Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2002

or

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)

Registrant’s telephone number, including area code: (503) 321-7000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: NONE

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the 10-K or any amendment to the Form 10-K. ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No ¨

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 28, 2002, was approximately $1.65 billion based upon the closing price of $55.50 on June 28, 2002.

As of March 4, 2003, there were 29,066,984 shares of the Registrant’s common stock, no par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement dated March 28, 2003 in connection with the 2003 Annual Meeting of Shareholders are incorporated by reference in Part III.

Table of Contents

Table of Contents

StanCorp Financial Group, Inc.

2

Table of Contents

Part I

As used in this Form 10-K, the terms “StanCorp,” “Company,” “we,” “us” and “our” refer to StanCorp Financial Group, Inc. and its subsidiaries, unless the context otherwise requires.

ITEM 1.  BUSINESS

For additional information on business developments and the financial results of our operating segments see Item 6, “Selected Financial Data,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data.”

Our filings with the Securities and Exchange Commission (“SEC”) include our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and amendments to those reports. All filed reports are available free of charge on our website at www.stancorpfinancial.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC also maintains an Internet site that contains report, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

General

StanCorp, through its subsidiaries, is a leading provider of selected insurance and retirement plan products. We were incorporated under the laws of Oregon in 1998 as a parent holding company and completed our initial public offering of common stock on April 21, 1999. We conduct business in all 50 states through our subsidiaries, including Standard Insurance Company (“Standard”); The Standard Life Insurance Company of New York; StanCorp Mortgage Investors, LLC (“StanCorp Mortgage Investors”); and StanCorp Investment Advisers, Inc.

Our largest subsidiary, Standard, was founded in 1906 and is domiciled in Oregon and licensed in 49 states, the District of Columbia and the U.S. Territories of Guam and the Virgin Islands. Standard offers income protection and investment products and services including the following primary products:

The Standard Life Insurance Company of New York was organized in 2000, and is licensed to provide long term and short term disability, life and accidental death and dismemberment insurance for groups in New York.

StanCorp Mortgage Investors originates, underwrites and services small fixed-rate commercial mortgage loans for investment portfolios of our insurance subsidiaries. It also generates fee income from the origination and servicing of commercial mortgage loans sold to institutional investors.

StanCorp Investment Advisers, Inc. is an SEC registered investment adviser providing performance analysis, fund selection support and model portfolios to our retirement plans customers and group life beneficiaries.

Recent Business Developments

Effective October 1, 2002, Standard acquired the group disability and group life insurance business of Teachers Insurance and Annuity Association of America (“TIAA”) through a reinsurance transaction. This block of business includes approximately 1,800 group insurance contracts, representing 650,000 insured individuals.

StanCorp filed a $1.0 billion shelf registration statement with the SEC, which became effective on July 23, 2002, registering common stock, preferred stock, debt securities, and warrants. On September 25, 2002 we completed an initial public debt offering of $250.0 million of 6.875%, 10-year senior notes, pursuant to the shelf registration statement. Approximately $200 million of the debt offering proceeds were used to fund the acquisition of the TIAA block of business. The remaining proceeds were used to pay our annual dividend to shareholders, to fund a modest level of share repurchases and for general corporate purposes.

Strategy and Competition

Our mission is to meet and exceed customers’ needs for financial products and services in growing markets where the application of specialized expertise creates potential for superior shareholder returns. We operate in select financial products and services growth markets and seek to compete on expertise, differentiation and service, while maintaining a strong financial position.

We have single digit market share in our markets. Based on recent industry premium statistics for the United States (which exclude premiums from the acquisition of the TIAA block of business), we have leading market positions in the following products:

StanCorp Financial Group, Inc.

3

Table of Contents

Part I

Competition for our products comes primarily from other insurers and financial services companies such as banks, broker-dealers and mutual funds. Some competitors have greater financial resources, offer a broader array of products and may have higher financial strength ratings. Standard’s financial strength ratings as of February 2003 were:

We maintain a disciplined approach to pricing our products and services, which we believe has contributed to our long-term financial growth and the strong persistency we have experienced in recent years, including recent periods of economic slowing. We also diversify risk by geography, industry, customer size and occupation of insured employees.

Segments

We operate through three segments: Employee Benefits—Insurance, Individual Insurance and Retirement Plans. The following table sets forth premiums for the Company’s segments for the years ended December 31:

Employee Benefits—Insurance Segment

The Employee Benefits—Insurance segment sells disability and life insurance products to employer groups ranging in size from two lives to over 150,000 lives. Through this segment the Company is a leading provider of group disability and group life insurance products, serving more than 32,500 employer groups representing more than 6 million employees. This segment also sells executive benefits income protection, group dental insurance and accidental death and dismemberment insurance. According to industry statistics, over the past five years the group insurance market in the U.S. has grown 8% to 9% annually.

Our group insurance products are sold by 157 sales representatives and managers, through independent employee benefit brokers and consultants. The sales representatives, who are employees of the Company, are compensated through salary and incentive compensation programs and are located in 40 offices in principal cities of the United States. The field offices also provide underwriting, sales support and service through a field administrative staff of almost 240 employees.

This segment includes the results of The Standard Life Insurance Company of New York. During the first quarter of 2002, this subsidiary received approval from the State of New York Insurance Department to sell group life and accidental death and dismemberment insurance products in New York. The Standard Life Insurance Company of New York is now licensed to provide long term and short term disability, life and accidental death and dismemberment insurance for groups in New York.

Also, during the first quarter of 2002, Standard formed a strategic marketing alliance with Ameritas Life Insurance Corp. (“Ameritas”) that offers Standard’s policyholders new and more flexible dental coverage options and access to Ameritas’ nationwide preferred provider organization panel.

Group Long Term Disability Insurance contributed approximately 45% of 2002 premiums for the segment.    Group long term disability insurance provides partial replacement of earnings to insured employees who become disabled for extended periods of time. The Company’s basic long term disability product covers disabilities that occur both at work and elsewhere. In order to receive disability benefits, an employee must be continuously disabled for a specified waiting period, which generally ranges from 30 to 180 days. The benefits usually are offset by other income that the disabled employee receives from sources such as social security disability, workers compensation and sick leave. The benefits also may be subject to certain maximum amounts and benefit periods.

Our long term disability products provide coverage for claims incurred during the policy period. Generally, group policies offer rate guarantees for periods from one to three years. While we can prospectively re-price and re-underwrite coverages at the end of these guarantee periods, we must pay benefits with respect to claims incurred during these periods without being able to increase guaranteed premium rates. Historically, the duration of approximately 50% of all claims filed under our long term disability policies is 24 months or fewer. However, claims caused by more severe disabling

StanCorp Financial Group, Inc.

4

Table of Contents

conditions may be paid over much longer periods, including up to normal retirement age or longer.

Group Life and Accidental Death and Dismemberment Insurance contributed approximately 39% of 2002 premiums for the segment.    Group life insurance products provide coverage to insured employees for a specified period and have no cash value (amount of cash available to a policyholder on the surrender of, or withdrawal from, the life insurance policy). Coverage is offered to employees and their dependents. Accidental death and dismemberment insurance is usually provided in conjunction with group life and is payable after the accidental death or dismemberment of the insured in an amount based on the face amount of the policy.

Group Short Term Disability Insurance contributed approximately 11% of 2002 premiums for the segment.    Group short term disability insurance provides partial replacement of earnings to insured employees who are temporarily disabled. Short term disability insurance generally requires a short waiting period, ranging from one to thirty days, before an employee may receive benefits. Maximum benefit periods generally do not exceed 26 weeks. Short term disability benefits also may be offset by other income, such as sick leave, that a disabled employee may receive. The Company’s basic short term disability product generally covers non-occupational disabilities only.

Group Dental Insurance contributed approximately 5% of 2002 premiums for the segment.    Group dental products provide coverage to insured employees for preventive, basic and major dental expenses. We offer three dental plans including a traditional plan, a reduced cost plan and a cost containment plan, which are differentiated by the level of service and cost.

Individual Insurance Segment

The Individual Insurance segment sells disability insurance and fixed-rate annuities to individuals. Our disability income insurance products are sold nationally through master general agents and brokers, primarily to physicians, lawyers, other professionals, executives, and small business owners. 87% of these policies are non-cancelable, guaranteeing the customer a fixed premium rate for the life of the contract.

This segment also sells business overhead expense coverage, which reimburses a business for covered operating expenses when the insured is disabled, and business equity buy-out coverage, which provides funds for the purchase, by other owners or partners, of the insured’s ownership interest in a business in the event of total disability.

Fixed-rate annuities are distributed through master general agents, brokers and financial institutions. The target market is any individual seeking conservative investments for retirement or other savings, or guaranteed fixed payments. The segment’s products include deferred annuities with interest rate guarantees ranging from one to six years and a full array of single premium immediate annuity income payment options.

In 2000 and 2001, two transactions were completed for the Individual Insurance segment. Effective October 1, 2000, Standard acquired a block of individual disability insurance business, for which the Company possesses economies of scale, market differentiation and expertise, from Minnesota Life Insurance Company (“Minnesota Life”). Effective January 1, 2001, Standard sold its individual life insurance product line, for which Standard did not possess economies of scale. Approximately one-third of individual disability insurance product sales in 2002 were through Minnesota Life general agencies. (See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Selected Segment Information—Individual Insurance Segment.”)

Retirement Plans Segment

The Retirement Plans segment offers full-service 401(k) products, defined benefit, money purchase, profit sharing and deferred compensation plan products and services to small and medium sized employers. Our 401(k) plans, which are our primary retirement plan product, offer participants a fixed income investment option, managed by Standard, and third-party brand name mutual funds. Mutual funds are offered from Fidelity Investments, Morgan Stanley, Franklin Templeton, The Vanguard Group, Janus, T.Rowe Price, American Century, Brandywine Fund, Inc., Columbia, Citizens Fund, Liberty Fund, TCW Galileo Funds, Inc., Federated, Harbor Fund, and Sterling Capital Management.

The Retirement Plans segment sells products and services primarily through brokers, employee benefit consultants, and other distributors served by our sales representatives throughout the U.S. Most of our retirement plans customers receive both financial and record-keeping services, although either may be provided on a stand-alone basis. Approximately 63% of plan sponsors use StanCorp Investment Advisers, Inc. to provide fund performance analysis and selection support. Standard has been

StanCorp Financial Group, Inc.

5

Table of Contents

Part I

recognized for our consistent, excellent service in surveys performed by 401(k)Exchange.com and Plan Sponsor Magazine.

The primary sources of revenue for the Retirement Plans segment include plan administration fees, fees on separate account assets under management and investment margin on general account assets under management (fixed income investment option). The investment margin is the excess of net investment income over related interest credited to policyholders. In addition, premiums and benefits to policyholders reflect the conversion of retirement plan assets into life contingent annuities.

Investments

Investment management is an integral part of our business. We seek to ensure that investment asset types and maturities are appropriate for the Company’s policy reserves and other liabilities so that we can meet our obligations to policyholders under a wide variety of economic conditions. (See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Investing Cash Flows” and Item 8, “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements.”)

Risk Management and Reinsurance

Methods used by the Company to manage risk include, but are not limited to, sound product design and underwriting, effective claims management, disciplined pricing, distribution expertise, broad diversification of risk by geography, industry, customer size and occupation, maintenance of a strong financial position, maintenance of reinsurance and risk pool arrangements, and sufficient alignment of assets and liabilities to meet financial obligations.

The primary purpose of ceding reinsurance is to limit losses from large exposures. The maximum retention limit per individual for group life and accidental death and dismemberment policies combined is $500,000. For group disability policies, the maximum retention limit is $10,000 gross monthly benefit per individual. Except for certain policies acquired with the Minnesota Life block of business, the maximum retention for individual disability policies is generally $3,500 monthly benefit per individual. Certain policies acquired with the Minnesota Life block of business have maximum retention limits of $6,000 monthly benefit per individual. The retention limits for the Minnesota Life block of business were established by a reinsurance agreement entered into effective July 1, 2002.

Standard is involved in a reinsurance and third party administration arrangement with The Northwestern Mutual Life Insurance Company (“Northwestern Mutual”) to market Northwestern Mutual’s group long term and short term disability products using Northwestern Mutual’s agency distribution system. Generally, Standard provides reinsurance to Northwestern Mutual for 60% of the risk, and receives 60% of the premiums for the policies issued. Premiums assumed by Standard for the Northwestern Mutual business accounted for 3.6%, 3.9%, and 4.0% of the Company’s total premiums in 2002, 2001, and 2000, respectively. In addition to assuming reinsurance risk, Standard provides product design, pricing, state regulatory filings, underwriting, legal support, claims management and other administrative services under the arrangement.

Standard and Ameritas entered into a reinsurance agreement effective June 1, 2002, that provides for approximately 15% of the net dental premiums written by Standard to be ceded to Ameritas. As a result of this reinsurance agreement and depending on related claims experience, we expect premiums to decrease approximately $8 million annually because reinsurance premium payments are treated as a reduction to premiums. We anticipate that the impact on profitability will be minimal. (See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Developments.”)

In addition to product-specific reinsurance arrangements, we have maintained reinsurance coverage in the past for certain catastrophe losses. Subsequent to the terrorist events of September 11, 2001, the availability of reinsurance for catastrophe coverage became less certain and more expensive. Accordingly, we entered into a catastrophe reinsurance pool with other insurance companies. This pool spreads catastrophe losses on group life and accidental death and dismemberment over approximately 40 participating members of the pool. The reinsurance pool exposes us to potential losses experienced by other participating members of the pool. However, through this pool, our catastrophe reinsurance coverage increased to approximately $240 million per event. If the Company had been in the pool on September 11, 2001, the estimated pre-tax charges related to the terrorist events would have been approximately $15 million compared to pre-tax charges of $5 million actually incurred. An

StanCorp Financial Group, Inc.

6

Table of Contents

occurrence of a significant catastrophic event or a change in the on-going nature and availability of reinsurance and catastrophe reinsurance could have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.

The Terrorism Risk Insurance Act of 2002 provides for federal government assistance to property and casualty insurers in the event of material losses due to terrorist acts on behalf of a foreign person or foreign interest. The legislation also provides for the United States Treasury Department to conduct an expedited study to determine if there should be federal assistance for group life insurers in the event of material losses due to terrorist acts. Group life insurance represents a significant portion of our revenues and operating income. Concentration of risk is inherent in the group life insurance products we offer. We have group life insurance exposure to certain customers in amounts in excess of our catastrophe reinsurance coverage. Without government assistance, terrorist acts could have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.

Employees

At December 31, 2002, StanCorp and its subsidiaries had 2,465 full- and part-time employees.

ITEM 1A.  EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of StanCorp are as follows:

Set forth below is biographical information for the executive officers of StanCorp:

Patricia J. Brown, CPA, FLMI, has been vice president, information technology of Standard since 1999. Ms. Brown has served in officer positions at StanCorp and Standard, including assistant vice president, controller and treasurer from 1996 to 1999. She has served in various management positions at Standard since 1992.

Kim W. Ledbetter, FSA, CLU, has been senior vice president, individual insurance and retirement plans of Standard since 1997 and from 1994 to 1997 was vice president, retirement plans of Standard.

Douglas T. Maines, LLIF, has been executive vice president of StanCorp and president of the Employee Benefits-Insurance division of Standard since 2002. Mr. Maines was senior vice president, employee benefits—insurance division of Standard since 1998. From 1993 to 1998, Mr. Maines was vice president, business development and vice president and general manager, claims for Liberty Mutual Insurance Company.

Cindy J. McPike, CPA, has been vice president and chief financial officer of StanCorp and Standard since July of 2002. Ms. McPike was vice president, controller and treasurer of StanCorp and Standard since July of 2001. Ms. McPike served in officer positions at StanCorp and Standard since 1999 and was manager, corporate accounting of Standard from 1998 to 1999. Prior to joining Standard, Ms. McPike served in various management positions at NW Natural, most recently as director of Internal Audit.

J. Gregory Ness, LLIF, has been senior vice president, investments of Standard since 1999. Mr. Ness was vice president and corporate secretary of StanCorp from its incorporation until 2000. From 1997 to 1999, Mr. Ness was vice president and corporate secretary of Standard.

Eric E. Parsons, has been president and chief executive officer of StanCorp and Standard since January 1, 2003. Mr. Parsons was senior vice president and chief financial officer of StanCorp from its incorporation until 2002 and was senior vice president and chief financial officer of Standard from 1998 through 2002. From 1997 to 1998, Mr. Parsons was senior vice president and chief financial and investment officer of Standard.

Michael T. Winslow, JD, has been vice president, general counsel and corporate secretary of StanCorp and Standard since 2001. Prior to joining StanCorp, Mr. Winslow served as assistant general counsel and chief compliance officer for PacifiCorp since 1995.

StanCorp Financial Group, Inc.

7

Table of Contents

Part I

Nanci W. Werts, has been assistant vice president, controller and treasurer of StanCorp and Standard since December 2002. Prior to joining StanCorp, Ms. Werts was director of investor relations for NetIQ Corporation since 2001 and served as treasurer and director of investor relations and in other financial management roles for WebTrends, Inc. from 1999 until its merger with NetIQ. From 1994 through 1999 she was business manager for SRG Partnership and previously held positions in finance, management and regulatory reporting.

ITEM 2.  PROPERTIES

Principal properties owned by Standard and used by the Company consist of two office buildings in downtown Portland, Oregon: the Standard Insurance Center, with approximately 459,000 square feet; and the Standard Plaza, with approximately 216,000 square feet. In addition, Standard leases 146,000 square feet of office space in a third office building, also located in downtown Portland, Oregon, and 49,000 square feet of offsite storage. The Company also leases offices under commitments of varying terms to support its sales and regional processing offices throughout the United States.

Management believes that the capacity and types of facilities are suitable and adequate for the present and foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS

See Item 8, “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements” for the information incorporated herein by reference.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of StanCorp’s shareholders during the fourth quarter of 2002.

StanCorp Financial Group, Inc.

8

Table of Contents

Part II

ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

StanCorp’s common stock is listed on the New York Stock Exchange under the symbol “SFG.” As of March 4, 2003 there were 58,108 shareholders of record of common stock.

The high and low sales prices as reported by the New York Stock Exchange and cash dividends paid per share of common stock were as follows by calendar quarter:

The declaration and payment of dividends in the future is subject to the discretion of the board of directors and it is anticipated that annual dividends will be paid in December of each year depending on our financial condition, results of operations, cash requirements, future prospects, regulatory restrictions on the payment of dividends by the insurance subsidiaries, the ability of the insurance subsidiaries to maintain adequate capital and other factors deemed relevant by the board of directors. (See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Cash Flows.”)

From time to time, the board of directors has authorized share repurchase programs. Share repurchases are to be effected 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. Execution of the share repurchase program is based upon management’s assessment of market conditions for its common stock and other potential growth opportunities. During 2002, the Company repurchased 853,000 shares of its common stock at a total cost of $45.5 million, for a weighted-average price per share of $53.34. At December 31, 2002, approximately 400,000 shares were remaining under the currently authorized share repurchase program, which expires December 31, 2003.

StanCorp Financial Group, Inc.

9

Table of Contents

Part II

ITEM 6.  SELECTED FINANCIAL DATA

The following financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data.”

StanCorp Financial Group, Inc.

10

Table of Contents

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used in this Form 10-K, the terms “StanCorp,” “Company,” “we,” “us” and “our” refer to StanCorp Financial Group, Inc. and its subsidiaries, unless the context otherwise requires.

The following analysis of the consolidated financial condition and results of operations of StanCorp and its subsidiaries should be read in conjunction with the consolidated financial statements and related notes thereto (see “Item 8, “Financial Statements and Supplementary Data”).

General

StanCorp, through its subsidiaries, is a leading provider of selected insurance and retirement plan products. StanCorp was incorporated under the laws of Oregon in 1998 as a parent holding company and completed its initial public offering of common stock on April 21, 1999. We conduct business in all 50 states through our subsidiaries, including Standard Insurance Company (“Standard”); The Standard Life Insurance Company of New York; StanCorp Mortgage Investors, LLC (“StanCorp Mortgage Investors”); and StanCorp Investment Advisers, Inc.

Forward-looking Statements

We have made in this Form 10-K, and from time to time may make in our public filings, news releases and oral presentations and discussions, certain statements which are not based on historical facts. These statements are “forward-looking” and, accordingly, involve risks and uncertainties that could cause actual results to differ materially from those discussed. Although such “forward-looking” statements have been made in good faith and are based on reasonable assumptions, there is no assurance that the expected results will be achieved. These statements include, without limitation, statements as to future expectations, beliefs, plans, strategies, objectives, events, conditions and financial performance, and are identified by words such as “believes,” “expects,” “intends,” “may,” “will,” “should,” “anticipates,” or the negative of those words or other comparable terminology. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we are providing this cautionary statement to identify important factors that could cause actual results to differ materially from those anticipated. The following factors could cause results to differ materially from management expectations as suggested by such forward-looking statements:

Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except to the extent required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

StanCorp Financial Group, Inc.

11

Table of Contents

Part II

Business Developments

Effective October 1, 2002, Standard acquired the group disability and group life insurance business of Teachers Insurance and Annuity Association (“TIAA”), through a reinsurance transaction. This block of business includes approximately 1,800 group insurance contracts, representing 650,000 insured individuals, and generated approximately $180 million in premiums in 2001. Acquiring the block of business expanded our presence in the Eastern United States, increased our market share in the education and research sectors and allowed us to appropriately reflect the value of business through the ceding commission. Standard paid a ceding commission of approximately $75 million for the block of business from TIAA and received approximately $705 million in assets and corresponding statutory liabilities. Approximately $60 million in value of business acquired (“VOBA”) was recorded upon closing of the acquisition.

StanCorp filed a $1.0 billion shelf registration statement with the Securities and Exchange Commission (“SEC”), which became effective on July 23, 2002, registering common stock, preferred stock, debt securities, and warrants. On September 25, 2002 we completed an initial public debt offering of $250.0 million of 6.875%, 10-year senior notes, pursuant to the shelf registration statement. The principal amount of the senior notes is payable at maturity and interest is payable semi-annually in April and October, beginning in 2003. Approximately $200 million of the debt offering proceeds were used to fund the acquisition by Standard of the TIAA block of business, including the $75 million ceding commission and $125 million to maintain Standard’s risk-based capital at the Company’s targeted level. The remaining proceeds were used to pay our annual dividend to shareholders, to fund a modest level of share repurchases and for general corporate purposes.

Effective October 1, 2000, Standard acquired a block of individual disability insurance business, for which the Company possesses economies of scale, market differentiation and expertise, from Minnesota Life Insurance Company (“Minnesota Life”). Certain policies acquired with the Minnesota Life block of business have maximum retention limits of $6,000 monthly benefit per individual. The retention limits for the Minnesota Life block of business were established by a reinsurance agreement entered into effective July 1, 2002.

During the first quarter of 2002, Standard formed a strategic marketing alliance with Ameritas Life Insurance Corp. (“Ameritas”) that offers Standard’s policyholders new and more flexible dental coverage options and access to Ameritas’ nationwide preferred provider organization panel of dentists. As part of this alliance, Standard and Ameritas entered into a reinsurance agreement, effective June 1, 2002, that provides for approximately 15% of the net dental premiums written by Standard to be ceded to Ameritas (see “—Selected Segment Information-Employee Benefits – Insurance Segment”). Management believes that the enhanced dental product together with our life and disability products provides a more attractive employee benefit product package.

Also during the first quarter of 2002, The Standard Life Insurance Company of New York received approval from the State of New York Insurance Department to sell group life and accidental death and dismemberment insurance products in New York. The Standard Life Insurance Company of New York is now licensed to provide long term and short term disability, life and accidental death and dismemberment insurance for groups in New York.

Critical Accounting Policies and Estimates

Our consolidated financial statements and certain disclosures made in this Form 10-K have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and require us to make estimates and assumptions that affect reported amounts of assets and liabilities and contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates most susceptible to material changes due to significant judgment (the “critical accounting policies”) are those used in determining investment impairments, the reserves for future policy benefits and claims, deferred acquisition costs and VOBA, and the provision for income taxes. The results of these estimates are critical because computed results affect our profitability and may affect key indicators used to measure the Company’s performance. These estimates have a material effect on our results of operations and financial condition.

Investments

The Company’s investment portfolio consists primarily of fixed maturity securities and commercial mortgage loans. Fixed maturity securities are recorded at fair value with net unrealized gains or losses recorded as an increase or decrease to other comprehensive income, net of tax. For all investments, we record impairments when it is determined

StanCorp Financial Group, Inc.

12

Table of Contents

that the decline in fair value of an investment below its amortized cost basis is “other than temporary.” We reflect impairment charges in net capital gains or losses and permanently adjust the cost basis of the investment to reflect the impairment.

Factors considered in evaluating whether a decline in value of fixed maturity securities is other than temporary include:

For securities expected to be sold, an other than temporary impairment charge is recorded if we do not expect the realizable market value of a security to recover to amortized cost prior to the expected date of sale. Once an impairment charge has been recorded, we continue to review the other than temporarily impaired securities for further potential impairment on an ongoing basis.

Reserves

For all of our product lines, we establish and carry as a liability actuarially determined reserves that are calculated to meet our obligations for future policy benefits and claims. These reserves do not represent an exact calculation of our future benefit liabilities, but are instead estimates based on assumptions concerning a number of factors, including:

In particular, our group long term disability reserves are sensitive to assumptions regarding the following factors:

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. Changes in one or more of these factors could require us to increase our reserves. If actual claims experience is materially inconsistent with our assumptions, we could be required to increase our reserves.

Quarterly, we evaluate the appropriateness of the discount rate used to establish new long term disability reserves. We determine the discount rate based on the average new money investment rate for the quarter less a margin to allow for reinvestment risk. If assets are subsequently reinvested at rates that do not exceed the established discount rate on the reserves, we could be required to increase our reserves (see “—Selected Segment Information—Employee Benefits—Insurance Segment,” and “—Liquidity and Capital Resources—Financing Cash Flows— Asset/Liability Matching and Interest Rate Risk Management”).

Deferred Acquisition Costs and Value of Business Acquired

Certain costs related to obtaining new business and acquiring blocks of business have been deferred to accomplish matching against related future premiums and gross profits. We normally defer certain acquisition related commissions and incentive payments, certain costs of policy issuance and underwriting, certain printing costs and certain variable field office expenses. Assumptions used in developing the amount of deferred acquisition costs to be amortized each period include expected future persistency, interest rates and profitability, which is significantly affected by premium renewal assumptions. These estimates are modified to reflect actual experience when appropriate. If actual persistency, interest rates, or profitability are inconsistent with our assumptions, we could be required to make adjustments to deferred acquisition costs and related amortization.

VOBA represents the discounted future profits of blocks of business acquired through reinsurance transactions. The value of business acquired is amortized in proportion to future premiums or expected future profitability, as appropriate. If actual premiums or expected future profitability are inconsistent with our assumptions, we could be required to make adjustments to VOBA and related amortization.

StanCorp Financial Group, Inc.

13

Table of Contents

Part II

Income Taxes

The provision for income taxes includes amounts currently payable, deferred amounts that result from temporary differences between financial reporting and tax bases of assets and liabilities as measured by current tax rates and laws, and estimated amounts provided for potential adjustments related to Internal Revenue Service examinations of open years, generally when the interpretation of the tax law is unclear. Although estimated amounts are adjusted when appropriate, amounts required to be provided upon the settlement of an examination may differ from amounts previously estimated. Years currently open for audit by the Internal Revenue Service are 1996 through 2001.

Financial Objectives

The Company has publicly stated financial objectives for premium growth, growth in operating income per diluted common share and operating return on average equity. Operating income is net income excluding after-tax capital gains and losses. The following sets forth our financial objectives and results against those objectives for the year ended December 31, 2002:

Consolidated Results of Operations

The following table sets forth consolidated results of operations for the years ended December 31:

Net Income

Net income increased $5.0 million, or 4.7%, in 2002 compared to 2001 and $11.3 million, or 11.9%, in 2001 compared to 2000. The increase in 2002 resulted primarily from premium growth and favorable claims experience in the Employee Benefits—Insurance segment partially offset by net capital losses of $19.7 million. The increase in 2001 resulted primarily from premium growth and stable claims experience in the Employee Benefits—Insurance segment and increased income contribution from the Individual Insurance segment as a result of the acquisition of a block of individual disability insurance business. Net income in 2001 included $5.0 million in pre-tax charges related to the terrorist events of September 11, 2001. (See “—Net Capital Losses” and “—Selected Segment Information.”)

Premiums

Premiums increased $151.6 million, or 12.3%, in 2002 compared to 2001, and $129.7 million, or 11.8%, in 2001 compared to 2000. Our premium growth target range is 10% to 12%, and is measured excluding adjustments for experience rated refunds on certain large group insurance contracts, and excludes premiums from acquisitions for the first 12 months after the acquisition closes (see “—Financial Objectives”). By that measure, premiums increased 9.5% in 2002 compared to 2001, and

StanCorp Financial Group, Inc.

14

Table of Contents

12.4% in 2001 compared to 2000. The growth rate achieved in 2002 was lower than in 2001 primarily due to economic conditions, including slower employment and wage growth and reduced employee benefit budgets on the part of employer groups primarily due to increased medical costs. Premium growth for both periods was primarily in the Employee Benefits—Insurance segment (see “—Selected Segment Information”).

Net Investment Income

Net investment income, which is affected by changes in interest rates and levels of invested assets, increased $32.2 million, or 9.2%, in 2002 compared to 2001. The increase was primarily due to an increase in average invested assets of 10.0% in 2002 compared to 2001, offset in part by declining portfolio yields. The increase in average invested assets included assets from debt offering proceeds and the acquisition of the TIAA block of business (see “—Business Developments”). The portfolio yield for fixed maturity securities decreased to 6.22% at December 31, 2002, from 6.79% at December 31, 2001. The portfolio yield for commercial mortgage loans decreased to 7.94% at December 31, 2002 from 8.22% at December 31, 2001.

Net investment income decreased $9.8 million, or 2.7%, in 2001 compared to 2000. The decrease primarily related to a $290 million net reduction of average invested assets, which resulted from the combined effect of the two transactions in the Individual Insurance segment (see “—Selected Segment Information—Individual Insurance Segment”), as well as lower portfolio yields. The portfolio yield for fixed maturity securities decreased to 6.79% at December 31, 2001 from 7.01% at December 31, 2000. The portfolio yield for commercial mortgage loans decreased to 8.22% at December 31, 2001 from 8.34% at December 31, 2000. Declines for both comparable periods reflect the general downward trend in interest rates.

Net Capital Losses

Net capital losses occur as a result of impairment or sale of the Company’s invested assets and include net gains and losses from the sale of fixed maturity securities, commercial mortgage loans and real estate. Net capital losses for fixed maturity securities were $33.9 million, $4.0 million, and $6.3 million in 2002, 2001, and 2000, respectively. Net capital losses in 2002 included $17.2 million related to WorldCom. Commercial mortgage loan sales contributed net capital gains of $13.2 million, $2.4 million, and $1.2 million in 2002, 2001, and 2000, respectively. Real estate sales contributed net capital gains of $1.0 million, $1.6 million, and $3.3 million in 2002, 2001, and 2000, respectively. (See “—Liquidity and Capital Resources —Investing Cash Flows.”)

Benefits to Policyholders and Interest Credited

Benefits to policyholders include changes in the liability for future policy benefits and claims, and are affected by claims experience, which can fluctuate significantly from period to period. Benefits to policyholders and interest credited increased $94.3 million, or 8.6%, in 2002 compared to 2001, and $75.8 million, or 7.4%, in 2001 compared to 2000. The increases resulted primarily from business growth, as evidenced by premium growth, in the Employee Benefits—Insurance segment. Policyholder benefits and interest credited for 2002 included results from the acquisition of the TIAA block of business effective October 1, 2002, and for 2001 included $5.0 million incurred as a result of the terrorist events of September 11, 2001.

Beyond premium growth, the most significant drivers of policyholder benefits are claims experience and the assumptions used to establish related reserves. We measure these factors for our disability businesses with a benefit ratio. Our expected benefit ratio differs by segment. For the Employee Benefits—Insurance segment, our expected benefit ratio is 82% to 84%. For 2002, 2001, and 2000, the benefit ratios for this segment were 80.5%, 82.1% and 82.1%, respectively. The decrease in this ratio in 2002 resulted from very favorable claims experience. Claims experience can fluctuate widely from period to period. (See “—Selected Segment Information.”)

Operating Expenses

Operating expenses increased $42.5 million, or 21.1%, in 2002 compared to 2001, and $14.8 million, or 7.9%, in 2001 compared to 2000. The increases for both comparative periods were primarily from operating expense growth to support business growth as evidenced by premium growth. The increase for 2002 was greater than planned primarily due to the addition of operating expenses related to the acquisition of the TIAA block of business. While the business is administered by TIAA, duplicate expenses are incurred as we pay TIAA administration fees while simultaneously building our infrastructure to assume administration of the business. The integration is expected to be completed by the end of the second quarter of 2003.

In addition to operating expenses for the TIAA block of business, operating expenses were higher in 2002 due to

StanCorp Financial Group, Inc.

15

Table of Contents

Part II

increased benefit costs for our own employees. We are in the process of analyzing the structure of overall benefit packages for cost and competitiveness and expect to execute plans during 2003 that will reduce increases in benefit costs, which would otherwise have been incurred. After the integration of the TIAA block of business is complete, we expect our operating expenses to be closer to historical levels as measured as a percent of premiums.

Commissions and Bonuses

Commissions and bonuses primarily represent sales-based compensation, and vary depending on the product, whether the sale is in its first year or a renewal year, and other factors. Commissions tend to fluctuate with premiums, but not directly, due to the structure of various commission programs. Commissions and bonuses increased $14.3 million, or 12.1%, for 2002 compared to 2001, and $15.6 million, or 15.2%, for 2001 compared to 2000. The increases for both comparable periods were primarily due to sales growth in the Employee Benefits—Insurance and Individual Insurance segments. (see  “—Selected Segment Information”).

Net Increase in Deferred Acquisition Costs and Value of Business Acquired

The net deferral and amortization of acquisition costs reduced expenses in 2002, 2001 and 2000 by $21.0 million, $19.6 million, and $7.8 million, respectively. The 2002 and 2001 net amounts deferred were primarily a result of the sale of the life insurance block of business, the acquisition of a block of individual disability insurance business and the growth in new sales.

Amortization of VOBA in 2002, 2001 and 2000 was $5.2 million, $3.3 million, and $0.7 million, respectively. Amortization for all years included amortization of the VOBA related to the Minnesota Life block of business, which was acquired effective October 1, 2000. Amortization for 2002 also included $2.1 million related to the acquisition of the block of business from TIAA in the fourth quarter (see “—Selected Segment Information”).

Income Taxes

Total income taxes differ from the amount computed by applying the federal corporate tax rate of 35% because of the net result of permanent differences and the inclusion of state and local income taxes, net of the federal benefit. The combined federal and state effective tax rates were 35.5%, 35.6%, and 32.9% for 2002, 2001, and 2000, respectively. The higher effective rates in 2002 and 2001 compared to 2000 resulted primarily from a change in our tax return filing status. Income taxes also include estimated amounts provided for potential adjustments resulting from Internal Revenue Service examinations of open years.

Selected Segment Information

The following table sets forth selected segment information at or for the years ended December 31:

Employee Benefits—Insurance Segment

The Employee Benefits—Insurance segment’s products are designed for groups ranging in size from two lives to over 150,000 lives. Through this segment, the Company is a leading provider of group disability and group life insurance products, serving more than 32,500 employer groups representing more than 6 million employees. The Employee Benefits—Insurance segment also sells group dental insurance and accidental death and dismemberment insurance. Our group insurance products are marketed by 157 sales representatives and managers. We plan to increase our sales force to 175 by the end of 2003 and 200 by the end of 2005. As the largest of the Company’s three segments, Employee Benefits—Insurance premiums accounted for 92.8%, 91.7%, and 88.3% of the Company’s total premiums for 2002, 2001, and 2000, respectively.

StanCorp Financial Group, Inc.

16

Table of Contents

In force premium distribution by industry, geography, and customer size for all products as of December 31, 2002 was as follows (including the TIAA block of business):

The following table sets forth selected financial data for the Employee Benefits—Insurance segment for the years ended December 31: