Net Investment Income
The following tables set forth net investment income and associated key indicators for the Asset Management segment:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
|
(Dollars in millions)
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement plans
|
|
$
|
25.0
|
|
|
$
|
23.4
|
|
|
|
6.8%
|
|
|
$
|
49.2
|
|
|
$
|
46.8
|
|
|
|
5.1%
|
|
Individual annuities
|
|
|
42.0
|
|
|
|
37.7
|
|
|
|
11.4
|
|
|
|
88.2
|
|
|
|
84.6
|
|
|
|
4.3
|
|
Other financial services business
|
|
|
3.7
|
|
|
|
3.5
|
|
|
|
5.7
|
|
|
|
6.6
|
|
|
|
6.3
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income
|
|
$
|
70.7
|
|
|
$
|
64.6
|
|
|
|
9.4
|
|
|
$
|
144.0
|
|
|
$
|
137.7
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
|
Key indicators of net investment income:
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|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
Average assets under administration:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement plan general account
|
|
$
|
2,072.1
|
|
|
$
|
1,763.7
|
|
|
|
17.5%
|
|
|
$
|
2,042.4
|
|
|
$
|
1,759.7
|
|
|
|
16.1%
|
|
Individual annuities
|
|
|
3,280.0
|
|
|
|
3,064.5
|
|
|
|
7.0
|
|
|
|
3,257.1
|
|
|
|
3,046.2
|
|
|
|
6.9
|
|
Contribution from the change in fair value of the S&P 500 Index options
|
|
$
|
1.2
|
|
|
$
|
(2.3)
|
|
|
$
|
3.5
|
|
|
$
|
7.2
|
|
|
$
|
4.4
|
|
|
$
|
2.8
|
|
Commercial mortgage loan prepayment revenues
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
|
|
|
|
1.2
|
|
|
|
1.3
|
|
|
|
(0.1)
|
|
Bond call premiums
|
|
|
1.1
|
|
|
|
0.2
|
|
|
|
0.9
|
|
|
|
1.6
|
|
|
|
0.6
|
|
|
|
1.0
|
|
Commercial mortgage loan originations
|
|
|
364.1
|
|
|
|
300.2
|
|
|
|
21.3%
|
|
|
|
637.8
|
|
|
|
509.7
|
|
|
|
25.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Consolidated portfolio yields:
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
4.51%
|
|
|
|
4.89%
|
|
Commercial mortgage loans
|
|
|
5.96
|
|
|
|
6.24
|
|
The increases in net investment income for the second quarter and first six months of
2013 compared to the same periods of 2012 were primarily due to an increase in average individual annuity and average retirement plan general account assets under administration, increases in bond call premiums and contributions from the change in
fair value of the S&P 500 Index options used to hedge our equity indexed annuity products. These increases were partially offset by a decline in the portfolio yields for fixed maturity securities and commercial mortgage loans.
Benefits and Expenses
Benefits to Policyholders
Benefits to policyholders for the Asset Management segment primarily represent current benefits and the change in reserves for 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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
Percent
Change
|
|
|
2013
|
|
|
2012
|
|
|
Percent
Change
|
|
|
|
(Dollars in millions)
|
|
Benefits to policyholders
|
|
$
|
4.3
|
|
|
$
|
4.9
|
|
|
|
(12.2)%
|
|
|
$
|
10.1
|
|
|
$
|
10.2
|
|
|
|
(1.0)%
|
|
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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2013
|
|
|
2012
|
|
|
Dollar
Change
|
|
|
2013
|
|
|
2012
|
|
|
Dollar
Change
|
|
|
|
(In millions)
|
|
Interest credited
|
|
$
|
39.0
|
|
|
$
|
38.2
|
|
|
$
|
0.8
|
|
|
$
|
84.7
|
|
|
$
|
83.8
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
Key indicators of interest credited:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution from the change in fair value of index-based interest guarantees
|
|
$
|
(1.7)
|
|
|
$
|
(1.7)
|
|
|
$
|
|
|
|
$
|
4.5
|
|
|
$
|
4.7
|
|
|
$
|
(0.2)
|
|
Average individual annuity assets under administration
|
|
|
3,280.0
|
|
|
|
3,064.5
|
|
|
|
215.5
|
|
|
|
3,257.1
|
|
|
|
3,046.2
|
|
|
|
210.9
|
|
The increase in interest credited for the second quarter and first six months of 2013
compared to the same periods for 2012 was primarily due to growth in our average individual fixed-rate annuity assets under administration, partially offset by a decrease in the average interest-crediting rate for our annuity products.
Operating Expenses
The following table sets forth operating expenses for the Asset Management segment:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
Percent
Change
|
|
|
2013
|
|
|
2012
|
|
|
Percent
Change
|
|
|
|
(Dollars in millions)
|
|
Operating expenses
|
|
$
|
28.8
|
|
|
$
|
29.3
|
|
|
|
(1.7)%
|
|
|
$
|
57.0
|
|
|
$
|
59.5
|
|
|
|
(4.2)%
|
|
The decrease in Asset Management operating expenses for the second quarter and first six
months of 2013 compared to the same periods of 2012 was primarily a result of expense management actions, which reduced headcount and other non-compensation related expenses.
Other
In addition to our two reportable 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 the loss before income taxes for the Other category:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
Percent
Change
|
|
|
2013
|
|
|
2012
|
|
|
Percent
Change
|
|
|
|
(Dollars in millions)
|
|
Loss before income taxes
|
|
$
|
3.6
|
|
|
$
|
15.9
|
|
|
|
(77.4)%
|
|
|
$
|
9.3
|
|
|
$
|
29.3
|
|
|
|
(68.3)%
|
|
The decrease in loss before income taxes for the second quarter of 2013 compared to the
second quarter of 2012 was primarily due to a decrease in operating expenses and a decrease in net capital losses. Operating expenses were reduced by $10.3 million for the second quarter of 2013 due to the amendment of our postretirement benefit
plan.
53
The decrease in loss before income taxes for the first six months of 2013
compared to the first six months of 2012 was primarily due to a decrease in operating expenses. Operating expenses were reduced by $20.6 million for the first six months of 2013 due to the amendment of our postretirement benefit plan. This reduction
in operating expenses will not reoccur in the second half of 2013, and was partially offset by approximately $4 million of non-recurring costs related to other expense management actions.
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 and losses recognized due to impairment of real estate and tax-advantaged investments.
The following table sets forth net capital gains and losses and associated key components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
(In millions)
|
|
Net capital gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$
|
4.6
|
|
|
$
|
1.0
|
|
|
$
|
6.6
|
|
|
$
|
2.2
|
|
Commercial mortgage loans
|
|
|
(5.4
|
)
|
|
|
(4.7
|
)
|
|
|
(8.0
|
)
|
|
|
(5.8
|
)
|
Real Estate Owned
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
|
|
(1.1
|
)
|
|
|
(0.7
|
)
|
Other
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net capital losses
|
|
$
|
(2.6
|
)
|
|
$
|
(4.0
|
)
|
|
$
|
(4.2
|
)
|
|
$
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key components of net capital losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision to our commercial mortgage loan loss allowance
|
|
$
|
(5.9
|
)
|
|
$
|
(5.1
|
)
|
|
$
|
(9.0
|
)
|
|
$
|
(6.4
|
)
|
Impairments on tax-advantaged investments
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
|
|
OTTI on fixed maturity securities
|
|
|
(0.3
|
)
|
|
|
(1.7
|
)
|
|
|
(0.6
|
)
|
|
|
(2.5
|
)
|
Impairments on Real Estate Owned
|
|
|
(0.3
|
)
|
|
|
(0.5
|
)
|
|
|
(1.3
|
)
|
|
|
(0.9
|
)
|
Net capital losses for the second quarter and the first six months of 2013 were primarily
related to our commercial mortgage loan loss allowance provision, and impairments on tax-advantaged investments. 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 June 30, 2013.
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, excluding bonds with make-whole provisions and bonds with provisions
that allow the borrower to prepay near maturity, represented 4.1%, or $289.8 million, of our fixed maturity securities portfolio at June 30, 2013. 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 the commercial
mortgage loan portfolio contains this type of prepayment provision. Approximately 1% of the commercial mortgage loan portfolio, without a make-whole prepayment provision, contains 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 $176.0 million
for the first six months of 2013, compared to $200.0 million for the first six months of 2012. The decrease in operating cash flows for the first
54
six months of 2013 compared to the same period in 2012 was primarily due to fluctuations in future policy benefits and claims, due to changes in reserve requirements, and other assets and
liabilities, mainly attributable to timing differences. The decrease was partially offset by an increase in net income. We typically generate positive cash flows from operating activities, as premiums collected from our insurance products and income
received from our investments exceed policy acquisition costs, benefits paid, redemptions and operating expenses. These positive cash flows are then invested to support the obligations of our insurance products and required capital supporting these
products. Our cash flows from operating activities are affected by the timing of premiums, fees, and investment income received and expenses paid.
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.
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 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.
Net cash used in investing activities was $348.3 million and $405.1 million for the first six months of 2013 and 2012,
respectively. The decrease in net cash used in investing activities for the first six months of 2013 compared to the first six months of 2012 was primarily due to higher proceeds from the sale or repayment of commercial mortgage loans, net of
commercial mortgage loan acquisition, and due to higher proceeds from the sale, maturity or repayment of fixed maturity securities, net of acquisition of fixed maturity securities. The decrease was partially offset by higher cash payments for other
invested assets for the first six months of 2013 compared to the first six 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 June 30, 2013, our portfolio consisted of 55.2% fixed maturity
securities, 42.5% commercial mortgage loans and 2.3% of real estate and other invested assets.
Fixed Maturity Securities
We maintain prudent diversification across industries, issuers and maturities and we have sought to avoid the types of
structured products that we believe are not adequately transparent to allow 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 we believe
reasonably reflects 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 primarily generates unrealized gains or losses 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.
55
The following tables set forth the composition of our fixed maturity
securities portfolio by industry category with the associated unrealized gains and losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(In millions)
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic industry
|
|
$
|
413.0
|
|
|
$
|
19.2
|
|
|
$
|
(7.8
|
)
|
|
$
|
424.4
|
|
Capital goods
|
|
|
760.6
|
|
|
|
43.2
|
|
|
|
(9.8
|
)
|
|
|
794.0
|
|
Communications
|
|
|
327.8
|
|
|
|
21.8
|
|
|
|
(3.3
|
)
|
|
|
346.3
|
|
Consumer cyclical
|
|
|
459.1
|
|
|
|
24.6
|
|
|
|
(5.4
|
)
|
|
|
478.3
|
|
Consumer non cyclical
|
|
|
893.0
|
|
|
|
74.3
|
|
|
|
(4.9
|
)
|
|
|
962.4
|
|
Energy
|
|
|
495.9
|
|
|
|
34.0
|
|
|
|
(6.7
|
)
|
|
|
523.2
|
|
Finance
|
|
|
1,578.4
|
|
|
|
76.3
|
|
|
|
(19.2
|
)
|
|
|
1,635.5
|
|
Utilities
|
|
|
921.6
|
|
|
|
73.1
|
|
|
|
(7.7
|
)
|
|
|
987.0
|
|
Transportation and other
|
|
|
254.4
|
|
|
|
16.4
|
|
|
|
(2.4
|
)
|
|
|
268.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate bonds
|
|
|
6,103.8
|
|
|
|
382.9
|
|
|
|
(67.2
|
)
|
|
|
6,419.5
|
|
U.S. government and agency bonds
|
|
|
335.8
|
|
|
|
42.0
|
|
|
|
(0.1
|
)
|
|
|
377.7
|
|
U.S. state and political subdivision bonds
|
|
|
145.2
|
|
|
|
9.8
|
|
|
|
(0.6
|
)
|
|
|
154.4
|
|
Foreign government bonds
|
|
|
61.1
|
|
|
|
7.9
|
|
|
|
|
|
|
|
69.0
|
|
S&P 500 Index options
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
6,659.6
|
|
|
$
|
442.6
|
|
|
$
|
(67.9
|
)
|
|
$
|
7,034.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(In millions)
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic industry
|
|
$
|
386.1
|
|
|
$
|
33.3
|
|
|
$
|
(0.4
|
)
|
|
$
|
419.0
|
|
Capital goods
|
|
|
727.1
|
|
|
|
66.5
|
|
|
|
(0.8
|
)
|
|
|
792.8
|
|
Communications
|
|
|
302.0
|
|
|
|
34.9
|
|
|
|
|
|
|
|
336.9
|
|
Consumer cyclical
|
|
|
442.0
|
|
|
|
38.3
|
|
|
|
(0.4
|
)
|
|
|
479.9
|
|
Consumer non cyclical
|
|
|
908.0
|
|
|
|
113.5
|
|
|
|
(0.5
|
)
|
|
|
1,021.0
|
|
Energy
|
|
|
484.4
|
|
|
|
51.1
|
|
|
|
(0.1
|
)
|
|
|
535.4
|
|
Finance
|
|
|
1,551.9
|
|
|
|
113.9
|
|
|
|
(1.1
|
)
|
|
|
1,664.7
|
|
Utilities
|
|
|
932.7
|
|
|
|
113.3
|
|
|
|
(0.4
|
)
|
|
|
1,045.6
|
|
Transportation and other
|
|
|
207.8
|
|
|
|
22.9
|
|
|
|
(0.1
|
)
|
|
|
230.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate bonds
|
|
|
5,942.0
|
|
|
|
587.7
|
|
|
|
(3.8
|
)
|
|
|
6,525.9
|
|
U.S. government and agency bonds
|
|
|
351.5
|
|
|
|
61.5
|
|
|
|
|
|
|
|
413.0
|
|
U.S. state and political subdivision bonds
|
|
|
151.6
|
|
|
|
16.8
|
|
|
|
|
|
|
|
168.4
|
|
Foreign government bonds
|
|
|
61.3
|
|
|
|
10.8
|
|
|
|
|
|
|
|
72.1
|
|
S&P 500 Index options
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
6,517.7
|
|
|
$
|
676.8
|
|
|
$
|
(3.8
|
)
|
|
$
|
7,190.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
The following table sets forth key indicators of our fixed maturity
securities portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
|
(Dollars in millions)
|
|
Fixed maturity securities
|
|
$
|
7,034.3
|
|
|
$
|
7,190.7
|
|
|
|
(2.2)%
|
|
|
|
|
|
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
|
|
|
5.5%
|
|
|
|
5.4%
|
|
|
|
|
|
Managed by a third party
|
|
$
|
353.9
|
|
|
$
|
349.5
|
|
|
|
1.3%
|
|
|
|
|
|
Fixed maturity securities on our watch list:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
6.2
|
|
|
$
|
1.7
|
|
|
$
|
4.5
|
|
Amortized cost after OTTI
|
|
|
6.2
|
|
|
|
1.7
|
|
|
|
4.5
|
|
|
|
|
|
Gross unrealized capital gains in our fixed maturity securities portfolio
|
|
$
|
442.6
|
|
|
$
|
676.8
|
|
|
$
|
(234.2)
|
|
Gross unrealized capital losses in our fixed maturity securities portfolio
|
|
|
(67.9)
|
|
|
|
(3.8)
|
|
|
|
(64.1)
|
|
We recorded OTTI of $0.3 million and $0.6 million, and $1.7 million and $2.5 million for
the second quarter and first six months of 2013 and 2012, 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 June 30, 2013. At June 30, 2013, 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 June 30, 2013, fixed maturity securities issued by investment and commercial banks headquartered in other euro zone countries represented 0.8%, or $56.4 million, of our fixed maturity securities portfolio.
There were no impairments on fixed maturity securities related to euro zone exposure during the first six months of 2013.
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.
57
The following table sets forth commercial mortgage loan originations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
Percent
Change
|
|
|
2013
|
|
|
2012
|
|
|
Percent
Change
|
|
|
|
(Dollars in millions)
|
|
Commercial mortgage loan originations
|
|
$
|
364.1
|
|
|
$
|
300.2
|
|
|
|
21.3%
|
|
|
$
|
637.8
|
|
|
$
|
509.7
|
|
|
|
25.1%
|
|
The increases in commercial mortgage loan originations for the second quarter and first
six months of 2013 compared to the same periods for 2012 were primarily due to increased purchase and sale activity in the commercial real estate market.
The following table sets forth commercial mortgage loan servicing data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
Percent
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
|
(Dollars in millions)
|
|
Commercial mortgage loans serviced:
|
|
|
|
|
|
|
|
|
|
|
|
|
For subsidiaries of StanCorp
|
|
$
|
5,425.6
|
|
|
$
|
5,266.8
|
|
|
|
3.0%
|
|
For other institutional investors
|
|
|
2,899.1
|
|
|
|
2,781.5
|
|
|
|
4.2
|
|
Capitalized commercial mortgage loan servicing rights associated with commercial mortgage loans serviced for other institutional
investors
|
|
$
|
7.8
|
|
|
$
|
7.4
|
|
|
|
5.4%
|
|
The estimated average loan to value ratio for the overall portfolio was less than 70% at
June 30, 2013. The average loan balance of our commercial mortgage loan portfolio was approximately $0.8 million at June 30, 2013. We have the contractual ability to pursue personal recourse on approximately 75% of our loans and partial
personal recourse on a majority of the remaining loans. The weighted average capitalization rate for the portfolio at June 30, 2013 was approximately 9%. Capitalization rates are used as part of our annual internal analysis of the commercial
mortgage loan portfolio. The rate is used in converting the propertys income to an estimated property value.
At June 30, 2013, 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.
58
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in millions)
|
|
Property type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
2,623.7
|
|
|
|
48.4%
|
|
|
$
|
2,560.7
|
|
|
|
48.6%
|
|
Industrial
|
|
|
1,027.6
|
|
|
|
18.9
|
|
|
|
995.8
|
|
|
|
18.9
|
|
Office
|
|
|
984.8
|
|
|
|
18.1
|
|
|
|
960.8
|
|
|
|
18.2
|
|
Hotel/motel
|
|
|
282.6
|
|
|
|
5.2
|
|
|
|
280.8
|
|
|
|
5.3
|
|
Commercial
|
|
|
230.5
|
|
|
|
4.3
|
|
|
|
205.3
|
|
|
|
4.0
|
|
Apartment and other
|
|
|
277.0
|
|
|
|
5.1
|
|
|
|
264.0
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial mortgage loans, net
|
|
$
|
5,426.2
|
|
|
|
100.0%
|
|
|
$
|
5,267.4
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic region*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pacific
|
|
$
|
1,905.9
|
|
|
|
35.1%
|
|
|
$
|
1,844.1
|
|
|
|
35.0%
|
|
South Atlantic
|
|
|
1,104.3
|
|
|
|
20.4
|
|
|
|
1,069.2
|
|
|
|
20.2
|
|
West South Central
|
|
|
660.9
|
|
|
|
12.2
|
|
|
|
634.8
|
|
|
|
12.1
|
|
Mountain
|
|
|
625.7
|
|
|
|
11.5
|
|
|
|
612.7
|
|
|
|
11.6
|
|
East North Central
|
|
|
463.6
|
|
|
|
8.5
|
|
|
|
443.9
|
|
|
|
8.4
|
|
Middle Atlantic
|
|
|
241.1
|
|
|
|
4.4
|
|
|
|
240.3
|
|
|
|
4.6
|
|
West North Central
|
|
|
187.6
|
|
|
|
3.5
|
|
|
|
183.0
|
|
|
|
3.5
|
|
East South Central
|
|
|
151.4
|
|
|
|
2.8
|
|
|
|
150.5
|
|
|
|
2.9
|
|
New England
|
|
|
85.7
|
|
|
|
1.6
|
|
|
|
88.9
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial mortgage loans, net
|
|
$
|
5,426.2
|
|
|
|
100.0%
|
|
|
$
|
5,267.4
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. state:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
$
|
1,461.0
|
|
|
|
26.9%
|
|
|
$
|
1,436.3
|
|
|
|
27.3%
|
|
Texas
|
|
|
607.2
|
|
|
|
11.2
|
|
|
|
587.0
|
|
|
|
11.1
|
|
Florida
|
|
|
339.8
|
|
|
|
6.3
|
|
|
|
331.9
|
|
|
|
6.3
|
|
Georgia
|
|
|
314.9
|
|
|
|
5.8
|
|
|
|
311.5
|
|
|
|
5.9
|
|
Other states
|
|
|
2,703.3
|
|
|
|
49.8
|
|
|
|
2,600.7
|
|
|
|
49.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial mortgage loans, net
|
|
$
|
5,426.2
|
|
|
|
100.0%
|
|
|
$
|
5,267.4
|
|
|
|
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 June 30, 2013, our ten largest borrowers represented less than 7% 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.
Due to the concentration of commercial mortgage loans in California, we could be exposed to potential losses as a result
of an economic downturn in California as well as certain catastrophes. 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.
59
In the normal course of business, we commit to fund commercial mortgage
loans generally up to 90 days in advance. At June 30, 2013, we had outstanding commitments to fund commercial mortgage loans totaling $219.5 million, with fixed interest rates ranging from 4.125% to 5.250%. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
Percent
Change
|
|
|
|
(Dollars in millions)
|
|
Commercial mortgage loans sixty-day delinquencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value
|
|
$
|
12.6
|
|
|
$
|
21.3
|
|
|
|
(40.8)%
|
|
Delinquency rate
|
|
|
0.23%
|
|
|
|
0.40%
|
|
|
|
|
|
In process of foreclosure
|
|
$
|
4.1
|
|
|
$
|
9.8
|
|
|
|
(58.2)
|
|
Restructured commercial mortgage loans on a statutory basis
|
|
|
110.6
|
|
|
|
77.6
|
|
|
|
42.5
|
|
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 low. We have avoided structured products that do not meet an adequate level of transparency for good decision making.
The increase in restructured commercial mortgage loans of $33.0 million during the first six months of 2013 was associated with a small number of borrowers.
The following table sets forth details of our commercial mortgage loans foreclosed or accepted as deeds in lieu of foreclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
|
(Dollars in millions)
|
|
Number of loans foreclosed
|
|
|
7
|
|
|
|
11
|
|
|
|
(4
|
)
|
|
|
18
|
|
|
|
22
|
|
|
|
(4
|
)
|
Book value of loans foreclosed
|
|
$
|
2.7
|
|
|
$
|
8.3
|
|
|
$
|
(5.6
|
)
|
|
$
|
9.3
|
|
|
$
|
16.9
|
|
|
$
|
(7.6
|
)
|
Number of properties foreclosed and transferred to Real Estate Owned
|
|
|
5
|
|
|
|
10
|
|
|
|
(5
|
)
|
|
|
16
|
|
|
|
19
|
|
|
|
(3
|
)
|
Real estate acquired
|
|
$
|
1.8
|
|
|
$
|
6.5
|
|
|
$
|
(4.7
|
)
|
|
$
|
5.6
|
|
|
$
|
13.3
|
|
|
$
|
(7.7
|
)
|
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 estimated net realizable value, which
includes an estimate for disposal costs. These amounts may be adjusted in a subsequent period as additional market information regarding fair value is received, however, these adjustments would not result in a carrying value greater than the initial
recorded amount. The book value of real estate acquired during the second quarter and first six months of 2013 compared to the same periods of 2012 decreased primarily due to fewer properties being foreclosed and because those that were foreclosed
and transferred to Real Estate Owned had lower average book values in the second quarter and first six months of 2013. See Critical Accounting Policies and EstimatesInvestment ValuationsCommercial Mortgage Loans for our
commercial mortgage loan loss allowance policy.
60
The following table sets forth changes in the commercial mortgage loan loss
allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
Dollar
Change
|
|
|
2013
|
|
|
2012
|
|
|
Dollar
Change
|
|
|
|
(In millions)
|
|
Commercial mortgage loan loss allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
42.8
|
|
|
$
|
45.6
|
|
|
$
|
(2.8
|
)
|
|
$
|
46.6
|
|
|
$
|
48.1
|
|
|
$
|
(1.5
|
)
|
Provision
|
|
|
5.9
|
|
|
|
5.1
|
|
|
|
0.8
|
|
|
|
9.0
|
|
|
|
6.4
|
|
|
|
2.6
|
|
Charge-offs, net
|
|
|
(1.9
|
)
|
|
|
(5.1
|
)
|
|
|
3.2
|
|
|
|
(8.8
|
)
|
|
|
(8.9
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
46.8
|
|
|
$
|
45.6
|
|
|
$
|
1.2
|
|
|
$
|
46.8
|
|
|
$
|
45.6
|
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in commercial mortgage loan loss allowance as of June 30, 2013 compared
to June 30, 2012 was primarily due to the increase in the specific loan loss allowance as of June 30, 2013 compared to June 30, 2012. The increase in the provision for the second quarter and first six months of 2013 compared to the
same periods of 2012 were related to an increase in impaired commercial mortgage loans, which was offset by fewer charge-offs associated with foreclosures, accepted deeds in lieu of foreclosure and other related charges associated with commercial
mortgage loans leaving the portfolio during the second quarter and first six months of 2013.
The following
table sets forth impaired commercial mortgage loans identified in managements specific review of probable loan losses and the related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
Dollar
Change
|
|
|
|
(In millions)
|
|
Impaired commercial mortgage loans with specific allowances for losses
|
|
$
|
99.6
|
|
|
$
|
74.1
|
|
|
$
|
25.5
|
|
Impaired commercial mortgage loans without specific allowances for losses
|
|
|
27.8
|
|
|
|
25.7
|
|
|
|
2.1
|
|
Specific allowance for losses on impaired commercial mortgage loans, end of the period
|
|
|
(25.5
|
)
|
|
|
(25.6
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying value of impaired commercial mortgage loans
|
|
$
|
101.9
|
|
|
$
|
74.2
|
|
|
$
|
27.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A commercial mortgage loan is impaired when we do not expect to receive contractual
principal and interest in accordance with the terms of the original 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 based on the terms
of the original note. We also hold specific loan loss allowances on certain performing commercial mortgage 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 all amounts due will be collected although the timing or nature may be outside the original contractual terms. The increase in impaired commercial mortgage loans at June 30, 2013 compared to
December 31, 2012 was primarily due to a net increase in the specific loan loss allowance within our retail segment during the first six months of 2013.
61
The following table sets forth the average recorded investment in impaired
commercial mortgage loans before specific allowance for losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
Dollar
Change
|
|
|
2013
|
|
|
2012
|
|
|
Dollar
Change
|
|
|
|
(In millions)
|
|
Average recorded investment
|
|
$
|
112.8
|
|
|
$
|
101.8
|
|
|
$
|
11.0
|
|
|
$
|
108.5
|
|
|
$
|
102.8
|
|
|
$
|
5.7
|
|
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 the collectability of the interest is determined to be not probable. 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.
The amount of interest income recognized on impaired commercial mortgage loans was $1.4 million and $1.0 million for the
second quarters of 2013 and 2012, respectively, and was $2.4 million and $2.1 million for the first six months of 2013 and 2012, respectively. The cash received by us in payment of interest on impaired commercial mortgage loans was $1.1 million and
$0.9 million for the second quarters of 2013 and 2012, respectively, and was $2.0 million for the first six months of 2013 and 2012.
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 $211.3 million and $196.2 million for the first six months of 2013 and 2012, respectively. The increase in funds provided by financing cash flows for the first
six months of 2013 compared to the first six months of 2012 was primarily due to a decrease in policyholder fund withdrawals, partially offset by a decrease in policyholder fund deposits and an increase in cash used to repurchase shares of common
stock. See Capital ManagementShare Repurchases for further discussion on share repurchases.
We maintain a four-year, $250 million senior unsecured revolving credit facility (Facility). Upon our request
and with consent of the lenders under the Facility, the Facility can be increased to $350 million. In June 2013, the termination date of the Facility was extended one year to June 22, 2017. At our option and with the consent of the lenders
under the Facility, the termination date can be extended for one additional one year period. Borrowings under the Facility will be used for working capital, general corporate purposes and for issuance of letters of credit.
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 total capitalization ratio that does not exceed 35% and a consolidated net worth that is equal to at least $1.31 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 June 30, 2013, we had a total debt to total capitalization ratio of 22.8% and consolidated net worth of $1.87 billion as defined by the financial covenants.
The Facility is subject to pricing levels based upon our 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 London Interbank Offered Rate
(LIBOR) plus the applicable margin, plus facility and utilization fees. At June 30, 2013, 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.
We have $250 million of 5.00%, 10-year
senior notes (Senior Notes), which mature on August 15, 2022. Interest is paid semi-annually on February 15 and August 15.
We have $300 million of 6.90% junior subordinated debentures (Subordinated Debt), which matures on June 1, 2067 and is non-callable prior to June 1, 2017. The principal amount of the
Subordinated Debt is payable at maturity. Interest is payable semi-annually on June 1 and December 1 until June 1, 2017, and quarterly thereafter at a floating rate equal to three-month LIBOR plus 2.51%. We have the option to defer
interest payments for up to five years. The declaration and payment of dividends to shareholders would be restricted if we elected to defer interest payments on our Subordinated Debt. If elected, the restriction would be in place during the interest
deferral period. We are not currently deferring 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 365% of the Company Action Level RBC at June 30, 2013. At June 30, 2013, statutory capital, adjusted to exclude asset valuation reserves, for our regulated insurance
subsidiaries totaled $1.40 billion.
62
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.
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 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 and by Oregon law, which limits Standard to 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 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, 2012, 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 $132.7 million and capital and surplus was $1.19 billion. Based upon Standards results for 2012, the amount of ordinary dividends and other distributions available
in 2013, without prior approval from the Oregon Insurance Division is $132.7 million. 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 prior approval from the
Oregon Insurance Division was $144.0 million. As of December 31, 2012 Standard had issued, upon approval of the Oregon Insurance Division, dividends in excess of $144.0 million.
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. As a result of the extraordinary dividend, future dividends will require the approval from the Oregon Insurance Division through August 14, 2013 as they will be considered extraordinary.
Dividends paid from Standard to StanCorp are 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 extraordinary cash dividends to StanCorp of $30.0 million for the second quarter of 2013. Standard did not pay ordinary cash dividends to StanCorp for the
second quarter of 2012. Standard paid extraordinary cash dividends to StanCorp of $60.0 million for the first six months of 2013. Standard paid ordinary cash dividends to StanCorp of $10.0 million for the first six months of 2012.
63
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. 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 2012, StanCorp paid an annual cash dividend of $0.93 per share, totaling $41.3 million.
Share Repurchases
On November 14, 2012, we
announced the Board of Directors approval of a share repurchase authorization of up to 3.0 million shares of StanCorp common stock. The November 2012 authorization expires on December 31, 2014. 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. We will evaluate share
repurchases opportunistically based on our capital levels and our assessment of the direction of the overall economy and equity market valuations.
The following table sets forth share repurchases activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
(Dollars in millionsexcept per share data)
|
|
Share repurchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
382,495
|
|
|
|
279,700
|
|
|
|
632,289
|
|
|
|
279,700
|
|
Cost of share repurchases
|
|
$
|
16.9
|
|
|
$
|
10.0
|
|
|
$
|
26.8
|
|
|
$
|
10.0
|
|
Weighted-average price per common share
|
|
|
44.14
|
|
|
|
35.68
|
|
|
|
42.33
|
|
|
|
35.68
|
|
Shares remaining under repurchase authorizations
|
|
|
2,367,711
|
|
|
|
2,720,300
|
|
|
|
2,367,711
|
|
|
|
2,720,300
|
|
64
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 July 2013 were:
|
|
|
|
|
S&P
|
|
Moodys
|
|
A.M. Best
|
A+ (Strong)
5th of 20 ratings
Outlook: Negative
|
|
A2 (Good)
6th of 21 ratings
Outlook: Negative
|
|
A (Excellent)
(1)
3rd of 13 ratings
Outlook: Stable
|
(1)
|
Also includes The Standard Life Insurance Company of New York
|
Debt 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 July 2013, which we believe are indicators of our liquidity and ability
to make payments, were:
|
|
|
|
|
|
|
|
|
S&P
|
|
Moodys
|
|
A.M. Best
|
StanCorp debt ratings:
|
|
|
|
|
|
|
Senior Notes
|
|
BBB+
|
|
Baa2
|
|
bbb
|
Subordinated Debt
|
|
BBB-
|
|
Baa3
|
|
bb+
|
|
|
|
|
Issuer credit ratings:
|
|
|
|
|
|
|
Standard
|
|
A+
|
|
|
|
a
(1)
|
StanCorp
|
|
BBB+
|
|
|
|
bbb
|
Outlook
|
|
Negative
|
|
Negative
|
|
Stable
(1)
|
(1)
|
Also includes The Standard Life Insurance Company of New York
|
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 in 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 were $1.1 million and $0.1 million for the first six months of 2013 and 2012, respectively. At June 30,
2013, we maintained a reserve of $1.5 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 NAIC.
65
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
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
Dollar
Change
|
|
|
2013
|
|
|
2012
|
|
|
Dollar
Change
|
|
|
|
(In millions)
|
|
Statutory Results
|
|
$
|
66.4
|
|
|
$
|
31.0
|
|
|
$
|
35.4
|
|
|
$
|
95.3
|
|
|
$
|
73.1
|
|
|
$
|
22.2
|
|
Adjusted GAAP Results
|
|
|
81.1
|
|
|
|
26.6
|
|
|
|
54.5
|
|
|
|
143.0
|
|
|
|
74.5
|
|
|
|
68.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference
|
|
$
|
(14.7
|
)
|
|
$
|
4.4
|
|
|
$
|
(19.1
|
)
|
|
$
|
(47.7
|
)
|
|
$
|
(1.4
|
)
|
|
$
|
(46.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in Statutory Results for the second quarter and first six months of 2013
compared to the second quarter and first six months of 2012 was primarily due to favorable claims experience and a decrease in reserves for our group insurance products.
The fluctuations in the difference between the Statutory Results and Adjusted GAAP Results for the second quarter and
first six months of 2013 compared to the second quarter and first six months of 2012 were primarily due to the reduction in operating expenses related to the amendment of the postretirement benefit plan of $10.3 million and $20.6 million for the
second quarter and first six months of 2013, respectively, which were included in the Adjusted GAAP Results and not recorded in the Statutory Results. Also contributing to the fluctuations are the differences in the reserves for our individual
annuity products and elimination of surplus note interest for Adjusted GAAP Results.
The following table sets
forth statutory capital and the associated asset valuation reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
Percent
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
|
(Dollars in millions)
|
|
Statutory capital adjusted to exclude asset valuation reserves for our regulated insurance subsidiaries
|
|
$
|
1,401.6
|
|
|
$
|
1,377.1
|
|
|
|
1.8%
|
|
Asset valuation reserve
|
|
|
132.8
|
|
|
|
117.5
|
|
|
|
13.0
|
|
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.
|
66
|
|
|
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 June 30, 2013, our fixed maturity securities watch list totaled $6.2 million at fair value and $6.5 million at amortized cost. We recorded $0.3 million and $0.6 million of
OTTI related to credit loss due to impairments for the second quarter and first six months of 2013, compared to credit losses of $1.7 million and $2.5 million of OTTI for the second quarter and first six months of 2012, respectively. We recorded no
OTTI related to noncredit loss for the second quarter and first six months of 2013 and 2012. See Item 1, Financial Statements Notes to Unaudited Condensed 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 Statements Notes to Unaudited Condensed 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.
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, debt coverage ratios, loan to value ratios, actual loan loss experience and individual loan analysis. 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 original 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 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 $90.8 million at June 30, 2013, compared to $95.5
million at December 31, 2012. The $4.7 million decrease in total real estate during the first six months of 2013 was primarily due to the sale of 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 and impairments on our Real Estate Owned. The decrease was partially offset by the acquisition of Real Estate Owned during the quarter.
67
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 higher 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 decreases our basis in the investments and is 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 as a capital loss.
Derivative financial instruments are carried at fair value, and valuation adjustments are reported as a
component of net investment income. See Item 1, Financial StatementsNotes to Unaudited Condensed Consolidated Financial StatementsNote 8 Derivative 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.
The following table sets forth the
balances of DAC, VOBA and other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
Percent
Change
|
|
|
|
(Dollars in millions)
|
|
DAC
|
|
$
|
310.1
|
|
|
$
|
284.9
|
|
|
|
8.8%
|
|
VOBA
|
|
|
22.2
|
|
|
|
23.4
|
|
|
|
(5.1)
|
|
Other intangible assets
|
|
|
34.9
|
|
|
|
38.2
|
|
|
|
(8.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total DAC, VOBA and other intangible assets
|
|
$
|
367.2
|
|
|
$
|
346.5
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. We normally defer 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.
68
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 $66.6 million and $65.4 million at June 30, 2013 and December 31, 2012, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in millions)
|
|
DAC
|
|
$
|
78.5
|
|
|
|
25.3%
|
|
|
$
|
60.9
|
|
|
|
21.4%
|
|
VOBA
|
|
|
5.6
|
|
|
|
25.2
|
|
|
|
5.9
|
|
|
|
25.2
|
|
Key assumptions, which will affect the determination of expected gross profits for
determining DAC and VOBA balances, are:
|
|
|
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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
(In millions)
|
|
Decrease to DAC and VOBA
|
|
$
|
1.2
|
|
|
$
|
0.3
|
|
|
$
|
1.2
|
|
|
$
|
1.1
|
|
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 7.1 years. The marketing agreement which accompanied the Minnesota
Life transaction 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 $39.8 million and $36.5 million at June 30, 2013 and December 31, 2012, respectively.
69
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:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
|
(In millions)
|
|
Reserves:
|
|
|
|
|
|
|
|
|
Policy reserves
|
|
$
|
1,078.1
|
|
|
$
|
1,072.0
|
|
Claim reserves
|
|
|
4,783.2
|
|
|
|
4,771.2
|
|
|
|
|
|
|
|
|
|
|
Total reserves
|
|
$
|
5,861.3
|
|
|
$
|
5,843.2
|
|
|
|
|
|
|
|
|
|
|
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.
The following table sets forth total reserve balances by calculation methodology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
|
Percent of
Total
|
|
|
December 31,
2012
|
|
|
Percent of
Total
|
|
|
|
(Dollars in millions)
|
|
Reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves determined through prescribed methodology
|
|
$
|
5,187.2
|
|
|
|
88.5%
|
|
|
$
|
5,186.2
|
|
|
|
88.8%
|
|
Reserves determined by internally-developed formulas
|
|
|
662.1
|
|
|
|
11.3
|
|
|
|
648.2
|
|
|
|
11.1
|
|
Reserves based on subjective judgment
|
|
|
12.0
|
|
|
|
0.2
|
|
|
|
8.8
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reserves
|
|
$
|
5,861.3
|
|
|
|
100.0%
|
|
|
$
|
5,843.2
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
|
(In millions)
|
|
Policy reserves:
|
|
|
|
|
|
|
|
|
Individual disability insurance
|
|
$
|
240.7
|
|
|
$
|
233.7
|
|
Individual and group immediate annuity businesses
|
|
|
232.6
|
|
|
|
237.4
|
|
Individual life insurance
|
|
|
604.8
|
|
|
|
600.9
|
|
|
|
|
|
|
|
|
|
|
Total policy reserves
|
|
$
|
1,078.1
|
|
|
$
|
1,072.0
|
|
|
|
|
|
|
|
|
|
|
70
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 termination rates.
|
|
|
|
Discount rates used to value expected future claim payments and premiums.
|
|
|
|
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.
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 primarily calculated using a company derived formula based 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:
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June 30,
2013
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December 31,
2012
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(In millions)
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Claim reserves:
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|
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Group disability insurance
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$
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3,253.2
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|
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$
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3,250.7
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Individual disability insurance
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|
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772.6
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|
|
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755.2
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Group life insurance
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|
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757.4
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|
|
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765.3
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|
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|
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Total claim reserves
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$
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4,783.2
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$
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4,771.2
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Group and individual disability insurance.
Claim reserves for our
disability products are sensitive to assumptions and considerations regarding:
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Claim incidence rates for IBNR claim reserves.
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Claim termination rates.
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Discount rates used to value expected future claim payments.
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The amount of monthly benefit paid to the insured less reinsurance recoveries and other offsets.
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Expense rates including inflation.
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Historical delay in reporting of claims incurred.
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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:
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The claim termination rate.
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The claim incidence rate for policy reserves and IBNR claim reserves.
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The following table sets forth the discount rate used for newly incurred long term disability claim reserves and life
waiver reserves:
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Three Months Ended
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June 30,
2013
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March 31,
2013
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June 30,
2012
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Discount rate
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3.75
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%
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3.75
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%
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4.00
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%
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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 25 basis point decrease in the discount rate for the second quarter of 2013 compared to the second quarter
of 2012 was primarily the result of a continued low interest rate environment, the compression of interest rate spread for certain investment types with similar duration, and the mix of new money 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 approximately $2 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 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 second quarter of 2013 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.
We evaluate the claim termination rate
assumptions for the reserves on a small Minnesota Life block of individual disability claims annually. 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 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 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. The employee pension plan is sponsored by StanCorp and the agent pension plan is sponsored by Standard. Both plans are administered by Standard Retirement Services, Inc. and are closed for new participants. In addition,
eligible executive officers are covered by a non-qualified supplemental retirement plan.
72
We also have a postretirement benefit plan that includes medical,
prescription drug benefits and group term life insurance. 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 was 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 2012, the postretirement benefit plan was amended to reduce future benefits to plan participants that were either not eligible to or chose not to retire on or before
July 1, 2013, which reduced operating expenses by $10.3 million and $20.6 million for the second quarter and first six months of 2013, respectively. The 2012 amendment did not affect future benefits for employees who were retired as of
July 1, 2013. In addition, as of December 31, 2011, the group term life insurance benefit was curtailed for plan participants who were not retired at December 31, 2011.
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.
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:
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1% Point
Increase
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1% Point
Decrease
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(In millions)
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Effect on total of service and interest cost
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$
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0.6
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$
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(0.5
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)
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Effect on postretirement benefit obligation
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2.2
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(1.8
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)
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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 carryforwards. 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.
73
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 2012 are open for audit by the IRS.
Forward-looking Statements
Some of the statements contained or incorporated by reference in this Form 10-Q, including guidance, estimates,
projections, statements related to business plans, strategies, objectives and expected operating results and the assumptions upon which those statements are based, are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements also include, without limitation, any statement that includes words such as expects,
anticipates, intends, plans, believes, estimates, seeks, will be, will continue, will likely result and similar expressions that are
predictive in nature or that depend on or refer to future events or conditions. Our forward-looking statements are not guarantees of future performance and involve uncertainties that are difficult to predict. They involve risks and uncertainties
which may cause actual results to differ materially from the forward-looking statements.
As a provider of
financial products and services, our actual results of operations may vary significantly in response to economic trends, interest rates, investment performance, claims experience, operating expenses and pricing. Given these uncertainties or
circumstances, investors are cautioned not to place undue reliance on forward-looking statements as a predictor of future results. 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 our results to differ materially
from management expectations suggested by forward-looking statements:
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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 use of capital, including the ability to achieve financing through
debt or equity.
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|
Changes in liquidity needs and the liquidity of assets in our investment portfolios.
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Performance of business acquired through reinsurance or acquisition.
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|
Changes in financial strength and credit ratings.
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|
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.
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|
Findings in litigation or other legal proceedings.
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|
Intent and ability to hold investments consistent with our investment strategy.
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|
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|
Receipt of dividends from, or contributions to, our subsidiaries.
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|
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|
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.
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|
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|
Levels of customer persistency.
|
|
|
|
Adequacy of reserves established for future policy benefits.
|
|
|
|
The effect of changes in interest rates on reserves, policyholder funds, investment income, bond call premiums 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.
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|
|
|
Achievement of anticipated levels of operating expenses.
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|
|
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, property type and geographic region.
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|
|
|
Credit quality of the holdings in our investment portfolios.
|
|
|
|
The condition of the economy and expectations for interest rate changes.
|
|
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|
The effect of changing levels of bond call premiums, commercial mortgage loan prepayment fees and commercial mortgage loan 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.
|
74
|
|
|
Concentration of commercial mortgage loan assets collateralized in certain states such as California.
|
|
|
|
Environmental liability exposure resulting from commercial mortgage loan and real estate investments.
|