StanCorp Financial Group, Inc.

StanCorp Financial Group, Inc.

1100 Southwest 6th Avenue
Portland, Oregon 97204
U.S.A.
Telephone: (503) 321-7000
Toll Free: (800) 642-9888
Fax: (503) 321-6776
Web site: http://www.stancorpfinancial.com

Public Company
Incorporated:
1906 as Oregon Life Insurance Company
Employees: 2,465
Total Assets: $1.75 billion (2003)
Stock Exchanges: New York,
Ticker Symbol: SFG
NAIC: 524113: Direct Life Insurance Carriers

StanCorp Financial Group, Inc. (StanCorp), located in Portland, Oregon, is the holding company for Standard Insurance Company, The Standard Life Insurance Company of New York, and two smaller subsidiaries, which collectively provide insurance, financial management services, retirement plans, and group and individual disability, life, and annuity products and dental insurance for groups. StanCorp was created as part of the process to convert Standard Insurance Company from mutual to stock ownership to enjoy the advantages of being a publicly traded company in a highly competitive and rapidly consolidating industry. StanCorps subsidiary, Standard Insurance Company offers group and individual disability insurance and retirement products, as well as group life and dental insurance. The Standard Life Insurance Company of New York offers group life and disability insurance products for the New York market. StanCorp Mortgage Investors, LLC is devoted to originating, underwriting, and servicing small commercial mortgage loans. StanCorp Investment Advisers, Inc. provides performance analysis, fund selection support, and model portfolios to Standard Insurance Company Retirement Plans clients.

Lineage of StanCorp Begins in the 19th Century

The founder of the insurance company that would one day evolve into StanCorp was Leo Samuel, whose life was a true rags-to-riches story. At the age of 13, in 1860, he immigrated to America from Germany, accompanied by an uncle who promptly abandoned him once they arrived safely in New York City. Starting out with just a dollar in his pocket, Samuel managed to survive by selling newspapers during the day while learning English at night and began to nurture a dream of one day becoming a magazine publisher. A year later, he worked his way west, settling in Sacramento, California. The youngster began to work his way up in the publishing industry, soon advancing to an advertising sales job. His first publishing endeavor was a travelers guide sold to steamboat passengers traveling between Sacramento and San Francisco. It was in 1871 that Samuel, still only 24 years of age, moved to Portland, where he published a variety of materials, from postcards to illustrated city directories, eventually launching an upscale magazine called The West Shore, which touted the Pacific Northwest. In the course of his publishing career, he made numerous contacts and friends in Oregon.

With the demise of his magazine in 1890, Samuel forged a mid-life career change, turning to the insurance industry, which was in its infancy and provided tremendous opportunity for growth during the period. He became an agent for Equitable Life Assurance Society of New York, one of the many large East Coast companies that dominated the insurance industry of the day, canvassing both Oregon and Idaho. He learned firsthand of the inequities facing the people who lived in the Pacific Northwest who did business with the eastern firms. Having the insurance companies located some 3,000 miles away meant that it usually took months to settle a claim. It also caused a lot of West Coast money in the form of premiums to flow to the East, only to be returned, at a price, to western banks to lend out for the development of the Pacific Northwest. The result was an economic drain on the area, which in effect enriched eastern investors, who made money coming and going on Oregons wealth. Moreover, these firms and other financial institutions, especially the high-flying trust companies of the day, were corrupt and caused any number of scandals.

Equitable Life was one of the insurance companies that came under government scrutiny in the early years of the new century. Samuel traveled to New York in 1905 to try to learn firsthand why Equitable Life was being investigated by New York State and returned home somewhat sobered about his employer and inspired with a new dream: to launch a local life insurance company.

Samuel broached his idea with one of the people he befriended in the upper crust of Portland society, Abbot Mills, president of First National Bank and a prominent businessman, who then involved his business partner, Charles Adams. Samuel won over Mills and Adams because the establishment of an area insurance company would help to keep local capital within the state. The idea also had practical merits because Portland, with its healthy climate and excellent municipal water system, boasted the lowest death rate in the United States.

By the end of 1905, Samuel already had a customer for a life insurance policy, but when he approached the State of Oregon it refused to license the insurance company until it established a reserve fund of $100,000. Samuel, Mills, and Adams enlisted the help of 81 wealthy Portland residents whom they approached to act as guarantors. The guarantors pledged to purchase at least one share of stock in the company, but no more than two, with the further stipulation that they would receive no profit from selling their shares. In addition, they could earn no more than a 7 percent return on their investment each year. A veritable Whos Who of Portland history signed up, and as a result the Oregon Life Insurance Company was licensed by the state on February 24, 1906. Although officially not a mutual company, it acted as if it were, with the clear understanding that when it was financially feasible the shareholders would be bought out.

Leo Samuel Dies in 1916

The new company, with Samuel serving as general manager and Mills as president, started out on a modest basis, at first operating out of a one-room office. Millss involvement with the First National Bank, where he was president in 1903, led to an intertwining of the fortunes of Oregon Life and First National Bank over the next quarter century. The conservative investment philosophy of the Bank and other banking leaders on the board guided Oregon Lifes investments. Leo Samuel died in 1916 before his dream of mutualizing Oregon Life could be realized, but he did live long enough to see that the enterprise was well established. Oregon Life expanded into Idaho in 1920 and Washington in 1921. All through the 1920s, while other financial institutions made heavy commitments to the stock market, the company continued to follow a balanced, conservative investment strategy, concentrating on local real estate investments and municipal, school, electrification, highway, water, and drainage bonds issued within its three state market.

With California growing rapidly in population and wealth, it was natural for Oregon Life to look southward for new business opportunities. Being a true mutual insurer was thought to be of significant value in entering California, prompting the leaders of Oregon Life to finally fulfill the dream of its founders. In 1929, the company was formally mutualized, the original investments of the 81 guarantors paid off, and the name of the business change to Oregon Mutual Life Insurance Company. In that same year the company began doing business in California. It was also in 1929 that the stock market crashed, ushering in the Great Depression. The fact that Oregon Mutual did not own and had never owned common stock proved to be a major selling point for its salesmen throughout the 1930s. The companys policyholders were further served by Oregon Mutuals conservative approach to its investments because it allowed them to borrow against the value of their policies, an important service during those difficult economic times.

In 1944, Oregon Mutual entered Utah. During the postwar economic boom, the company was eager to expand its business even further but came to believe its efforts were hindered, especially in the all-important California market, by having Oregon as part of its name. Thus, in 1946, it changed its name to Standard Insurance Company. Another key development in the postwar years was the move into the group insurance market. In 1951, Standard Insurance Company, with absolutely no program in place, was able to win the group insurance contract for the Oregon State Police and Penitentiary Guards Association. Although it was entering a highly competitive field, the company had an edge over the better established New York insurers, which were bound by a New York State law that prevented them from bidding below the minimum rate that prevailed in their home state. Group insurance proved to be such a boon for Standard Insurance Company that by the end of the 1950s group sales outstripped individual sales.

Standard Insurance Company entered Arizona in 1958, Alaska and Nevada in 1959, and Montana in 1962. By 1963, Standard Insurance Company had $1 billion of insurance in force. Also in the 1960s, Standard Insurance Company entered the mortgage business, but the product that would prove to be the most instrumental in establishing Standard Insurance Company on a national level was long-term disability insurance (LTD). The product was hardly unique and far from the least expensive on the market, but the company worked hard to establish a reputation for superior service by quickly settling claims and making an extra effort to help customers employees receive rehabilitation so that they could return to their jobs as soon as possible.

Company Perspectives:

StanCorp Financial Group, Inc., through its principal subsidiaries, has earned a reputation for high-quality, consistent performance. Responsive caring service, strong focused growth, and disciplined financial practices all add up to a company that dependably delivers on promises to customers.

Connecticut Mutual Life Insurance Co. recognized what Standard Insurance Company had accomplished, and in 1985 the two parties created a joint-venture in which Connecticut Mutual marketed Standard Insurance Companys group insurance products. The arrangement was not entirely satisfactory for Standard Insurance Company, which sold out to its partner after two years, but the experience paid dividends. Standard Insurance Companys next joint-venture, a reinsurance agreement with Wisconsin-based Northwestern Mutual Life Insurance Co., was successful and is still in place today.

With success came the confidence that Standard Insurance Company could succeed on the national level, and management made the commitment to apply for licenses and register its products in other states. By 1983, the company had offices established in 13 states and by 1987 was licensed to do business in 34 states. It boasted $1.4 billion in assets and $23 billion of life insurance in force. By 1989, the company was licensed in 49 states and the District of Columbia, electing to forego the state of New York (other than reinsurance) and its costly regulatory climate.

Mutuals Begin Converting to Stock Ownership in the 1990s

In the 1990s, long-time changes undertaken by mutual life insurance companies came to fruition when a number of them decided to convert to stock ownership in order to gain stock as a currency to use in acquisitions and thereby achieve greater growth. In 1992, the Equitable Life Assurance Society converted, followed by State Mutual Life Assurance in 1995, and Farm Family Mutual Insurance and American Mutual Life Assurance in 1996. When giant Prudential Insurance Company decided to convert to stock ownership in 1998, the industry reached a tipping point and the other major players made plans to follow suit. Standard Insurance Company considered converting to a stock company for more than year, then at a December 1997 meeting of its board of directors unanimously voted to pursue demutualization and take the business public. Over the course of the next year a plan was created and submitted to The Director of the Oregon Department of Consumer and Business Services for approval, and StanCorp Financial Group, Inc. was created as a holding company.

Conversion plans used by mutual insurance companies fall under three general types. A full demutualization plan compensates policyholders with stock in the newly formed holding company or with cash, all insurance policies remaining in effect. A subscription rights demutualization conversion offered no compensation to policyholders other than the right to purchase stock in the new company before the general public. Under the final option, the insurer formed a holding company, which was owned by policyholders and controlled a majority stake in the insurance company, now its subsidiary. On December 15, 1997, Standard Insurance Companys Board voted to pursue full demutualization, with policyholders receiving a number of StanCorp shares based on how long they held policies with Standard Insurance Company.

After receiving state and policyowner approval, Standard Insurance Company was officially demutualized in April 1999. Company executives, in conjunction with investment bankers Goldman Sachs, conducted extensive pre-IPO presentations to promote the offering, in just three weeks holding 70 meetings in 28 cities and five countries. The insurer pledged to expand its distribution and focus more effort into eastern markets, doubling the number of its sales representatives from 100 to 200. StanCorps initial public offering (IPO) was conducted in April 1999, netting some $320 million. The stock then began trading on the New York Stock Exchange. The company quickly moved to keep its promises, opening five new group sales offices and hiring 19 new sales representatives. As a stock company, StanCorp continued to follow the conservative investment and bookkeeping practices that served it well as a mutual company. Although the company hoped to use its new status to achieve greater growth, management of Standard Insurance Company remained dedicated to its core insurance products and mindful of its commitment to provide excellent service and maintain the ability to pay benefits promised to policyholders. At the same time, StanCorp took steps to keep the company competitive in a changing marketplace and become a more full-service financial services company.

Continued Growth in the 21st Century

StanCorp took a number of positive steps in 2000. The companys presence in the East was bolstered by the opening of a customer service office in Portland, Maine. The company formed a subsidiary in White Plains, New York, named The Standard Life Insurance Company of New York and obtained a license from New York State to sell group life and disability products. A sales office was also established in New York. For years Standard Insurance Company had been accredited only for reinsurance in the heavily regulated New York market, but to further strengthen its market position in group life and disability StanCorp became licensed in New York, allowing it to bid on major group insurance accounts for companies headquartered in that state. Standard Insurance Companys commitment to the disability insurance business was reinforced by an agreement it signed in the fall of 2000 to acquire the individual disability insurance business of Minnesota Life Insurance Company. At the same time, it sold its individual life insurance business to Protective Life Insurance of Birmingham, Alabama. The transaction took effect on January 1, 2001.

Key Dates:

1906:
Oregon Life Insurance Company is formed.
1916:
Founder Leo Samuel dies.
1929:
The company is mutualized, becoming Oregon Mutual Life Insurance Company.
1946:
The companys name is changed to Standard Insurance Company.
1998:
StanCorp is formed as a holding company.
1999:
Standard Insurance is demutualized; StanCorp goes public.

In 2002, Standard Insurance Company strengthened its core business further by acquiring the group disability and group life insurance business of Teachers Insurance & Annuity Association, a transaction which placed Standard Insurance Company as the fourth largest provider of LTD and the ninth largest provider of Group Life. To finance the transaction, StanCorp raised $250 million through a ten-year debt-offering of 6.875 percent senior notes. In addition, the insurer continued to make progress in its national expansion efforts and in expanding its other lines, such as group dental coverage. By the end of 2002, over 70 percent of new sales were generated in the East and Midwest. It is now Americas fourth largest provider of long-term disability insurance and the fifth largest publicly traded company in Oregon. Given that the employee benefits market continues to grow despite a troubled economy, the conservatively managed StanCorp appears well positioned for ongoing growth.

Principal Subsidiaries

Standard Insurance Company; StanCorp Mortgage Investors, LLC; StanCorp Investment Advisors Inc.; Stan West Equities, Inc.; The Standard Life Insurance Company of New York.

Principal Competitors

Aon Corporation; Pacific Mutual Holding Company; UN-UMProvident.

Further Reading

Brock, Kathy, Standard Insurance Positions Itself for Growth, Business Journal-Portland, January 9, 1998, p. 8.

Frank, Gerry, Duty To Make a Difference Not Confined to Any Age, Portland Oregonia, October 7, 1994, p. A28.

Giegerich, Andy, Not Your Fathers Insurer, Business Journal-Portland, December 31, 1999, p. 11.

Hollon, Jim, Standard Turns History Upside Down, Oregon Business, March 1, 1998, p. 97.

Moody, Robin J., Stancorps Conservative Management Paying Off, Business Journal, May 9, 2003, p. 3.

Zolkos, Rodd, More Mutuals Changing Structures, Business Insurance, March 9, 1998, p. 1.

Ed Dinger

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