|• FORM 10-Q • FORM OF STANCORP FINANCIAL GROUP, INC. LONG-TERM INCENTIVE AWARD AGREEMENT • CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 • CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 • CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 • CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended March 31, 2012
For the transition period from to
Commission File Number: 1-14925
STANCORP FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
1100 SW Sixth Avenue, Portland, Oregon, 97204
(Address of principal executive offices, including zip code)
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
As of April 27, 2012, there were 44,377,419 shares of the registrants common stock, no par value, outstanding.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Dollars in millionsexcept share data)
See Condensed Notes to Unaudited Consolidated Financial Statements.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
See Condensed Notes to Unaudited Consolidated Financial Statements.
UNAUDITED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY
(Dollars in millions)
See Condensed Notes to Unaudited Consolidated Financial Statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
See Condensed Notes to Unaudited Consolidated Financial Statements.
As used in this Form 10-Q, the terms StanCorp, Company, we, us and our refer to StanCorp Financial Group, Inc. and its subsidiaries, unless the context otherwise requires.
StanCorp, headquartered in Portland, Oregon, is a holding company and conducts business through wholly-owned operating subsidiaries throughout the United States. Through its subsidiaries, StanCorp has the authority to underwrite insurance products in all 50 states. StanCorp operates through two segments: Insurance Services and Asset Management as well as an Other category. See Note 5Segments.
StanCorp has the following wholly-owned operating subsidiaries: Standard Insurance Company (Standard), The Standard Life Insurance Company of New York, Standard Retirement Services, Inc. (Standard Retirement Services), StanCorp Equities, Inc. (StanCorp Equities), StanCorp Mortgage Investors, LLC (StanCorp Mortgage Investors), StanCorp Investment Advisers, Inc. (StanCorp Investment Advisers), StanCorp Real Estate, LLC (StanCorp Real Estate), Standard Management, Inc. (Standard Management) and Adaptu, LLC (Adaptu).
Standard, the Companys largest subsidiary, underwrites group and individual disability insurance and annuity products, group life and accidental death and dismemberment (AD&D) insurance, and provides group dental and group vision insurance, absence management services and retirement plan products. Founded in 1906, Standard is domiciled in Oregon, licensed in all states except New York, and licensed in the District of Columbia and the U.S. territories of Guam and the Virgin Islands.
The Standard Life Insurance Company of New York was organized in 2000 and is licensed to provide group long term and short term disability insurance, group life and AD&D insurance, group dental insurance and individual disability insurance in New York.
The Standard is a service mark of StanCorp and its subsidiaries and is used as a brand mark and marketing name by Standard and The Standard Life Insurance Company of New York.
Standard Retirement Services administers and services StanCorps retirement plans group annuity contracts and trust products. Retirement plan products are offered in all 50 states through Standard or Standard Retirement Services.
StanCorp Equities is a limited broker-dealer and member of the Financial Industry Regulatory Authority. StanCorp Equities serves as principal underwriter and distributor for group variable annuity contracts issued by Standard and as the broker of record for certain retirement plans using the trust platform. StanCorp Equities carries no customer accounts but provides supervision and oversight for the distribution of group variable annuity contracts and of the sales activities of all registered representatives employed by StanCorp Equities and its affiliates.
StanCorp Mortgage Investors originates and services fixed-rate commercial mortgage loans for the investment portfolios of the Companys insurance subsidiaries. StanCorp Mortgage Investors also generates additional fee income from the origination and servicing of commercial mortgage loans participated to institutional investors.
StanCorp Investment Advisers, Inc. is a Securities and Exchange Commission (SEC) registered investment adviser providing performance analysis, fund selection support, model portfolios and other investment advisory, financial planning, and investment management services to its retirement plan clients, individual investors and subsidiaries of StanCorp.
StanCorp Real Estate is a property management company that owns and manages the Hillsboro, Oregon home office properties and other properties held for investment and held for sale. StanCorp Real Estate also manages the Portland, Oregon home office properties.
Standard Management has owned and managed certain real estate properties held for sale.
Adaptu provides an online service to help members plan and manage their financial lives.
Standard holds interests in low-income housing tax credit investments. These interests do not meet the requirements for consolidation under existing accounting standards, and thus the Companys interests in the low-income housing tax credit investments are accounted for under the equity method of accounting. The total investment in these interests was $174.6 million and $128.0 million at March 31, 2012 and December 31, 2011, respectively.
In October 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU No. 2010-26 amends the codification guidance for insurance entities to eliminate the diversity of accounting treatment related to deferred acquisition costs (DAC). The Company has adopted this standard retrospectively as of January 1, 2012, and comparative financial statements of prior periods have been adjusted.
The accompanying unaudited consolidated financial statements of StanCorp and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in conformance with the requirements of Form 10-Q pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. Intercompany balances and transactions have been eliminated on a consolidated basis. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the financial statement date, and the reported amounts of revenues and expenses during the period. Actual results may differ from those estimates. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the Companys financial condition at March 31, 2012, and for the results of operations for the three months ended March 31, 2012 and 2011, and cash flows for the three
months ended March 31, 2012 and 2011. Interim results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. This report should be read in conjunction with the Companys 2011 annual report on Form 10-K.
Net income per basic common share was calculated by dividing net income by the weighted-average number of common shares outstanding. Net income per diluted common share, as calculated using the treasury stock method, reflects the potential dilutive effects of stock award grants and exercises of dilutive outstanding stock options. The computation of diluted weighted-average earnings per share does not include stock options with an option exercise price greater than the average market price because they are antidilutive and inclusion would increase earnings per share.
The following table sets forth the calculation of net income per basic and diluted weighted-average common shares outstanding:
The Company has two active share-based compensation plans: the 2002 Stock Incentive Plan (2002 Plan) and the 1999 Employee Share Purchase Plan (ESPP). The 2002 Plan authorizes the Board of Directors to grant incentive or non-statutory stock options and stock awards to eligible employees and certain related parties. Of the 4.8 million shares of common stock authorized for the 2002 Plan, 0.9 million shares or options for shares remain available for grant at March 31, 2012. The Companys ESPP allows eligible employees to purchase StanCorp common stock at a discount. Of the 2.0 million shares authorized for the ESPP, 0.2 million shares remain available for issuance at March 31, 2012.
The following table sets forth the total compensation cost and related income tax benefit under the Companys share-based compensation plans:
The Company has provided three types of share-based compensation pursuant to the 2002 Plan: option grants, stock award grants and director stock grants.
Options are granted to directors, officers and certain non-officer employees. Options are granted with an exercise price equal to the closing market price of StanCorp common stock on the grant date. Directors options vest after one year while other options generally vest in equal installments on the first four anniversaries of the vesting reference date.
The Company granted 225,133 and 205,155 options for the first quarters of 2012 and 2011, respectively, at a weighted-average exercise price of $39.58 and $45.85, respectively. The fair value of each option award granted was estimated using the Black-Scholes option pricing model as of the grant date. The weighted-average grant date fair value of options granted for the first quarters of 2012 and 2011 was $14.44 and $17.67, respectively.
The compensation cost of stock options is recognized over the vesting period, which is also the period over which the grantee must provide services to the Company. At March 31, 2012, the total compensation cost related to unvested option awards that had not yet been recognized in the financial statements was $8.1 million. This compensation cost will be recognized over a weighted-average period of 2.9 years.
Stock Award Grants
The Company grants performance-based stock awards (Performance Shares) to designated senior officers. The payout for these awards is based on the Companys financial performance over a three-year period. Performance Share grants represent the maximum number of shares of StanCorp common stock issuable to the designated senior officers. The actual number of shares issued at the end of the performance period is based on satisfaction of employment and Company financial performance conditions, with a portion of the shares withheld to cover required tax withholding. Under the 2002 Plan, the Company had 0.6 million shares available for issuance as stock award grants at March 31, 2012.
The Company granted 179,818 and 116,978 Performance Shares for the first quarters of 2012 and 2011, respectively.
The Company issued 9,899 and 4,906 shares of StanCorp common stock for the first quarters of 2012 and 2011, respectively, to redeem Performance Shares that vested following the 2011 and 2010 performance periods, net of Performance Shares withheld to cover the required taxes.
The fair value of the Performance Shares is determined based on the closing market price of StanCorp common stock on the grant date.
The compensation cost that the Company will ultimately recognize as a result of these stock awards is dependent on the Companys financial performance. Assuming that the maximum performance is achieved for each performance goal, $15.3 million in additional compensation cost would be recognized through 2014. The target or expected payout is 70% of the maximum Performance Shares for 2012 performance period and 50% of the maximum Performance Shares for the 2013 and 2014 performance periods. A target payout for these periods would result in approximately $8.1 million of additional compensation cost through 2014. This cost is expected to be recognized over a weighted-average period of 2.1 years.
Director Stock Grants
Effective May 7, 2012, each director who is not an employee of the Company receives annual compensation of StanCorp common stock with a fair value equal to $100,000 based on the closing market price of StanCorp common stock on the day of the annual shareholders meeting.
Employee Share Purchase Plan
The Companys ESPP allows eligible employees to purchase StanCorp common stock at a 15% discount of the lesser of the closing market price of StanCorp common stock on either the commencement date or the final date of each six-month offering period. Under the terms of the plan, each eligible employee may elect to have up to 10% of the employees gross total cash compensation for the period withheld to purchase StanCorp common stock. No employee may purchase StanCorp common stock having a fair market value in excess of $25,000 in any calendar year.
The following table sets forth the compensation cost and related income tax benefit under the Companys ESPP:
The Company has two non-contributory defined benefit pension plans: the employee pension plan and the agent pension plan. The employee pension plan is for all eligible employees of the Company, and the agent pension plan is for former field employees and agents. The defined benefit pension plans provide benefits based on years of service and final average pay. Both plans are sponsored by Standard and administered by Standard Retirement Services and are closed to new participants. Participation in the defined benefit pension plans is generally limited to eligible employees whose date of employment began before 2003.
Under the employee pension plan, a participant is entitled to a normal retirement benefit once the participant reaches age 65. A participant can also receive a normal, unreduced retirement benefit once the sum of his or her age plus years of service is at least 90.
The Company recognizes the funded status of the pension plans as an asset or liability on the balance sheet. The funded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation as of the year-end balance sheet date. While the Company is not obligated to make any contributions to its pension plans for 2012, it does evaluate the funding status of these plans annually in the fourth quarter.
The following table sets forth the components of net periodic benefit cost and other changes in plan assets and benefit obligations recognized in other comprehensive income for pension benefits:
Postretirement Benefits Other Than Pensions
Standard sponsors and administers a postretirement benefit plan that includes medical and prescription drug benefits. A group term life insurance benefit was curtailed as of December 31, 2011. Eligible retirees are required to contribute specified amounts for medical and prescription drug benefits that are determined periodically and are based on retirees length of service and age at retirement. Participation in the postretirement benefit plan is limited to employees who had reached the age of 40, or whose combined age and length of service was equal to or greater than 45 years as of January 1, 2006. This plan is closed to new participants.
The Company recognizes the funded status of the postretirement benefit plan as an asset or liability on the balance sheet. The funded status is measured as the difference between the fair value of the plan assets and the accumulated benefit obligation.
The following table sets forth the components of net periodic benefit cost and other amounts recognized in other comprehensive income for postretirement benefits:
Deferred Compensation Plans
Eligible employees are covered by a qualified deferred compensation plan sponsored by Standard under which a portion of the employee contribution is matched. Employees not eligible for the employee pension plan are eligible for an additional non-elective employer contribution. Contributions to the plan for both the first quarters of 2012 and 2011 were $3.1 million.
Eligible executive officers, directors, agents and group producers may participate in one of several non-qualified deferred compensation plans under which a portion of the deferred compensation for participating executive officers, agents and group producers is matched. The liability for the plans was $10.3 million at March 31, 2012 and $10.7 million at December 31, 2011.
Non-Qualified Supplemental Retirement Plan
Eligible executive officers are covered by a non-qualified supplemental retirement plan (non-qualified plan). Under the non-qualified plan, a participant is entitled to a normal retirement benefit once the participant reaches age 65. A participant can also receive a normal, unreduced retirement benefit once the sum of his or her age plus years of service is at least 90. The Company recognizes the unfunded status of the non-qualified plan in other liabilities on the balance sheet. The unfunded status was $28.6 million and $28.5 million at March 31, 2012 and December 31, 2011, respectively. Expenses were $0.6 million and $0.7 million for the first quarters of 2012 and 2011, respectively. The net loss and prior service cost, net of tax, excluded from the net periodic benefit cost and reported as a component of accumulated other comprehensive income was $0.1 million and $5.7 million at March 31, 2012 and December 31, 2011, respectively.
StanCorp operates through two reportable segments: Insurance Services and Asset Management, as well as an Other category. Subsidiaries, or operating segments, have been aggregated to form the Companys reportable segments. Resources are allocated and performance is evaluated at the segment level. The Insurance Services segment offers group and individual disability insurance, group life and AD&D insurance, group dental and group vision insurance, and absence management services. The Asset Management segment offers full-service 401(k) plans, 403(b) plans, 457 plans, defined benefit plans, money purchase pension plans, profit sharing plans and non-qualified deferred compensation products and services. This segment also offers investment advisory and management services, financial planning services, commercial mortgage loan origination and servicing, individual fixed-rate annuity products, group annuity contracts and retirement plan trust products. The Other category includes return on capital not allocated to the product segments, holding company expenses, operations of certain unallocated subsidiaries, interest on debt, unallocated expenses, net capital gains and losses related to the impairment or the disposition of the Companys invested assets and adjustments made in consolidation.
Intersegment revenues are comprised of administrative fee revenues charged by the Asset Management segment to manage the fixed maturity securitiesavailable-for-sale (fixed maturity securities) and commercial mortgage loan portfolios for the Companys insurance subsidiaries.
The following table sets forth intersegment revenues:
The following table sets forth premiums, administrative fee revenues and net investment income by major product line or category within each of the Companys segments:
The following tables set forth select segment information:
Assets and liabilities recorded at fair value are disclosed using a three-level hierarchy. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources while unobservable inputs reflect the Companys estimates about market data.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels: Level 1 inputs are based upon quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date. Level 2 inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 inputs are generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Companys estimates of assumptions that market participants would use in pricing the asset or liability.
There are three types of valuation techniques used to measure assets and liabilities recorded at fair value:
The Company uses both the market and income approach in its fair value measurements. These measurements are discussed in more detail below.
The following table sets forth the estimated fair value and the carrying value of each financial instrument:
Financial Instruments Not Recorded at Fair Value
The Company did not elect to measure and record commercial mortgage loans, policy loans, other policyholders funds that are investment-type contracts, or long-term debt at fair value on the consolidated balance sheets.
For disclosure purposes, the fair values of commercial mortgage loans were estimated using an option-adjusted discounted cash flow valuation. The valuation includes both observable market inputs and estimated model parameters.
Significant observable inputs to the valuation include:
Significant estimated parameters include:
For policy loans, the carrying value represents historical cost but approximates fair value. While potentially financial instruments, policy loans are an integral component of the insurance contract and have no maturity date.
The fair value of other policyholder funds that are investment-type contracts was calculated using the income approach in conjunction with the cost of capital method. The parameters used for discounting in the calculation were estimated using the perspective of the principal market for the contracts under consideration. The principal market consists of other insurance carriers with similar contracts on their books.
The fair value for long-term debt was predominantly based on quoted market prices as of March 31, 2012 and December 31, 2011, and trades occurring close to March 31, 2012 and December 31, 2011.
Financial Instruments Measured and Recorded at Fair Value
Fixed maturity securities, Standard & Poors (S&P) 500 Index call options (S&P 500 Index options) and index-based interest guarantees embedded in indexed annuities (index-based interest guarantees) are recorded at fair value on a recurring basis. In the Companys consolidated statements of income and comprehensive income, unrealized gains and losses are reported in other comprehensive income for fixed maturity securities, in net investment income for S&P 500 Index options and in interest credited for index-based interest guarantees.
Separate account assets represent segregated funds held for the exclusive benefit of contract holders. The activities of the account primarily relate to participant-directed 401(k) contracts. Separate account assets are recorded at fair value on a recurring basis, with changes in fair value recorded in separate account liabilities. Separate account assets consist of mutual funds. The mutual funds fair
value is determined through Level 1 and Level 2 inputs. The majority of the separate account assets are valued using quoted prices in an active market with the remainder of the assets valued using quoted prices from an independent pricing service. The Company reviews the values obtained from the pricing service for reasonableness through analytical procedures and performance reviews.
Fixed maturity securities are comprised of the following classes:
The fixed maturity securities are diversified across industries, issuers and maturities. The Company calculates fair values for all classes of fixed maturity securities using valuation techniques described below. They are placed into three levels depending on the valuation technique used to determine the fair value of the securities.
The Company uses an independent pricing service to assist management in determining the fair value of these assets. The pricing service incorporates a variety of information observable in the market in its valuation techniques, including:
The pricing service also takes into account perceived market movements and sector news, as well as a bonds terms and conditions, including any features specific to that issue that may influence risk, and thus marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. The Company generally obtains one value from its primary external pricing service. On a case-by-case basis, the Company may obtain further quotes or prices from additional parties as needed.
The pricing service provides quoted market prices when available. Quoted prices are not always available due to bond market inactivity. The pricing service obtains a broker quote when sufficient information, such as security structure or other market information, is not available to produce a valuation. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes on which one may execute the disposition of the assets.
The significant unobservable inputs used in the fair value measurement of the reporting entitys bonds are valuations and quotes received from secondary pricing service, analytical reviews and broker quotes. Significant increases or decreases in any of those inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, a change in the assumption used for the pricing evaluation is accompanied by a directionally similar change in the assumption used for the methodologies.
The Company performs control procedures over the external valuations at least quarterly through a combination of procedures that include an evaluation of methodologies used by the pricing service, analytical reviews and performance analysis of the prices against statistics and trends, back testing of sales activity and maintenance of a securities watch list. As necessary, the Company compares prices received from the pricing service to prices independently estimated by the Company utilizing discounted cash flow models or through performing independent valuations of inputs and assumptions similar to those used by the pricing service in order to ensure prices represent a reasonable estimate of fair value. Although the Company does identify differences from time to time as a result of these validation procedures, the Company did not make any significant adjustments as of March 31, 2012 or December 31, 2011.
S&P 500 Index options and certain fixed maturity securities were valued using Level 3 inputs. The Level 3 fixed maturity securities were valued using matrix pricing, independent broker quotes and other standard market valuation methodologies. The fair value was determined using inputs that were not observable or could not be derived principally from, or corroborated by, observable market data. These inputs included assumptions regarding liquidity, estimated future cash flows and discount rates. Unobservable inputs to these valuations are based on managements judgment or estimation obtained from the best sources available. The Companys valuations maximize the use of observable inputs, which include an analysis of securities in similar sectors with comparable maturity dates and bond ratings. Broker quotes are validated by management for reasonableness in conjunction with information obtained from matrix pricing and other sources.
The Company calculates the fair value for its S&P 500 Index options using the Black-Scholes option pricing model and parameters derived from market sources. The Companys valuations maximize the use of observable inputs, which include direct price quotes from the Chicago Board Options Exchange (CBOE) and values for on-the-run treasury securities and London Interbank Offered Rate (LIBOR) rates as reported by Bloomberg. Unobservable inputs are estimated from the best sources available to the Company and include estimates of future gross dividends to be paid on the stocks underlying the S&P 500 Index, estimates of bid-ask spreads, and estimates of implied volatilities on options. Valuation parameters are calibrated to replicate the actual end-of-day market quotes for options trading on the CBOE. The Company performs additional validation procedures such as the daily observation of market activity and conditions and the tracking and analyzing of actual quotes provided by banking counterparties each time the Company purchases options from them. Additionally, in order to help validate the values derived through the procedures noted above, the Company obtains indicators of value from representative investment banks.
The Company uses the income approach valuation technique to determine the fair value of index-based interest guarantees. The liability is the present value of future cash flows attributable to the projected index growth in excess of cash flows driven by fixed interest rate guarantees for the indexed annuity product. Level 3 assumptions for policyholder behavior and future index interest rate declarations significantly influence the calculation. Index-based interest guarantees are included in the other policyholder funds line on the Companys consolidated balance sheet.
While valuations for the S&P 500 Index options are sensitive to a number of variables, valuations for S&P 500 Index options purchased are most sensitive to changes in the estimates of bid ask spreads, or the S&P Index value, and the implied volatilities of this index. Significant fluctuations in any of those inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, an increase or decrease used in the assumption for the implied volatilities and in the S&P Index value would result in a directionally similar change in the fair value of the asset.
Valuations for the index-based interest guarantees are sensitive to a number of variables, but are most sensitive to the S&P Index value, the implied volatilities of this index, and LIBOR rates as reported by Bloomberg. Generally, a significant increase or decrease used in the assumption for the implied volatilities and in the S&P Index value would result in a directionally similar change, while an increase or decrease in the LIBOR rates would result in a directionally opposite change in the fair value of the liability.
Valuations for commercial mortgage loans and real estate owned measured on a nonrecurring basis are sensitive to a number of variables, but are most sensitive to the capitalization rate. Generally, an increase or decrease used in the assumption for the capitalization rate would result in a directionally similar change in the fair value of the asset.
The following table sets forth quantitative information regarding significant unobservable inputs used in Level 3 valuation of assets and liabilities measured and recorded at fair value is as follows:
The following tables set forth the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable Level 3 inputs:
For all periods disclosed above, fixed maturity securities transferred into Level 3 from Level 2 are the result of the Company being unable to obtain pricing for these investments from an independent pricing service. Fixed maturity securities transferred out of Level 3 into Level 2 are the result of the Company being able to obtain pricing for these investments from an independent pricing service. There were no transfers between Level 1 and Level 2 for the first quarter of 2012 and 2011.
The following table sets forth the changes in unrealized gains (losses) included in net income relating to positions that the Company continued to hold:
Changes to the fair value of fixed maturity securities, excluding S&P 500 Index options, were recorded in other comprehensive income. Changes to the fair value of the S&P 500 Index options were recorded to net investment income. Changes to the fair value of the index-based interest guarantees were recorded as interest credited. There was no negative interest included in interest credited on policyholder funds due to changes in the Level 3 actuarial assumptions for the first quarter of 2012 and 2011.
Certain assets and liabilities are measured at fair value on a nonrecurring basis such as impaired commercial mortgage loans with specific allowances for losses and real estate acquired in satisfaction of debt through foreclosure or the acceptance of deeds in lieu of foreclosure on commercial mortgage loans (real estate owned). The impaired commercial mortgage loans and real estate owned are valued using Level 3 measurements. These Level 3 inputs are reviewed for reasonableness by management and evaluated on a quarterly basis. The commercial mortgage loan measurements include valuation of the market value of the asset using general underwriting procedures and appraisals. Real estate owned is initially recorded at estimated net realizable value, which includes an estimate for disposal costs. These amounts may be adjusted in a subsequent period as independent appraisals are received.
The following table sets forth the assets measured at fair value on a nonrecurring basis as of March 31, 2012 that the Company continued to hold:
Commercial mortgage loans measured on a nonrecurring basis with a carrying amount of $77.5 million were written down to their fair value of $52.0 million, less selling costs, at March 31, 2012. The specific commercial mortgage loan loss allowance related to these commercial mortgage loans was $25.5 million at March 31, 2012. The real estate owned measured on a nonrecurring basis as of March 31, 2012, and still held at March 31, 2012 had capital losses totaling $0.4 million for the first quarter of 2012. Real estate owned measured on a nonrecurring basis represents expected proceeds from pending sales.
The following table sets forth the assets measured at fair value on a nonrecurring basis as of March 31, 2011 that the Company continued to hold:
Commercial mortgage loans measured on a nonrecurring basis with a carrying amount of $75.8 million were written down to their fair value of $49.2 million, less selling costs, at December 31, 2011. The specific commercial mortgage loan loss allowance related to these commercial mortgage loans was $26.6 million at December 31, 2011. The real estate owned measured on a nonrecurring basis as of December 31, 2011, and still held at December 31, 2011 had capital losses totaling $3.5 million for 2011. See Note 7InvestmentsCommercial Mortgage Loans for further disclosures regarding the commercial mortgage loan loss allowance.
Fixed Maturity Securities
The following tables set forth amortized costs, gross unrealized gains and losses and fair values of the Companys fixed maturity securities:
The following table sets forth the amortized costs and fair values of the Companys fixed maturity securities by contractual maturity:
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Callable bonds without make-whole provisions represented 6.9%, or $476.9 million, of the Companys fixed maturity securities portfolio at March 31, 2012. At March 31, 2012, the Company did not have any direct exposure to sub-prime or Alt-A mortgages in its fixed maturity securities portfolio. At March 31, 2012, the Companys foreign government bonds category did not have any direct exposure to Euro zone government issued debt.
Gross Unrealized Losses
The following tables set forth the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
The unrealized losses on the investment securities set forth above were primarily due to increases in market interest rates subsequent to their purchase by the Company. Additionally, unrealized losses have been affected by overall economic factors. The Company expects the fair value of these investment securities to recover as the investment securities approach their maturity dates or sooner if market yields for such investment securities decline. The Company does not believe that any of the investment securities are impaired due to credit quality or due to any company or industry specific event. Based on managements evaluation of the securities and the Companys intent to hold the securities, and as it is unlikely that the Company will be required to sell the securities, none of the unrealized losses summarized in this table are considered other-than-temporary.
Commercial Mortgage Loans
The Company underwrites mortgage loans on commercial property throughout the United States. In addition to real estate collateral, the Company requires either partial or full recourse on most loans. At March 31, 2012, the Company did not have any direct exposure to sub-prime or Alt-A mortgages in its commercial mortgage loan portfolio.
The following table sets forth the commercial mortgage loan portfolio by property type, by geographic region within the U.S. and by U.S. state:
Through its concentration of commercial mortgage loans in California, the Company is exposed to potential losses from an economic downturn in California as well as certain catastrophes, such as earthquakes and fires that may affect certain areas of the western region. Borrowers are required to maintain fire insurance coverage to provide reimbursement for any losses due to fire. Management diversifies the commercial mortgage loan portfolio within California by both location and type of property in an effort to reduce certain catastrophe and economic exposure. However, diversification may not always eliminate the risk of such losses. Historically, the delinquency rate of the California-based commercial mortgage loans has been substantially below the industry average and consistent with the Companys experience in other states. The Company does not require earthquake insurance for the properties when it underwrites new loans. However, management does consider the potential for earthquake loss based upon seismic surveys and structural information specific to each property. The Company does not expect a catastrophe or earthquake damage in the western region to have a material adverse effect on its business, financial position, results of operations or cash flows. Currently, the Companys California exposure is primarily in Los Angeles County, Orange County, San Diego County and the Bay Area Counties. There is a smaller concentration of commercial mortgage loans in the Inland Empire and the San Joaquin Valley where there has been greater economic decline. Due to the concentration of commercial mortgage loans in California, a continued economic decline in California could have a material adverse effect on the Companys business, financial position, results of operations or cash flows.
The carrying value of commercial mortgage loans represents the outstanding principal balance less a loan loss allowance for probable uncollectible amounts. The commercial mortgage loan loss allowance is estimated based on evaluating known and inherent risks in the loan portfolio and consists of a general and a specific loan loss allowance.
The Company continuously monitors its commercial mortgage loan portfolio for potential nonperformance by evaluating the portfolio and individual loans. Key factors that are monitored are as follows:
If the analysis above indicates a loan might be impaired, it is further analyzed for impairment through the consideration of the following additional factors:
If it is determined a loan is impaired, a specific allowance is recorded, if necessary.
General Loan Loss Allowance
The general loan loss allowance is based on the Companys analysis of factors including changes in the size and composition of the loan portfolio, debt coverage ratios, loan to value ratios, actual loan loss experience and individual loan analysis.
Specific Loan Loss Allowance
An impaired commercial mortgage loan is a loan that is not performing to the contractual terms of the loan agreement. A specific allowance for losses is recorded when a loan is considered to be impaired and it is probable that all amounts due will not be collected. The Company also holds specific loan loss allowances on certain performing commercial mortgage loans that it continues to monitor and evaluate. Impaired commercial mortgage loans without specific allowances for losses are those for which the Company has determined that it remains probable that all amounts due will be collected although the timing or nature may be outside the original contractual terms. In addition, for impaired commercial mortgage loans, the Company evaluates the cost to dispose of the underlying collateral, any significant out of pocket expenses the loan may incur and other quantitative information management has concerning the loan. Portions of loans that are deemed uncollectible are written off against the allowance, and recoveries, if any, are credited to the allowance.
The following table sets forth changes in the commercial mortgage loan loss allowance:
The smaller provision for the commercial mortgage loan loss allowance for the first quarter of 2012 compared to the first quarter of 2011 was primarily due to the smaller provision on restructured and 60 day delinquent commercial mortgage loans during the first quarter of 2012. The decrease in charge-offs for the first quarter of 2012 compared to the first quarter of 2011 was primarily related to a decrease in foreclosures and the acceptance of deeds in lieu of foreclosure on commercial mortgage loans for the first quarter of 2012.
The following table sets forth the recorded investment in commercial mortgage loans:
The Company assesses the credit quality of its commercial mortgage loan portfolio quarterly by reviewing the performance of its portfolio which includes evaluating its performing and nonperforming commercial mortgage loans. Nonperforming commercial mortgage loans include all commercial mortgage loans that are 60 days or more past due and commercial mortgage loans that are not 60 days past due but are not substantially performing to other original contractual terms. Nonperforming commercial mortgage loans do not include restructured commercial mortgage loans that are current with their payments and thus are considered performing. However, these restructured commercial mortgage loans may continue to be classified as impaired commercial mortgage loans for monitoring and review purposes.
The following tables set forth performing and nonperforming commercial mortgage loans by property type:
The following tables set forth impaired commercial mortgage loans identified in managements specific review of probable loan losses and the related allowance:
The decrease in impaired commercial mortgage loans at March 31, 2012 compared to December 31, 2011 was primarily due to a decrease in restructured commercial mortgage loans. As of March 31, 2012 and December 31, 2011, the Company did not have any commercial mortgage loans greater than 90 days delinquent that were accruing interest.
As a result of adopting the amendments in ASU No. 2011-02, A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring, the Company assessed all restructurings that occurred during the period for identification as troubled debt restructurings. The Company did not identify any troubled debt restructurings that were not already considered impaired. As of March 31, 2012, there was $1.5 million in troubled debt restructurings that subsequently defaulted since the adoption of ASU 2011-02.
The following table sets forth information related to the troubled debt restructurings of financing receivables:
The following table sets forth information related to the troubled debt restructurings that subsequently defaulted since the adoption of ASU 2011-02:
A restructuring is considered to be a troubled debt restructuring when the debtor is experiencing financial difficulties and the restructured terms constitute a concession. The Company evaluates all restructured commercial mortgage loans for indications of troubled debt restructurings and the potential losses related to these restructurings. If a loan is considered a troubled debt restructuring, the Company impairs the loan and records a specific allowance for estimated losses. In some cases, the recorded investment in the loan may increase post-restructuring.
The following table sets forth the average recorded investment in impaired commercial mortgage loans before specific allowances for losses:
The Company records interest income in net investment income and continues to recognize interest income on delinquent commercial mortgage loans until the loans are more than 90 days delinquent. Interest income and accrued interest receivable are reversed when a loan is put on non-accrual status. For loans that are less than 90 days delinquent, management may reverse interest income and the accrued interest receivable if there is a question on the collectability of the interest. Interest income on loans in the 90-day delinquent category is recognized in the period the cash is collected. The Company resumes the recognition of interest income when the loan becomes less than 90 days delinquent and management determines it is probable that the loan will remain performing.
The amount of interest income recognized on impaired commercial mortgage loans was $1.1 million and $1.2 million for the first quarters of 2012 and 2011, respectively. The cash received by the Company in payment of interest on impaired commercial mortgage loans was $1.1 million and $0.7 million for the first quarters of 2012 and 2011, respectively.
The following tables set forth the aging of commercial mortgage loans by property type:
The Company closely monitors all past due commercial mortgage loans; additional attention is given to those loans at least 60 days past due. Commercial mortgage loans that were at least 60 days past due totaled $16.6 million and $17.1 million at March 31, 2012 and December 31, 2011, respectively. The Companys current level of 60 days past due commercial mortgage loans is higher than its historical levels due to the current economic challenges. Overall, loans at least 60 days past due were 0.33% and 0.34% of the commercial mortgage loan portfolio at March 31, 2012 and December 31, 2011.
Net Investment Income
The following table sets forth net investment income summarized by investment type:
Securities Deposited as Collateral
Securities deposited for the benefit of policyholders in various states, in accordance with state regulations, amounted to $7.3 million and $6.7 million at March 31, 2012 and December 31, 2011, respectively.
The Company sells indexed annuities, which permit the holder to elect a fixed interest rate return or an indexed return, where interest credited to the contracts is based on the performance of the S&P 500 Index, subject to an upper limit or cap and minimum guarantees. Policyholders may elect to rebalance between interest crediting options at renewal dates annually. At each renewal date, the Company has the opportunity to re-price the indexed component by changing the cap, subject to minimum guarantees. The Company estimates the fair value of the index-based interest guarantees for the current period and for all future reset periods until contract maturity. Changes in the fair value of the index-based interest guarantees are recorded as interest credited. The liability represents an estimate of the cost of the options to be purchased in the future to manage the risk related to the index-based interest guarantees. The liability for index-based interest guarantees is the present value of future cash flows attributable to the projected index growth that is in excess of cash flows attributable to fixed interest rates guarantees. The excess cash flows are discounted back to the date of the balance sheet using current market indicators for future interest rates and option costs. Cash flows depend on actuarial estimates for policyholder lapse behavior and managements discretion in setting renewal index-based interest guarantees.
The Company purchases S&P 500 Index options for its interest crediting strategy used in its indexed annuity product. The S&P 500 Index options are purchased from investment banks and are selected in a manner that supports the amount of interest that is expected to be credited in the current year to annuity policyholder accounts that are dependent on the performance of the S&P 500 Index. The purchase of S&P 500 Index options is a pivotal part of the Companys risk management strategy for indexed annuity products. The S&P 500 Index options are exclusively used for risk management. While valuations of the S&P 500 Index options are sensitive to a number of variables, valuations for S&P 500 Index options purchased are most sensitive to changes in the S&P 500 Index value and the implied volatilities of this index. The Company generally purchases one S&P 500 Index option contract per month, which has an expiry date of one year from the date of purchase.
The notional amount of the Companys S&P 500 Index options at March 31, 2012 and December 31, 2011 was $294.4 million and $303.1 million, respectively. Option premiums paid for the Companys S&P 500 Index options were $2.0 million and $2.2 million for the first quarters of 2012 and 2011, respectively. The Company received $1.6 million and $4.4 million for options exercised for the first quarters of 2012 and 2011, respectively.
The Company recognizes all derivative investments as assets or liabilities on the balance sheet at fair value. The Company does not designate its derivatives as hedging instruments and thus does not use hedge accounting. As such, any change in the fair value of the derivative assets and derivative liabilities is recognized as income or loss in the period of change. See Note 6Fair Value for additional information regarding the fair value of the Companys derivative assets and liabilities.
The following table sets forth the fair value of the Companys derivative assets and liabilities:
The following table sets forth the amount of gain or loss recognized in earnings from the change in fair value of the Companys derivative assets and liabilities:
Fluctuations in the fair value of the S&P 500 Index options related to the volatility of the S&P 500 Index increased net investment income for the first quarters of 2012 and 2011. Fluctuations in the fair value of the index-based interest guarantees related to the volatility of the S&P 500 Index increased interest credited for the first quarter of 2012. The combined changes in fair value of the S&P 500 Index options and the index-based interest guarantees resulted in a net gain for the first quarters of 2012 and 2011, respectively.
The Company does not bear derivative-related risk that would require it to post collateral with another institution, and its index option contracts do not contain counterparty credit-risk-related contingent features. The Company is exposed to the credit worthiness of the institutions from which it purchases its S&P 500 Index options and these institutions continued abilities to perform according to the terms of the contracts. The current values for the credit exposure have been affected by fluctuations in the S&P 500 Index. The Companys maximum credit exposure would require an increase of approximately 5.3% in the value of the S&P 500 Index. The maximum credit risk is calculated using the cap strike price of the Companys S&P 500 Index options less the floor price, multiplied by the notional amount of the S&P 500 Index options.
The following table sets forth the fair value of the Companys derivative assets and its maximum credit risk exposure related to its derivatives:
DAC, VOBA and other acquisition related intangible assets are generally originated through the issuance of new business or the purchase of existing business, either by purchasing blocks of insurance policies from other insurers or by the outright purchase of other companies. The Companys other intangible assets are subject to impairment tests on an annual basis or more frequently if circumstances indicate that carrying values may not be recoverable.
In October 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU No. 2010-26 amends the codification guidance for insurance entities to eliminate the diversity of accounting treatment related to deferred acquisition costs. The Company adopted this standard retrospectively as of January 1, 2012, and comparative financial statements of prior periods have been adjusted.
The following table sets forth activity for DAC, VOBA and other intangible assets:
The Company defers certain acquisition costs that vary with and are directly related to the origination of new business and placing that business in force. Certain costs related to obtaining new business and acquiring business through reinsurance agreements have been deferred and will be amortized to accomplish matching against related future premiums or gross profits as appropriate. The Company normally defers certain acquisition-related commissions and incentive payments, certain costs of policy issuance and underwriting, and certain printing costs. Assumptions used in developing DAC and amortization amounts each period include the
amount of business in force, expected future persistency, withdrawals, interest rates and profitability. These assumptions are modified to reflect actual experience when appropriate. Additional amortization of DAC is charged to current earnings to the extent it is determined that future premiums or gross profits are not adequate to cover the remaining amounts deferred. Changes in actual persistency are reflected in the calculated DAC balance. Costs that are not directly associated with the acquisition of new business are not deferred as DAC and are charged to expense as incurred. Generally, annual commissions are considered expenses and are not deferred.
DAC for group and individual disability insurance products and group life insurance products is amortized over the life of related policies in proportion to future premiums. The Company amortizes DAC for group disability and life insurance products over the initial premium rate guarantee period, which averages 2.5 years. DAC for individual disability insurance products is amortized in proportion to future premiums over the life of the contract, averaging 20 to 25 years.
The Companys individual deferred annuities and group annuity products are classified as investment contracts. DAC related to these products is amortized over the life of related policies in proportion to expected gross profits. For the Companys individual deferred annuities, DAC is generally amortized over 30 years, though expected gross profits can fluctuate due to changes in the fair value of our S&P 500 Index options and index-based interest guarantees. DAC for group annuity products is amortized over 10 years.
VOBA primarily represents the discounted future profits of business assumed through reinsurance agreements. The Company has established VOBA for a block of individual disability business assumed from Minnesota Life Insurance Company (Minnesota Life) and a block of group disability and group life business assumed from Teachers Insurance and Annuity Association of America (TIAA). VOBA is generally amortized in proportion to future premiums for group and individual disability insurance products and group life products. However, the VOBA related to the TIAA transaction associated with an in force block of group long term disability claims for which no ongoing premium is received is amortized in proportion to expected gross profits. If actual premiums or future profitability are inconsistent with the Companys assumptions, the Company could be required to make adjustments to VOBA and related amortization. During the first quarter of 2012, the Company recorded an $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 $63.9 million and $62.4 million at March 31, 2012 and December 31, 2011, respectively.
The following table sets forth the amount of DAC and VOBA balances amortized in proportion to expected gross profits and the percentage of the total balance of DAC and VOBA amortized in proportion to expected gross profits:
Key assumptions, which will affect the determination of expected gross profits for determining DAC and VOBA balances, are:
These assumptions are modified to reflect actual experience when appropriate. Although a change in a single assumption may have an impact on the calculated amortization of DAC or VOBA for balances associated with investment contracts, it is the relationship of that change to the changes in other key assumptions that determines the ultimate impact on DAC or VOBA amortization. Because actual results and trends related to these assumptions vary from those assumed, the Company revises these assumptions annually to reflect its current best estimate of expected gross profits. As a result of this process, known as unlocking, the cumulative balances of DAC and VOBA are adjusted with an offsetting benefit or charge to income to reflect changes in the period of the revision. An unlocking event 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:
Significant, unanticipated changes in key assumptions, which affect the determination of expected gross profits, may result in a large unlocking event that could have a material adverse effect on the Companys financial position or results of operations. However, future changes in DAC and VOBA balances due to changes in underlying assumptions are not expected to be material.
The Companys other intangible assets are subject to amortization and consist of certain customer lists from Asset Management business acquired and an individual disability marketing agreement. Customer lists have a combined estimated weighted-average remaining life of approximately 8.3 years. The marketing agreement accompanied the Minnesota Life transaction and provides access to Minnesota Life agents, some of whom now market Standards individual disability insurance products. The Minnesota Life marketing agreement will be fully amortized by the end of 2023. The accumulated amortization of other intangible assets was $32.1 million and $30.6 million at March 31, 2012 and December 31, 2011, respectively.
The following table sets forth the estimated net amortization of VOBA and other intangible assets for the remainder of 2012 and for each of the next five years:
In the normal course of business, the Company is involved in various legal actions and other state and federal proceedings. A number of actions or proceedings were pending at March 31, 2012. In some instances, lawsuits include claims for punitive damages and similar types of relief in unspecified or substantial amounts, in addition to amounts for alleged contractual liability or other compensatory damages. In the opinion of management, the ultimate liability, if any, arising from the actions or proceedings is not expected to have a material adverse effect on the Companys business, financial position, results of operations or cash flows.
Senior Unsecured Revolving Credit Facility (Facility) Contingencies
The Company maintains a $200 million Facility, which will remain at $200 million through June 15, 2012 and will then decrease to $165 million until final maturity on June 15, 2013. Borrowings under the Facility will continue to be used to provide for working capital and general corporate purposes of the Company and its subsidiaries and the issuance of letters of credit.
Under the agreement, StanCorp is subject to two financial covenants that are based on the Companys ratio of total debt to total capitalization and consolidated net worth. The Facility is subject to performance pricing based upon the Companys ratio of total debt to total capitalization and includes interest based on a Eurodollar margin, plus facility and utilization fees. At March 31, 2012, StanCorp was in compliance with all financial covenants under the Facility and had no outstanding balance on the Facility.
Other Financing Obligations
The Company has $250 million of 6.875%, 10-year senior notes (Senior Notes), which mature on September 25, 2012. The principal amount of the Senior Notes is payable at maturity and interest is payable semi-annually in April and October. Given the maturity date of the Senior Notes, they have been classified as short-term debt as of March 31, 2012.
The Company has $300 million of 6.90%, junior subordinated debentures (Subordinated Debt), which matures on June 1, 2067, is non-callable at par for the first 10 years (prior to June 1, 2017) and is subject to a replacement capital covenant. The covenant limits replacement of the Subordinated Debt for the first 40 years to be redeemable after year 10 (on or after June 1, 2017) and only with securities that carry equity-like characteristics that are the same as or more equity like than the Subordinated Debt. The principal amount of the Subordinated Debt is payable at final maturity. Interest is payable semi-annually in June and December for the first 10 years up to June 1, 2017, and quarterly thereafter at a floating rate equal to three-month LIBOR plus 2.51%. StanCorp has the option to defer interest payments for up to five years. The declaration and payment of dividends to shareholders would be restricted if the Company elected to defer interest payments on its Subordinated Debt. If elected, the restriction would be in place during the interest deferral period. StanCorp is currently not deferring interest on the Subordinated Debt.
In the normal course of business, the Company commits to fund commercial mortgage loans generally up to 90 days in advance. At March 31, 2012, the Company had outstanding commitments to fund commercial mortgage loans totaling $118.6 million, with fixed interest rates ranging from 4.625% to 6.375%. These commitments generally have fixed expiration dates. A small percentage of commitments expire due to the borrowers failure to deliver the requirements of the commitment by the expiration date. In these cases, the Company will retain the commitment fee and good faith deposit. Alternatively, if the Company terminates a commitment due to the disapproval of a commitment requirement, the commitment fee and good faith deposit may be refunded to the borrower, less an administrative fee.