6.01. The Indenture, as supplemented by this Second Supplemental Indenture, is in all respects ratified and confirmed, and this Second Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided and shall be read, taken and construed as one and the same instrument.
Section 6.02. The recitals herein contained are made by the Company and not by the Trustee, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representation as to the validity or sufficiency of this Second Supplemental Indenture.
Section 6.03. This Second Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and performed in said state.
Section 6.04. This Second Supplemental Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed on the date or dates indicated in the acknowledgments and as of the day and year first above written.
STANCORP FINANCIAL GROUP, INC. | ||||
By: | /s/ J. Greg Ness | |||
Name: | J. Greg Ness | |||
Title: | Chairman, President and | |||
Chief Executive Officer |
Attest: | /s/ Floyd F. Chadee | |||
Name: | Floyd F. Chadee | |||
Title: | Senior Vice President and | |||
Chief Financial Officer |
U.S. BANK NATIONAL ASSOCIATION | ||||
as Trustee | ||||
By: | /s/ Cheryl Nelson | |||
Name: | Cheryl Nelson | |||
Title: | Vice President |
Signature Page to Second Supplemental Indenture
Exhibit A
(FORM OF FACE OF NOTE)
THIS NOTE IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY. THIS NOTE IS EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN SECTION 2.11 OF THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN SECTION 2.11 OF THE INDENTURE.
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
No.[ ] |
$ | 250,000,000 |
CUSIP No. 852891 AC4
ISIN No. US852891AC44
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STANCORP FINANCIAL GROUP, INC.
5.00% Senior Note due 2022
STANCORP FINANCIAL GROUP, INC., a corporation duly organized and existing under the laws of the State of Oregon (herein referred to as the Company, which term includes any successor corporation under the Indenture), for value received, hereby promises to pay to Cede & Co., or registered assigns, the principal sum of Two Hundred Fifty Million U.S. Dollars ($250,000,000), on August 15, 2022 (the Stated Maturity), and to pay interest on such principal sum from and including August 10, 2012 or from the most recent Interest Payment Date (as defined below) to which interest has been paid or duly provided for, payable semiannually in arrears on February 15 and August 15 of each year (each such date, an Interest Payment Date), commencing on February 15, 2013, at the rate of 5.00% per annum, until the principal hereof shall have become due and payable, and on any overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months and, for any period shorter than a full calendar month, on the basis of the actual number of days elapsed in such period. In the event that any date on which interest is payable on this Note is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day (and without any reduction in interest or other payment in respect of any such early payment), in each case with the same force and effect as if made on such date. The interest installment so payable, and punctually paid or duly provided for on any Interest Payment Date will, as provided in the Indenture, be paid to the person in whose name this Note (or one or more Predecessor Securities, as defined in the Indenture) is registered at the close of business on the last day of the month preceding the month in which such Interest Payment Date occurs (each, a Record Date). Any such interest installment not punctually paid or duly provided for on any Interest Payment Date shall forthwith cease to be payable to the registered holder on the relevant Record Date, and may be paid to the person in whose name this Note (or one or more Predecessor Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of this series of Notes not less than 10 days prior to such special record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may then be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture hereinafter referred to.
Payment of the principal of and interest due at the Stated Maturity of this Note shall be made upon surrender of this Note at the Corporate Trust Office. The principal of and interest on this Note shall be paid in such coin of currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Payment of interest (including interest on an Interest Payment Date) will be made, subject to such surrender where applicable, at the option of the Company, (i) by check mailed to the address of the person entitled thereto as such address shall appear in the Security Register or (ii) by wire transfer in immediately available funds at such place and to such account at a banking institution in the United States as may be designated in writing to the Trustee at least 15 days prior to the date for payment by this person entitled thereto.
The Senior Notes (as defined on the reverse hereof) will be senior unsecured obligations of the Company and will rank equally in right of payment with all of the other senior unsecured, unguaranteed and unsubordinated indebtedness of the Company from time to time outstanding. The Senior Notes will rank senior to any subordinated indebtedness of the Company.
REFERENCE IS HEREBY MADE TO THE FURTHER PROVISIONS OF THIS NOTE SET FORTH ON THE REVERSE HEREOF, WHICH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS IF SET FORTH AT THIS PLACE.
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This Note shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee.
IN WITNESS WHEREOF, the Company has caused this Note to be executed.
STANCORP FINANCIAL GROUP, INC. | ||
By |
| |
Name: | ||
Title: |
Attest: |
Name: |
Title: |
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Certificate of Authentication
This is one of the Notes of the series of Securities described in the within-mentioned Indenture.
Dated: [], 2012
U.S. BANK NATIONAL ASSOCIATION | ||
as Trustee | ||
By |
| |
Authorized Signatory |
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(Reverse)
5.00% Senior Note due 2022
(continued)
This Note is one of a duly authorized series of senior notes of the Company (herein sometimes referred to as the Securities), specified in the Indenture (as defined below), all issued or to be issued in one or more series under and pursuant to an Indenture dated as of September 25, 2002 (the Indenture) duly executed and delivered between the Company and U.S. Bank National Association, a national banking association, as Trustee (herein referred to as the Trustee), to which Indenture and all indentures supplemental thereto (including, without limitation, the Second Supplemental Indenture, dated as of August 10, 2012, between the Company and the Trustee) reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Securities and the terms upon which said Securities are, and are to be, authenticated and delivered. By the terms of the Indenture, the Securities are issuable in series which may vary as to amount, date of maturity, rate of interest and in other respects as in the Indenture provided. This Note is one of a series designated as the 5.00% Senior Notes due 2022, limited in initial aggregate principal amount of $250,000,000; provided, however, that the aggregate principal amount of the Securities may be increased in the future, without the consent of the holders of the Securities, on the same terms and with the same CUSIP and ISIN numbers as the Securities; provided further, however, that if the additional notes are not fungible with the 5.00% Senior Notes for U.S. federal income tax purposes, the additional notes will have a separate CUSIP number.
Subject to the terms of Article Three of the Indenture, the Company shall have the right to redeem the Securities of this series at the option of the Company, in whole or in part at any time and from time to time (an Optional Redemption), at a redemption price equal to the greater of (i) 100% of the principal amount of the Securities of this series to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes to be redeemed (not including any portion of such payments of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate, plus 50 basis points; plus, in each case, any accrued and unpaid interest thereon to the date of such redemption. If the Securities of this series are only partially redeemed by the Company pursuant to an Optional Redemption, the Securities of this series will be redeemed pro rata by the Trustee.
Adjusted Treasury Rate means, with respect to any date of redemption, the rate per year equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for that date of redemption.
Comparable Treasury Issue means the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the remaining term of the Securities to be redeemed that would be used, at the time of selection and under customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the 5.00% Senior Notes.
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Comparable Treasury Price means, with respect to any date of redemption, the average of the Reference Treasury Dealer Quotations for the date of redemption, after excluding the highest and lowest Reference Treasury Dealer Quotations, or if the Trustee obtains fewer than three Reference Treasury Dealer Quotations, the average of all Reference Treasury Dealer Quotations.
Quotation Agent means Barclays Capital Inc., Goldman, Sachs & Co. and J.P. Morgan Securities LLC, or another Reference Treasury Dealer appointed by the Company.
Reference Treasury Dealer means Barclays Capital Inc., Goldman, Sachs & Co. and J.P. Morgan Securities LLC, and their respective successors and, at the Companys option, other nationally recognized investment banking firms that are primary dealers of U.S. government securities in New York City. If any of the foregoing ceases to be a primary dealer of U.S. government securities in New York City, the Company must substitute another primary dealer of U.S. government securities.
Reference Treasury Dealer Quotations means, with respect to each Reference Treasury Dealer and any date of redemption, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by the Reference Treasury Dealer at 5:00 p.m., New York City time, on the third business day before the date of redemption.
In the event of redemption of this Security in part only, a new Security or Securities of this series for the unredeemed portion hereof will be issued in the name of the holder hereof upon the cancellation hereof.
In case an Event of Default with respect to the Securities of this series shall have occurred and be continuing, the principal of all of the Securities of this series may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture.
The Indenture contains provisions for defeasance at any time of the entire indebtedness of the Securities of this series upon compliance by the Company with certain conditions set forth therein.
The Indenture permits, with certain exceptions as therein provided, the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Securities of each series affected at the time Outstanding, as defined in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to, changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Securities. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Securities of all series at the time outstanding affected thereby, on behalf of the holders of the Securities of such series, to waive any past default in the performance of any of the covenants contained in the Indenture, or established pursuant to the Indenture with respect to such series, and its consequences, except a default in the payment of the principal of or premium, if any, or interest on any of the Securities of such series, which default may be waived by the unanimous consent of the holders affected. Any such consent or waiver by the registered holder of this Security (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Security and of any Security issued in exchange herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Security.
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Upon an Event of Default, the Trustee or the holders of not less than 25% in principal amount of the outstanding Securities of this series may declare the principal of all of the Securities of this series to be immediately due and payable; and upon any such declaration such principal amount of and the accrued interest on all of the Securities of this series shall become immediately due and payable.
No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest on this Security at the time and place and at the rate and in the money herein prescribed.
As provided in the Indenture and subject to certain limitations therein set forth, this Security is transferable by the registered holder hereof on the Security Register of the Company, upon surrender of this Security for registration of transfer at the office or agency of the Company designated for such purpose in the City of St. Paul, Minnesota, accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee duly executed by the registered holder hereof or its attorney duly authorized in writing, and thereupon one or more new Securities of authorized denominations and for the same aggregate principal amount and series will be issued to the designated transferee or transferees. No service charge will be made for any such transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto.
Prior to due presentment for registration of transfer of this Security, the Company, the Trustee, any paying agent and any Security Registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Security shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Security Registrar) for the purpose of receiving payment of or on account of the principal hereof and premium, if any, and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any paying agent nor any Security Registrar shall be affected by any notice to the contrary.
No recourse shall be had for the payment of the principal of or the interest on this Security, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released.
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[If this Note is to be issued as a Global Security, insert This Global Security is exchangeable for Securities in certificated form only under certain limited circumstances set forth in the Indenture.] The Securities of this series are issuable in registered form without coupons in denominations of $2,000 and integral multiples of $1,000 in excess thereof. As provided in the Indenture and subject to certain limitations herein and therein set forth, Securities of this series so issued are exchangeable for a like aggregate principal amount of Securities of this series of a different authorized denomination, as requested by the holder surrendering the same.
All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.
This Security shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and performed in said state.
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Exhibit 4.2
EXECUTION VERSION
STANCORP FINANCIAL GROUP, INC.
Debt Securities
Underwriting Agreement Standard Provisions
From time to time, StanCorp Financial Group, Inc., an Oregon corporation (the Company), may enter into one or more underwriting agreements in the form of Annex A hereto that incorporate by reference these Standard Provisions (collectively with these Standard Provisions, an Underwriting Agreement) that provide for the sale of the securities designated in such Underwriting Agreement (the Securities) to the several Underwriters named therein (the Underwriters), for whom the Underwriter(s) named therein shall act as representative (the Representative). The Underwriting Agreement, including these Standard Provisions, is sometimes referred to herein as this Agreement. The Securities will be issued pursuant to an Indenture dated as of September 25, 2002 (the Base Indenture) between the Company and U.S. Bank National Association, as trustee (the Trustee), as supplemented and amended by a supplemental indenture thereto to be dated as of the Closing Date (as defined herein) (the Supplemental Indenture) between the Company and the Trustee. The Base Indenture, as amended and supplemented from time to time (including, without limitation pursuant to the Supplemental Indenture), is referred to herein as the Indenture.
1. Registration Statement. The Company has prepared and filed with the Securities and Exchange Commission (the Commission) under the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the Securities Act), a registration statement on Form S-3 (File No. 333-182759), including a prospectus (the Basic Prospectus), relating to the debt securities to be issued from time to time by the Company. The Company has also filed, or proposes to file, with the Commission pursuant to Rule 424 under the Securities Act a prospectus supplement specifically relating to the Securities (the Prospectus Supplement). The registration statement, as amended to the date of this Agreement, including the information, if any, deemed pursuant to Rule 430A, 430B or 430C under the Securities Act to be part of the registration statement at the time of its effectiveness (Rule 430 Information), is referred to herein as the Registration Statement; and as used herein, the term Prospectus means the Basic Prospectus as supplemented by the prospectus supplement specifically relating to the Securities in the form first used (or made available upon request of purchasers pursuant to Rule 173 under the Securities Act) in connection with confirmation of sales of the Securities and the term Preliminary Prospectus means the preliminary prospectus supplement specifically relating to the Securities together with the Basic Prospectus. If the Company has filed an abbreviated registration statement pursuant to Rule 462(b) under the Securities Act (the Rule 462 Registration Statement), then any reference herein to the term Registration Statement shall be deemed to include such Rule 462 Registration Statement.
Capitalized terms used but not defined herein shall have the meanings given to such terms in the Registration Statement and the Prospectus. References herein to the Registration Statement, the Basic Prospectus, any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein. The terms supplement, amendment and amend as used herein as used herein with respect to the Registration Statement, any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include any documents filed by the Company under the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder (the Exchange Act) subsequent to the date of the Underwriting Agreement which are deemed to be incorporated by reference therein. For purposes of this Agreement, the term Effective Time means the effective date of the Registration Statement with respect to the offering of Securities, as determined for the Company pursuant to Section 11 of the Securities Act and Item 512 of Regulation S-K, as applicable.
At or prior to the time when sales of the Securities will be first made (the Time of Sale), the Company will prepare certain information (collectively, the Time of Sale Information) which information will be identified in Schedule 3 to the Underwriting Agreement for such offering of Securities as constituting part of the Time of Sale Information.
2. Purchase of the Securities by the Underwriters. (a) The Company agrees to issue and sell the Securities to the several Underwriters named in the Underwriting Agreement, and each Underwriter, on the basis of the representations, warranties and agreements set forth herein and subject to the conditions set forth herein, agrees, severally and not jointly, to purchase from the Company the respective principal amount of Securities set forth opposite such Underwriters name in the Underwriting Agreement at the purchase price set forth in the Underwriting Agreement.
(b) Payment for and delivery of the Securities will be made at the time and place set forth in the Underwriting Agreement. The time and date of such payment and delivery is referred to herein as the Closing Date.
(c) The Company acknowledges and agrees that the Underwriters named in the Underwriting Agreement are acting solely in the capacity of an arms length contractual counterparty to the Company with respect to any offering of Securities contemplated hereby (including in connection with determining the terms of the offering) and not as a financial advisor or a fiduciary to, or an agent of, the Company or any other person. Additionally, no such Underwriter is advising the Company or any other person as to any legal, tax, investment, accounting or regulatory matters in any jurisdiction. The Company shall consult with its own advisors concerning such matters and shall be responsible for making its own independent investigation and appraisal of the transactions contemplated hereby, and such Underwriters shall have no responsibility or liability to the Company with respect thereto. Any review by such Underwriters named in the Underwriting Agreement, the transactions contemplated thereby or other matters relating to such transactions will be performed solely for the benefit of the Underwriters and shall not be on behalf of the Company.
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3. Representations and Warranties of the Company. The Company represents and warrants to each Underwriter that:
(a) Registration Statement and Prospectus. The Registration Statement is an automatic shelf registration statement as defined under Rule 405 of the Securities Act that has been filed with the Commission not earlier than three years prior to the date hereof; and no notice of objection of the Commission to the use of such registration statement or any post-effective amendment thereto pursuant to Rule 401(g)(2) under the Securities Act has been received by the Company. No order suspending the effectiveness of the Registration Statement has been issued by the Commission and no proceeding for that purpose or pursuant to Section 8A of the Securities Act against the Company or related to the offering has been initiated or threatened by the Commission; as of the Effective Time, the Registration Statement complied in all material respects with the Securities Act and the Trust Indenture Act of 1939, as amended, and the rules and regulations of the Commission thereunder (collectively, the Trust Indenture Act), and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; and as of the date of the Prospectus and any amendment or supplement thereto and as of the Closing Date, the Prospectus did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation and warranty with respect to (i) that part of the Registration Statement that constitutes the Statement of Eligibility and Qualification (Form T-1) of the Trustee under the Trust Indenture Act or (ii) any statements or omissions in the Registration Statement and the Prospectus and any amendment or supplement thereto made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representative expressly for use therein.
(b) Time of Sale Information. The Time of Sale Information, at the Time of Sale did not, and at the Closing Date will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation and warranty with respect to any statements or omissions made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representative expressly for use in such Time of Sale Information. No statement of material fact included in the Prospectus has been omitted from the Time of Sale Information and no statement of material fact included in the Time of Sale Information that is required to be included in the Prospectus has been omitted therefrom.
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(c) Issuer Free Writing Prospectus. The Company (including its agents and representatives, other than the Underwriters in their capacity as such) has not used, authorized or approved and will not use, authorize or approve any written communication (as defined in Rule 405 under the Securities Act) that constitutes an offer to sell or solicitation of an offer to buy the Securities (each such communication by the Company or its agents and representatives (other than a communication referred to in clauses (i), (ii) and (iii) below) an Issuer Free Writing Prospectus) other than (i) any document not constituting a prospectus pursuant to Section 2(a)(10)(a) of the Securities Act or Rule 134 under the Securities Act, (ii) the Preliminary Prospectus, (iii) the Prospectus, (iv) the documents listed on Schedule 3 to the Underwriting Agreement as constituting the Time of Sale Information and (v) any electronic road show or other written communications, in each case approved in writing in advance by the Representative. Each such Issuer Free Writing Prospectus complied in all material respects with the Securities Act, has been or will be (within the time period specified in Rule 433) filed in accordance with the Securities Act (to the extent required thereby) and, when taken together with the Preliminary Prospectus accompanying, or delivered prior to delivery of, or filed prior to the first use of such Issuer Free Writing Prospectus, did not, and at the Closing Date will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation and warranty with respect to any statements or omissions made in each such Issuer Free Writing Prospectus in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representative expressly for use in any Issuer Free Writing Prospectus.
(d) Incorporated Documents. The documents incorporated by reference in the Registration Statement, the Prospectus and the Time of Sale Information, when filed with the Commission, conformed or will conform, as the case may be, in all material respects with the requirements of the Exchange Act and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
(e) Financial Statements. The financial statements and the related notes thereto included or incorporated by reference in the Registration Statement, the Time of Sale Information and the Prospectus comply in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as applicable, and present fairly the financial position of the Company and its subsidiaries as of the dates indicated and the results of their operations and cash flows for the periods specified; such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods covered thereby, and the supporting schedules included or incorporated by reference in the Registration Statement present fairly the information required to be stated therein; and the other financial information included or incorporated by reference in the Registration Statement, the Time of Sale Information and the Prospectus has been derived from the accounting records of the Company and its subsidiaries and presents fairly the information shown thereby.
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(f) No Material Adverse Change. Since the date of the most recent financial statements of the Company included or incorporated by reference in the Registration Statement, the Time of Sale Information and the Prospectus, (i) except for the grant, termination or exercise of awards under share-based compensation plans, there has not been any change in the capital stock or long-term debt of the Company or any of its subsidiaries, or any dividend or distribution of any kind declared, set aside for payment, paid or made by the Company on any class of capital stock, or any material adverse change, or any development involving a prospective material adverse change, in or affecting the business, properties, management, financial position, results of operations or prospects of the Company and its subsidiaries taken as a whole; (ii) neither the Company nor any of its subsidiaries has entered into any transaction or agreement that is material to the Company and its subsidiaries taken as a whole or incurred any liability or obligation, direct or contingent, that is material to the Company and its subsidiaries taken as a whole; and (iii) neither the Company nor any of its subsidiaries has sustained any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor disturbance or dispute or any action, order or decree of any court or arbitrator or governmental or regulatory authority, except in each case as otherwise disclosed in the Registration Statement, the Time of Sale Information and the Prospectus.
(g) Organization and Good Standing. The Company and each of its significant subsidiaries have been duly organized and are validly existing under the laws of their respective jurisdictions of organization, are duly qualified to do business and are in good standing or validly existing, as applicable, in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all power and authority necessary to own or hold their respective properties and to conduct the businesses in which they are engaged, except where the failure to be so qualified, in good standing or have such power or authority would not, individually or in the aggregate, have a material adverse effect on the business, properties, management, financial position, results of operations or prospects of the Company and its subsidiaries taken as a whole or on the performance by the Company of its obligations under the Securities (a Material Adverse Effect). Standard Insurance Company is the only significant subsidiary of the Company.
(h) Capitalization. All the outstanding shares of capital stock or other equity interests of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly or indirectly by the Company, free and clear of any lien, charge, encumbrance, security interest, restriction on voting or transfer or any other claim of any third party.
(i) Due Authorization. The Company has full right, power and authority to execute and deliver this Agreement, the Securities and the Indenture (collectively, the Transaction Documents) and to perform its obligations hereunder and thereunder; and
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all action required to be taken for the due and proper authorization, execution and delivery of each of the Transaction Documents and the consummation of the transactions contemplated thereby has been duly and validly taken.
(j) The Indenture. The Indenture has been duly authorized by the Company and upon effectiveness of the Registration Statement was or will have been duly qualified under the Trust Indenture Act and, when duly executed and delivered in accordance with its terms by each of the parties thereto, will constitute a valid and legally binding agreement of the Company enforceable against the Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors rights generally or by equitable principles relating to enforceability (collectively, the Enforceability Exceptions).
(k) The Securities. The Securities have been duly authorized by the Company and, when duly executed, authenticated, issued and delivered as provided in the Indenture and paid for as provided herein, will be duly and validly issued and outstanding and will constitute valid and legally binding obligations of the Company enforceable against the Company in accordance with their terms, subject to the Enforceability Exceptions, and will be entitled to the benefits of the Indenture.
(l) Underwriting Agreement. The Underwriting Agreement has been duly authorized, executed and delivered by the Company.
(m) Descriptions of the Transaction Documents. Each Transaction Document conforms in all material respects to the description thereof contained in the Registration Statement, the Time of Sale Information and the Prospectus.
(n) No Violation or Default. Neither the Company nor any of its subsidiaries is (i) in violation of its charter or by-laws or similar organizational documents; (ii) in default, and no event has occurred that, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject; or (iii) in violation of any law or statute or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory authority, except, in the case of clauses (ii) and (iii) above, for any such default or violation that would not, individually or in the aggregate, have a Material Adverse Effect.
(o) No Conflicts. The execution, delivery and performance by the Company of each of the Transaction Documents, the issuance and sale of the Securities and compliance by the Company with the terms thereof and the consummation of the transactions contemplated by the Transaction Documents will not (i) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any
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property or assets of the Company or any of its subsidiaries pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, (ii) result in any violation of the provisions of the charter or by-laws or similar organizational documents of the Company or any of its subsidiaries, (iii) result in the violation of any law or statute or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory authority or (iv) require any Insurance Approval (as defined below), except such Insurance Approvals as may be required under state securities or Blue Sky laws (including insurance securities laws), except, in the case of clauses (i), (iii) and (iv) above, for any such conflict, breach, violation, default or Insurance Approval that would not, individually or in the aggregate, have a Material Adverse Effect.
(p) No Consents Required. No consent, approval, authorization, order, registration or qualification of or with any court or arbitrator or governmental or regulatory authority is required for the execution, delivery and performance by the Company of each of the Transaction Documents, the issuance and sale of the Securities and compliance by the Company with the terms thereof and the consummation of the transactions contemplated by the Transaction Documents, except for the registration of the Securities under the Securities Act, the qualification of the Indenture under the Trust Indenture Act and such consents, approvals, authorizations, orders and registrations or qualifications as may be required under applicable state securities laws in connection with the purchase and distribution of the Securities by the Underwriters.
(q) Legal Proceedings. Except as described in the Registration Statement, the Time of Sale Information and the Prospectus, there are no legal, governmental or regulatory investigations, actions, suits or proceedings pending to which the Company or any of its subsidiaries is or may be a party or to which any property of the Company or any of its subsidiaries is or may be the subject that, individually or in the aggregate, if determined adversely to the Company or any of its subsidiaries, could reasonably be expected to have a Material Adverse Effect; no such investigations, actions, suits or proceedings are threatened or, to the knowledge of the Company, contemplated by any governmental or regulatory authority or threatened by others; and (i) there are no current or pending legal, governmental or regulatory actions, suits or proceedings that are required under the Securities Act to be described in the Registration Statement or the Prospectus that are not so described in the Registration Statement, the Time of Sale Information and the Prospectus and (ii) there are no statutes, regulations or contracts or other documents that are required under the Securities Act to be filed as exhibits to the Registration Statement or described in the Registration Statement and the Prospectus that are not so filed as exhibits to the Registration Statement or described in the Registration Statement, the Time of Sale Information and the Prospectus.
(r) Independent Accountants. Deloitte & Touche LLP, who have certified certain financial statements of the Company and its subsidiaries are an independent
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registered public accounting firm with respect to the Company and its subsidiaries within the applicable rules and regulations adopted by the Commission and the Public Company Accounting Oversight Board (United States) and as required by the Securities Act.
(s) Investment Company Act. The Company is not and, after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Registration Statement, the Time of Sale Information and the Prospectus, will not be an investment company or an entity controlled by an investment company within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder (collectively, Investment Company Act).
(t) Forward-Looking Statements. No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained or incorporated by reference in the Registration Statement, the Time of Sale Information and the Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.
(u) Status under the Securities Act. The Company is not an ineligible issuer and is a well-known seasoned issuer, in each case as defined under the Securities Act, in each case at the times specified in the Securities Act in connection with the offering of the Securities.
(v) Insurance Authorities. No insurance or other regulatory authority has authority or jurisdiction to prevent the issuance of the Securities or the sale of the Securities to or by the Underwriters or payment of principal of or interest on the Securities at the times and in the manner provided for in the Indenture and the Securities.
(w) Compliance with Insurance Laws. Each of the Companys subsidiaries engaged in the business of insurance (collectively, the Insurance Subsidiaries and, individually, an Insurance Subsidiary) is in compliance with the requirements of the insurance laws and regulations of its jurisdiction of incorporation and the insurance laws and regulations of other jurisdictions which are applicable to such Insurance Subsidiary and has filed all notices, reports, rates, forms, documents or other information required to be filed thereunder (Insurance Notices), in each case, with such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect, and, no Insurance Subsidiary has received any notification from any insurance regulatory authority to the effect that any additional authorization, approval, order, consent, license, certificate, permit, registration or qualification (Insurance Approvals) from such insurance regulatory authority is needed to be obtained by any Insurance Subsidiary, in each case, with such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect.
(x) Insurance Approvals. Without limiting the foregoing, each of the Company and the Insurance Subsidiaries has filed all Insurance Notices pursuant to, and has obtained all Insurance Approvals required to be obtained under, and has otherwise
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complied with all requirements of, all applicable insurance laws and regulations in connection with the issuance and sale of the Securities; and no such Insurance Notices or Insurance Approvals are required to be filed or obtained by any of the Company or the Insurance Subsidiaries in connection with the issuance and sale of the Securities.
(y) Title to Real and Personal Property. The Company and its subsidiaries have good and marketable title in fee simple to, or have valid rights to lease or otherwise use, all items of real and personal property that are material to the respective businesses of the Company and its subsidiaries, in each case free and clear of all liens, encumbrances, claims and defects and imperfections of title except those that (i) do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries or (ii) could not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect.
(z) Title to Intellectual Property. The Company and its subsidiaries own or possess adequate rights to use all material patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses and know-how, including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures, (collectively, Intellectual Property) necessary for the conduct of their respective businesses; and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, individually or in the aggregate, would result in a Material Adverse Effect.
(aa) No Undisclosed Relationships. No relationship, direct or indirect, exists between or among the Company or any of its subsidiaries, on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company or any of its subsidiaries, on the other, that is required by the Securities Act to be described in the Registration Statement and the Prospectus and that is not so described in such documents and in the Time of Sale Information.
(bb) Taxes. The Company and its subsidiaries have paid all federal, state, local and foreign taxes and filed all tax returns required to be paid or filed through the date hereof; and except as otherwise disclosed in the Registration Statement, the Time of Sale Information and the Prospectus, there is no tax deficiency that has been, or could reasonably be expected to be, asserted against the Company or any of its subsidiaries or any of their respective properties or assets.
(cc) Licenses and Permits. The Company and its subsidiaries possess all licenses, certificates, permits and other authorizations issued by, and have made all declarations and filings with, the appropriate federal, state, local or foreign governmental or regulatory authorities that are necessary for the ownership or lease of their respective
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properties or the conduct of their respective businesses as described in the Registration Statement, the Time of Sale Information and the Prospectus, except where the failure to possess or make the same would not, individually or in the aggregate, have a Material Adverse Effect; and except as described in the Registration Statement, the Time of Sale Information and the Prospectus, neither the Company nor any of its subsidiaries has received notice of any revocation or modification of any such license, certificate, permit or authorization or has any reason to believe that any such license, certificate, permit or authorization will not be renewed in the ordinary course.
(dd) No Labor Disputes. No labor disturbance by or dispute with employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is contemplated or threatened and the Company is not aware of any existing or imminent labor disturbance by, or dispute with, the employees of any of its or its subsidiaries principal suppliers, contractors or customers, except as would not have a Material Adverse Effect.
(ee) Compliance With Environmental Laws. (i) The Company and its subsidiaries (x) are, and at all prior times were, in compliance with any and all applicable federal, state, local and foreign laws rules, regulations, requirements, decisions and orders relating to the protection of human health or safety, the environment, natural resources, hazardous or toxic substances or wastes, pollutants or contaminants (collectively, Environmental Laws); (y) have received and are in compliance with all permits, licenses, certificates or other authorizations or approvals required of them under applicable Environmental Laws to conduct their respective businesses; and (z) have not received notice of any actual or potential liability under or relating to any Environmental Laws, including for the investigation or remediation of any disposal or release of hazardous or toxic substances or wastes, pollutants or contaminants and have no knowledge of any event or condition that would reasonably be expected to result in any such notice; (ii) there are no costs or liabilities associated with Environmental Laws of or relating to the Company or its subsidiaries, except in the case of each of (i) and (ii) above, for any such failure to comply with, or failure to receive required permits, licenses, certificates, authorizations or approvals, or cost or liability as would not, individually or in the aggregate, have a Material Adverse Effect and (iii) except as described in each of the Time of Sale Information and the Prospectus, (x) there are no proceedings that are pending, or that are known to be contemplated, against the Company or any of its subsidiaries under any Environmental Laws in which a governmental entity is also a party, other than such proceedings regarding which it is reasonably believed no monetary sanctions of $100,000 or more will be imposed, (y) the Company and its subsidiaries are not aware of any issues regarding compliance with Environmental Laws, or liabilities or other obligations under Environmental Laws or concerning hazardous or toxic substances or wastes, pollutants or contaminants, that could reasonably be expected to have a material effect on the capital expenditures, earnings or competitive position of the Company and its subsidiaries, and (z) none of the Company and its subsidiaries anticipates material capital expenditures relating to any Environmental Laws.
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(ff) Compliance With ERISA. (i) Each employee benefit plan, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), for which the Company or any member of its Controlled Group (defined as any organization which is a member of a controlled group of corporations within the meaning of Section 414 of the Internal Revenue Code of 1986, as amended (the Code)) would have any liability (each, a Plan) has been maintained in compliance with its terms and the requirements of any applicable statutes, orders, rules and regulations, including but not limited to ERISA and the Code, except where failure to comply would not reasonably be expected to have a Material Adverse Effect; (ii) no prohibited transaction, within the meaning of Section 406 of ERISA or Section 4975 of the Code, has occurred with respect to any Plan excluding transactions effected pursuant to a statutory or administrative exemption; (iii) for each Plan that is subject to the funding rules of Section 412 of the Code or Section 302 of ERISA, no accumulated funding deficiency as defined in Section 412 of the Code, whether or not waived, has occurred or is reasonably expected to occur; (iv) the fair market value of the assets of each Plan exceeds the present value of all benefits accrued under such Plan (determined based on those assumptions used to fund such Plan); (v) no reportable event (within the meaning of Section 4043(c) of ERISA) has occurred or is reasonably expected to occur; and (vi) neither the Company nor any member of the Controlled Group has incurred, nor reasonably expects to incur, any liability under Title IV of ERISA (other than contributions to the Plan or premiums to the PBGC, in the ordinary course and without default) in respect of a Plan (including a multiemployer plan, within the meaning of Section 4001(a)(3) of ERISA).
(gg) Disclosure Controls. The Company maintains a system of disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commissions rules and forms, including controls and procedures designed to ensure that such information is accumulated and communicated to the Companys management as appropriate to allow timely decisions regarding required disclosure. The Company has evaluated the effectiveness of its disclosure controls and procedures as required by Rule 13a-15 of the Exchange Act.
(hh) Accounting Controls. The Company maintains a system of internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that complies with the requirements of the Exchange Act and has been designed by, or under the supervision of the principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, including, but not limited to internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with managements general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to
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maintain asset accountability; (iii) access to assets is permitted only in accordance with managements general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as disclosed in the Registration Statement, the Time of Sale Information and the Prospectus, there are no material weaknesses in the Companys internal controls.
(ii) eXtensible Business Reporting Language. The interactive data in eXtensible Business Reporting Language included or incorporated by reference in the Registration Statement, the Time of Sale Information and the Prospectus fairly presents the information called for in all material respects and has been prepared in accordance with the Commissions rules and guidelines applicable thereto.
(jj) Insurance. The Company and its subsidiaries have insurance covering their respective properties, operations, personnel and businesses, including business interruption insurance, which insurance is in amounts and insures against such losses and risks as are customary in the industry to protect the Company and its subsidiaries and their respective businesses; and neither the Company nor any of its subsidiaries has (i) received notice from any insurer or agent of such insurer that capital improvements or other expenditures are required or necessary to be made in order to continue such insurance or (ii) any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage at reasonable cost from similar insurers as may be necessary to continue its business.
(kk) No Unlawful Payments. Neither the Company nor any of its subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee or other person associated with or acting on behalf of the Company or any of its subsidiaries has (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977; or (iv) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment.
(ll) Compliance with Money Laundering Laws. The operations of the Company and its subsidiaries are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the Money Laundering Laws) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened.
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(mm) Senior Indebtedness. The Securities constitute senior indebtedness as such term is defined in any indenture or agreement governing any outstanding subordinated indebtedness of the Company.
(nn) Compliance with OFAC. None of the Company, any of its subsidiaries or, to the knowledge of the Company, any director, officer, agent, employee or Affiliate of the Company or any of its subsidiaries has been or is currently the subject of any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (OFAC); and the Company will not directly or indirectly use the proceeds of the offering of the Securities hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC, except as it relates to the Companys use of such proceeds to repay existing indebtedness as disclosed in the Registration Statement, the Time of Sale Information and the Prospectus.
(oo) No Brokers Fees. Neither the Company nor any of its subsidiaries is a party to any contract, agreement or understanding with any person (other than this Agreement) that would give rise to a valid claim against the Company or any of its subsidiaries or any Underwriter for a brokerage commission, finders fee or like payment in connection with the offering and sale of the Securities.
(pp) No Registration Rights. No person has the right to require the Company or any of its subsidiaries to register any securities for sale under the Securities Act by reason of the filing of the Registration Statement with the Commission or the issuance and sale of the Securities.
(qq) No Stabilization. The Company has not taken, directly or indirectly, any action designed to or that could reasonably be expected to cause or result in any stabilization or manipulation of the price of the Securities.
(rr) Margin Rules. Neither the issuance, sale and delivery of the Securities nor the application of the proceeds thereof by the Company as described in the Registration Statement, the Time of Sale Information and the Prospectus will violate Regulation T, U or X of the Board of Governors of the Federal Reserve System or any other regulation of such Board of Governors.
(ss) Statistical and Market Data. Nothing has come to the attention of the Company that has caused the Company to believe that the statistical and market-related data included or incorporated by reference in the Registration Statement, the Time of Sale Information and the Prospectus are not based on or derived from sources that are reliable and accurate in all material respects.
(tt) Sarbanes-Oxley Act. There is and has been no failure on the part of the Company or any of the Companys directors or officers, in their capacities as such, to comply in all material respects with any provision of the Sarbanes-Oxley Act of 2002
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and the rules and regulations promulgated in connection therewith (the Sarbanes-Oxley Act), including Section 402 related to loans and Sections 302 and 906 related to certifications.
4. Further Agreements of the Company. The Company covenants and agrees with each Underwriter that:
(a) Filings with the Commission. The Company will (i) pay the registration fees for this offering within the time period required by Rule 456(b)1(i) under the Securities Act (without giving effect to the proviso therein) and in any event prior to the Closing Date and (ii) file the Prospectus in a form approved by the Underwriters with the Commission pursuant to Rule 424 under the Securities Act not later than the close of business on the second business day following the date of determination of the public offering price of the Securities or, if applicable, such earlier time as may be required by Rule 424(b) and Rule 430A, 430B or 430C under the Securities Act. The Company will file any Issuer Free Writing Prospectus (including the Term Sheet in the form of Schedule 4 to the Underwriting Agreement) to the extent required by Rule 433 under the Securities Act; and the Company will furnish copies of the Prospectus and each Issuer Free Writing Prospectus (to the extent not previously delivered) to the Underwriters in New York City prior to 10:00 A.M., New York City time, on the business day next succeeding the date of this Agreement in such quantities as the Representative may reasonably request.
(b) Delivery of Copies. The Company will deliver, without charge, to each Underwriter (A) a conformed copy of the Registration Statement as originally filed and each amendment thereto, in each case including all exhibits and consents filed therewith and (B) during the Prospectus Delivery Period (as defined below), as many copies of the Prospectus (including all amendments and supplements thereto and documents incorporated by reference therein) and each Issuer Free Writing Prospectus (if applicable) as the Representative may reasonably request. As used herein, the term Prospectus Delivery Period means such period of time after the first date of the public offering of the Securities as in the opinion of counsel for the Underwriters a prospectus relating to the Securities is required by law to be delivered (or required to be delivered but for Rule 172 under the Securities Act) in connection with sales of the Securities by any Underwriter or dealer.
(c) Amendments or Supplements; Issuer Free Writing Prospectuses Before using, authorizing, approving or filing any Issuer Free Writing Prospectus, and before filing any amendment or supplement to the Registration Statement or the Prospectus, the Company will furnish to the Representative and counsel for the Underwriters a copy of the proposed Issuer Free Writing Prospectus, amendment or supplement for review and will not use, authorize, approve or file any such Issuer Free Writing Prospectus or file any such proposed amendment or supplement to which the Representative reasonably objects.
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(d) Notice to the Representative. The Company will advise the Representative promptly, and confirm such advice in writing, (i) when any amendment to the Registration Statement has been filed or becomes effective; (ii) when any supplement to the Prospectus or any amendment to the Prospectus or any Issuer Free Writing Prospectus has been filed; (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or the receipt of any comments from the Commission relating to the Registration Statement or any other request by the Commission for any additional information; (iv) of the issuance by the Commission of any order suspending the effectiveness of the Registration Statement or preventing or suspending the use of any Preliminary Prospectus or the Prospectus or the initiation or threatening of any proceeding for that purpose or pursuant to Section 8A of the Securities Act; (v) of the occurrence of any event within the Prospectus Delivery Period as a result of which the Prospectus, the Time of Sale Information or any Issuer Free Writing Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances existing when the Prospectus, the Time of Sale Information or any such Issuer Free Writing Prospectus is delivered to a purchaser, not misleading; (vi) of the receipt by the Company of any notice of objection of the Commission to the use of the Registration Statement or any post-effective amendment thereto pursuant to Rule 401(g)(2) under the Securities Act and (vii) of the receipt by the Company of any notice with respect to any suspension of the qualification of the Securities for offer and sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and the Company will use its reasonable best efforts to prevent the issuance of any such order suspending the effectiveness of the Registration Statement, preventing or suspending the use of any Preliminary Prospectus or the Prospectus or suspending any such qualification of the Securities and, if any such order is issued, will obtain as soon as possible the withdrawal thereof.
(e) Time of Sale Information. If at any time prior to the Closing Date (i) any event shall occur or condition shall exist as a result of which the Time of Sale Information as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances, not misleading or (ii) it is necessary to amend or supplement the Time of Sale Information to comply with law, the Company will immediately notify the Underwriters thereof and forthwith prepare and, subject to paragraph (c) above, file with the Commission (to the extent required) and furnish to the Underwriters and to such dealers as the Representative may designate, such amendments or supplements to the Time of Sale Information as may be necessary so that the statements in the Time of Sale Information as so amended or supplemented will not, in the light of the circumstances, be misleading or so that the Time of Sale Information will comply with law.
(f) Ongoing Compliance. If during the Prospectus Delivery Period (i) any event shall occur or condition shall exist as a result of which the Prospectus as then
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amended or supplemented would include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances existing when the Prospectus is delivered to a purchaser, not misleading or (ii) it is necessary to amend or supplement the Prospectus to comply with law, the Company will immediately notify the Underwriters thereof and forthwith prepare and, subject to paragraph (c) above, file with the Commission and furnish to the Underwriters and to such dealers as the Representative may designate, such amendments or supplements to the Prospectus as may be necessary so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances existing when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus will comply with law.
(g) Blue Sky Compliance. The Company will qualify the Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representative shall reasonably request and will continue such qualifications in effect so long as required for distribution of the Securities; provided that the Company shall not be required to (i) qualify as a foreign corporation or other entity or as a dealer in securities in any such jurisdiction where it would not otherwise be required to so qualify, (ii) file any general consent to service of process in any such jurisdiction or (iii) subject itself to taxation in any such jurisdiction if it is not otherwise so subject.
(h) Earning Statement. The Company will make generally available to its security holders and the Representative as soon as practicable an earning statement that satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 of the Commission promulgated thereunder.
(i) Clear Market. During the period from the date hereof through and including the business day following the Closing Date or such later date as is specified in the Underwriting Agreement, the Company will not, without the prior written consent of the Representative, offer, sell, contract to sell or otherwise dispose of any debt securities issued or guaranteed by the Company and having a term of more than one year.
(j) Use of Proceeds. The Company will apply the net proceeds from the sale of the Securities as described in the Registration Statement, the Time of Sale Information and the Prospectus under the heading Use of Proceeds.
(k) No Stabilization. The Company will not take, directly or indirectly, any action designed to or that could reasonably be expected to cause or result in any stabilization or manipulation of the price of the Securities.
(l) Filing of Exchange Act Documents. The Company will file promptly all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act during the Prospectus Delivery Period.
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(m) Record Retention. The Company will, pursuant to reasonable procedures developed in good faith, retain copies of each Issuer Free Writing Prospectus that is not filed with the Commission in accordance with Rule 433 under the Securities Act.
5. Certain Agreements of the Underwriters. Each Underwriter hereby represents and agrees that
(a) It has not and will not use, authorize use of, refer to, or participate in the planning for use of, any free writing prospectus, as defined in Rule 405 under the Securities Act (which term includes use of any written information furnished to the Commission by the Company and not incorporated by reference into the Registration Statement and any press release issued by the Company) other than (i) a free writing prospectus that, solely a result of use by such underwriter, would not trigger an obligation to file such free writing prospectus with the Commission pursuant to Rule 433, (ii) any Issuer Free Writing Prospectus listed on Schedule 3 to the Underwriting Agreement or prepared pursuant to Section 3(c) or Section 4(c) above (including any electronic road show), or (iii) any free writing prospectus prepared by such underwriter and approved by the Company in advance in writing (each such free writing prospectus referred to in clauses (i) or (iii), an Underwriter Free Writing Prospectus).
(b) Notwithstanding the foregoing the Underwriters may use a term sheet substantially in the form of Schedule 4 to the Underwriting Agreement without the consent of the Company.
6. Conditions of Underwriters Obligations. The obligation of each Underwriter to purchase Securities on the Closing Date as provided herein is subject to the performance by the Company of its covenants and other obligations hereunder and to the following additional conditions:
(a) Registration Compliance; No Stop Order. No order suspending the effectiveness of the Registration Statement shall be in effect, and no proceeding for such purpose, pursuant to Rule 401(g)(2) or pursuant to Section 8A under the Securities Act shall be pending before or threatened by the Commission; the Prospectus and each Issuer Free Writing Prospectus shall have been timely filed with the Commission under the Securities Act (in the case of an Issuer Free Writing Prospectus, to the extent required by Rule 433 under the Securities Act) and in accordance with Section 4(a) hereof; and all requests by the Commission for additional information shall have been complied with to the reasonable satisfaction of the Representative.
(b) Representations and Warranties. The representations and warranties of the Company contained herein shall be true and correct on the date hereof and on and as of the Closing Date; and the statements of the Company and its officers made in any certificates delivered pursuant to this Agreement shall be true and correct on and as of the Closing Date.
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(c) No Downgrade. Subsequent to the earlier of (A) the Time of Sale and (B) the execution and delivery of this Agreement, (i) no downgrading shall have occurred in the rating accorded the Securities or any other debt securities or preferred stock of or guaranteed by the Company or any of its subsidiaries by any nationally recognized statistical rating organization, as such term is defined by the Commission for purposes of Section 3(a)(62) under the Exchange Act and (ii) no such organization shall have publicly announced that it has under surveillance or review, or has changed its outlook with respect to, its rating of the Securities or of any other debt securities or preferred stock of or guaranteed by the Company or any of its subsidiaries (other than an announcement with positive implications of a possible upgrading).
(d) No Material Adverse Change. No event or condition of a type described in Section 3(f) hereof shall have occurred or shall exist, which event or condition is not described in the Time of Sale Information (excluding any amendment or supplement thereto) and the Prospectus (excluding any amendment or supplement thereto) and the effect of which in the judgment of the Representative makes it impracticable or inadvisable to proceed with the offering, sale or delivery of the Securities on the terms and in the manner contemplated by this Agreement, the Time of Sale Information and the Prospectus.
(e) Officers Certificate. The Representative shall have received on and as of the Closing Date a certificate of an executive officer of the Company who has specific knowledge of the Companys financial matters and is satisfactory to the Representative (i) confirming that such officer has carefully reviewed the Registration Statement, the Time of Sale Information and the Prospectus and, to the knowledge of such officer, the representations set forth in Sections 3(a) and 3(b) hereof are true and correct, (ii) confirming that the other representations and warranties of the Company in this Agreement are true and correct and that the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date and (iii) to the effect set forth in paragraphs (a), (c) and (d) above.
(f) Comfort Letters. On the date of this Agreement and on the Closing Date, Deloitte & Touche LLP shall have furnished to the Representative, at the request of the Company, letters, dated the respective dates of delivery thereof and addressed to the Underwriters, in form and substance reasonably satisfactory to the Representative, containing statements and information of the type customarily included in accountants comfort letters to underwriters with respect to the financial statements and certain financial information contained or incorporated by reference in the Registration Statement, the Time of Sale Information and the Prospectus; provided that the letter delivered on the Closing Date shall use a cut-off date no more than three business days prior to the Closing Date.
(g) Opinion and 10b-5 Statement of Counsel for the Company. Stoel Rives LLP, counsel for the Company, shall have furnished to the Representative, at the request of the Company, their written opinion and 10b-5 Statement, dated the Closing Date and addressed to the Underwriters, in the form set forth in Annex B hereto.
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(h) Opinion of General Counsel for the Company. Holley Y. Franklin, Associate Counsel of the Company, shall have furnished to the Representative, at the request of the Company, her written opinion, dated the Closing Date and addressed to the Underwriters, in the form set forth in Annex C hereto.
(i) Opinion and 10b-5 Statement of Counsel for the Underwriters. The Representative shall have received on and as of the Closing Date an opinion and 10b-5 Statement of Davis Polk & Wardwell LLP, counsel for the Underwriters, with respect to such matters as the Representative may reasonably request, and such counsel shall have received such documents and information as they may reasonably request to enable them to pass upon such matters.
(j) No Legal Impediment to Issuance. No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any federal, state or foreign governmental or regulatory authority that would, as of the Closing Date, prevent the issuance or sale of the Securities; and no injunction or order of any federal, state or foreign court shall have been issued that would, as of the Closing Date, prevent the issuance or sale of the Securities.
(k) Good Standing. The Representative shall have received on and as of the Closing Date satisfactory evidence of the good standing or valid existence, as applicable, of the Company and its significant subsidiaries in their respective jurisdictions of organization and their good standing in such other jurisdictions as the Representative may reasonably request, in each case in writing or any standard form of telecommunication from the appropriate governmental authorities of such jurisdictions.
(l) Additional Documents. On or prior to the Closing Date, the Company shall have furnished to the Representative such further certificates and documents as the Representative may reasonably request.
All opinions, letters, certificates and evidence mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters.
7. Indemnification and Contribution.
(a) Indemnification of the Underwriters. The Company agrees to indemnify and hold harmless each Underwriter, its affiliates, directors and officers and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim asserted as such fees and expenses are incurred), joint or several, that arise out of, or
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are based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (or any amendment or supplement thereto), any Issuer Free Writing Prospectus or any Time of Sale Information, or caused by any omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, in each case except insofar as such losses, claims, damages or liabilities arise out of, or are based upon, any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with any information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representative expressly for use therein.
(b) Indemnification of the Company. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the indemnity set forth in paragraph (a) above, but only with respect to any losses, claims, damages or liabilities that arise out of, or are based upon, any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with any information relating to such Underwriter furnished to the Company in writing by such Underwriter through the Representative expressly for use in the Registration Statement, the Prospectus (or any amendment or supplement thereto), any Issuer Free Writing Prospectus or any Time of Sale Information, it being understood and agreed that the only such information consists of the information identified in the Underwriting Agreement as being provided by the Underwriters.
(c) Notice and Procedures. If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any person in respect of which indemnification may be sought pursuant to either paragraph (a) or (b) above, such person (the Indemnified Person) shall promptly notify the person against whom such indemnification may be sought (the Indemnifying Person) in writing; provided that the failure to notify the Indemnifying Person shall not relieve it from any liability that it may have under this Section 7 except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and provided, further, that the failure to notify the Indemnifying Person shall not relieve it from any liability that it may have to an Indemnified Person otherwise than under paragraphs (a) and (b) above. If any such proceeding shall be brought or asserted against an Indemnified Person and it shall have notified the Indemnifying Person thereof, the Indemnifying Person shall retain counsel reasonably satisfactory to the Indemnified Person (who shall not, without the consent of the Indemnified Person, be counsel to the Indemnifying Person) to represent the Indemnified Person and any others entitled to indemnification pursuant to this Section 6 that the Indemnifying
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Person may designate in such proceeding and shall pay the fees and expenses of such proceeding and shall pay the fees and expenses of counsel related to such proceeding as incurred. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the contrary, (ii) the Indemnifying Person has failed within a reasonable time to retain counsel reasonably satisfactory to the Indemnified Person; (iii) the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it that are different from or in addition to those available to the Indemnifying Person; or (iv) the named parties in any such proceeding (including any impleaded parties) include both the Indemnifying Person and the Indemnified Person and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood and agreed that the Indemnifying Person shall not, in connection with any proceeding or related proceeding in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be reimbursed as they are incurred. Any such separate firm for any Underwriter, its affiliates, directors and officers and any control persons of such Underwriter shall be designated in writing by the Representative and any such separate firm for the Company, its directors, its officers who signed the Registration Statement and any control persons of the Company shall be designated in writing by the Company. The Indemnifying Person shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Indemnifying Person agrees to indemnify each Indemnified Person from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an Indemnified Person shall have requested that an Indemnifying Person reimburse the Indemnified Person for fees and expenses of counsel as contemplated by this paragraph, the Indemnifying Person shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by the Indemnifying Person of such request and (ii) the Indemnifying Person shall not have reimbursed the Indemnified Person in accordance with such request prior to the date of such settlement. No Indemnifying Person shall, without the written consent of the Indemnified Person, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party and indemnification could have been sought hereunder by such Indemnified Person, unless such settlement (x) includes an unconditional release of such Indemnified Person, in form and substance reasonably satisfactory to such Indemnified Person, from all liability on claims that are the subject matter of such proceeding and (y) does not include any statement as to or any admission of fault, culpability or a failure to act by or on behalf of any Indemnified Person.
(d) Contribution. If the indemnification provided for in paragraphs (a) and (b) above is unavailable to an Indemnified Person or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under
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such paragraph, in lieu of indemnifying such Indemnified Person thereunder, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Securities or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same respective proportions as the net proceeds (before deducting expenses) received by the Company from the sale of the Securities and the total underwriting discounts and commissions received by the Underwriters in connection therewith, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate offering price of the Securities. The relative fault of the Company on the one hand and the Underwriters on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
(e) Limitation on Liability. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such Indemnified Person in connection with any such action or claim. Notwithstanding the provisions of this Section 7, in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total underwriting discounts and commissions received by such Underwriter with respect to the offering of the Securities exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters obligations to contribute pursuant to this Section 7 are several in proportion to their respective purchase obligations hereunder and not joint.
(f) Non-Exclusive Remedies. The remedies provided for in this Section 7 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any Indemnified Person at law or in equity.
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8. Effectiveness of Agreement. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.
9. Termination. This Agreement may be terminated in the absolute discretion of the Representative, by notice to the Company, if after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on the New York Stock Exchange or the over-the-counter market; (ii) trading of any securities issued or guaranteed by the Company shall have been suspended on any exchange or in any over-the-counter market; (iii) a general moratorium on commercial banking activities shall have been declared by federal or New York State authorities; (iv) there shall have occurred a material disruption in commercial banking or securities settlement or clearance services in the United States; or (v) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis, either within or outside the United States, that, in the judgment of the Representative, is material and adverse and makes it impracticable or inadvisable to proceed with the offering, sale or delivery of the Securities on the terms and in the manner contemplated by this Agreement, the Time of Sale Information and the Prospectus.
10. Defaulting Underwriter. (a) If, on the Closing Date, any Underwriter defaults on its obligation to purchase the Securities that it has agreed to purchase hereunder, the non-defaulting Underwriters may in their discretion arrange for the purchase of such Securities by other persons satisfactory to the Company on the terms contained in this Agreement. If, within 36 hours after any such default by any Underwriter, the non-defaulting Underwriters do not arrange for the purchase of such Securities, then the Company shall be entitled to a further period of 36 hours within which to procure other persons satisfactory to the non-defaulting Underwriters to purchase such Securities on such terms. If other persons become obligated or agree to purchase the Securities of a defaulting Underwriter, either the non-defaulting Underwriters or the Company may postpone the Closing Date for up to five full business days in order to effect any changes that in the opinion of counsel for the Company or counsel for the Underwriters may be necessary in the Registration Statement and the Prospectus or in any other document or arrangement, and the Company agrees to promptly prepare any amendment or supplement to the Registration Statement and the Prospectus that effects any such changes. As used in this Agreement, the term Underwriter includes, for all purposes of this Agreement unless the context otherwise requires, any person not listed in the Underwriting Agreement that, pursuant to this Section 10, purchases Securities that a defaulting Underwriter agreed but failed to purchase.
(b) If, after giving effect to any arrangements for the purchase of the Securities of a defaulting Underwriter or Underwriters by the non-defaulting Underwriters and the Company as provided in paragraph (a) above, the aggregate principal amount of such Securities that remains unpurchased does not exceed one-eleventh of the aggregate principal amount of all the Securities, then the Company shall have the right to require each non-defaulting Underwriter to purchase the principal amount of Securities that such
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Underwriter agreed to purchase hereunder plus such Underwriters pro rata share (based on the principal amount of Securities that such Underwriter agreed to purchase hereunder) of the Securities of such defaulting Underwriter or Underwriters for which such arrangements have not been made.
(c) If, after giving effect to any arrangements for the purchase of the Securities of a defaulting Underwriter or Underwriters by the non-defaulting Underwriters and the Company as provided in paragraph (a) above, the aggregate principal amount of such Securities that remains unpurchased exceeds one-eleventh of the aggregate principal amount of all the Securities, or if the Company shall not exercise the right described in paragraph (b) above, then this Agreement shall terminate without liability on the part of the non-defaulting Underwriters. Any termination of this Agreement pursuant to this Section 10 shall be without liability on the part of the Company, except that the Company will continue to be liable for the payment of expenses as set forth in Section 11 hereof and except that the provisions of Section 7 hereof shall not terminate and shall remain in effect.
(d) Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company or any non-defaulting Underwriter for damages caused by its default.
11. Payment of Expenses. (a) Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company will pay or cause to be paid all costs and expenses incident to the performance of its obligations hereunder, including without limitation, (i) the costs incident to the authorization, issuance, sale, preparation and delivery of the Securities and any taxes payable in that connection; (ii) the costs incident to the preparation, printing and filing under the Securities Act of the Registration Statement, the Preliminary Prospectus, any Issuer Free Writing Prospectus, any Time of Sale Information and the Prospectus (including all exhibits, amendments and supplements thereto) and the distribution thereof; (iii) the costs of reproducing and distributing each of the Transaction Documents; (iv) the fees and expenses of the Companys counsel and independent accountants; (v) the fees and expenses incurred in connection with the registration or qualification and determination of eligibility for investment of the Securities under the laws of such jurisdictions as the Representative may designate and the preparation, printing and distribution of a Blue Sky Memorandum (including the related fees and expenses of counsel for the Underwriters); (vi) any fees charged by rating agencies for rating the Securities; (vii) the fees and expenses of the Trustee and any paying agent (including related fees and expenses of any counsel to such parties); (viii) all expenses and application fees incurred in connection with any filing with, and clearance of any offering by, the Financial Industry Regulatory Authority, Inc.; and (ix) all expenses incurred by the Company in connection with any road show presentation to potential investors.
(b) If (i) this Agreement is terminated pursuant to Section 9, (ii) the Company for any reason fails to tender the Securities for delivery to the Underwriters or (iii) the Underwriters decline to purchase the Securities for any reason permitted under this
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Agreement, the Company agrees to reimburse the Underwriters for all out-of-pocket costs and expenses (including the fees and expenses of their counsel) reasonably incurred by the Underwriters in connection with this Agreement and the offering contemplated hereby.
12. Persons Entitled to Benefit of Agreement. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and any controlling persons referred to herein, and the affiliates of each Underwriter referred to in Section 7 hereof. Nothing in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. No purchaser of Securities from any Underwriter shall be deemed to be a successor merely by reason of such purchase.
13. Survival. The respective indemnities, rights of contribution, representations, warranties and agreements of the Company and the Underwriters contained in this Agreement or made by or on behalf of the Company or the Underwriters pursuant to this Agreement or any certificate delivered pursuant hereto shall survive the delivery of and payment for the Securities and shall remain in full force and effect, regardless of any termination of this Agreement or any investigation made by or on behalf of the Company or the Underwriters.
14. Certain Defined Terms. For purposes of this Agreement, (a) except where otherwise expressly provided, the term affiliate has the meaning set forth in Rule 405 under the Securities Act; (b) the term business day means any day other than a day on which banks are permitted or required to be closed in New York City; (c) the term subsidiary has the meaning set forth in Rule 405 under the Securities Act; and (d) the term significant subsidiary has the meaning set forth in Rule 1-02 of Regulation S-X under the Exchange Act.
15. Miscellaneous. (a) Authority of the Representative. Any action by the Underwriters hereunder may be taken by the Representative on behalf of the Underwriters, and any such action taken by the Representative shall be binding upon the Underwriters.
(b) Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted and confirmed by any standard form of telecommunication. Notices to the Underwriters shall be given to the Representative at the address set forth in the Underwriting Agreement. Notices to the Company shall be given to it at 1100 SW Sixth Avenue, Portland, Oregon 97204, (fax: 971.321.5243); Attention: Office of the General Counsel, or if different, to the address set forth in the Underwriting Agreement.
(c) Patriot Act. In accordance with the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)), the Underwriters are required to obtain, verify and record information that identifies their respective clients,
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including the Company, which information may include the name and address of their respective clients, as well as other information that will allow the underwriters to properly identify their respective clients.
(d) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.
(e) Amendments or Waivers. No amendment or waiver of any provision of this Agreement, nor any consent or approval to any departure therefrom, shall in any event be effective unless the same shall be in writing and signed by the parties hereto.
(f) Headings. The headings herein are included for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement.
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Annex A
Underwriting Agreement
August 3, 2012
Barclays Capital Inc.
Goldman, Sachs & Co.
J.P. Morgan Securities LLC
As Representatives of the
several Underwriters listed
in Schedule 1 hereto
c/o | Barclays Capital Inc. |
745 Seventh Avenue
New York, New York 10019
Goldman, Sachs & Co.
200 West Street
New York, NY 10282
J.P. Morgan Securities LLC
383 Madison Avenue
New York, New York 10179
Ladies and Gentlemen:
StanCorp Financial Group, Inc., an Oregon corporation (the Company), proposes to issue and sell to the several Underwriters listed in Schedule 1 hereto (the Underwriters), for whom you are acting as representative (the Representative), $250,000,000 principal amount of its 5.00% Senior Notes due 2022 having the terms set forth in Schedule 2 hereto (the Securities). The Securities will be issued pursuant to an Indenture dated as of September 25, 2002 (the Base Indenture) between the Company and U.S. Bank National Association, as trustee (the Trustee), as supplemented and amended by a supplemental indenture thereto to be dated as of the Closing Date (as defined herein) (the Supplemental Indenture) between the Company and the Trustee. The Base Indenture, as amended and supplemented from time to time (including, without limitation pursuant to the Supplemental Indenture), is referred to herein as the Indenture.
The Company agrees to issue and sell the Securities to the several Underwriters as provided in this Agreement, and each Underwriter, on the basis of the representations, warranties and agreements set forth herein and subject to the conditions set forth herein, agrees, severally and not jointly, to purchase from the
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Company the respective principal amount of Securities set forth opposite such Underwriters name in Schedule 1 hereto at a price equal to 98.696% of the principal amount thereof plus accrued interest, if any, from August 10, 2012 to the Closing Date (as defined below). The Company will not be obligated to deliver any of the Securities except upon payment for all the Securities to be purchased as provided herein.
The Company understands that the Underwriters intend to make a public offering of the Securities as soon after the effectiveness of this Agreement as in the judgment of the Representative is advisable, and initially to offer the Securities on the terms set forth in the Time of Sale Information and the Prospectus. Section 3 hereto sets forth the Time of Sale Information made available at the Time of Sale. The Company acknowledges and agrees that the Underwriters may offer and sell Securities to or through any affiliate of an Underwriter and that any such affiliate may offer and sell Securities purchased by it to or through any Underwriter.
Payment for and delivery of the Securities shall be made at the offices of Davis Polk & Wardwell LLP, 450 Lexington Avenue, New York, New York, 10017 at 10:00 A.M., New York City time, on August 10, 2012, or at such other time or place on the same or such other date, not later than the fifth business day thereafter, as the Representative and the Company may agree upon in writing.
Payment for the Securities shall be made by wire transfer in immediately available funds to the account(s) specified by the Company to the Representative against delivery to the nominee of The Depository Trust Company, for the account of the Underwriters, of one or more global notes representing the Securities (collectively, the Global Note), with any transfer taxes payable in connection with the sale of the Securities duly paid by the Company. The Global Note will be made available for inspection by the Representative not later than 1:00 P.M., New York City time, on the business day prior to the Closing Date.
The Company and the Underwriters acknowledge and agree that the only information relating to any Underwriter that has been furnished to the Company in writing by any Underwriter through the Representative expressly for use in the Registration Statement, the Prospectus (or any amendment or supplement thereto) any Issuer Free Writing Prospectus or any Time of Sale Information and any Preliminary Prospectus consists of the following: the second and third sentences of the third paragraph, the third sentence of the seventh paragraph, the eight paragraph and the first and second sentences of the ninth paragraph under the caption Underwriting in the Preliminary Prospectus and the Prospectus.
All provisions contained in the document entitled StanCorp Financial Group, Inc. Debt Securities Underwriting Agreement Standard Provisions are incorporated by reference herein in their entirety and shall be deemed to be a part of this Underwriting Agreement to the same extent as if such provisions had been set forth in full herein, except that if any term defined in such Underwriting Agreement Standard Provisions is otherwise defined herein, the definition set forth herein shall control.
28
This Agreement may be signed in counterparts (which may include counterparts delivered by any standard form of telecommunication), each of which shall be an original and all of which together shall constitute one and the same instrument.
29
If the foregoing is in accordance with your understanding, please indicate your acceptance of this Agreement by signing in the space provided below.
Very truly yours, | ||||
STANCORP FINANCIAL GROUP, INC. | ||||
By | /s/ Robert M. Erickson | |||
Name: | Robert M. Erickson | |||
Title: | Vice President and Controller |
30
Accepted: | ||||
BARCLAYS CAPITAL INC. | ||||
GOLDMAN, SACHS & CO. | ||||
J.P. MORGAN SECURITIES LLC | ||||
For themselves and on behalf of the several Underwriters listed in Schedule 1 hereto. | ||||
By: Barclays Capital Inc. | ||||
By: | /s/ Jawad Haider | |||
Name: | Jawad Haider | |||
Title: | Managing Director | |||
By: Goldman, Sachs & Co. | ||||
By: | /s/ Adam T. Greene | |||
Name: | Adam T. Greene | |||
Title: | Vice President | |||
By: J.P. Morgan Securities LLC | ||||
By: | /s/ Robert Bottamedi | |||
Name: | Robert Bottamedi | |||
Title: | Vice President |
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Schedule 1
Underwriter |
Principal Amount |
|||
Barclays Capital Inc. |
$ | 68,750,000 | ||
Goldman, Sachs & Co. |
68,750,000 | |||
J.P. Morgan Securities LLC |
68,750,000 | |||
U.S. Bancorp Investments, Inc. |
13,750,000 | |||
Wells Fargo Securities, LLC |
13,750,000 | |||
BNY Mellon Capital Markets, LLC |
8,125,000 | |||
The Williams Capital Group, L.P. |
8,125,000 | |||
|
|
|||
Total |
$ | 250,000,000 | ||
|
|
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Schedule 2
Representatives and Addresses for Notices:
Barclays Capital Inc.
745 Seventh Avenue
New York, New York 10019
Goldman, Sachs & Co.
200 West Street
New York, NY 10282
J.P. Morgan Securities LLC
383 Madison Avenue
New York, New York 10179
Certain Terms of the Securities:
Title of Securities: | 5.00% Senior Notes due 2022 |
Aggregate Principal Amount of Securities: | $250,000,000 |
Maturity Date: | August 15, 2022 | |
Interest Rate: | 5.00% |
Interest Payment Dates: | Semi-annually on February 15 and August 15, commencing February 15, 2013 | |
Record Dates: | January 31 and July 31 |
Redemption Provisions: | The optional redemption provision described under the caption Description of NotesOptional Redemption in the Preliminary Prospectus and Prospectus. |
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Schedule 3
Time of Sale Information
Pricing Term Sheet dated August 3, 2012
Preliminary Prospectus Supplement dated August 3, 2012
34
Schedule 4
StanCorp Financial Group, Inc.
Pricing Term Sheet
Issuer: | StanCorp Financial Group, Inc. | |
Title of Securities | 5.00% Senior Notes due 2022 | |
Principal Amount: | $250,000,000 | |
Maturity Date: | August 15, 2022 | |
Coupon: | 5.00% | |
Price to Public: | 99.346% of principal amount | |
Yield to Maturity: | 5.084% | |
Spread to Benchmark Treasury: | 350 basis points (3.50%) | |
Benchmark Treasury: | 1.750% due May 15, 2022 | |
Benchmark Treasury Yield: | 1.584% | |
Interest Payment Dates: | Semi-annually on February 15 and August 15, commencing February 15, 2013 | |
Make-Whole Call: | At any time at the greater of par or make-whole at Treasury plus 50 basis points | |
Trade Date: | August 3, 2012 | |
Settlement Date(1): | T+5; August 10, 2012 | |
CUSIP/ISIN: | 852891AC4/US852891AC44 | |
Joint Book-Running Managers: | Barclays Capital Inc. Goldman, Sachs & Co. J.P. Morgan Securities LLC | |
Co-Managers: | BNY Mellon Capital Markets, LLC The Williams Capital Group, L.P. U.S. Bancorp Investments, Inc. Wells Fargo Securities, LLC |
(1) | We expect that delivery of the notes will be made against payment therefor on or about the fifth business day following the date of pricing of the notes (T+5). Rule 15c6-1 under the Securities Exchange Act of 1934 requires that trades in the secondary market settle in three business days unless the parties to a trade expressly agree otherwise. Accordingly, purchasers who wish to trade notes on the date of pricing or the next business day will be required, by virtue of the fact that the notes initially will settle in T+5, to specify an alternate settlement cycle at the time of a trade to prevent a failed settlement. |
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The issuer has filed a registration statement, including a prospectus and a prospectus supplement, with the Securities and Exchange Commission for the offering to which this communication relates. Before you invest, you should read the prospectus and the prospectus supplement in that registration statement and other documents the issuer has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free at www.sec.gov. Alternatively, the issuer, any underwriter or any dealer participating in the offering will send you the prospectus if you request it by calling Barclays Capital Inc. at 1-888-603-5847, Goldman, Sachs & Co. at 1-866-471-2526 or J.P. Morgan Securities LLC at 1-212-834-4533.
36
Annex B
Form of Opinion of Counsel for the Company
, 2012
Barclays Capital Inc.
Goldman, Sachs & Co.
J.P. Morgan Securities LLC
As Representatives of the
several Underwriters listed
in Schedule 1 hereto
c/o | Barclays Capital Inc. | |
745 Seventh Avenue | ||
New York, New York 10019 | ||
Goldman, Sachs & Co. | ||
200 West Street | ||
New York, NY 10282 | ||
J.P. Morgan Securities LLC | ||
383 Madison Avenue | ||
New York, New York 10179 |
Re: StanCorp Financial Group, Inc.
Ladies and Gentlemen:
We have acted as legal counsel for StanCorp Financial Group, Inc., an Oregon corporation (the Company), in connection with the issuance and sale by the Company to you (the Underwriters) pursuant to that certain Underwriting Agreement, dated August , 2012 (the Underwriting Agreement), between the Company and you as Representatives of the several Underwriters, of $ aggregate principal amount of the Companys % senior notes due 2022 (the Securities). The Securities are being issued under the Companys Indenture relating to Senior Debt Securities dated as of September 25, 2002 (the Base Indenture), between the Company and U.S. Bank National Association, as trustee (the Trustee), as previously supplemented, and as further supplemented by the Second Supplemental Indenture dated as of , 2012 between the Company and the Trustee (the Supplemental Indenture and, together with the Base Indenture, the Indenture). This letter is being delivered to you pursuant to Section 6(g) of the document entitled StanCorp Financial Group, Inc. Debt Securities Underwriting Agreement Standard Provisions incorporated by reference in the Underwriting Agreement. Unless otherwise provided, capitalized terms used herein shall have the meanings set forth in the Underwriting Agreement.
37
We have examined and are familiar with: (a) the articles of incorporation (Articles) and Bylaws of the Company certified by the Secretary of the Company; (b) the records of various corporate proceedings relating to the authorization, issuance and sale of the Securities by the Company; (c) an executed copy of the Underwriting Agreement; (d) an executed copy of the Base Indenture; (e) an executed copy of the Supplemental Indenture; (f) an executed copy of the global certificate representing the Securities; (g) the Registration Statement; (h) the Basic Prospectus; and (i) the Preliminary Prospectus, the documents incorporated by reference into the Preliminary Prospectus (the Incorporated Documents) as of (Eastern time) , 2012 (the Applicable Time) and the free writing prospectus filed with the Commission on , 2012, all considered together (the General Disclosure Package). We have also examined such other documents and have satisfied ourselves as to such other matters as we have deemed necessary in order to render this opinion.
In rendering this opinion, we have assumed the genuineness of all signatures, the authenticity of all documents provided to us as originals and the conformity to authentic original documents of all documents provided to us as certified, conformed or photostatic copies. As to questions of fact material to the following opinions, when relevant facts were not independently established by us, we have relied upon certificates of officers of the Company and its subsidiaries, and the representations of the Company in the Underwriting Agreement.
Based upon the foregoing and subject to the qualifications below, we are of the opinion that:
(i) the Company has been duly incorporated and is validly existing as a corporation under the laws of the jurisdiction of its incorporation, with corporate power and corporate authority to own its properties and conduct its business as described in the Prospectus;
(ii) the Securities have been duly authorized, executed, issued and delivered by the Company and, when authenticated by the Trustee in the manner provided for in the Indenture and delivered to you against payment of the consideration thereof in accordance with the terms of the Underwriting Agreement, constitute valid and legally binding obligations of the Company entitled to the benefits provided by the Indenture;
(iii) each of the Base Indenture and the Supplemental Indenture has been duly authorized, executed and delivered by the Company and constitutes a valid and legally binding instrument, enforceable against the Company in accordance with its terms; and the Indenture has been duly qualified under the Trust Indenture Act of 1939, as amended (the Trust Indenture Act);
(iv) the issue and sale of the Securities and the compliance by the Company with all of the provisions of the Securities, the Indenture and the Underwriting Agreement with respect to the Securities and the consummation of the transactions therein contemplated will not result in (i) any violation of the provisions of the Articles or Bylaws of the Company (ii) any statute or any
38
order, rule or regulation known to us of any court or governmental agency or body having jurisdiction over the Company or any of its properties or (iii) any agreement that is specified in Annex A;
(v) no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Securities or the consummation by the Company of the transactions contemplated by the Underwriting Agreement or the Indenture, except such as have been obtained under the Securities Act and the Trust Indenture Act and such consents, approvals, authorizations, orders, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Securities by the Underwriters;
(vi) the Company is not and, after giving effect to the offering and sale of the Securities, will not be an investment company, as such term is defined in the Investment Company Act of 1940, as amended;
(vii) the statements set forth in the Prospectus under the captions Description of Notes insofar as they purport to constitute a summary of the terms of the Securities, and under the captions Plan of Distribution, Underwriting and Material U.S. Federal Income Tax Consequences insofar as they purport to describe the provision of the laws and documents referred to therein, are accurate and complete in all material respects;
(viii) the Registration Statement, the Prospectus (other than the financial statements and related schedules therein, as to which we express no opinion) and the Indenture comply as to form in all material respects with the requirements of the Securities Act and the Trust Indenture Act and the rules and regulations thereunder;
(ix) an Oregon court or U.S. federal court applying the choice of laws principles prevailing under the laws of the State of Oregon will give effect to the provisions in the Base Indenture, the Supplemental Indenture, the Underwriting Agreement and the Securities (hereinafter collectively referred to as the Operative Agreements) selecting the law of New York as the proper governing law thereof and will apply New York law, rather than the laws of the State of Oregon, to the construction and application of the terms of the Operative Agreements. In the event that such an Oregon or U.S. federal court were not to respect the choice of law in the Operative Agreements, such court will find that (a) the Securities, when authenticated by the Trustee in the manner provided for in the Indenture and delivered to you against payment of the consideration thereof in accordance with the terms of the Underwriting Agreement, constitute valid and legally binding obligations of the Company entitled to the benefits provided by the Indenture, and (b) each of the Base Indenture and the Supplemental Indenture constitutes a valid and legally binding instrument, enforceable against the Company in accordance with its terms;
(x) the Registration Statement is effective under the 1933 Act; the Prospectus and the items comprising the General Disclosure Package have been filed, as applicable, pursuant to Rule
39
424(b) in the manner and within the time period required by Rule 424(b) (without reference to Rule 424(b)(8)) or pursuant to Rule 433 in the manner and within the time period required by Rule 433(d); and, to our knowledge, (A) no stop order suspending the effectiveness of the Registration Statement has been issued under the 1933 Act and (B) no proceedings for that purpose have been instituted or are pending or threatened by the Commission; and
(xi) the Underwriting Agreement has been duly authorized, executed and delivered by the Company.
Although we do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement, the General Disclosure Package or the Prospectus, except for those referred to in paragraph (viii) above, nothing has come to our attention which has caused us to believe that, as of its effective date, the Registration Statement (other than the financial statements and related schedules therein, as to which we express no opinion) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that, as of its date and as of the date hereof, the Prospectus (other than the financial statements and related schedules therein, as to which we express no opinion) contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or that, as of the Applicable Time, the General Disclosure Package (other than the financial statements and related schedules therein, as to which we express no opinion) contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
The opinions set forth in paragraphs (ii), (iii) and (ix) above are subject to (a) applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws relating to or affecting creditors rights generally and (b) the application of general principles of equity, including those limiting the availability of specific performance, injunctive relief and other equitable remedies (regardless of whether considered in a proceeding in equity or at law). With regard to the opinion set forth in paragraph (ix) above, we have assumed that the parties have a reasonable basis for the choice of New York law as the governing law of the Operative Agreements and that no state has an interest in the transactions contemplated therein that is materially greater than the interests of the states of New York.
The opinions expressed herein are limited to matters governed by the laws of the United States of America and the State of Oregon. We express no opinion as to the laws of any other jurisdiction.
This opinion is delivered solely for the benefit of the persons to whom it is addressed and is not to be relied upon by any other person, and this opinion is not to be used, circulated, quoted or otherwise referred to in connection with any transactions other than those contemplated by the Underwriting Agreement.
Very truly yours, |
STOEL RIVES LLP |
40
Annex C
, 2012
Barclays Capital Inc.
Goldman, Sachs & Co.
J.P. Morgan Securities LLC
As Representatives of the
several Underwriters listed
in Schedule 1 hereto
c/o | Barclays Capital Inc. |
745 Seventh Avenue
New York, New York 10019
Goldman, Sachs & Co.
200 West Street
New York, NY 10282
J.P. Morgan Securities LLC
383 Madison Avenue
New York, New York 10179
Re: StanCorp Financial Group, Inc.
Ladies and Gentlemen:
I am Associate Counsel of StanCorp Financial Group, Inc., an Oregon corporation (the Company). This opinion is being delivered in connection with the issuance and sale by the Company to you (the Underwriters) pursuant to that certain Underwriting Agreement, dated August , 2012 (the Underwriting Agreement), between the Company and you as Representatives of the several Underwriters, of $250 million aggregate principal amount of the Companys % senior notes due 2022 (the Securities). The Securities are being issued under the Companys Indenture relating to Senior Debt Securities dated as of September 25, 2002 (the Base Indenture), between the Company and U.S. Bank National Association, as trustee (the Trustee), as previously supplemented, and as further supplemented by the Second Supplemental Indenture dated as of , 2012 between the Company and the Trustee (the Supplemental Indenture and, together with the Base Indenture, the Indenture). This letter is being delivered to you pursuant to Section 6(h) of the document entitled StanCorp Financial Group, Inc. Debt Securities Underwriting Agreement Standard Provisions incorporated by reference in the Underwriting Agreement. Unless otherwise provided, capitalized terms used herein shall have the meanings set forth in the Underwriting Agreement.
In my capacity as such counsel, I have examined and am familiar with: (a) the articles of incorporation (Articles) and Bylaws of the Company certified by the Secretary of the
41
Company; (b) the records of various corporate proceedings relating to the authorization, issuance and sale of the Securities by the Company; (c) an executed copy of the Underwriting Agreement; (d) an executed copy of the Base Indenture; (e) an executed copy of the Supplemental Indenture; (f) an executed copy of the global certificate representing the Securities; (g) the Registration Statement; (h) the Basic Prospectus and (i) the Preliminary Prospectus, the documents incorporated by reference into the Prospectus (the Incorporated Documents) as of (Eastern time) , 2012 (the Applicable Time), and the free writing prospectus filed with the Commission on , 2012, all considered together (the General Disclosure Package). We have also examined such other documents and have satisfied ourselves as to such other matters as we have deemed necessary in order to render this opinion.
I have also examined such other documents and have reviewed such questions of law as I have considered necessary and appropriate for the purposes of the opinions set forth below. In rendering the opinions set forth below, I have assumed the authenticity of all documents submitted to me as originals, the genuineness of all signatures and the conformity of authentic originals of all documents submitted to me as copies. I have also assumed the legal capacity for all purposes relevant hereto of all natural persons and, with respect to all parties to agreements or instruments relevant hereto other than the Company, that such parties had the requisite power and authority (corporate or otherwise) to execute, deliver and perform such agreements or instruments, that such agreements or instruments have been duly authorized by all requisite action (corporate or otherwise), executed and delivered by such parties and that such agreements or instruments are the valid, binding and enforceable obligations of such parties. As to questions of fact material to my opinions, I have relied upon certificates of public officials.
On the basis of the foregoing and my examination of such other questions of law and fact as I deem relevant under the circumstances, and in reliance thereon, and subject to the limitations, qualifications and exceptions set forth herein, I am of the opinion that, as of the date hereof:
(i) each of the Company and Standard Insurance Company, an Oregon corporation (Standard), has been duly incorporated and is validly existing as a corporation under the laws of the jurisdiction of its incorporation, with corporate power and corporate authority to own its properties and conduct its business as described in the Prospectus and, in the case of the Company, to enter into and perform its obligations under the Underwriting Agreement;
(ii) each of the Company and Standard are duly qualified to do business and are in good standing in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all power and authority necessary to own or hold their respective properties and to conduct the businesses in which they are engaged, except where the failure to be so qualified or have such power or authority would not, individually or in the aggregate, have a Material Adverse Effect;
(iii) Standard has been duly incorporated and is validly existing as a corporation under the laws of its jurisdiction of incorporation; and all of the issued shares of capital stock of Standard have been duly and validly authorized and issued, and are fully paid and non-assessable;
42
(iv) the issue and sale of the Securities and the compliance by the Company with all of the provisions of the Securities, the Indenture and the Underwriting Agreement and the consummation of the transactions herein and therein contemplated will not (i) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to me to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, (ii) result in any violation of the provisions of the charter or by-laws or similar organizational documents of the Company or any of its subsidiaries, (iii) result in the violation of any law or statute or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory authority or (iv) require any Insurance Approval, except such Insurance Approvals as may be required under state securities or Blue Sky laws (including insurance securities laws), except, in the case of clauses (i), (iii) and (iv) above, for any such conflict, breach, violation, default or Insurance Approval that would not, individually or in the aggregate, have a Material Adverse Effect;
(v) to the best of my knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect and, to the best of my knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others;
(vi) to the best of my knowledge, the Company has made all required filings under applicable insurance holding company statutes, and has received approvals of acquisition or control and/or affiliate transactions in each jurisdiction in which such filings or approvals are required, except where the failure to have made such filings or receive such approvals in any such jurisdiction would not, individually or in the aggregate with other such failures, have a Material Adverse Effect; to the best of my knowledge, each of the Company and Standard has all necessary Consents of and from, and has made all Filings with, all insurance regulatory authorities, all Federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, necessary to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus, except where the failure to have such Consents or to make such Filings would not, individually or in the aggregate, have a Material Adverse Effect; to the best of my knowledge, all such Consents and filings are in full force and effect and neither the Company nor Standard has received any notice of any event, inquiry, investigation or proceeding that would result in the suspension, revocation or limitation of any such Consent or otherwise impose any limitation on the conduct of the business of the Company or Standard, except as set forth in the Prospectus, or any such suspension, revocation or limitation which would not, individually or in the aggregate, have a Material Adverse Effect;
(vii) Standard is duly licensed or authorized as an insurer or reinsurer in each jurisdiction where it is required to be so licensed or authorized to conduct its business as described in the
43
Prospectus, except where the failure to be so licensed or authorized would not, individually or in the aggregate, have a material adverse effect on the assets, business, financial position, equity, reserves, surplus, results of operations or prospects of Standard; all such licenses or authorizations are in full force and effect and, to the best of my knowledge, none of the Company nor Standard has received any notice of any event, inquiry, investigation or proceeding that would result in the suspension, revocation or limitation of any such licenses or authorizations or otherwise impose any limitation on the conduct of the business of Standard, except any such suspension, revocation or limitation which would not, individually or in the aggregate, have a Material Adverse Effect, and, to my knowledge, there is no sustainable basis for any such suspension, revocation or limitation and, to my knowledge, Standard is in compliance with, and conducts its businesses in conformity with, all applicable insurance laws and regulations, except where the failure to so comply or conform would not have a Material Adverse Effect;
(viii) No insurance regulatory authority has authority or jurisdiction to prevent the issuance of the Securities or the sale of the Securities to or by the Underwriters;
(ix) the Company is not and, after giving effect to the offering and sale of the Securities, will not be an investment company, as such term is defined in the Investment Company Act and is not required to be registered as an investment company in any jurisdiction where it conducts business; Standard is not required to be registered as an investment company with the Commission or in any jurisdiction where it conducts business; to the best of my knowledge, each of the Company and Standard is registered in all capacities with each Federal, state, local or other governmental authority and is registered with, a member of, or a participant in, each self-regulatory organization, in each case, as is necessary to conduct its business as described in or contemplated by the Prospectus except as set forth in the Prospectus or where the failure to be so registered would not, individually or in the aggregate, have a Material Adverse Effect; to the best of my knowledge, all such registrations and memberships are in full force and effect and neither the Company nor Standard has received any notice of any event, inquiry, investigation or proceeding that would result in the suspension, revocation or limitation of any such registrations, or memberships, except as set forth in the Prospectus or any such suspension, revocation or limitation which would not, individually or in the aggregate, have a Material Adverse Effect; to the best of my knowledge, there is no sustainable basis for any such suspension, revocation or limitation; and, to my knowledge, each of the Company and Standard is in compliance with all applicable laws, rules, regulations, orders, bylaws, and similar requirements in connection with such registrations or memberships, as the case may be, except as set forth in the Prospectus or where the failure to so comply would not, individually or in the aggregate, have a Material Adverse Effect;
(x) the documents incorporated by reference in the Prospectus (other than the financial statements and related schedules therein, as to which I express no opinion), when they became effective or were filed with the Commission, as the case may be, complied as to form in all material respects with the requirements of the Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder;
44
(xi) except for Standard, none of the direct or indirect subsidiaries of the Company is a significant subsidiary as such term is defined in Rule 1-02(w) of Regulation S-X; and
(xii) all descriptions included or incorporated by reference in the Registration Statement of contracts and other documents to which the Company or its subsidiaries are a party are accurate in all material respects; to the best of my knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits to the Registration Statement other than those described or referred to therein or filed or incorporated by reference as exhibits thereto.
Although I do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement, the General Disclosure Package or the Prospectus, nothing has come to my attention which causes me to believe that, as of its effective date, the Registration Statement or any further amendment thereto made by the Company prior to the Time of Delivery (other than the financial statements and related schedules therein, as to which I express no opinion) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that, as of its date and as of the date hereof, the Prospectus (other than the financial statements and related schedules therein, as to which I express no opinion) contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or that, as of the Applicable Time, the General Disclosure Package (other than the financial statements and related schedules therein, as to which I express no opinion) contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and I do not know of any amendment to the Registration Statement required to be filed or any contracts or other documents of a character required to be filed as an exhibit to the Registration Statement or required to be incorporated by reference into the Prospectus or required to be described in the Registration Statement or the Prospectus which are not filed or incorporated by reference or described as required.
The opinions expressed herein are limited to matters governed by the laws of the United States of America and the State of Oregon. I express no opinion as to the laws of any other jurisdiction.
The foregoing opinions are being furnished to you solely for your benefit and may not be relied upon by, nor may copies be delivered to, any other person without my prior written consent.
Very truly yours,
Holley Y. Franklin
Associate Counsel
45
Exhibit 10.1
STANCORP FINANCIAL GROUP, INC.
1999 EMPLOYEE SHARE PURCHASE PLAN
1. Purpose of the Plan. StanCorp Financial Group, Inc. (the Company) believes that ownership of shares of its Common Stock by employees of the Company and its Participating Subsidiaries (hereinafter defined) is desirable as an incentive to better performance and improvement of profits, and as a means by which employees may share in the rewards of growth and success. The purpose of the 1999 Employee Share Purchase Plan (the Plan) is to provide a convenient means by which employees of the Company and Participating Subsidiaries may purchase the Companys shares through payroll deductions and a method by which the Company may assist and encourage such employees to become share owners.
2. Shares Reserved for the Plan. There are 3,500,000 shares of the Companys authorized Common Stock reserved for issuance under the Plan. The number of shares reserved for issuance under the Plan is subject to adjustment in the event of any stock dividend, stock split, combination of shares, recapitalization or other change in the outstanding Common Stock of the Company. The determination of whether an adjustment shall be made and the manner of any such adjustment shall be made by the Board of Directors of the Company, which determination shall be conclusive.
3. Administration of the Plan. The Plan shall be administered by the Board of Directors of the Company (the Board of Directors). The Board of Directors may promulgate rules and regulations for the operation of the Plan, adopt forms or electronic or telephonic procedures for use in connection with the Plan, and decide any question of interpretation of the Plan or rights arising thereunder. The Board of Directors may consult with counsel for the Company on any matter arising under the Plan. All determinations and decisions of the Board of Directors shall be conclusive. Notwithstanding the foregoing, the Board of Directors, if it so desires, may delegate to the Compensation Committee of the Board the authority for general administration of the Plan.
4. Eligible Employees. Except as indicated below all regular employees of the Company and of each of the Companys subsidiary corporations which is designated by the Board of Directors as a participant in the Plan (such participating subsidiary being hereinafter called a Participating Subsidiary) are eligible to participate in the Plan. Any employee who would, after a purchase of shares under the Plan, own or be deemed (under Section 424(d) of the Internal Revenue Code of 1986, as amended (the Code) to own stock (including stock subject to any outstanding options held by the employee) possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or any parent or subsidiary of the Company, shall be ineligible to participate in the Plan. A regular employee is a person who has been in the employ of the Company or a Participating Subsidiary for at least one calendar month and whose employment relationship has not terminated (as determined under Section 1.421-1(h)(2) of U.S. Treasury Regulations or a successor regulations), excluding, however, any employee whose customary employment is less than 20 hours per week.
1
5. Offerings.
(a) Offering Periods. Commencing on January 1, 2012, the Plan shall be implemented by a series of six-month offering periods (Offering Periods), with a new Offering Period commencing on February 2 and August 2 of each year; provided, however, that for transitional purposes a one-time seven-month Offering Period shall commence on January 3, 2012. Each Offering Period commencing on February 2 of any year (as well as the Offering Period commencing on January 3, 2012) shall end on August 1 of that year. Each Offering Period commencing on August 2 of any year shall end on February 1 of the following year. The first day of each Offering Period is the Offering Date and the last day of each Offering Period is the Purchase Date for the Offering Period. Notwithstanding the foregoing provisions of this paragraph 5(a), (i) if an Offering Date would fall on a day on which the public equity securities markets in the United States are not open for trading (a Non-trading Day), the Offering Date shall instead occur on the next day on which such markets are open for trading (a Trading Day), and (ii) if a Purchase Date would fall on a Non-trading Day, the Purchase Date shall instead occur on the preceding Trading Day.
(b) Grants; Limitations. On each Offering Date, each eligible employee is hereby granted an option under the Plan to purchase shares of Common Stock on the Purchase Date for that Offering Period for the price determined under paragraph 7 of the Plan exclusively through payroll deductions authorized under paragraph 6 of the Plan; provided, however, that (i) no such option shall permit the purchase of more than 2,500 shares, and (ii) no option may be granted under the Plan that would allow an employees right to purchase shares under all stock purchase plans of the Company and its parents and subsidiaries to which Section 423 of the Code applies to accrue at a rate that exceeds $25,000 of fair market value of shares (determined at the Offering Date) for each calendar year in which such option is outstanding.
6. Participation in the Plan.
(a) Initiating Participation. An eligible employee may participate in an Offering Period under the Plan by filing with the Custodian no later than ten days prior to the Offering Date, on forms furnished by the Custodian or pursuant to electronic or telephonic procedures established by the Custodian, a subscription and payroll deduction authorization. Once filed, a subscription and payroll deduction authorization shall remain in effect for subsequent Offering Periods unless amended or terminated. The payroll deduction authorization will take effect on the Offering Date and will authorize the employing entity to make payroll deductions in the specified amount from each paycheck of the participating employee. Payroll deductions for any Offering Period may not exceed 10% of the gross amount of total cash compensation in the aggregate payable to the employee for such Offering Period. Total cash compensation does not include amounts paid under disability plans. If a payroll deduction is made by a Participating Subsidiary, that entity will promptly remit the amount of the deduction to the Company.
2
(b) Amending or Terminating Participation. A participating employee may amend his or her payroll deduction authorization once during any Offering Period, to reduce the amount of future payroll deductions, with effect during the remaining part of the Offering Period. Other amendments to the payroll deduction authorization will not become effective until the next following Offering Period. A permitted change in payroll deductions shall be effective for any pay period only if notice is received by the Custodian at least ten business days before the payday on which the change will become effective. After an employee has begun participating in the Plan, he or she may terminate participation in the Plan by notice received by the Custodian at any time up to the tenth day before a Purchase Date. Any notices required under this paragraph 6(b) shall be in writing, unless electronic or telephonic procedures are then in effect in which case the notices shall be in the form required under those procedures. Participation in the Plan shall also terminate when a participant ceases to be an eligible employee for any reason, including death or retirement. Determination of when the employment relationship terminates for this purpose shall be made under Section 1.421-1(h)(2) of U.S. Treasury Regulations or successor regulations. A participant may not reinstate participation in the Plan with respect to a particular Offering Period after once terminating participation in the Plan with respect to that Offering Period. Upon termination of a participants participation in the Plan, all amounts deducted from the participants pay and not previously used to purchase shares under the Plan shall be returned to the participant, without interest.
7. Option Price. The price at which shares shall be purchased in an Offering Period shall be the lower of (a) 85% of the fair market value of a share of Common Stock on the Offering Date of the applicable Offering Period or (b) 85% of the fair market value of a share of Common Stock on the Purchase Date. The fair market value of a share of Common Stock on any date shall be the closing price of a share of Common Stock as shown on the New York Stock Exchange Composite Transactions Listing for such date, as published in The Wall Street Journal. In the event that the Common Stock is not listed on the New York Stock Exchange or the price is no longer shown on the New York Stock Exchange Composite Transactions Listing, the Board of Directors shall substitute a comparable source of closing price information.
8. Newly Eligible Employees. A person who becomes an eligible employee after the Offering Date of an Offering Period shall not be eligible to participate in such Offering Period but may participate in any subsequent Offering Period provided he or she is still an eligible employee as of the Offering Date of such subsequent Offering Period.
9. Purchase of Shares. All amounts withheld from the pay of a participant shall be credited to his or her account under the Plan by the Custodian appointed under paragraph 10. No interest will be paid on such accounts unless the Board of Directors determines otherwise. On each Purchase Date of an Offering Period, the amount of the account of each participant will be applied to the purchase of whole shares by such participant from the Company at the price determined under paragraph 7. Any cash balance remaining in a participants account after a Purchase Date because it was less than the amount required to purchase a full share shall be retained in the participants account for the next Offering Period.
3
10. Delivery and Custody of Shares. Shares purchased by participants pursuant to the Plan will be held in the custody of such investment or financial firm (the Custodian) as shall be appointed by the Board of Directors. The Custodian may hold shares purchased pursuant to the Plan in book entry form and may commingle shares in its custody pursuant to the Plan in a single account without identification as to individual participants. By appropriate instructions to the Custodian on forms to be provided for that purpose, a participant may from time to time obtain (a) transfer into the participants own name of some or all of the shares held by the Custodian for the participants account and delivery of such shares to the participant; (b) transfer of some or all of the shares held for the participants account by the Custodian to a regular individual brokerage account in the participants own name, either with the firm then acting as Custodian or with another firm, or (c) sale of some or all of the shares held by the Custodian for the participants account at the market price at the time the order is executed and remittance of the net proceeds of sale to the participant. Upon termination of participation in the Plan, a participant may elect to have the shares held by the Custodian for his or her account transferred and delivered in accordance with (a) above, transferred to a brokerage account in accordance with (b), or sold in accordance with (c).
11. Records and Statements. The Custodian will maintain the records of the Plan. As soon as practicable after each Purchase Date the Custodian will furnish to each participant a statement showing the activity in the participants account for the period covered by the statement and the cash and share balances in the account as of the Purchase Date. Participants will be furnished such other reports and statements, and at such intervals, as the Board of Directors shall determine from time to time.
12. Expense of the Plan. The Company will pay all expenses incident to operation of the Plan, including costs of record keeping, accounting fees, legal fees, commissions and issue or transfer taxes on purchases pursuant to the Plan and on delivery of shares to a participant or into his or her brokerage account. The Company will not pay expenses, commissions or taxes incurred in connection with sales of shares by the Custodian at the request of a participant. Expenses to be paid by a participant will be deducted from the proceeds of sale prior to remittance.
13. Rights Not Transferable. The right to purchase shares under this Plan is not transferable by a participant, and such right is exercisable during the participants lifetime only by the participant. Upon the death of a participant, any cash or shares held for the participants account shall be transferred to the persons entitled thereto under the laws of the state of domicile of the participant upon a proper showing of authority.
14. Dividends and Other Distributions. Cash dividends and other cash distributions, if any, on shares held by the Custodian will be paid currently to the participants entitled thereto unless the Company subsequently adopts a dividend reinvestment plan and the participant directs that his or her cash dividends be invested in accordance with such plan. Stock dividends and other distributions in shares of the Company on shares held by the Custodian shall be issued to the Custodian and held by it for the account of the respective participants entitled thereto.
15. Voting and Shareholder Communications. In connection with voting on any matter submitted to the shareholders of the Company, the Custodian will furnish to each participant a proxy authorizing the participant to vote the shares held by the custodian for his account. Copies of all general communications to shareholders of the Company will be sent to participants in the Plan.
16. Tax Withholding. Each participant who has purchased shares under the Plan shall immediately upon notification of the amount due, if any, pay to the Company in cash amounts necessary to satisfy any applicable federal, state, local, national or other governmental tax withholding determined by the Company to be required in any country having taxing jurisdiction. If the Company determines that additional withholding is required beyond any amount deposited at the time of purchase, the participant shall pay such amount to the Company on demand. If the participant fails to pay the amount demanded, the Company may withhold that amount from other amounts payable by the Company to the participant, including salary, subject to applicable law.
4
17. Responsibility and Indemnity. Neither the Company, its Board of Directors, the Custodian, any Participating Subsidiary, nor any member, officer, agent, or employee of any of them, shall be liable to any participant under the Plan for any mistake of judgment or for any omission or wrongful act unless resulting from gross negligence, willful misconduct or intentional misfeasance. The Company will indemnify and save harmless its Board of Directors, the Custodian and any such member, officer, agent or employee against any claim, loss, liability or expense arising out of the Plan, except such as may result from the gross negligence, willful misconduct or intentional misfeasance of such entity or person.
18. Conditions and Approvals. The obligations of the Company under the Plan shall be subject to and conditioned upon compliance with all applicable state, federal and foreign laws and regulations, compliance with the rules of any stock exchange or market on which the Companys securities may be listed, and approval of such federal, state and foreign authorities or agencies as may have jurisdiction over the Plan or the Company. The Company will use its best effort to comply with such laws, regulations and rules and to obtain such approvals.
19. Amendment of the Plan. The Board of Directors of the Company may from time to time amend the Plan in any and all respects, except that without the approval of the shareholders of the Company, the Board of Directors may not increase the number of shares reserved for the Plan or decrease the purchase price of shares offered pursuant to the Plan.
20. Termination of the Plan. The Plan shall terminate when all of the shares reserved for purposes of the Plan have been purchased, provided that the Board of Directors in its sole discretion may at any time terminate the Plan without any obligation on account of such termination, except as hereinafter in this paragraph provided. Upon termination of the Plan, the cash and shares, if any, held in the account of each participant shall forthwith be distributed to the participant or to the participants order, provided that if prior to the termination of the Plan, the Board of Directors and shareholders of the Company shall have adopted and approved a substantially similar plan, the Board of Directors may in its discretion determine that the account of each participant under this Plan shall be carried forward and continued as the account of such participant under such other plan, subject to the right of any participant to request distribution of the cash and shares, if any, held for his account.
21. Effective Date of the Plan. The Plan shall become effective on the effective date of the Companys initial public offering, subject to prior or subsequent approval by the affirmative vote, in person or by proxy, of the holders of at least a majority of the shares of the Company represented and voting on the approval of the Plan at a validly held meeting of the shareholders.
5
Exhibit 31.1
Certification
I, J. Greg Ness, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of StanCorp Financial Group, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the Audit Committee of the registrants Board of Directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated: November 6, 2012
/s/ J. GREG NESS |
J. Greg Ness Chairman, President and Chief Executive Officer |
Exhibit 31.2
Certification
I, Floyd F. Chadee, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of StanCorp Financial Group, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the Audit Committee of the registrants Board of Directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated: November 6, 2012
/s/ FLOYD F. CHADEE |
Floyd F. Chadee Senior Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of StanCorp Financial Group, Inc. (the Company) on Form 10-Q for the quarter ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, J. Greg Ness, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: November 6, 2012
/s/ J. GREG NESS |
J. Greg Ness Chairman, President and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of StanCorp Financial Group, Inc. (the Company) on Form 10-Q for the quarter ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Floyd F. Chadee, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: November 6, 2012
/s/ FLOYD F. CHADEE |
Floyd F. Chadee Senior Vice President and Chief Financial Officer |
Segments (Segment Information) (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 9 Months Ended | |||
---|---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
|
Sep. 30, 2011
|
Dec. 31, 2011
|
|
Premiums | $ 528.7 | $ 539.8 | $ 1,630.1 | $ 1,610.6 | |
Administrative fees | 27.8 | 28.5 | 86.2 | 87.4 | |
Net investment income | 159.8 | 147.3 | 470.9 | 456.9 | |
Net capital gains (losses) | (2.6) | 7.7 | (6.8) | (7.9) | |
Total revenues | 713.7 | 723.3 | 2,180.4 | 2,147.0 | |
Benefits to policyholders | 422.4 | 432.2 | 1,348.3 | 1,324.7 | |
Interest credited | 43.9 | 36.7 | 130.3 | 117.1 | |
Operating expenses | 115.3 | 120.7 | 355.9 | 357.1 | |
Commissions and bonuses | 49.6 | 53.1 | 156.3 | 166.1 | |
Premium taxes | 9.1 | 9.1 | 28.6 | 27.4 | |
Interest expense | 11.8 | 9.7 | 31.3 | 29.2 | |
Net increase in deferred acquisition costs, value of business acquired and intangible assets | 0.3 | (4.2) | (1.9) | (14.6) | |
Total benefits and expenses | 652.4 | 657.3 | 2,048.8 | 2,007.0 | |
Income (loss) before income taxes | 61.3 | 66.0 | 131.6 | 140.0 | |
Total Assets | 19,621.3 | 17,887.9 | 19,621.3 | 17,887.9 | 18,403.2 |
Insurance Services [Member]
|
|||||
Premiums | 527.5 | 538.3 | 1,625.1 | 1,604.4 | |
Administrative fees | 3.1 | 3.0 | 10.4 | 8.6 | |
Net investment income | 86.0 | 85.8 | 254.2 | 255.6 | |
Net capital gains (losses) | 0 | 0 | 0 | 0 | |
Total revenues | 616.6 | 627.1 | 1,889.7 | 1,868.6 | |
Benefits to policyholders | 417.6 | 427.1 | 1,333.3 | 1,309.5 | |
Interest credited | 1.0 | 0.9 | 3.6 | 3.5 | |
Operating expenses | 85.4 | 84.2 | 264.5 | 256.4 | |
Commissions and bonuses | 43.2 | 46.1 | 133.9 | 140.3 | |
Premium taxes | 9.1 | 9.1 | 28.6 | 27.3 | |
Interest expense | 0 | 0 | 0 | 0 | |
Net increase in deferred acquisition costs, value of business acquired and intangible assets | (2.1) | (5.3) | (6.0) | (16.3) | |
Total benefits and expenses | 554.2 | 562.1 | 1,757.9 | 1,720.7 | |
Income (loss) before income taxes | 62.4 | 65.0 | 131.8 | 147.9 | |
Total Assets | 8,347.5 | 8,109.5 | 8,347.5 | 8,109.5 | |
Asset Management [Member]
|
|||||
Premiums | 1.2 | 1.5 | 5.0 | 6.2 | |
Administrative fees | 29.2 | 29.7 | 89.1 | 91.2 | |
Net investment income | 72.3 | 59.0 | 210.0 | 193.5 | |
Net capital gains (losses) | 0 | 0 | 0 | 0 | |
Total revenues | 102.7 | 90.2 | 304.1 | 290.9 | |
Benefits to policyholders | 4.8 | 5.1 | 15.0 | 15.2 | |
Interest credited | 42.9 | 35.8 | 126.7 | 113.6 | |
Operating expenses | 28.7 | 28.9 | 88.2 | 87.2 | |
Commissions and bonuses | 6.4 | 7.0 | 22.4 | 25.8 | |
Premium taxes | 0 | 0 | 0 | 0.1 | |
Interest expense | 0 | 0 | 0 | 0 | |
Net increase in deferred acquisition costs, value of business acquired and intangible assets | 2.4 | 1.1 | 4.1 | 1.7 | |
Total benefits and expenses | 85.2 | 77.9 | 256.4 | 243.6 | |
Income (loss) before income taxes | 17.5 | 12.3 | 47.7 | 47.3 | |
Total Assets | 10,888.7 | 9,492.9 | 10,888.7 | 9,492.9 | |
Other Category [Member]
|
|||||
Administrative fees | (4.5) | (4.2) | (13.3) | (12.4) | |
Net investment income | 1.5 | 2.5 | 6.7 | 7.8 | |
Net capital gains (losses) | (2.6) | 7.7 | (6.8) | (7.9) | |
Total revenues | (5.6) | 6.0 | (13.4) | (12.5) | |
Benefits to policyholders | 0 | 0 | 0 | 0 | |
Interest credited | 0 | 0 | 0 | 0 | |
Operating expenses | 1.2 | 7.6 | 3.2 | 13.5 | |
Commissions and bonuses | 0 | 0 | 0 | 0 | |
Premium taxes | 0 | 0 | 0 | 0 | |
Interest expense | 11.8 | 9.7 | 31.3 | 29.2 | |
Net increase in deferred acquisition costs, value of business acquired and intangible assets | 0 | 0 | 0 | 0 | |
Total benefits and expenses | 13.0 | 17.3 | 34.5 | 42.7 | |
Income (loss) before income taxes | (18.6) | (11.3) | (47.9) | (55.2) | |
Total Assets | $ 385.1 | $ 285.5 | $ 385.1 | $ 285.5 |
Investments (Schedule Of Contractual Maturities Of Fixed Maturity Securities Available-For-Sale) (Details) (USD $)
In Millions, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Investments | ||
Due in one year or less, Amortized cost | $ 803.0 | $ 632.7 |
Due after one year through five years, Amortized cost | 2,697.1 | 2,534.6 |
Due after five years through ten years, Amortized Cost | 2,076.6 | 2,173.9 |
Due after ten years, Amortized Cost | 841.8 | 868.7 |
Total fixed maturity securities-available-for-sale, Amortized Cost | 6,418.5 | 6,209.9 |
Due in one year or less, Fair Value | 818.6 | 645.0 |
Due after one year through five years, Fair Value | 2,915.8 | 2,693.6 |
Due after five years through ten years, Fair Value | 2,343.5 | 2,392.5 |
Due after ten years, Fair Value | 1,042.5 | 1,038.4 |
Total fixed maturity securities-available-for-sale | $ 7,120.4 | $ 6,769.5 |
Commitments And Contingencies (Details) (USD $)
|
9 Months Ended | 3 Months Ended | ||||
---|---|---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
Junior Subordinated Debentures [Member]
|
Sep. 30, 2012
Unsecured Revolving Credit Facility [Member]
NumberOfDebtCovenants
NumberOfContractExtentions
|
Sep. 30, 2012
Senior Notes 2012 [Member]
|
Sep. 30, 2012
Senior Notes 2022 [Member]
|
|
Line of creadit facility initiation date | Jun. 22, 2012 | |||||
Line of Credit Facility, Borrowing Capacity, Description | On June 22, 2012, StanCorp entered into an agreement for a four-year, $250 million Facility. Additionally, upon the request of StanCorp and with the consent of the lenders under the Facility, the Facility can be increased to $350 million. | |||||
Line of Credit Facility, Current Borrowing Capacity | $ 250,000,000 | |||||
Line of credit facility, maximum borrowing capacity | 350,000,000 | |||||
Line of credit facility, expiration date | Jun. 22, 2016 | |||||
Line of credit facility, number of one year extension periods | 2 | |||||
Line of Credit Facility, Covenant Terms | Under the agreement, StanCorp is subject to two financial covenants that are based on the Company's ratio of total debt to total capitalization and consolidated net worth. StanCorp is also subject to covenants that limit subsidiary indebtedness. | |||||
Line of credit facility, financial covenants, number | 2 | |||||
Line of credit facility, amount outstanding | 0 | |||||
Debt instrument, face amount | 300,000,000 | 250,000,000 | ||||
Debt instrument, interest rate, stated percentage | 6.90% | 6.875% | 5.00% | |||
Repayment of senior debt | 250,000,000 | 0 | 250,000,000 | |||
Debt instrument, maturity date | Jun. 01, 2067 | Aug. 15, 2022 | ||||
Debt instrument, non-callable at par, years | 10 years 0 months 0 days | |||||
Debt instrument, call date, earliest | Jun. 01, 2017 | |||||
Debt instrument, term of stated percentage, initial years | 10 years 0 months 0 days | |||||
Debt instrument, floating rate, LIBOR rate plus | 2.51% | |||||
Debt Instrument, Description of Variable Rate Basis | LIBOR | |||||
Debt instrument, option to defer interest payments, years | 5 years 0 months 0 days | |||||
Total outstanding commitments to fund commercial mortgage loans | $ 128,300,000 | |||||
Minimum fixed interest rate on commercial mortgage loan commitments | 4.50% | |||||
Maximum fixed interest rate on commercial mortgage loan commitments | 5.875% |
Investments (Troubled Debt Restructurings on Financing Receivables) (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 9 Months Ended |
---|---|---|
Sep. 30, 2012
NumberOfLoans
|
Sep. 30, 2012
NumberOfLoans
|
|
Number of Loans | 3 | 11 |
Pre-Restructuring Recorded Investment | $ 2.6 | $ 10.2 |
Post-Restructuring Recorded Investment | 3.9 | 11.4 |
Retail [Member]
|
||
Number of Loans | 3 | 7 |
Pre-Restructuring Recorded Investment | 2.6 | 6.0 |
Post-Restructuring Recorded Investment | 3.9 | 7.2 |
Industrial [Member]
|
||
Number of Loans | 0 | 3 |
Pre-Restructuring Recorded Investment | 0 | 2.4 |
Post-Restructuring Recorded Investment | 0 | 2.4 |
Apartment and Other [Member]
|
||
Number of Loans | 0 | 1 |
Pre-Restructuring Recorded Investment | 0 | 1.8 |
Post-Restructuring Recorded Investment | $ 0 | $ 1.8 |
Share-Based Compensation (Schedule Of Compensation Cost And Related Income Tax Benefit Under Share-Based Compensation Plans) (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
|
Sep. 30, 2011
|
|
Share-Based Compensation | ||||
Compensation cost | $ 1.4 | $ 1.4 | $ 5.3 | $ 4.5 |
Related income tax benefit | $ 0.5 | $ 0.5 | $ 1.8 | $ 1.6 |
Investments (Average Recorded Investment In Impaired Commercial Mortgage Loans Before Specific Allowances For Losses) (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
|
Sep. 30, 2011
|
|
Investments | ||||
Average recorded investment | $ 99.0 | $ 91.9 | $ 101.7 | $ 89.2 |
Incom Taxes (Narrative) (Details)
|
3 Months Ended |
---|---|
Sep. 30, 2012
|
|
Income Tax Disclosure [Abstract] | |
Federal corporate tax rate | 35.00% |
Fair Value (Tables)
|
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2012
|
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Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Abstract | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Estimated Fair Value and the Carrying Value of Each Financial Instrument Categorized by Fair Value Hierarcy |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Estimated Fair Values of Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Level 3 Inputs |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in unrealized gains (losses) included in net income relating to positions still held |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets measured at fair value on a nonrecurring basis and still held as of the balance sheet date |
|
Fair Value (Significant Unobservable Inputs Used in Level 3 Valuations of Assets and Liabilities) (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2012
|
Jun. 30, 2012
|
Dec. 31, 2011
|
Sep. 30, 2011
|
Jun. 30, 2011
|
Dec. 31, 2010
|
||||||||
Fair Value Assets | $ 82.2 | $ 72.8 | $ 73.1 | $ 68.1 | $ 70.1 | $ 74.9 | |||||||
Various Assumptions [Member] | Maximum [Member]
|
|||||||||||||
Unobservable Inputs | 36% | ||||||||||||
Various Assumptions [Member] | Minimum [Member]
|
|||||||||||||
Unobservable Inputs | 5% | ||||||||||||
Various Assumptions [Member] | Black-Scholes Option Pricing model [Member]
|
|||||||||||||
Unobservable Inputs | (a) | [1] | |||||||||||
Commercial Mortgage Loans [Member]
|
|||||||||||||
Fair Value Assets | 55.1 | ||||||||||||
FairValueMeasurementsSignificantAssumptions | Reduction on appraisal , Capitalization rate (c) | [2] | |||||||||||
FairValueMeasurementsValuationTechniques | Appraisals, Cash flows | ||||||||||||
Commercial Mortgage Loans [Member] | Discount For Dated Appraisal [Member]
|
|||||||||||||
Unobservable Inputs | 0%-43% | ||||||||||||
Commercial Mortgage Loans [Member] | Discount For Dated Appraisal [Member] | Maximum [Member]
|
|||||||||||||
Unobservable Inputs | 43% | ||||||||||||
Commercial Mortgage Loans [Member] | Discount For Dated Appraisal [Member] | Minimum [Member]
|
|||||||||||||
Unobservable Inputs | 0% | ||||||||||||
Commercial Mortgage Loans [Member] | Capitalization Rate [Member]
|
|||||||||||||
Unobservable Inputs | 7%-14% | ||||||||||||
Commercial Mortgage Loans [Member] | Capitalization Rate [Member] | Maximum [Member]
|
|||||||||||||
Unobservable Inputs | 14% | ||||||||||||
Commercial Mortgage Loans [Member] | Capitalization Rate [Member] | Minimum [Member]
|
|||||||||||||
Unobservable Inputs | 7% | ||||||||||||
Real Estate Owned [Member]
|
|||||||||||||
Fair Value Assets | 32.9 | ||||||||||||
FairValueMeasurementsSignificantAssumptions | Reduction on appraisal | ||||||||||||
FairValueMeasurementsValuationTechniques | Appraisals | ||||||||||||
Real Estate Owned [Member] | Discount For Dated Appraisal [Member]
|
|||||||||||||
Unobservable Inputs | 0%-44% | ||||||||||||
Real Estate Owned [Member] | Discount For Dated Appraisal [Member] | Maximum [Member]
|
|||||||||||||
Unobservable Inputs | 44% | ||||||||||||
Real Estate Owned [Member] | Discount For Dated Appraisal [Member] | Minimum [Member]
|
|||||||||||||
Unobservable Inputs | 0% | ||||||||||||
S and P Five Hundred Index Options [Member]
|
|||||||||||||
Fair Value Assets | 13.8 | 12.4 | 7.2 | 4.4 | 12.8 | 13.3 | |||||||
FairValueMeasurementsSignificantAssumptions | Various assumptions | ||||||||||||
FairValueMeasurementsValuationTechniques | Black-Scholes option pricing model | ||||||||||||
S and P Five Hundred Index Options [Member] | Various Assumptions [Member]
|
|||||||||||||
Unobservable Inputs | (a) | [1] | |||||||||||
Index Based Interest Guarantees [Member]
|
|||||||||||||
Fair Value Liabilities | $ 58.6 | $ 56.0 | $ 49.5 | $ 47.2 | $ 51.1 | $ 48.5 | |||||||
FairValueMeasurementsSignificantAssumptions | Expected future option purchase, Various assumptions | ||||||||||||
FairValueMeasurementsValuationTechniques | Discounted cash flow, Black-Scholes option pricing model | ||||||||||||
Index Based Interest Guarantees [Member] | Various Assumptions [Member]
|
|||||||||||||
Unobservable Inputs | (b) | [3] | |||||||||||
Index Based Interest Guarantees [Member] | Expected Future Option Purchase [Member]
|
|||||||||||||
Unobservable Inputs | 1%-5% | ||||||||||||
Index Based Interest Guarantees [Member] | Expected Future Option Purchase [Member] | Maximum [Member]
|
|||||||||||||
Unobservable Inputs | 5% | ||||||||||||
Index Based Interest Guarantees [Member] | Expected Future Option Purchase [Member] | Minimum [Member]
|
|||||||||||||
Unobservable Inputs | 1% | ||||||||||||
|
Segments (Intersegment Administrative Fee Revenues) (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
|
Sep. 30, 2011
|
|
Administrative fees | $ 27.8 | $ 28.5 | $ 86.2 | $ 87.4 |
IntersegmentEliminationMember
|
||||
Administrative fees | $ 4.5 | $ 4.2 | $ 13.3 | $ 12.4 |
Investments (Schedule Of Recorded Investment In Commercial Mortgage Loans) (Details) (USD $)
In Millions, unless otherwise specified |
Sep. 30, 2012
|
Jun. 30, 2012
|
Dec. 31, 2011
|
Sep. 30, 2011
|
Jun. 30, 2011
|
Dec. 31, 2010
|
---|---|---|---|---|---|---|
Investments | ||||||
Commercial mortgage loans collectively evaluated for impairment | $ 5,098.4 | $ 4,845.7 | ||||
Commercial mortgage loans individually evaluated for impairment | 98.6 | 104.7 | ||||
Commercial mortgage loan loss allowance | (48.0) | (45.6) | (48.1) | (47.1) | (43.5) | (36.1) |
Total commercial mortgage loans | $ 5,149.0 | $ 4,902.3 |
Deferred Acquisition Costs ("DAC"), Value Of Business Acquired ("VOBA") And Other Intangible Assets (Amount For DAC, VOBA Balances And Percentage To The Expected Gross Profit) (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 12 Months Ended |
---|---|---|
Sep. 30, 2012
|
Dec. 31, 2011
|
|
Deferred Acquisition Costs, Value Of Business Acquired And Other Intangible Assets Disclosures [Abstract] | ||
DAC | $ 57.1 | $ 60.7 |
VOBA | $ 6.0 | $ 7.1 |
DAC, percent | 20.40% | 22.10% |
VOBA, percent | 25.20% | 26.90% |
Derivative Financial Instruments (Narrative) (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 9 Months Ended | |||
---|---|---|---|---|---|
Sep. 30, 2012
NumberOfDerivativeContracts
|
Sep. 30, 2011
|
Sep. 30, 2012
|
Sep. 30, 2011
|
Dec. 31, 2011
|
|
S & P 500 index options purchased per month | 1 | ||||
Notional amount of index option contract | $ 313.2 | $ 313.2 | $ 303.1 | ||
Derivative Option premiums paid | 2.1 | 2.2 | 6.9 | 6.9 | |
Amount received for derivative options exercised | 3.6 | 3.8 | 7.6 | 12.8 | |
Maximum credit exposure required increase in S&P 500 index, percentage | 8.10% | ||||
Impact On Interest Credited Changes In Actuarial Assumptions | $ 1.1 | $ 0.2 | $ 2.2 | $ 1.7 | |
S and P Five Hundred Index Options [Member]
|
|||||
Expiry date of S & P 500 index options purchased, years | 1 year 0 months 0 days |
Organization, Principles Of Consolidation And Basis Of Presentation
|
3 Months Ended |
---|---|
Sep. 30, 2012
|
|
Organization, Principles Of Consolidation And Basis Of Presentation [Abstract] | |
Organization, Principles Of Consolidation And Basis Of Presentation | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS As used in this Form 10-Q, the terms “StanCorp,” “Company,” “we,” “us” and “our” refer to StanCorp Financial Group, Inc. and its subsidiaries, unless the context otherwise requires. 1. ORGANIZATION, PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION StanCorp, headquartered in Portland, Oregon, is a holding company and conducts business through wholly-owned operating subsidiaries throughout the United States (“U.S.”). Through its subsidiaries, StanCorp has the authority to underwrite insurance products in all 50 states. StanCorp operates through two segments: Insurance Services and Asset Management as well as an Other category. See “Note 5—Segments.” StanCorp has the following wholly-owned operating subsidiaries: Standard Insurance Company (“Standard”), The Standard Life Insurance Company of New York, Standard Retirement Services, Inc. (“Standard Retirement Services”), StanCorp Equities, Inc. (“StanCorp Equities”), StanCorp Mortgage Investors, LLC (“StanCorp Mortgage Investors”), StanCorp Investment Advisers, Inc. (“StanCorp Investment Advisers”), StanCorp Real Estate, LLC (“StanCorp Real Estate”), Standard Management, Inc. (“Standard Management”) and Adaptu, LLC (“Adaptu”). Standard, the Company's largest subsidiary, underwrites group and individual disability insurance and annuity products, group life and accidental death and dismemberment (“AD&D”) insurance, and provides group dental and group vision insurance, absence management services and retirement plan products. Founded in 1906, Standard is domiciled in Oregon, licensed in all states except New York, and licensed in the District of Columbia and the U.S. territories of Guam and the Virgin Islands. The Standard Life Insurance Company of New York was organized in 2000 and is licensed to provide group long term and short term disability insurance, individual disability insurance, group life and AD&D insurance and group dental insurance in New York. The Standard is a service mark of StanCorp and its subsidiaries and is used as a brand mark and marketing name by Standard and The Standard Life Insurance Company of New York. Standard Retirement Services administers and services StanCorp's retirement plans group annuity contracts and trust products. Retirement plan products are offered in all 50 states through Standard or Standard Retirement Services. StanCorp Equities is a limited broker-dealer and member of the Financial Industry Regulatory Authority. StanCorp Equities serves as principal underwriter and distributor for group variable annuity contracts issued by Standard and as the broker of record for certain retirement plans using the trust platform. StanCorp Equities carries no customer accounts but provides supervision and oversight for the distribution of group variable annuity contracts and of the sales activities of all registered representatives employed by StanCorp Equities and its affiliates. StanCorp Mortgage Investors originates and services fixed-rate commercial mortgage loans for the investment portfolios of the Company's insurance subsidiaries. StanCorp Mortgage Investors also generates additional fee income from the origination and servicing of commercial mortgage loans participated to institutional investors. StanCorp Investment Advisers is a Securities and Exchange Commission (“SEC”) registered investment adviser providing performance analysis, fund selection support, model portfolios and other investment advisory, financial planning, and investment management services to its retirement plan clients, individual investors and subsidiaries of StanCorp. StanCorp Real Estate is a property management company that owns and manages the Hillsboro, Oregon home office properties and other properties held for investment and held for sale. StanCorp Real Estate also manages the Portland, Oregon home office properties. Standard Management owns and manages certain real estate properties held for sale from time-to-time in conjunction with our real estate business. Adaptu provides an online service to help users plan and manage their financial lives. Standard holds interests in tax-advantaged investments. These interests do not meet the requirements for consolidation under existing accounting standards, and thus the Company's interests in the tax-advantaged investments are accounted for under the equity method of accounting. The total investment in these interests was $177.1 million and $128.0 million at September 30, 2012 and December 31, 2011, respectively. In October 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU No. 2010-26 amends the codification guidance for insurance entities to eliminate the diversity of accounting treatment related to deferred acquisition costs (“DAC”). The Company has adopted this standard retrospectively as of January 1, 2012, and comparative financial statements of prior periods have been adjusted. 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 pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. Intercompany balances and transactions have been eliminated on a consolidated basis. 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 revenues 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, 2012, and for the results of operations for the three and nine months ended September 30, 2012 and 2011, and cash flows for the nine months ended September 30, 2012 and 2011. Interim results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. This report should be read in conjunction with the Company's 2011 annual report on Form 10-K and the Company's current report on Form 8-K dated July 18, 2012 which updated certain items in the Company's annual report on Form 10-K for the retrospective adoption of ASU No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. |
Derivative Financial Instruments (Fair Value Of The Company's Derivative Assets And Liabilities) (Details) (USD $)
In Millions, unless otherwise specified |
Sep. 30, 2012
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Dec. 31, 2011
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Derivative Assets | $ 13.8 | |
S and P Five Hundred Index Options [Member] | Fixed Maturity Securities-Available-for-Sale [Member]
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Derivative Assets | 13.8 | 7.2 |
Index Based Interest Guarantees [Member] | Other Policyholder Funds Member
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Derivative Liabilities | $ 58.6 | $ 49.5 |