Regulatory Matters

12 Months Ended

Dec. 31, 2014

17. REGULATORY MATTERS

Standard and The Standard Life Insurance Company of New York prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by their states of domicile. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as the Statements of Statutory Accounting Principles set forth in publications of the National Association of Insurance Commissioners (“NAIC”). Standard and the Standard Life Insurance Company of New York did not use any prescribed or permitted statutory accounting practices that are different than the statutory accounting practices promulgated by the NAIC for the years ended 2014, 2013 or 2012.

Statutory accounting practices differ in some respects from GAAP. The principal statutory accounting practices that differ from GAAP are:

Bonds and commercial mortgage loans are reported principally at amortized cost and adjusted carrying value, respectively.
Asset valuation and the interest maintenance reserves are provided as prescribed by the NAIC.
Certain assets designated as non-admitted, principally deferred tax assets, furniture, equipment, and unsecured receivables are not recognized as assets, resulting in a charge to statutory surplus.
Annuity considerations with life contingencies, or purchase rate guarantees, are recognized as revenue when received.
Reserves for life and disability policies and contracts are reported net of ceded reinsurance and calculated based on statutory requirements, including required discount rates.
Commissions, including initial commissions and expense allowance paid for reinsurance assumed, and other policy acquisition expenses are expensed as incurred.
Initial commissions and expense allowance received for a block of reinsurance ceded net of taxes are reported as deferred gains in surplus and recognized as income in subsequent periods.
Federal income tax expense includes current income taxes defined as current year estimates of federal income taxes and tax contingencies for current and all prior years and amounts incurred or received during the year relating to prior periods, to the extent not previously provided.
Deferred tax assets, net of deferred tax liabilities, which will be realized within three years, are considered admitted assets and are included in the regulatory financial statements.
Surplus notes are classified as a component of surplus for statutory reporting and are classified as a liability for GAAP reporting.

Standard and The Standard Life Insurance Company of New York are subject to statutory restrictions that limit the maximum amount of dividends and distributions that they could declare and pay to StanCorp without prior approval of the states in which the subsidiaries are domiciled. Standard’s ability to pay dividends to StanCorp is affected by factors deemed relevant by Standard’s Board of Directors and by Oregon law, which limits Standard’s dividend payments and other distributions to the earned surplus arising from its business. If the proposed dividend or other distribution exceeds certain statutory limitations, Standard must receive prior approval of the Director of the Oregon Department of Consumer and Business Services—Insurance Division (“Oregon Insurance Division”). The current statutory dividend limitations are the greater of (a) 10% of Standard’s combined capital and surplus as of December 31 of the preceding year, or (b) the net gain from operations after dividends to policyholders and federal income taxes and before realized capital gains or losses for the 12-month period ended on the preceding December 31. In each case, the limitation must be determined under statutory accounting practices. Oregon law gives the Oregon Insurance Division broad discretion to approve or decline requests for dividends and other distributions in excess of these limits. As of December 31, 2014, Standard's net gain from operations after dividends to policyholders and federal income taxes and before capital gains or losses for the 12-month period then ended was $208.5 million and capital and surplus was $1.15 billion. Based upon Standard's results for 2014, the amount of ordinary dividends and other distributions available in 2015, without additional approval from the Oregon Insurance Division is $208.5 million. As of December 31, 2013, Standard's net gain from operations after dividends to policyholders and federal income taxes and before capital gains or losses for the 12-month period then ended was $195.1 million and capital and surplus was $1.29 billion. Based upon Standard's results for 2013, the amount of ordinary dividends and other distributions available in 2014, without additional approval from the Oregon Insurance Division was $195.1 million.

During 2014 and 2013, Standard made distributions to StanCorp totaling $390.0 million and $130.0 million, respectively. The 2014 distributions included a $240 million extraordinary distribution that was used to capitalize StanCap Insurance Company. Effective September 30, 2014, StanCap Insurance Company entered into a reinsurance agreement with Standard to reinsure Standard’s group life and AD&D business. This reinsurance agreement between StanCap Insurance Company and Standard replaced the yearly renewable term group life reinsurance agreement with Canada Life Assurance Company, which was terminated effective September 30, 2014. As a result of the extraordinary distribution in 2014, future dividends will require approval from the Oregon Insurance Division through September 2015 and will be considered extraordinary.

State insurance departments require insurance enterprises to adhere to minimum Risk-based Capital (“RBC”) requirements promulgated by the NAIC. At December 31, 2014 and 2013, the insurance subsidiaries’ capital and surplus levels were significantly in excess of that which would require corrective action by the insurance subsidiaries or regulatory agencies. The Authorized Control Level RBC was $149.6 million and $186.6 million at December 31, 2014 and 2013, respectively. At December 31, 2014, the capital and surplus of the Company’s insurance subsidiaries was approximately 445% of the Company Action Level RBC required by regulators, which was approximately 890% of the Authorized Control Level RBC required by the Company’s states of domicile. At December 31, 2013, the capital and surplus of the Company’s insurance subsidiaries was approximately 398% of the Company Action Level RBC required by regulators, which was approximately 796% of the Authorized Control Level RBC required by the Company’s states of domicile.

The following table reconciles the statutory capital and surplus of the insurance subsidiaries based on statutory filings with applicable insurance regulatory authorities to the Company’s GAAP equity:

		December 31,
(In millions)		2014		2013

Statutory capital and surplus		$	1,228.4	$	1,359.0

Adjustments to reconcile to GAAP equity:
	Future policy benefits and other policyholder funds		276.0		325.8
	DAC, VOBA and other intangible assets		365.7		351.6
	Deferred tax liabilities		(245.6)		(265.3)
	Asset valuation reserve		106.2		127.5
	Valuation of investments		259.6		236.4
	Interest maintenance reserve		28.5		25.5
	Equity of StanCorp and its non-insurance subsidiaries		277.5		116.1
	Non-admitted assets		166.3		178.2
	Pension and postretirement benefit plans		(11.3)		(6.6)
	Capital lease obligations		(2.1)		(3.4)
	Surplus note		(250.0)		(250.0)
	Other, net		(27.4)		(42.0)

GAAP equity		$	2,171.8	$	2,152.8

The following table reconciles statutory net income based on statutory filings with applicable insurance regulatory authorities to the Company’s GAAP net income:

		Years ended December 31,
(In millions)		2014		2013		2012

Statutory net income		$	213.4	$	198.5	$	131.5

Adjustments to reconcile to GAAP net income:
	Future policy benefits and other policyholder funds		(24.3)		11.0		26.4
	DAC and VOBA, net of amortization		9.2		9.4		5.5
	Deferred income taxes		(5.7)		(13.5)		(22.4)
	Current income taxes		9.6		9.6		17.2
	Earnings of StanCorp and its non-insurance subsidiaries		8.9		(8.9)		(23.8)
	Deferred capital gains (interest maintenance reserve)		3.0		0.7		5.0
	Pension and postretirement benefit plans		(2.6)		17.6		(1.7)
	Share based compensation		---		(3.6)		(5.4)
	Investments		7.9		8.5		5.8
	Other, net		(0.1)		(0.8)		0.4

GAAP net income		$	219.3	$	228.5	$	138.5

- Definition

Tabular disclosure of how the entity's reporting under GAAP as of the balance sheet date differs from the results based on prescribed and permitted accounting practices of the state or country of domicile in which a relevant statutory filing is made, or differences in results based on the National Association of Insurance Commissioners (NAIC) prescribed practices, or a combination thereof. Describes the accounting practices used and the related monetary effect on statutory surplus, net income, and risk-based capital. If an insurance enterprise's risk-based capital would have triggered a regulatory event had it not used a permitted practice, that fact is disclosed in the financial statements. Permitted statutory accounting practices include practices not prescribed but allowed by the domiciliary state insurance department regulatory authority.

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