StanCorp Financial Group (SFG)

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.

AVAILABLE INFORMATION

StanCorp files its annual, quarterly and current reports, proxy statements and other information with the United States Securities and Exchange Commission (“SEC”). You may read and copy any document StanCorp files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549, U.S.A. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330 (or 1-202-551-8090). The SEC maintains an Internet site that contains annual, quarterly and current reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. StanCorp’s electronic SEC filings are available to the public at www.sec.gov.

StanCorp’s Internet site for investors is www.stancorpfinancial.com/investors. StanCorp publishes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, on its Internet site free of charge. StanCorp makes these reports available as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. StanCorp also makes available on www.stancorpfinancial.com/investors (i) its Corporate Governance Guidelines, (ii) its codes of business ethics (including any waivers therefrom granted to executive officers or directors), and (iii) the charters of the audit, organization and compensation, and nominating and corporate governance committees of its board of directors. These documents are also available in print without charge to any person who requests them by writing or telephoning:

Shareholder Relations Department

StanCorp Financial Group, Inc.

1100 SW Sixth Avenue

Portland, OR 97204

(800) 378-8360

FORWARD-LOOKING STATEMENTS

Some of the statements contained or incorporated by reference in this Annual Report on Form 10-K, including those relating to the Company’s strategy and other statements that are predictive in nature, that depend on or

refer to future events or conditions, or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “seeks” and similar expressions, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements are not historical facts but instead represent only management’s expectations, estimates and projections regarding future events. Similarly, these statements are not guarantees of future performance and involve uncertainties that are difficult to predict, which may include, but are not limited to, the factors listed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward-looking Statements” of this Report. As a provider of financial products and services, our results of operations may vary significantly in response to claims experience, economic trends, interest rate changes, investment performance, operating expenses and pricing. Caution should be used when extrapolating historical results or conditions to future periods.

Our actual results and financial condition may differ, perhaps materially, from the anticipated results and financial condition in any such forward-looking statements and, given these uncertainties or circumstances, readers are cautioned not to place undue reliance on such statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

GENERAL

We are a holding company for our insurance and asset management subsidiaries and are headquartered in Portland, Oregon. We are the parent company of Standard Insurance Company, a leading provider of group insurance products and services serving the life and disability insurance needs of employer groups and disability insurance serving the needs of individuals. Our insurance subsidiaries also provide accidental death and dismemberment insurance (“AD&D”) and dental insurance. Through our insurance subsidiaries, we have the authority to underwrite insurance products in all 50 states. Our asset management businesses offer investment management services, retirement financial services, individual annuities, group annuity contracts and trust products, full-service 401(k) plans, 457 plans, defined benefit plans, money purchase pension plans, profit sharing plans, 403(b) plans, non-qualified deferred compensation products and services and limited trust services. Our mortgage subsidiary originates and services small, fixed-rate commercial mortgage loans for the investment portfolios of our insurance subsidiaries and for sale to institutional investors.

MISSION AND STRATEGY

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

StanCorp’s strategy includes:

Our ability to accomplish this strategy is dependent on a number of factors, some of which involve risks or uncertainties. See “Competition” and “Key Factors Affecting Results of Operations” below, Item 1A, “Risk Factors,” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward-looking Statements” of this Report.

DEVELOPMENT OF STANCORP

StanCorp was incorporated under the laws of Oregon in 1998 as a parent holding company and conducts business through its 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”); and StanCorp Trust Company. The Company is based in Portland, Oregon and, through our subsidiaries, has operations throughout the United States.

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. We have the authority to underwrite insurance products in all 50 states.

Standard, our largest subsidiary, underwrites group and individual disability insurance and annuity products, group life, AD&D, and dental insurance, and provides retirement plan products. Founded in 1906, Standard is domiciled in Oregon

and licensed in all states except New York, and is 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, life, AD&D and dental insurance in New York.

Effective January 1, 2007, the administration and servicing operations of StanCorp’s retirement plans group annuity contracts offered through Standard and for the trust product formerly offered through Invesmart, Inc. (“Invesmart”), which was acquired in July 2006, began operating under the name Standard Retirement Services. Retirement plans products are offered in all fifty 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, underwrites and services small, fixed-rate commercial mortgage loans for the investment portfolios of our insurance subsidiaries. StanCorp Mortgage Investors also generates additional fee income from the origination and servicing of commercial mortgage loans participated to institutional investors. StanCorp Mortgage Investors began operations in 1996 and, as of December 31, 2007, was servicing $3.66 billion in commercial mortgage loans for subsidiaries of StanCorp and $1.90 billion in commercial mortgage loans for other institutional investors. The average loan size of the commercial mortgage loans held by the insurance subsidiaries and serviced by StanCorp Mortgage Investors was approximately $0.7 million at December 31, 2007.

StanCorp Investment Advisers is a Securities and Exchange Commission (“SEC”) registered investment adviser providing performance analysis, fund selection support, model portfolios and other investment advisory and investment management services to its retirement plans clients, individual investors and subsidiaries of StanCorp.

StanCorp Real Estate is a property management company that owns and manages our Hillsboro, Oregon home office properties and other investment properties and manages our Portland, Oregon home office properties.

In January 2006, StanCorp established StanCorp Trust Company, which offers limited directed trust services to clients.

MARKET POSITION

Based on mid-year 2007 insurance industry in force premium statistics in the United States, provided by JHA and LIMRA International, we have leading market positions with single digit market share in group long term and short term disability insurance and group life insurance. Based on a 2006 survey by LIMRA International we also have single digit market share for individual disability insurance. The positions are as follows:

FINANCIAL STRENGTH RATINGS

Financial strength ratings, which gauge claims paying ability, are an important factor in establishing the competitive position of insurance companies. Ratings are important in maintaining public confidence in our company and in our ability to market our products. Rating organizations continually review the financial performance and condition of insurance companies, including ours. In addition, credit ratings on our 10-year senior notes (“Senior Notes”) and junior subordinated debentures (“Subordinated Debt”) are tied to our financial strength ratings. A ratings downgrade could increase surrender levels for our annuity products, could adversely affect our ability to market our products and could increase costs of future debt issuances. Standard & Poor’s, Moody’s Investors Service, Inc. and A.M. Best Company provide financial strength and credit ratings.

Standard’s financial strength ratings as of February 2008 were:

CREDIT RATINGS

Standard & Poor’s, Moody’s Investors Service, Inc. and A.M. Best Company provide credit ratings on StanCorp’s Senior Notes. As of February 2008, ratings from these agencies were A-, Baa1 and bbb+, respectively. As of February 2008, A.M. Best Company affirmed an issuer credit rating of a+ to Standard.

Standard & Poor’s, Moody’s Investor Services, Inc. and A.M. Best Company also provide credit ratings on StanCorp’s

Subordinated Debt. As of February 2008, ratings from these agencies were BBB, Baa2 and bbb-, respectively.

SEGMENTS

Our operations include two reportable segments: Insurance Services and Asset Management, as well as an “Other” category for activity outside of the two 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, and group dental insurance. The Asset Management segment offers full-service 401(k) plans, 457 plans, defined benefit plans, money purchase pension plans, profit sharing plans, 403(b) plans and non-qualified deferred compensation products and services through an affiliated broker-dealer. This segment also offers investment management and financial planning services, commercial mortgage loan origination and servicing, and individual fixed annuities. It also includes the former operations of Invesmart, a provider of retirement plan services, and investment advisory and management services, acquired in July 2006. Effective January 1, 2007, the administration and servicing operations for the retirement plans group annuity contracts offered through Standard and for the trust product offered through Invesmart, began operating under the name Standard Retirement Services.

Measured as a percentage of total revenues, revenues for each of our segments for 2007 were 88.5% for Insurance Services and 11.2% for Asset Management. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Consolidated Results of Operations—Revenues” and Item 8, “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 3—Segments.”

Net capital gains and losses on investments, return on capital not allocated to the product segments, holding company expenses, interest on debt and adjustments made in consolidation are reflected in “Other.”

Insurance Services Segment

The Insurance Services segment sells disability, life, AD&D and dental insurance products to employer groups ranging in size from two lives to over 685,000 lives, and has about 30,000 group insurance policies in force, covering approximately 8.1 million employees as of December 31, 2007. This segment also sells disability insurance to individuals.

Our group insurance products are sold by sales representatives 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 41

field offices in principal metropolitan areas of the United States. The field offices also provide sales support, customer service and limited underwriting through field administrative staff. The Company’s arrangements with brokers include compensation earned at the time of sale, and, in some situations, also include compensation related to the overall performance of a block of business (performance related compensation). In most cases, the overall performance of a block of business is measured in terms of volume and persistency (customer retention).

Group long term disability insurance contributed 41% of 2007 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 during the policy period at both work and elsewhere. In order to receive long term disability benefits, an employee must be continuously disabled beyond a specified waiting period, which generally ranges from 30 to 180 days. The benefits usually are reduced 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. Historically, approximately 50% of all claims filed under our long term disability policies close within 24 months. However, claims caused by more severe disabling conditions may be paid over much longer periods, including up to normal retirement age or longer.

Generally, group long term disability 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 during the same periods.

Group life and AD&D insurance contributed 38% of 2007 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 an insured employee on the surrender of, or withdrawal from, the life insurance policy). Coverage is offered to insured employees and their dependents. AD&D insurance is usually provided in conjunction with group life insurance, and is payable after the accidental death or dismemberment of the insured in an amount based on the face amount of the policy or dismemberment schedule.

Group short term disability insurance contributed 11% of 2007 premiums for the segment. Our basic short term disability products generally cover only disabilities occurring outside of work. Short term disability insurance generally

requires a short waiting period, ranging from one to 30 days, before an insured employee may receive benefits, with maximum benefit periods generally not exceeding 26 weeks. Group short term disability benefits also may be reduced by other income, such as sick leave, that a disabled insured employee may receive.

Group dental insurance contributed 3% of 2007 premiums for the segment. Group dental products provide coverage to insured employees and their dependents for preventive, basic and major dental expenses, and also include an option to purchase orthodontia benefits. We offer three dental plans including a traditional plan, a reduced cost plan and a cost containment plan, which are differentiated by levels of service and cost. Standard has a strategic marketing alliance with Ameritas Life Insurance Corp. (“Ameritas”), which offers Standard’s policyholders flexible dental coverage options and access to Ameritas’ nationwide preferred provider organization panel of dentists.

Individual disability insurance contributed 7% of 2007 premiums for the segment. The products include non-cancelable disability coverage, which provides insurance at a guaranteed fixed premium rate for the life of the contract, and guaranteed renewable coverage where premium rates are guaranteed for limited periods and subject to change thereafter. This segment also sells business overhead expense coverage, which reimburses covered operating expenses when the insured is disabled, and business equity buy-out coverage, which provides payment for the purchase, by other owners or partners, of the insured’s ownership interest in a business in the event of total disability. Non-cancelable disability insurance policies represented 81% of sales based on annualized new premiums for 2007.

Our individual disability insurance products are sold nationally by sales representatives through master general agents and brokers, primarily to physicians, lawyers, executives, other professionals and small business owners. The compensation paid to master general agents and brokers is based primarily on a percentage of premiums. Master general agents and some brokers are eligible for a bonus based on sales volume and persistency of business they have written.

Asset Management Segment

The Asset Management segment offers full-service 401(k) plans, 457 plans, defined benefit plans, money purchase pension plans, profit sharing plans, 403(b) plans and non-qualified deferred compensation products and services through an affiliated broker-dealer. This segment also offers investment management and financial planning services,

commercial mortgage loan origination and servicing, and individual fixed annuities. Beginning in the third quarter of 2006, this segment included the former operations of Invesmart, a national retirement financial services company. Effective January 1, 2007, the administration and operations of StanCorp’s retirement plans group annuity contracts offered through Standard and for the trust product offered through Invesmart, which was acquired in July 2006, began operating under the name Standard Retirement Services. In the third quarter of 2007, this segment also added $1.7 billion of assets under administration acquired from DPA, Inc., a retirement business based in Portland, Oregon.

Investment services for 401(k), defined benefit, and other 401(a) qualified plans and governmental 457 plans are provided through a non-registered group annuity contract with third party brand name mutual funds through a separate account and, for certain plans, a stable value investment option managed by Standard. These plan services also are provided through a trust product offering third party brand name mutual funds. Mutual funds offered through the separate account as of December 31, 2007, were from American Beacon Funds, AllianceBernstein, Alger Allianz Pimco Funds, American Century Investment Services, Artisan Funds, AST Capital Trust Company, Aston Asset Management LLC., Black Rock Funds, Brandywine Fund, Inc., Calamos, California Investors, Davis Funds, Dodge & Cox, The Dreyfus Corporation, First American, Federated Investors Funds, Fidelity Investments, Franklin Templeton, GE, Goldman Sachs, Harbor, Hotchkis and Wiley Funds, Jennison Dryden Mutual Funds, JP Morgan, Munder Funds, Neuberger & Berman Funds, Oppenheimer, Rainer Investment Management, Royce Funds, SEI Investments, T. Rowe Price, TCW Galileo Funds, UMB, Vanguard Funds, Van Kampen Investment, Wells Fargo and Williams Companies.

The 403(b) and non-qualified deferred compensation plan services are provided through a registered group variable annuity contract, with a stable value investment option managed by Standard and separate account investment options from AllianceBernstein, Alger, Allianz Pimco Funds, American Century Investment Services, Black Rock Funds, Davis, Delaware Investments Mutual Funds, The Dreyfus Corporation, Federated Investors Funds, Fidelity Investments, Franklin Templeton, GE, Goldman Sachs, Lincoln National Funds, Neuberger & Berman Funds, Principal Funds, Royce Funds, T. Rowe Price and Vanguard Funds. Certain plan services also are provided through a trust product offering third party investment options. Funds offered in our retirement plans are regularly evaluated for performance, expense ratios, risk statistics, style consistency, industry diversification and management through the investment

advisory service we provide to our customers. Funds are added and removed as part of this evaluation process. StanCorp Investment Advisers provides fund performance analysis and selection support to 85% of our group annuity plan sponsors. All group annuity contracts are distributed by StanCorp Equities.

The target market for retirement plans is businesses with $1 million to $25 million in plan assets. Our retirement plans products and services are sold primarily through registered investment advisors, brokers, employee benefit consultants, and other distributors served by our sales representatives throughout the United States. Brokers are compensated based on a percentage of the combination of deposits and assets under administration. Compensation is disclosed to the customer by the Company. Most of our retirement plan customers receive financial, record keeping and administrative services, although the option is available to receive only financial and record keeping services or financial services alone.

The primary sources of revenue for the retirement plans business include plan administration fees, asset-based fees and investment income on general account assets under administration, a portion of which is credited to policyholders. In addition, premiums and benefits to policyholders reflect the conversion of retirement plan assets into life-contingent annuities, which is an option that can be selected by plan participants at the time of retirement. Individual fixed annuity deposits earn investment income, a portion of which is credited to policyholders.

In three recent surveys for 2007, the retirement plans business was recognized as an outstanding retirement plan provider.

Standard earned 21 Best in Class awards in PLANSPONSOR magazine’s 2007 defined contribution plan survey as a provider serving plans with less than $5 million in assets.

In 401kExchange’s most recent survey of retirement plan sponsors, Standard was rated the number four plan administrator in the $1 million to $10 million asset range. Rankings were based on interviews of almost 20,000 plan sponsors. Since the Company’s entrance into the 401kExchange.com survey beginning in 1999, Standard has been ranked number two in the category of overall plan administrator for plans with $1 million to $10 million in assets.

In the Boston Research Group’s 2007 survey of defined contribution plans under $5 million in assets, The Standard was rated first in terms of overall satisfaction by plan sponsors. Twenty-six providers were included in this survey.

In July 2006, StanCorp acquired Invesmart and all of its subsidiaries. Invesmart was a provider of retirement plan

services, and investment advisory and management services. Effective January 1, 2007, the administration and servicing operations for the retirement plans group annuity contracts offered through Standard Insurance Company (“Standard”) and for the trust product offered through Invesmart began operating under the name Standard Retirement Services.

In July 2007, Standard Retirement Services acquired DPA, Inc., a retirement business based in Portland, Oregon. The acquisition of DPA, Inc. added $1.7 billion to assets under administration. Retirement plans assets under administration were $18.73 billion at December 31, 2007.

The individual annuity products sold by this segment are primarily fixed-rate and indexed deferred annuities, although we also market life-contingent immediate annuities. The target market for fixed-rate and indexed annuities is any individual seeking conservative investments to meet their retirement or other financial goals. The fixed-rate annuity product portfolio includes deferred annuities with initial interest rate guarantees generally ranging from one to six years and a full array of single premium immediate annuity income payment options. The Company launched an indexed annuity product in January 2006 and uses over the counter call-spread options to hedge the index performance of the policies.

Fixed-rate annuities are distributed through master general agents, brokers and financial institutions and compensation is primarily based on a percentage of premiums and deposits related to the business sold.

Master general agents are eligible for a bonus based on the volume of annuity business they coordinate, which is sold by financial institutions and brokers they coordinate.

Most of our annuity business deposits are not recorded as premiums, but rather are recorded as liabilities. Individual fixed annuity deposits earn investment income, a portion of which is credited to policyholders. Annuity premiums consist of premiums on life-contingent annuities, which are a small portion of total sales.

Our investment advisory business, StanCorp Investment Advisers, is a SEC-registered investment adviser providing performance analysis, fund selection support, model portfolios and other investment advisory and investment management services. Our target market is our retirement plan clients with $1 million to $25 million in plan assets, individual investors with $250,000 to $2 million in portfolio assets and the subsidiaries of StanCorp.

Our commercial mortgage loans subsidiary, StanCorp Mortgage Investors, originates, underwrites and services small, fixed-rate commercial mortgage loans, generally between $250,000 and $5 million per loan for the investment

portfolios of our insurance subsidiaries. It also generates additional fee income from the origination and servicing of commercial mortgage loans participated to institutional investors. The target market for commercial mortgage loans is small retail, office, and industrial properties located throughout the continental United States.

Other

In addition to our two segments, we report our holding company and corporate activity in “Other.” This category includes net capital gains and losses on investments, return on capital not allocated to the product segments, holding company expenses, interest on debt and adjustments made in consolidation.

COMPETITION

Competition for sale of 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. Pricing is a competitive issue in the markets we serve. We do not seek to compete primarily on price. While we believe our products and service provide superior value to our customers, a significant price difference between our products and those of some of our competitors may result in periods of declining new sales, reduced persistency (customer retention), lower premium growth, and increased sales force attrition. See “Key Factors Affecting Results of Operations—Pricing.”

KEY FACTORS AFFECTING RESULTS OF OPERATIONS

Group insurance is our largest business and represented 93%, 93% and 94% of total premiums for the years ended December 31, 2007, 2006 and 2005, respectively. In addition to competition, three factors can have a critical impact on the financial results of our Insurance Services segment operations: claims experience, economic conditions and pricing.

Claims Experience. We have a large and well-diversified group insurance business. However, claims experience can fluctuate widely, particularly from quarter to quarter. The predominant factors affecting claims experience are incidence (number of claims) and severity (length of time a disability claim is paid and the size of the claim). These factors can fluctuate widely within and between our insurance products.

Economic Conditions. The rate of wage and employment growth can influence premium growth in our group insurance business because premium rates are based, in part, on total salaries covered. In addition, our financial results are

sensitive to changing interest rates and their effect on product pricing because premiums collected today must be invested to provide a return sufficient to meet the future claims of policyholders. For that reason, we closely monitor changes in interest rates and make changes to our pricing, as appropriate. Interest rates also affect the discount rates we use to establish reserves.

Pricing. One of the key components of our pricing decisions for many of our insurance products is the investment return available to us. In periods of decreasing interest rates, the returns available to us from our primary investments, fixed maturity securities and commercial mortgage loans, decline. This may require us to increase the price of some of our products in order to maintain our targeted returns. If our competitors do not make similar adjustments to their product pricing or if they have a higher return on investments, our products may be more expensive than those offered by competitors. Alternatively, in periods when interest rates are increasing, we may be able to reduce premium rates, and therefore reduce pricing pressure to customers. Given the negative financial consequences of under-pricing, we believe that our practice of maintaining a disciplined approach to product pricing provides the best long-term pricing stability, stable renewal pricing for our customers, higher levels of persistency, and therefore, the best long-term financial success for our company.

RISK MANAGEMENT

We manage risk through sound product design and underwriting, effective claims management, disciplined pricing, distribution expertise, broad diversification of risk by customer geography, industry, 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.

Diversification of Products

We achieve earnings diversification by offering multiple insurance products such as group life, group long term disability, and individual disability products. These products have differing price, market and risk characteristics. Our strategy is to diversify our earnings further through growth in our asset management businesses. Our long-term financial goal is to grow assets under administration 10-15% per year, excluding acquisitions. The Company experienced growth of 6.0% in assets under administration during 2007, excluding 2007 acquisitions, and growth of 17.6%, including the 2007 acquisitions. Even though the Company expects favorable sales and cash flows in 2008, the Company recognizes the current volatility in the stock markets and does not provide specific short-term guidance with regard to overall asset growth.

Diversification by Customer Industry, Geography and Size

We seek to diversify risk by customer industry, geography and size measured by the number of insured employees. Over half of our group insurance premiums come from industries that are resistant to the effects a recession may have on employment. These industries include the public sector, education, health care and utilities. Compared to other industries during the last recession of 2001, most of these businesses showed either slight increases in employment or only fractional decreases. In force premium distribution by industry, geography and customer size for group long term disability and group life products was as follows as of December 31, 2007:

Reinsurance

In order to limit our losses from large exposures, we enter into reinsurance agreements with other insurance companies. We review our retention limits based on size and experience. The maximum retention limit per individual for group life and AD&D is $750,000. Our maximum retention limit for group disability insurance is $15,000 monthly benefit per individual. During 2007, we increased our maximum retention limit from $5,000 to $5,500 monthly benefit per individual for individual disability policies with effective dates on or after September 1, 2007. On certain business acquired from Minnesota Life Insurance Company, we have a maximum retention of $6,000 monthly benefit per individual.

Standard participates in a reinsurance and third party administration arrangement with Northwestern Mutual under which Northwestern Mutual group long term and short term disability products are sold using Northwestern Mutual’s agency distribution system. Generally, Standard assumes 60% of the risk, and receives 60% of the premiums for the policies issued. If Standard were to become unable to meet its obligations, Northwestern Mutual would retain the reinsured liabilities. Therefore, in accordance with an agreement with Northwestern Mutual, Standard established a trust for the benefit of Northwestern Mutual with the market value of assets in the trust equal to Northwestern Mutual’s reinsurance receivable from Standard. The market value of assets required to be maintained in the trust at December 31, 2007, was $218.0 million. Premiums assumed by Standard for the Northwestern Mutual business accounted for 3% of the Company’s total premiums for each of the three years 2007, 2006 and 2005. In addition to assuming risk, Standard provides product design, pricing, underwriting, legal support, claims management and other administrative services under the arrangement.

Standard maintains a strategic marketing alliance with Ameritas that offers Standard’s policyholders 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 that provides for 20% of the net dental premiums written by Standard and the risk associated with these premiums to be ceded to Ameritas.

In addition to product-specific reinsurance arrangements, we maintain reinsurance coverage for certain catastrophe losses related to group life and AD&D. This agreement excludes nuclear, biological and chemical acts of terrorism. Through a combination of this agreement and our participation in a catastrophe reinsurance pool discussed below, we have coverage of up to $453.0 million per event.

Subsequent to the terrorist events of September 11, 2001, we entered into a catastrophe reinsurance pool with other insurance companies. This pool spreads catastrophe losses on group life and AD&D over 29 participating members. The annual fee paid by the Company in 2007 to participate in the pool was minor. As a member of the pool, we are exposed to maximum potential losses experienced by other participating members of up to $90.9 million for a single event for losses submitted by a single company and a maximum of $227.2 million for a single event for losses submitted by multiple companies. The Company’s percentage share of losses experienced by pool members will change over time as it is a function of our group life and AD&D in force relative to the

total group life and AD&D in force for all pool participants. The reinsurance pool does not exclude war or nuclear, biological and chemical acts of terrorism.

The Terrorism Risk Insurance Act of 2002 (“TRIA”), which has been extended through 2014, 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. Due to the concentration of risk present in group life insurance and the fact that group life insurance is not covered under TRIA, an occurrence of a significant catastrophe or a change in the on-going nature and availability of reinsurance and catastrophe reinsurance could have a material adverse effect on the Company.

Asset/Liability and Interest Rate Risk Management

See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Asset/Liability and Interest Rate Risk Management.”

INVESTMENTS

Investment management is an integral part of our business. Investments are maintained to ensure that 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. A substantial portion of our insurance subsidiaries’ policy liabilities result from long term disability reserves that have proven to be very stable over time, and annuity products on which interest rates can be adjusted periodically, subject to minimum interest rate guarantees. Policyholders or claimants may not withdraw funds from the large block of disability reserves. Instead, claim payments are issued monthly over periods that may extend for many years. Holding these stable long-term reserves makes it possible to allocate a significant portion of invested assets to long-term fixed-rate investments, including commercial mortgage loans. The ability to allocate a significant portion of investments to commercial mortgage loans, combined with StanCorp Mortgage Investors’ unique expertise with respect to its market niche for fixed-rate commercial mortgage loans, allows us to enhance the yield on the overall investment portfolio beyond that available through fixed maturity securities with an equivalent risk profile. See Part II, 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.”

REGULATION

State and Federal Laws and Regulations

Standard sells its products in and is regulated by all states except New York, and sells its products and is regulated in the District of Columbia. The Standard Life Insurance Company of New York sells its products in and is regulated by New York. The insurance industry in the United States is subject to extensive regulation. Such regulation relates to, among other things, terms and provisions of insurance policies, market conduct practices, maintenance of capital and payment of distributions, and financial reporting on a statutory basis of accounting.

We market registered group variable annuity products, which are part of a registered investment company under the Investment Company Act of 1940. These products are subject to that act and the rules thereunder, which, among other things, regulate the relationship between a registered investment company and its investment adviser.

As registered investment advisers, StanCorp Investment Advisers is subject to regulation under the Investment Advisers Act of 1940. This Act requires, among other things, recordkeeping and reporting requirements, disclosure requirements, limitations on transactions between the adviser’s account and an advisory client’s account, limitations on transactions between the accounts of advisory clients, and general anti-fraud prohibitions.

The Sarbanes-Oxley Act of 2002 and rules promulgated by the SEC and the New York Stock Exchange thereunder have imposed substantial new or enhanced regulations and disclosure requirements in the areas of corporate governance (including director independence, director selection and audit committee, corporate governance committee and compensation committee responsibilities), equity compensation plans, auditor independence, pre-approval of auditor fees and services, disclosure of executive compensation and internal control procedures.

Violation of applicable laws and regulations can result in legal or administrative proceedings, which can result in fines, penalties, cease and desist orders or suspension or expulsion of our license to sell insurance in a particular state.

Capital Requirement—Risk-Based Capital

The National Association of Insurance Commissioners has a tool to aid in the assessment of the statutory capital and surplus of life and health insurers. This tool, known as Risk-based Capital (“RBC”), augments statutory minimum capital and surplus requirements. RBC employs a risk-based formula that applies prescribed factors to the various risk elements inherent in an insurer’s business to arrive at minimum capital requirements in proportion to the amount of risk assumed by the insurer.

State insurance departments require insurance enterprises to maintain minimum levels of capital and surplus. As of December 31, 2007, the insurance subsidiaries’ capital was approximately 301% of the company action level of RBC required by regulators, which is 601% of the authorized control level RBC required by our states of domicile. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Management.”

EMPLOYEES

At December 31, 2007, StanCorp and its subsidiaries had 3,437 full-time equivalent employees, 68% of which were located in Portland, Oregon and the surrounding metropolitan area. At December 31, 2007, none of the Company’s employees were represented by unions.

Risk factors that may affect our business are as follows:

Many of our subsidiaries are non-insurance businesses and have no regulatory restrictions on dividends. Our insurance subsidiaries, however, are regulated by insurance laws and regulations that limit the maximum amount of dividends, distributions and other payments that they could declare and pay to us without prior approval of the states in which the subsidiaries are domiciled. Under Oregon law, Standard Insurance Company may pay dividends only from the earned surplus arising from its business. Oregon law gives the Director of the Oregon Department of Consumer and Business Services—Insurances Division (“Oregon Insurance Division”) broad discretion regarding the approval of dividends. Oregon law requires us to receive the prior approval of the Oregon Insurance Division to pay a dividend if such dividend exceeds certain statutory limitations; however, it is at the Oregon Insurance Division’s discretion to request prior approval of dividends at any time. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Management—Dividends from Subsidiaries.”

None.

Principal properties owned by Standard Insurance Company (“Standard”) and used by the Company consist of two office buildings in downtown Portland, Oregon: the Standard Insurance Center, with approximately 460,000 square feet; and the Standard Plaza, with approximately 220,000 square feet. Both of our business segments use the facilities described above. The Company also owns a building with 72,000 square feet of office space in Hillsboro, Oregon, which is used by StanCorp Mortgage Investors, LLC and our group insurance claims operations. A second building with 72,000 square feet was completed in the first quarter of 2007 and is used by our group operations. In addition, Standard leases 160,000 square feet of office space located in downtown Portland, Oregon, for home office and claims operations and 60,000 square feet of offsite storage. The

Company leases 66 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. Management may evaluate additional square footage in 2008 to accommodate its increasing workforce. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 1 to Consolidated Financial Statements.”

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 as of December 31, 2007. 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 Company’s business, financial position, results of operations or cash flows.

There were no matters submitted to a vote of StanCorp’s shareholders during the fourth quarter of 2007.

The information with respect to executive officers is set forth pursuant to General Instruction G of Form 10-K.

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

Robert M. Erickson, CMA, has been assistant vice president and controller of StanCorp and Standard Insurance Company (“Standard”) since July 2005. In June 2007, he began fulfilling the duties of the Principal Financial Officer on an interim basis until a successor Chief Financial Officer is in place. Since 2000, Mr. Erickson has held several leadership roles in the Corporate Financial Services division of Standard, most recently as corporate divisional controller of Standard.

Kim W. Ledbetter, FSA, CLU, has been senior vice president, Asset Management group of Standard since the Company’s segment realignment in January 2006. Since June 2004, Mr. Ledbetter was senior vice president, asset management and individual disability of Standard, which included responsibility for Standard’s investment operations, including StanCorp Mortgage Investors, LLC, StanCorp Investment Advisers, Inc., our real estate department, and the individual insurance and retirement plans divisions. Since 1997, Mr. Ledbetter was senior vice president, retirement plans division of Standard.

J. Gregory Ness, LLIF, has been senior vice president, Insurance Services group of Standard since the Company’s segment realignment in January 2006. Since April 2004, Mr. Ness was senior vice president, group insurance division of Standard. Since 1999, Mr. Ness was senior vice president, investments of Standard.

Eric E. Parsons has been chairman, president and chief executive officer of StanCorp and Standard since May 2004. Prior to this, Mr. Parsons was president since May 2002 and chief executive officer since January 2003. Mr. Parsons was senior vice president and chief financial officer of StanCorp from its incorporation until 2002 and was chief financial officer of Standard from 1998 through 2002.

Michael T. Winslow, JD, has been senior vice president and general counsel of StanCorp and Standard since July 2004. Mr. Winslow has also performed the duties of assistant corporate secretary since February 2007. Since 2001, Mr. Winslow was vice president, general counsel and corporate secretary of StanCorp and Standard. Prior to joining StanCorp, Mr. Winslow served as assistant general counsel and chief compliance officer for PacifiCorp.

All share information below has been adjusted to reflect the December 9, 2005, two-for-one stock split, affected as a share dividend, of the Company’s common stock. StanCorp’s common stock is listed on the New York Stock Exchange under the symbol “SFG.” As of February 22, 2008, there were 40,630 shareholders of record of common stock.

The following tables set forth the high and low sales prices as reported by the New York Stock Exchange at the close of the trading day and cash dividends paid per share of common stock by calendar quarter:

The declaration and payment of dividends in the future is subject to the discretion of StanCorp’s board of directors. It is anticipated that annual dividends will be paid in December of each year depending on StanCorp’s financial condition, results of operations, cash requirements, future prospects, regulatory restrictions on the distributions from the insurance subsidiaries, the ability of the insurance subsidiaries to maintain adequate capital and other factors deemed relevant by StanCorp’s board of directors. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Management.” See also Item 1A, “Risk Factors—As a holding company, we depend on the ability of our subsidiaries to transfer funds to us in sufficient amounts to pay dividends to shareholders, make payments on debt securities and meet our other obligations.”

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. On November 14, 2005, the board of directors authorized a share repurchase program of up to 3.0 million shares of StanCorp common stock. The share repurchases were effected in the open market or in negotiated transactions through May 7, 2007. On May 7, 2007, the board of directors authorized a new share repurchase program of up to 6.0 million shares of StanCorp common stock. The new share repurchase program will be effected in the open market or in negotiated transactions through December 31, 2008. The new share repurchase program replaced our

previous share repurchase program, which had 1.2 million shares remaining that were canceled upon authorization of the new program.

During 2007, the Company repurchased 4.8 million shares of common stock at a total cost of $235.6 million for a volume weighted-average price of $48.60 per common share. At December 31, 2007, there were 1.4 million shares remaining under the Company’s current share repurchase program. During 2007, the Company acquired 7,620 shares of common stock from executive officers to cover tax liabilities of these officers resulting from the release of performance-based shares and retention-based shares at a total cost of $0.4 million for a volume weighted-average price of $47.55 per common share. Repurchases are made at market prices on the date of repurchase. Information required by Item 5 with respect to securities authorized for issuance under equity compensation plans is contained in Part III, Item 12 of this Form 10-K.

The following management assessment of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto. See Item 8, “Financial Statements and Supplementary Data.” 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 dates of the financial statements and the reported amounts of revenues and expenses during each reporting period. The estimates most susceptible to material changes due to significant judgment are identified as critical accounting policies. The results of these estimates are critical because they affect our profitability and may affect key indicators used to measure the Company’s performance. See “Critical Accounting Policies and Estimates.”

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 predictive in nature and 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 or implied. 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. See “Forward-looking Statements.”

EXECUTIVE SUMMARY

Financial Results Overview

Net income per diluted share was $4.35, $3.73 and $3.76 for the years 2007, 2006 and 2005, respectively. Net income for these same periods was $227.5 million, $203.8 million and $211.1 million, respectively. The increase in net income for 2007 compared to 2006 reflected premium growth and comparatively favorable claims experience in our group insurance and individual disability businesses. Net income for 2006 was affected by premium growth, offset by comparatively higher claims expense. Premium growth in the Insurance Services segment was 7.1%, 6.1% and 10.1% for 2007, 2006 and 2005, respectively. For the Insurance Services segment, claims experience for the group insurance products, as indicated by the benefit ratio (benefits to policyholders and interest credited measured as a percentage of premiums), was 77.4%, 78.3% and 75.8% for 2007, 2006 and 2005,

respectively. The growth in net income per diluted share for 2007 also reflected a reduction in diluted weighted-average shares outstanding of 2.3 million compared to 2006 due to increased share repurchase activity in 2007.

Outlook for 2008

For 2008, we will continue to focus on our long-term objectives and address challenges that may arise with financial discipline and from a position of superior financial strength. We manage for profitability, focusing on good business diversification, disciplined product pricing, sound underwriting, effective claims management and high quality customer service.

For 2008, the Company has established the following expectations, which will affect our annual financial results:

CONSOLIDATED RESULTS OF OPERATIONS

Revenues

Revenues primarily consist of premiums, administrative fees and net investment income. Total revenues increased 8.7% to $2.71 billion for 2007 compared to 2006 and 6.7% to $2.49 billion for 2006 compared to 2005.

The following table sets forth percentages of premium and administrative fee growth, and net investment income growth by segment for the years December 31:

Consolidated premium and administrative fee growth is driven primarily by premium growth in our Insurance Services segment and administrative fee growth in our Asset Management segment. The three primary factors that influence premium growth for our Insurance Services

segment are sales, customer retention, and organic growth that is derived from wage and employment growth. Premiums for the Insurance Services segment increased 7.1% to $2.06 billion for 2007 compared to 2006, and 6.1% to $1.93 billion for 2006 compare to 2005. The increases in premiums were due in part to strong sales and a single premium in 2007 of $19.3 million related to a reserve buyout, which was partially offset by higher experience rated refunds (“ERRs”) of $37.2 million for 2007, compared to $22.6 million for 2006. Administrative fees for our Asset Management segment increased 51.6% to $118.7 million for 2007 compared to 2006, and 92.9% to $78.3 million for 2006 compared to 2005. Administrative fee growth in our Asset Management segment was due to continued deposit growth, strong customer retention in the retirement plans business, as well as assets under administration added through the acquisition of DPA, Inc. in July 2007 and Invesmart, Inc. (“Invesmart”) in July 2006. Excluding the administrative fees related to the addition of Invesmart and DPA, Inc., administrative fee growth for the Asset Management segment was 22.9% for 2007 compared to 2006.

Net investment income increased 7.8% to $516.3 million for 2007 compared to 2006 and 2.9% to $478.9 million for 2006 compared to 2005. Net investment income primarily is affected by changes in levels of invested assets, interest rates, the change in fair value of derivative assets and commercial mortgage loan prepayment fees.

The increase in net investment income for 2007 compared to 2006 was primarily due to an increase of 4.9% to $8.47 billion in average invested assets resulting from operations, and an increase in assets related to proceeds of $300 million from junior subordinated debentures (“Subordinated Debt’) issued in May 2007. Average invested assets do not include cash and cash equivalents. Also contributing to the increase was an increase in premiums on called bonds, primarily in the first six months of 2007. Premiums on called bonds were $2.0 million for 2007, compared to $0.5 million for 2006. The increase in net investment income was partially offset by decreases in the fair value of derivative assets and lower portfolio yield of commercial mortgage loans. The fair value adjustment to derivative assets was a decrease of $1.0 million for 2007, compared to an increase of $0.9 million for 2006. The portfolio yield for commercial mortgage loans decreased to 6.36% at the end of 2007 from 6.40% at the end of 2006. The portfolio yield for fixed maturity securities remained stable at 5.57% at the end of 2007 and 2006.

The increase in net investment income for 2006 compared to 2005 was primarily due to an increase of 4.9% to $8.07 billion in average invested assets resulting from operations and an increase of $0.9 million in the fair value of derivative assets. The increase in net investment income was partially offset by a $3.6 million decrease in commercial mortgage loan prepayment fees, a $1.1 million decrease in premiums on called bonds and decreases in the portfolio yields of commercial mortgage loans and fixed maturity securities. The portfolio yield for commercial mortgage loans decreased to 6.40% at the end of 2006 from 6.46% at the end of 2005. The portfolio yield for fixed maturity securities decreased to 5.57% at the end of 2006 from 5.61% at the end of 2005.

Commercial mortgage loan prepayment fees were $9.7 million, $9.8 million and $13.4 million for 2007, 2006 and 2005, respectively. Approximately 85% of our commercial mortgage loans have a provision that requires the borrower to pay a prepayment fee that assures that the Company’s expected cash flow from commercial mortgage loan investments will be protected in the event of prepayment. Since 2001, all new commercial mortgage loans originated by the Company contain this prepayment provision. The remainder of our commercial mortgage loans contains fixed prepayment fees that mitigate prepayments, but may not fully protect the Company’s expected cash flow in the event of prepayment.

Net capital gains and losses are reported in “Other.” Net capital losses were $0.6 million for 2007. Net capital gains were $1.9 million and $2.2 million for 2006 and 2005, respectively. Net capital gains and losses occur as a result of sale or impairment of the Company’s assets, neither of which is likely to occur in regular patterns. While the timing of an impairment is not controllable, management does have discretion over the timing of sales of invested assets.

Benefits and Expenses

The growth in benefits to policyholders, including interest credited, is driven by different factors for each of our product segments. For the Insurance Services segment, three primary factors drive benefits to policyholders: premium growth (reserves are established in part based on premium levels), claims experience, and the assumptions used to establish related reserves. The predominant factors affecting claims experience are incidence measured by the number of claims and severity measured as the length of time a disability claim is paid and the size of the claim. The assumptions used to establish the related reserves reflect expected incidence and

severity, as well as new investment interest rates and overall portfolio yield, both of which affect the discount rate used to establish reserves. See “Critical Accounting Policies and Estimates—Reserves.”

For our Asset Management segment, the primary factors that drive benefits to policyholders, including interest credited, relate to interest credited to customers. The primary factors that affect interest credited are growth in

general account assets under management, new investment interest rates and overall portfolio yield (which influence our interest crediting rate for our customers), and customer retention. In addition, these amounts may fluctuate from quarter to quarter in compliance with Statement of Financial Accounting Standards (“SFAS”) No. 133 related to changes in interest rates and equity market volatility.

The increase in benefits to policyholders, including interest credited, for the Insurance Services segment for 2007 compared to 2006 resulted from business growth as evidenced by premium growth, partially offset by comparatively favorable claims experience in our group insurance and individual disability insurance businesses. See “Business Segments—Insurance Services Segment—Benefits and Expenses—Benefits to Policyholders (including interest credited).”

The increase in benefits to policyholders, including interest credited, for the Insurance Services segment for 2006 compared to 2005 primarily resulted from business growth, as evidenced by premium growth, and comparatively less favorable claims experience in our group insurance product lines. By contrast, group insurance products had favorable claims experience overall for most of 2005.

The increase in benefits to policyholders, including interest credited, for the Asset Management segment for 2007 compared to 2006 resulted primarily from increased interest credited related to growth in general account assets in our retirement plans and individual fixed annuities businesses. Growth in interest credited for this segment was affected by higher SFAS No. 133 liability accruals for our small block of indexed annuities. In 2007, interest credited was increased by $1.6 million due to the effects of this valuation. In addition, benefits to policyholders for the Asset Management segment increased in 2007 compared to 2006 due to an increase in life-contingent annuity sales for our individual fixed annuities business.

The increase in benefits to policyholders, including interest credited, for the Asset Management segment for 2006 compared to 2005 resulted from an increase in assets under administration due to favorable customer retention,

growth in general account assets in our retirement plans and individual fixed annuities businesses, offset by reduced interest crediting rates due to lower new investment interest rates and overall portfolio yield. Growth in general account assets for our retirement plans and individual fixed annuities businesses was 6.4% for 2007 compared to 2006, and 10.2% for 2006 compared to 2005. In addition, a significant increase in the sales of life-contingent annuities for our individual fixed annuities business in 2005 increased benefits to policyholders for that period. See “Business Segments—Asset Management Segment—Benefits and Expenses—Benefits to Policyholders.”

Operating expenses increased 17.4% to $434.8 million for 2007 compared to 2006, and 8.7% to $370.3 million for 2006 compared to 2005. The increase in operating expenses was primarily due to the integration of Invesmart since 2007 included a full year of Invesmart expenses compared to a half year of expenses in 2006. The additional increase in operating expenses was due to business growth as evidenced by growth in assets under administration and up-front costs related to the consolidation of some of our trust and insurance platforms. In addition, we acquired DPA, Inc. during the third quarter of 2007. DPA, Inc. is a retirement plan business based in Portland, Oregon. Operating expenses for DPA, Inc. during 2007 were approximately $1.9 million. There were also additional costs related to the installation of a large national account group policy sold in our group insurance business that contributed approximately $8.5 million to the overall increase in operating expenses for 2007. The installation of the large national account included capitalized software and system costs that will be depreciated

and amortized through 2012. The depreciation and amortization costs will add an average of $3.0 million to operating expenses for the next five years.

The increase in operating expenses for 2006 was primarily due to expenses related to the operations of Invesmart. Excluding expenses from the Invesmart operations, operating expense growth for 2006 was 2.7%. Operating expense growth is typically influenced by business growth as evidenced by premium and administrative fee growth. Premium and administrative fee growth for 2007 was 9.0% compared to 2006, and for 2006 was 7.6% compared to 2005. See “Business Segments.”

Commissions and bonuses primarily represent sales-based compensation, which can vary depending on the product, the structure of the commission program and factors such as customer retention, sales, growth in assets under administration and profitability of the business in each of our segments. Commissions and bonuses increased 7.8% to $198.0 million for 2007 compared to 2006, and 9.0% to $183.6 million for 2006 compared to 2005. The increases for the comparative periods were due to premium growth and persistency for our Insurance Services segment and growth in assets under administration for our Asset Management segment. In addition, commissions and bonuses increased due to operations from the Invesmart acquisition in the third quarter of 2006. Excluding the Invesmart acquisition, growth in commissions and bonuses was 7.6% for 2007 compared to 2006, and 8.2% for 2006 compared to 2005.

Net Decrease in Deferred Acquisition Costs (“DAC”), Value of Business Acquired (“VOBA”) and Intangibles

We defer certain commissions, bonuses and operating expenses, which are considered acquisition costs. These costs are then amortized into expenses over a period not to exceed the life of the related policies, which for group insurance contracts is the initial premium rate guarantee period, which averages 2.5 years. VOBA primarily represents the discounted future profits of business assumed through reinsurance agreements. A portion of VOBA is amortized each year to achieve matching against expected gross profits. The Company’s intangibles, consisting of customer lists and marketing agreements, are also subject to amortization. Customer lists were acquired through the purchase of Invesmart, DPA, Inc. and the acquisition by StanCorp Investment Advisers, Inc. of several small investment advisory firms. The values associated with the customer lists are amortized over 10 years. The amortization for the marketing agreement with the Minnesota Life Insurance Company (“Minnesota Life”) is up to 25 years. See “Critical Accounting Policies and Estimates—DAC, VOBA, Other Intangible Assets

and Goodwill.” The net deferral for DAC, VOBA and intangibles for 2007 decreased $1.0 million compared to 2006 and increased $10.2 million for 2006 compared to 2005. In addition, a cumulative effect adjustment of $39.4 million after-tax was recorded as a reduction to retained earnings as of January 1, 2007, as a result of the adoption of Statement of Position (“SOP”) 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts.

Income Taxes

Total income taxes may 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 tax benefit. The combined federal and state effective tax rates were 33.4%, 34.2% and 35.2% for 2007, 2006 and 2005, respectively. See Item 8, “Note 10—Income Taxes” for more information on the change in the effective tax rate.

BUSINESS SEGMENTS

StanCorp’s operations include two reportable segments: Insurance Services and Asset Management, as well as an “Other” category for activity outside of the two 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 accidental death and dismemberment (“AD&D”) insurance, and group dental insurance. The Asset Management segment offers full-service 401(k) plans, 457 plans, defined benefit plans, money purchase pension plans, profit sharing plans, 403(b) plans and non-qualified deferred compensation products and services through an affiliated broker-dealer. This segment also offers investment management and financial planning services, commercial mortgage loan origination and servicing, and individual fixed annuities. It also includes the former operations of Invesmart, a provider of retirement plan services, and investment advisory and management services, acquired in July 2006. Effective January 1, 2007, the administration and servicing operations for the retirement plans group annuity contracts offered through Standard and for the trust product offered through Invesmart, began operating under the name Standard Retirement Services, Inc. (“Standard Retirement Services”).

Segment revenues measured as a percentage of total revenues for 2007 were 88.5% for the Insurance Services segment and 11.2% for the Asset Management segment.

Net capital gains and losses on investments, return on capital not allocated to the product segments, holding company expenses, interest on debt and adjustments made in consolidation are reflected in “Other.”

Insurance Services Segment

As the Insurance Services segment is our largest segment, it substantially influences our consolidated financial results. Income before income taxes for the Insurance Services segment was $322.6 million, $282.4 million and $300.1 million for 2007, 2006 and 2005, respectively. Income before income taxes for this segment for 2007 was affected by premium growth and comparatively favorable claims experience in our group insurance and individual disability businesses. Income before income taxes for 2006 for this segment was affected by premium growth, comparatively less favorable claims experience in our group insurance products and operating expense growth less than premium growth.

Following are key indicators that management uses to manage and assess the performance of the Insurance Services segment:

Revenues for the Insurance Services segment increased 6.6% to $2.40 billion for 2007 compared to 2006, primarily due to premium growth of 7.1% and increased net investment income in our insurance businesses. Revenues for the Insurance Services segment increased 5.7% to $2.25 billion for 2006 compared to 2005, again primarily due to increased premiums and increased net investment income in our insurance businesses.

Premiums

Premiums for the Insurance Services segment increased 7.1% for 2007 compared to 2006, and 6.1% for 2006 compared to 2005. The primary factors that contribute to premium growth for the Insurance Services segment are sales and persistency for all of our insurance products and organic growth in our group insurance product lines due to

employment and wage rate growth from existing group policyholders.

Sales. Sales of our group insurance products increased 28.6% for 2007 compared to 2006, and decreased 2.2% for 2006 compared to 2005. Sales for 2007 exceeded $400 million of annualized premium for the first time in our history. This sales growth and the related increase in the number of new cases underscores our efforts to diversify our block of business further and thus our risk. The increase in sales for 2007 included sales to a few large national accounts and a single sale of $19.3 million related to a reserve buyout. The decline in sales for 2006 compared to 2005 was due to a highly competitive sales environment and slower industry growth. The group insurance market continues to reflect a price-competitive sales environment.

Persistency. Persistency for our group insurance products has historically exceeded industry averages, which we believe demonstrates our commitment to customer service and pricing discipline for new sales. Premium growth for 2007 was supported by strong persistency in our group insurance product lines at 87.4%, compared to 88.1% for 2006 and 88.2% for 2005. Persistency in our individual disability products remains favorable. A significant portion of our in force individual disability policies are non-cancelable.

Organic Growth. A portion of our premium growth in our group insurance in force business is due to continued employment and wage rate growth. Employment and wage growth slowed during 2007 compared to 2006 and 2005. Organic growth is also affected by changes in premium per insured and the average age of employees.

Premium growth for 2007 compared to 2006 was affected by a single sale of $19.3 million related to a reserve buyout. The buyout included claims incurred prior to June 1, 2007. Premium growth was offset by ERRs of $37.2 million, $22.6 million and $20.2 million for 2007, 2006 and 2005, respectively. ERRs, which are refunds to certain group contract holders based on claims experience, can fluctuate widely from quarter to quarter depending on the underlying experience of specific contracts.

Net Investment Income

Net investment income for the Insurance Services segment increased 4.0% to $325.8 million for 2007 compared to 2006 and 3.3% to $313.4 million for 2006 compared to 2005. The increase in net investment income for 2007 compared to 2006 was primarily affected by growth in average invested assets due to premium growth and by additional income related to premiums on called bonds for this segment of $1.2 million for 2007 compared to $0.3 million for 2006. The increase in net investment income for 2006 compared to 2005 was primarily affected by growth in average invested

assets due to premium growth, partially offset by a reduction in invested asset yields and commercial mortgage loan prepayments. See “Consolidated Results of Operations—Revenues—Net Investment Income.”

Benefits to Policyholders (including interest credited)

Three primary factors drive benefits to policyholders: premium growth (reserves are established in part based on premium levels), claims experience and the assumptions used to establish related reserves. The predominant factors affecting claims experience are claims incidence measured by the number of claims and claims severity measured as the length of time a disability claim is paid and the size of the claim. The assumptions used to establish the related reserves reflect claims incidence and claims severity, in addition to new-money investment interest rates and overall portfolio yield, as both affect the discount rate used to establish reserves.

Benefits to policyholders, including interest credited, for the Insurance Services segment increased 5.0% to $1.59 billion for 2007 compared to 2006, and 9.4% to $1.51 billion for 2006 compared to 2005. The increases primarily resulted from business growth as evidenced by premium growth, with the 2007 increase partially offset by favorable claims experience. Premiums for the Insurance Services segment increased 7.1% for 2007 compared to 2006, and 6.1% for 2006 compared to 2005.

Because premium growth is one of the primary factors that drive benefits to policyholders, the benefit ratio, calculated as benefits to policyholders and interest credited as a percentage of premiums, is utilized to provide a measurement of claims normalized for premium growth. The benefit ratio for our group insurance product lines for 2007 was 77.4%, compared to 78.3 % for 2006 and 75.8% for 2005. The group benefit ratio for 2007 was just below the Company’s estimated annual range of 77.5% to 79.5% for 2007.

We adopted a new group life waiver table, the Society of Actuaries Table 2005, to be used in the calculation of reserves for group life waiver claims incurred in 2007 and later. Adoption of this table resulted in a reduction of $15.5 million in reserves established for new 2007 group life waiver claims compared to the reserves that would have been established using the prior table.

The benefit ratio for our individual disability business was 69.3% for 2007 compared to 79.4% for 2006, primarily reflecting favorable claims experience in 2007. The benefit ratio for our individual disability business was 79.2% for 2005.

Due to the small size of our individual disability business, claims experience and, therefore, the benefit ratio can fluctuate more widely from quarter to quarter than that of our group insurance business.

We increased our individual disability reserves by $6.0 million in 2006 and by an additional $7.4 million in 2007 to address findings of an industry experience study. Due to the size of our individual disability block of business, we view the industry experience study as a credible source for establishing reserves. As with any block of business, we will continue to monitor emerging information, and if necessary, we will adjust our reserves accordingly.

Generally, we expect the individual disability benefit ratio to trend down over time to reflect the growth in the business outside of the large block of disability business assumed in 2000 from Minnesota Life, and the corresponding shift in revenues from net investment income to premiums. The decrease year to year in the expected benefit ratio does not necessarily indicate an increase in profitability; rather it reflects a change in the mix of revenues from the business.

The discount rate used in the fourth quarter of 2007 for newly established long term disability claim reserves was 5.35%, which decreased from 5.50% used during the first three quarters of 2007.

If investment rates prove to be lower than provided for in the margin between the new money investment rate and the reserve discount rate, we could be required to increase reserves, which could cause expense for benefits to policyholders to increase. The margin at December 31, 2007, in our overall block of business for group insurance between invested asset yield and weighted-average reserve discount rate was 40 basis points. See “Liquidity and Capital Resources.”

Operating Expenses

Operating expenses in the Insurance Services segment increased 7.3% to $313.2 million for 2007 compared to 2006, and 2.7% to $291.8 million for 2006 compared to 2005. Operating expenses as a percentage of premiums were 15.2%, 15.1% and 15.6% for 2007, 2006 and 2005, respectively. The increase in operating expenses in 2007 was primarily due to business growth as evidenced by premium growth and additional costs related to strong sales in our group insurance business. Some of the expense related to our strong sales in 2007 included new and enhanced systems capabilities that will benefit current and future customers. The decrease in the expense ratio for 2006 was primarily due to careful expense management, and decreased expenses related to technology spending in 2006 compared to 2005.

Asset Management Segment

Income before income taxes for the Asset Management segment increased 11.7% to $42.9 million for 2007 compared to 2006, and 24.3% to $38.4 million for 2006 compared to 2005. The increases were primarily due to fees earned from higher assets under administration. Revenues grew 28.0% for 2007 compared to 2006, and 24.2% for 2006 compared to 2005. The slower growth in income before income taxes compared to revenue growth was primarily due to higher interest credited relating to changes in the fair value of certain liabilities for indexed annuities, higher expenses related to the integration of Invesmart and consolidation of some of our trust and insurance platforms. During the third quarter of 2007, the Company acquired DPA, Inc., a retirement business based in Portland, Oregon, which added $1.7 billion to the Company’s total assets under administration.

Following are key indicators that management uses to manage and assess the performance of the Asset Management segment:

Revenues for the Asset Management segment increased 28.0% to $303.6 million for 2007 compared to 2006, and 24.2% to $237.2 million for 2006 compared to 2005. Revenues from the retirement plans business include plan and trust administration fees, fees on equity investments held in separate account assets and other assets under administration, and investment income on general account assets under administration. Premiums and benefits to policyholders reflect the conversion of retirement plan assets into life-contingent annuities, which can be selected by plan participants at the time of retirement, including the sale of immediate annuities. Most of the sales for this segment are recorded as deposits and are therefore not reflected as premiums. Individual fixed annuity deposits earn investment income, a portion of which is credited to policyholders.

Premiums

Premiums for the Asset Management segment are generated from life-contingent annuities, which primarily are a single-premium product. Premiums for the segment can vary significantly from quarter to quarter due to low sales volume of life-contingent annuities and the varying size of single premiums. Premiums for the Asset Management segment were $14.7 million, $7.6 million and $10.1 million for 2007, 2006 and 2005, respectively.

Administrative Fees

Administrative fees for the Asset Management segment were $118.7 million, $78.3 million and $40.6 million for 2007 2006 and 2005, respectively. Administrative fees are primarily earned from assets under administration.

Assets under administration for this segment, including retirement plans, individual fixed annuities and outside managed commercial mortgage loans, were $22.37 billion at December 31, 2007, which was a $3.35 billion increase compared to December 31, 2006. The increase was due to continued deposit growth, good customer retention, strong mortgage originations for other investors and equity market

appreciation in the retirement plans business as well as $1.7 billion acquired through the third quarter 2007 acquisition of DPA, Inc., a retirement plans business based in Portland, Oregon. Administrative fee growth for 2007 included $2.6 million in administrative fee revenue from the DPA, Inc. business acquired in the third quarter of 2007. Assets under administration increased $12.48 billion for 2006 compared to 2005. Growth in assets under administration in 2006 resulted from almost $11 billion added through the addition of Invesmart, as well as continued deposit growth and customer retention in our other retirement plans business. Excluding the assets under administration added through the addition of Invesmart, average assets under administration increased 23.2% for 2006 compared to 2005.

StanCorp Mortgage Investors, LLC (“StanCorp Mortgage Investors”) originated $1.45 billion, $942.8 million and $996.4 million of commercial mortgage loans for 2007, 2006 and 2005, respectively. The increases in originations primarily were due to less competition, accompanied by increased demand for fixed-rate commercial mortgage loans. Commercial mortgage loans managed for other investors increased 35.0% at December 31, 2007, compared with December 31, 2006.

Net Investment Income

Net investment income for the Asset Management segment increased 12.5% to $170.2 million for 2007 compared to 2006. The increase was primarily due to an increase of 9.8% to $1.41 billion in average general account assets under administration and an increase in commercial mortgage loan commitment fees of $3.9 million for 2007 compared to 2006 as a result of the increase in commercial mortgage loan originations. Partially offsetting the increase in net investment income was a decrease in the fair value of derivative assets of $1.0 million, compared to an increase of $0.9 million for 2006 and lower yields on commercial mortgage loans.

Net investment income for the Asset Management segment increased 7.8% to $151.3 million for 2006 compared to 2005. The increase for the comparative periods was primarily due to a 14.9% increase in average retirement plan general account assets under administration, partially offset by a $1.6 million decrease in commercial mortgage loan prepayments and a $1.6 million decrease in commercial mortgage loan commitment fees.

Benefits to Policyholders

Benefits to policyholders for the Asset Management segment represents current and future benefits on life-

contingent annuities, which vary with life-contingent annuity sales. Benefits to policyholders for the Asset Management segment increased $6.4 million to $22.4 million for 2007 compared to 2006 and decreased $3.4 million to $16.0 million for 2006 compared to 2005. Changes in the level of benefits to policyholders will approximate changes in premium levels because these annuities primarily are single-premium life-contingent annuity products with a significant portion of all premium payments established as reserves.

Interest credited represents interest paid to policyholders on retirement plan general account assets and individual fixed annuity deposits. Interest credited for the Asset Management segment increased 9.8% to $92.7 million for 2007 compared to 2006, and 11.2% to $84.4 million for 2006 compared to 2005. Interest credited to retirement plan customers increased primarily due to an increase in the interest-crediting rate to retirement plan customers and increases in average balances. Interest credited to individual fixed annuity deposits included the indexed annuity products first offered in 2006. The interest credited to the indexed annuities increased $4.3 million for 2007 compared to 2006 primarily due to increases in the S&P 500 Index and average balances. Average assets under administration for individual fixed annuities increased 6.4% for 2007 compared to 2006, and 6.7% for 2006 compared to 2005. Interest credited also includes changes in fair value of index-based interest guarantees. See Item 8 “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 7, Derivative Financial Instruments.”

Operating expenses for the Asset Management segment increased 52.9% to $120.2 million for 2007 compared to 2006. The increase in operating expenses for this segment was due to business growth as evidenced by growth in assets under administration, the integration of Invesmart, which included a full year of expenses in 2007 compared to a half year of expenses in 2006, up-front costs related to the consolidation of our trust product and group annuity platforms and $1.9 million of expenses in 2007 related to the operations of DPA, Inc.

Operating expenses for the Asset Management segment increased 54.4% to $78.6 million for 2006 compared to 2005. The increase in operating expenses for this segment was due to business growth as evidenced by growth in assets under administration and operating expenses related to the acquisition of Invesmart in July 2006. Segment operating expenses in 2006 included nearly a half year of operating expenses related to Invesmart. Excluding operating expenses

related to operating the Invesmart business, operating expenses for 2006 increased 14.1% to $58.1 million compared to 2005.

OTHER

In addition to our two segments, we report our holding company and corporate activity in “Other.” This category includes net capital gains and losses, return on capital not allocated to the product segments, holding company expenses, interest on debt and adjustments made in consolidation.

The Other category reported a loss before income taxes of $23.8 million for 2007 compared to a loss before income taxes of $11.1 million for 2006 and a loss before income taxes of $5.4 million for 2005. Contributing to the loss before income taxes for 2007 compared to 2006 was an increase in interest expense of $12.8 million primarily related to the $300 million Subordinated Debt issued in May 2007. The interest expense was partially offset by an increase in net investment income of $6.1 million to $20.3 million in 2007. The increase in net investment income is primarily due to increased levels of invested assets attributed to the proceeds received through the Subordinated Debt issuance. In addition, 2007 included $3.0 million in pre-tax severance costs due to the departure of the chief financial officer in the second quarter. The increased loss before income taxes for 2006 compared to 2005 was primarily due to lower net investment income resulting from lower excess capital as a result of the purchase of Invesmart in the third quarter of 2006. Net investment income for 2006 was $14.2 million, compared to $21.6 million for 2005. See “Liquidity and Capital Resources—Financing Cash Flows.”

LIQUIDITY AND CAPITAL RESOURCES

Asset/Liability and Interest Rate Risk Management

Asset/Liability management is a part of our risk management structure. The risks we assume related to asset/liability mismatches vary with economic conditions. The primary source of economic risk originates from changes in interest rates. It is generally management’s objective to align the characteristics of assets and liabilities so that our financial obligations can be met under a wide variety of economic conditions. From time to time, management may choose to liquidate certain investments and reinvest in different investments so that the certainty of meeting our financial obligations is increased. See “—Investing Cash Flows.”

We manage interest rate risk, in part, through asset/liability analyses. In keeping with presently accepted actuarial standards, the Company has made adequate provisions for the anticipated cash flows required to meet contractual obligations and related expenses, through the use of statutory reserves and related items at December 31, 2007.

Our financial instruments are exposed to financial market volatility and potential disruptions in the market that may result in certain financial instruments becoming less valuable. Financial market volatility includes interest rate risk. We have analyzed the estimated loss in fair value of certain market sensitive financial assets held at December 31, 2007 and 2006, given a hypothetical 10% increase in interest rates, and related qualitative information on how we manage interest rate risk. The interest rate sensitivity analysis was based upon our fixed maturity securities and commercial mortgage loans held at December 31, 2007 and 2006. Interest rate sensitivity of our financial assets was measured assuming a parallel shift in interest rates. All security yields were increased by 10% of the year-end 10-year U.S. Government Treasury bond yield, or 0.40% and 0.47% for the 2007 and 2006 analyses, respectively. The change in fair value of each security was estimated as the change in the option adjusted value of each security. Option adjusted values were computed using our payment models and provisions for the effects of possible future changes in interest rates. The analyses did not explicitly provide for the possibility of non-parallel shifts in the yield curve, which would involve discount rates for different maturities being increased by different amounts. The actual change in fair value of our financial assets can be significantly different from that estimated by the model. The hypothetical reduction in the fair value of our financial assets that resulted from the model was estimated to be $180 million and $183 million at December 31, 2007 and 2006, respectively.

As a percentage of our fixed maturity investments, callable bonds were 2.4% at December 31, 2007. Since 2001, all commercial mortgage loans originated by us contain a provision requiring the borrower to pay a prepayment fee to assure that our expected cash flow from commercial mortgage loan investments would be protected in the event of prepayment. Approximately 85% of our commercial mortgage loan portfolio contains this prepayment provision. The remainder of our commercial mortgage loans contains fixed prepayment fees that mitigate prepayments, but may not fully protect our expected cash flow in the event of prepayment.

Operating Cash Flows

Net cash provided by operations is net income adjusted for non-cash items and accruals and was $485.7 million, $390.1 million and $407.1 million for 2007, 2006 and 2005, respectively.

Investing Cash Flows

We maintain a diversified investment portfolio primarily consisting of fixed maturity securities and fixed-rate

commercial mortgage loans. Investing cash inflows primarily consist of the proceeds of investments sold, matured or repaid. Investing cash outflows primarily consist of payments for investments acquired or originated.

The insurance laws of the states of domicile and other states in which the insurance subsidiaries conduct business regulate the investment portfolios of the insurance subsidiaries. Relevant laws and regulations generally limit investments to bonds and other fixed maturity securities, mortgage loans, common and preferred stock and real estate. Decisions to acquire and dispose of investments are made in accordance with guidelines adopted and modified from time to time by the insurance subsidiaries’ boards of directors. Each investment transaction requires the approval of one or more members of senior investment staff, with increasingly higher approval authorities required for transactions that are more significant. Transactions are reported quarterly to the finance and operations committee of the board of directors for Standard and to the board of directors for The Standard Life Insurance Company of New York.

Net cash used in investing activities was $597.0 million, $749.3 million and $664.9 million for 2007, 2006 and 2005, respectively. The decrease in the net use of cash in investing activities from 2007 compared to 2006 was primarily due to the July 2006 purchase of Invesmart. Invesmart was a national retirement financial services company and is now part of our Asset Management segment. There were no similar sized acquisitions during 2007. In addition, contributing to the decrease in cash used was a $606.9 million increase in proceeds from investments sold, matured or repaid. This increase was partially offset by a $495.5 million increase in cash used by the combination of new mortgage originations, purchases of fixed maturity securities, and purchases of real estate investments. Partially offsetting the overall decrease in investing cash used for acquisitions was the Company’s increased use of cash for short-term investments. The increased use of cash for short-term investments was primarily due to the investment of cash received through the Subordinated Debt offering in May 2007.

Our target investment portfolio allocation is approximately 60% fixed maturity securities and 40% commercial mortgage loans. At December 31, 2007, our portfolio consisted of 57.2% fixed maturity securities, 41.9% commercial mortgage loans, 0.8% real estate and 0.1% short-term investments.

Our fixed maturity securities totaled $5.0 billion at December 31, 2007. We believe that we maintain prudent diversification across industries, issuers and maturities. Our corporate bond industry diversification targets are based on

the Lehman Investment Grade Credit Index, which is reasonably reflective of the mix of issuers broadly available in the market. We also target a specified level of government, agency and municipal securities in our portfolio for credit quality and additional liquidity. The overall credit quality of our fixed maturity securities investment portfolio was A (Standard & Poor’s) at December 31, 2007. The percentage of fixed maturity securities below investment-grade was 4.1% and 3.6% at December 31, 2007 and 2006, respectively. At December 31, 2007, bonds on our watch list totaled approximately $49.3 million. We did not have any direct exposure to sub-prime or Alt-A mortgages in our fixed maturity securities portfolio at December 31, 2007. We held investments in debt securities issued by bond insurers at December 31, 2007, with $33.5 million in market value and $40.7 million in book value. The Company intends to hold these securities to maturity and will continue to evaluate these holdings, but currently expects the fair values of its investments in debt securities issued by bond insurers to recover as these debt securities approach their maturity dates. Should the credit quality of our fixed maturity securities decline, there could be a material adverse effect on our business, financial position, results of operations or cash flows.

At December 31, 2007, our fixed maturity securities portfolio had gross unrealized capital gains of $115.8 million and gross unrealized capital losses of $52.4 million. Unrealized gains and losses primarily result from holding fixed maturity securities with interest rates higher or lower, respectively, than those currently available at the reporting date.

StanCorp Mortgage Investors originates and services fixed-rate commercial mortgage loans for the investment portfolios of our insurance subsidiaries and generates additional fee income from the origination and servicing of commercial mortgage loans participated to institutional investors.

Commercial mortgage loan originations for internal and external investors were $1.45 billion, $942.8 million and $996.4 million for 2007, 2006 and 2005, respectively. The increased originations in 2007 reflected a return to a more traditional origination market with the securitized lenders essentially out of the market for loans, making the market less competitive with wider spreads. The decrease in originations in 2006 reflected a more competitive origination market for commercial mortgage loan financing. The level of commercial mortgage loan originations in any year is influenced by market conditions as we respond to changes in interest rates, available spreads and borrower demand.

At December 31, 2007, StanCorp Mortgage Investors serviced $3.66 billion in commercial mortgage loans for subsidiaries of StanCorp and $1.90 billion for other institutional investors, compared to $3.32 billion serviced for subsidiaries of StanCorp and $1.41 billion for other institutional investors at December 31, 2006.

The average loan to value ratio for the overall portfolio was approximately 57% at December 31, 2007, and the average loan size in the portfolio was approximately $0.7 million at December 31, 2007. We have the contractual ability to pursue personal recourse on most of the loans.

Capitalized commercial mortgage loan servicing rights associated with commercial loans serviced for other institutional investors were $5.7 million and $4.0 million at December 31, 2007 and 2006, respectively.

At December 31, 2007, there were four commercial mortgage loans totaling $1.9 million in our portfolio that were more than sixty days delinquent, of which two commercial mortgage loans with a total balance of $0.7 million were in the process of foreclosure. We had a net balance of restructured loans of $3.4 million at December 31, 2007, and a commercial mortgage loan loss reserve of $3.0 million. At December 31, 2007, we do not have any direct exposure to sub-prime or Alt-A mortgages. The delinquency rate and loss performance of our commercial mortgage loan portfolio is in line with the recent industry averages as reported by the American Council of Life Insurers. The performance of our commercial mortgage loan portfolio may fluctuate in the future. Should the delinquency rate or loss performance of our commercial mortgage loan portfolio increase, the increase could have a material adverse effect on our business, financial position, results of operations or cash flows.

At December 31, 2007, our commercial mortgage loan portfolio was collateralized by properties with the following characteristics:

At December 31, 2007, our commercial mortgage loan portfolio was diversified regionally as follows:

Commercial mortgage loans in California accounted for 30% of our commercial mortgage loan portfolio at December 31, 2007. Through this concentration, we are

exposed to potential losses resulting from an economic downturn in California as well as to certain catastrophes, such as earthquakes and fires, which may affect certain areas of the state. We require borrowers to maintain fire insurance coverage to provide reimbursement for any losses due to fire. Although we diversify our commercial mortgage loan portfolio within California by both location and type of property in an effort to reduce certain catastrophe and economic exposure, such diversification may not eliminate the risk of such losses. Historically, the delinquency rate of our California-based commercial mortgage loans has been substantially below the industry average and consistent with our experience in other states. In addition, we do not require earthquake insurance for properties on which we make commercial mortgage loans, but do consider the potential for earthquake loss based upon seismic surveys and structural information specific to each property when new loans are underwritten. We do not expect the exposure to catastrophe or earthquake damage to the properties in our commercial mortgage loan portfolio located in California to have a material adverse effect on our business, financial position, results of operations or cash flows. However, if economic conditions in California decline, we could experience a higher delinquency rate on the portion of our commercial mortgage loan portfolio located in California, which could have a material adverse effect on our business, financial position, results of operations or cash flows.

Under the laws of certain states, environmental contamination of a property may result in a lien on the property to secure recovery of the costs of cleanup. In some states, such a lien has priority over the lien of an existing mortgage against such property. As a commercial mortgage lender, we customarily conduct environmental assessments prior to making commercial mortgage loans secured by real estate and before taking title through foreclosure on real estate collateralizing delinquent commercial mortgage loans held by us. Based on our environmental assessments, we believe that any compliance costs associated with environmental laws and regulations or any remediation of affected properties would not have a material adverse effect on our business, financial position, results of operations or cash flows. However, we cannot provide assurance that material compliance costs will not be incurred by us.

In the normal course of business, we commit to fund commercial mortgage loans generally up to 90 days in advance. At December 31, 2007, the Company had outstanding commitments to fund commercial mortgage loans totaling $265.0 million, with fixed interest rates ranging from 6.0% to 7.125%. These commitments generally have fixed expiration dates. A small percentage of commitments

expire due to the borrower’s failure to deliver the requirements of the commitment by the expiration date. In these cases, we will retain the commitment fee and good faith deposit. Alternatively, if we terminate a commitment due to the disapproval of a commitment requirement, the commitment fee and good faith deposit may be refunded to the borrower, less an administrative fee.

Financing Cash Flows

Financing cash flows primarily consist of policyholder fund deposits and withdrawals, borrowings and repayments on the line of credit, borrowings and repayments on long-term debt, repurchases of common stock and dividends paid on common stock. Net cash provided by financing activities was $261.1 million, $362.0 million and $265.7 million for 2007, 2006 and 2005, respectively. The decrease for 2007 resulted from several offsetting factors. Cash inflows from a $300 million Subordinated Debt offering in May 2007 were offset by increased repurchases of common stock, the elimination of cash inflows from a third party minority interest in a limited liability company that was dissolved in December 2006 and slightly slower growth in policyholder fund deposits, net of withdrawals. The increase for 2005 primarily resulted from the third party interest in the limited liability company created for the purpose of holding commercial mortgage loans originated by StanCorp Mortgage Investors. The minority third party investment totaled $143.2 million for 2005. Standard retained its ownership share of the commercial mortgage loans upon the dissolution of the limited liability company. The non-cash transaction in the Consolidated Statements of Cash Flows for 2006 represented the transfer of commercial mortgage loans to the minority shareholders at dissolution. The Company repurchased common stock at a total cost of $235.6 million, $70.1 million and $106.4 million for 2007, 2006 and 2005, respectively.

On June 15, 2006, the Company established a five-year, $200 million senior unsecured revolving credit facility (“Facility”). On May 9, 2007, the Facility was amended to extend the expiration date by one year to June 15, 2012. At the option of StanCorp and with the consent of the lenders under the Facility, the termination date can be extended for an additional one-year period. Additionally, upon the request of StanCorp and with consent of the lenders under the Facility, the Facility can be increased by up to $100 million to a total of up to $300 million. Borrowings under the Facility will 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 customary covenants that take into consideration the impact of material

transactions, changes to the business, compliance with legal requirements and financial performance. The two financial covenants are based on our total debt to total capitalization ratio and consolidated net worth. The Facility is subject to performance pricing based upon our total debt to total capitalization ratio and includes interest based on a Eurodollar margin, plus facility and utilization fees. At December 31, 2007, StanCorp was in compliance with all covenants under the Facility and had no outstanding balance on the Facility. StanCorp currently has no commitments for standby letters of credit, standby repurchase obligations or other related commercial commitments.

StanCorp filed a $1.0 billion shelf registration statement with the Securities and Exchange Commission, which became effective on July 23, 2002, and expires on December 1, 2008, registering common stock, preferred stock, debt securities and warrants. On September 25, 2002, we completed an initial public debt offering of $250 million of 6.875%, 10-year senior notes (“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. Upon expiration of the $1.0 billion shelf registration statement in December 2008, the Company, as a well-known seasoned issuer, has the ability to file an automatic shelf registration statement for subsequent security issuances.

On May 29, 2007, the Company completed a public debt offering of $300 million of 6.90%, Subordinated Debt. The Subordinated Debt has a final maturity on June 1, 2067, is non-callable at par for the first 10 years and is subject to a replacement capital covenant. The covenant limits replacement of the Subordinated Debt for the first 40 years to be redeemable only with securities, which 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 at 6.90% in June and December for the first 10 years 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. StanCorp management chose to make the first scheduled interest payment of $10.5 million in December 2007. StanCorp used approximately $30 million of the proceeds from the sale of the Subordinated Debt to fund the acquisition by StanCorp Real Estate, LLC (a wholly owned subsidiary) of certain real estate assets from Standard and $227.7 million to repurchase approximately 4.6 million shares of common stock. The Company intends to use the remaining debt proceeds to repurchase additional shares of its common stock and for general corporate purposes.

On May 7, 2007, the board of directors authorized a new repurchase program for up to 6.0 million shares of StanCorp common stock, which replaced the Company’s prior share repurchase program. We repurchased 4.8 million shares of common stock at a total cost of $235.6 million during 2007. At December 31, 2007, there were 1.4 million shares remaining under the current repurchase program.

CAPITAL MANAGEMENT

State insurance departments require insurance enterprises to maintain minimum levels of capital and surplus. At December 31, 2007, the insurance subsidiaries capital was approximately 301% of the company action level of Risk-based Capital (“RBC”) required by regulators, which is 601% of the authorized control level RBC required by our states of domicile. We expect to maintain a target capital of approximately 300% of the company action level of the insurance company. We expect to distribute capital in excess of the target to the holding company. At December 31, 2007, statutory capital, adjusted to exclude asset valuation reserves, for our regulated insurance subsidiaries totaled $1.15 billion.

The levels of capital in excess of targeted RBC we generate vary inversely in relation to our levels of premium growth, primarily due to initial reserve requirements, certain regulatory capital requirements based on premiums and certain acquisition costs associated with policy issuance. At higher levels of premium growth, we generate less capital in excess of targeted RBC. At very high levels of premium growth, we could generate the need for capital infusions. At lower levels of premium growth, we generate more capital in excess of targeted RBC. At our expected growth rate, we anticipate generating capital in excess of our 300% target of $125 to $150 million in 2008.

We will continue to maintain our three priorities, in the following order, for the remaining excess capital:

In addition, we seek to maintain amounts sufficient to fund holding company operating expenses, interest on our debt and our annual dividends to shareholders. Maintaining additional capital provides timing flexibility if we choose to access capital markets to finance growth or acquisition. StanCorp has a $1.0 billion shelf registration statement with the SEC. Under the shelf registration, we have issued $550 million in long-term debt. See “Liquidity and Capital Resources—Financing Cash Flows.”

We had debt to total capitalization ratios of 28.6% and 15.2% at December 31, 2007 and 2006, respectively. The increase in our debt to total capitalization ratio was primarily due to the $300 million Subordinated Debt. Certain rating agencies recognize a portion of the Subordinated Debt as equity. Standard & Poor’s currently recognizes the Subordinated Debt as 100% equity, while Moody’s and AM Best currently recognize 75% of the Subordinated Debt as equity. Debt to total capitalization after the 75% equity credit is 17.3% at December 31, 2007. Our ratio of earnings to fixed charges for 2007 and 2006 was 3.3x and 3.5x, respectively.

Dividends from Subsidiaries

StanCorp’s ability to pay dividends to its shareholders, repurchase its shares and meet its obligations substantially depends upon the receipt of distributions from its subsidiaries, including Standard. Standard’s ability to pay dividends to StanCorp is affected by factors deemed relevant by Standard’s board of directors, including the ability to maintain adequate RBC according to Oregon statute. Under Oregon law, Standard may pay dividends only from the earned surplus arising from its business. It also must receive the prior approval of the Director of the Oregon Department of Consumer and Business Services—Insurance Division (“Oregon Insurance Division”) to pay a dividend if such dividend exceeds certain statutory limitations. The current statutory 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 before realized capital gains or losses for the 12-month period ended on the preceding December 31 date. In each case, the limitation must be determined under statutory accounting practices. Oregon law gives the Oregon Insurance Division broad discretion to disapprove requests for dividends in excess of these limits. There are no regulatory restrictions on dividends from non-insurance subsidiaries of StanCorp.

During 2007 and 2006, Standard paid dividends to StanCorp totaling $155.0 million and $147.0 million, respectively.

Dividends to Shareholders

On November 5, 2007, the board of directors of StanCorp declared an annual cash dividend of $0.72 per share, calculated and payable on a per share basis. The dividend was payable on December 7, 2007, to shareholders of record on November 16, 2007. The declaration and payment of dividends in the future is subject to the discretion of StanCorp’s board of directors. It is anticipated that annual dividends will be paid in December of each year depending on StanCorp’s financial condition, results of operations, cash

requirements, future prospects, regulatory restrictions on distributions from the insurance subsidiaries, the ability of the insurance subsidiaries to maintain adequate capital and other factors deemed relevant by the board of directors. In addition, the declaration or payment of dividends would be restricted if StanCorp elects to defer interest payments on its Subordinated Debt. If elected, the restriction would be in place during the deferral period, which cannot exceed five years. StanCorp has paid dividends each year since its initial public offering in 1999.

Share Repurchases

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 (the “Exchange Act”). Execution of the share repurchase program is based upon management’s assessment of market conditions for its common stock and other potential growth opportunities.

On November 14, 2005, the board of directors authorized a share repurchase program of up to 3.0 million shares of StanCorp common stock. The share repurchases were effected in the open market or in negotiated transactions through May 7, 2007. On May 7, 2007, the board of directors authorized a new share repurchase program of up to 6.0 million shares of StanCorp common stock. The new share repurchase program will be effected in the open market or in negotiated transactions through December 31, 2008. The new share repurchase program replaced our previous share repurchase program, which had 1.2 million shares remaining that were canceled upon authorization of the new program.

During 2007, we repurchased 4.8 million shares of common stock at a total cost of $235.6 million for a volume weighted-average price of $48.60 per common share. At December 31, 2007, there were 1.4 million shares remaining under the current share repurchase program. In addition, during 2007, we acquired 7,620 shares of common stock from executive officers to cover tax liabilities of these officers resulting from the release of performance-based shares and retention-based shares at a total cost of $0.4 million for a volume weighted-average price of $47.55 per common share, which reflects the market price on the transaction dates.

FINANCIAL STRENGTH RATINGS

Financial strength ratings, which gauge claims paying ability, are an important factor in establishing the competitive position of insurance companies. Ratings are important in maintaining public confidence in our company and in our ability to market our products. Rating organizations

continually review the financial performance and condition of insurance companies, including ours. In addition, credit ratings on our Senior Notes and Subordinated Debt are tied to our financial strength ratings. A ratings downgrade could increase surrender levels for our annuity products, could adversely affect our ability to market our products and could increase costs of future debt issuances. Standard & Poor’s, Moody’s Investors Service, Inc. and A.M. Best Company provide financial strength and credit ratings.

Standard’s financial strength ratings as of February 2008 were:

CREDIT RATINGS

Standard & Poor’s, Moody’s Investors Service, Inc. and A.M. Best Company provide credit ratings on StanCorp’s Senior Notes. As of February 2008, ratings from these agencies were A-, Baa1 and bbb+, respectively. As of February 2008, A.M. Best Company affirmed an issuer credit rating of a+ to Standard.

Standard & Poor’s, Moody’s Investor Services, Inc. and A.M. Best Company also provide credit ratings on StanCorp’s Subordinated Debt. As of February 2008, ratings from these agencies were BBB, Baa2 and bbb-, respectively.

CONTINGENCIES AND LITIGATION

See Item 8, “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 19—Contingencies and Commitments.”

OFF-BALANCE SHEET ARRANGEMENTS

See discussion of loan commitments, “Liquidity and Capital Resources, Investing Cash Flows, Commercial Mortgage Loans.”

CONTRACTUAL OBLIGATIONS

See Item 8, “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 19—Contingencies and Commitments.”

INSOLVENCY ASSESSMENTS

Insolvency regulations exist in many of the jurisdictions in which our subsidiaries do business. Such regulations may require insurance companies operating within the jurisdiction to participate in guaranty associations. The associations levy assessments against their members for the purpose of paying benefits due to policyholders of impaired or insolvent insurance companies. Association assessments levied against us from January 1, 2005, through December 31, 2007, aggregated $0.5 million. At December 31, 2007, we maintained a reserve

of $0.6 million for future assessments with respect to currently impaired, insolvent or failed insurers.

STATUTORY FINANCIAL ACCOUNTING

Standard and The Standard Life Insurance Company of New York prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by their states of domicile. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as the Statements of Statutory Accounting Practices set forth in publications of the National Association of Insurance Commissioners (“NAIC”).

Statutory accounting practices differ in some respects from GAAP. The principal statutory practices that differ from GAAP are: a) bonds and commercial mortgage loans are reported principally at amortized cost; b) asset valuation and the interest maintenance reserves are provided as prescribed by the NAIC; c) 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; d) annuity considerations with life contingencies, or purchase rate guarantees, are recognized as revenue when received; e) reserves for life and disability policies and contracts are reported net of ceded reinsurance and calculated based on statutory requirements, including required discount rates; f) commissions, including initial commissions and expense allowance paid for reinsurance assumed, and other policy acquisition expenses are expensed as incurred; g) 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; h) 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; i) deferred tax assets, net of deferred tax liabilities, are included in the regulatory financial statements but are limited to those deferred tax assets that will be realized within one year; j) surplus notes are included in capital and surplus; and k) interest on surplus notes is not recorded as a liability nor an expense until approval for payment of such interest has been granted by the commissioner of the state of domicile.

Statutory net gains from insurance operations before federal income taxes were $309.3 million, $271.1 million and $314.0 million for 2007, 2006 and 2005, respectively. The changes in net gains were primarily due to premium growth, comparatively favorable claims experience, and a rise in the statutory discount rate that decreased reserve requirements.

Differences between Statutory and GAAP results for 2007 compared to 2006 were due to a rise in the statutory discount rate effective in 2007 for certain reserves established after January 1, 2007, that decreased statutory reserve requirements. Statutory capital, adjusted to exclude asset valuation reserves, for our insurance regulated subsidiaries totaled $1.15 billion and $1.06 billion at December 31, 2007 and 2006, respectively.

Effective December 31, 2006, the NAIC adopted changes to the RBC calculation that required us to perform additional testing to determine the risk based capital requirement for annuities. The adopted change did not have a material impact on our RBC requirements.

ACCOUNTING PRONOUNCEMENTS

See Item 8, “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 1—Summary of Significant Accounting Policies—Accounting Pronouncements.”

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements and certain disclosures made in this Form 10-K have been prepared in accordance with 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The estimates most susceptible to material changes due to significant judgment (identified as the “critical accounting policies”) are those used in determining asset impairments, DAC, VOBA, other intangibles and goodwill, the reserves for future policy benefits and claims, and the provision for income taxes. The results of these estimates are critical because they affect our profitability and may affect key indicators used to measure the Company’s performance. These estimates have a material effect on our results of operations and financial condition.

Investment Impairments

Our investment portfolio includes fixed maturity securities and commercial mortgage loans. When the fair value of a fixed maturity security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair value is below amortized cost, additional analysis is performed to determine whether an impairment exists. The analysis considers the financial condition and near-term prospects of the issuer, as well as the value of any security we may have in the investment. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject

to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the fixed maturity security may be different than previously estimated, which could have a material effect on our results of operations and financial condition. The commercial mortgage loan valuation allowance is based on our analysis of factors including changes in the size and composition of the loan portfolio, actual loan loss experience, economic conditions and individual loan analysis.

DAC, VOBA, Other Intangible Assets and Goodwill

DAC, VOBA, other intangible assets and goodwill are considered intangible assets. These intangible assets are generally originated through the issuance of new business or the purchase of existing business, either by purchasing blocks of insurance policies from other insurers or by the outright purchase of other companies. Our intangible assets are subject to impairment tests on an annual basis, or more frequently if circumstances indicate that carrying values may not be recoverable.

Acquisition costs we have deferred as DAC are those costs that vary with and primarily are related to the acquisition, and in some instances the renewal of insurance products. These costs are typically one-time expenses that represent the cost of originating new business and placing that business in force. Certain costs related to obtaining new business and acquiring business through reinsurance agreements have been deferred and will be amortized to accomplish matching against related future premiums or gross profits, as appropriate. We normally defer certain acquisition-related commissions and incentive payments, certain costs of policy issuance and underwriting, and certain printing costs. Assumptions used in developing DAC and amortization amounts each period include the amount of business in force, expected future persistency, withdrawals, interest rates and profitability. These assumptions are modified to reflect actual experience when appropriate. Additional amortization of DAC is charged to current earnings to the extent it is determined that future premiums or gross profits are not adequate to cover the remaining amounts deferred. DAC totaled $202.3 million and $208.5 million at December 31, 2007 and 2006, respectively. Changes in actual persistency are reflected in the calculated DAC balance. Costs that do not vary with the production of new business are not deferred as DAC and are charged to expense as incurred.

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 in accordance with SFAS No. 60, Accounting and Reporting by Insurance Enterprises. The DAC for our group life and group

disability products has generally been amortized over a period of five years. DAC for individual disability insurance products is amortized in proportion to future premiums over the life of the contract, averaging 20 to 25 years with approximately 50% and 75% expected to be amortized by years 10 and 15, respectively. Beginning with the adoption of SOP 05-1 on January 1, 2007, we began amortizing DAC for group disability and life insurance products over the initial premium rate guarantee period, which averages 2.5 years.

Our individual deferred annuities and group annuity products are classified as investment contracts. DAC related to these products is amortized over the life of related policies in proportion to expected gross profits in accordance with SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. For our individual deferred annuities, DAC is generally amortized over 30 years with approximately 50% and 90% expected to be amortized by years 5 and 15, respectively. DAC for group annuity products is amortized over 10 years with approximately 30% expected to be amortized by year five.

VOBA primarily represents the discounted future profits of business assumed through reinsurance agreements. We have established VOBA for a block of individual disability business assumed from Minnesota Life and a block of group disability and group life business assumed from Teachers Insurance and Annuity Association of America (“TIAA”). VOBA is generally amortized in proportion to future premiums for group and individual disability insurance products and group life products. However, a portion of the VOBA related to the TIAA transaction associated with an in force block of group long term disability claims for which no ongoing premium is received is amortized in proportion to expected gross profits. If actual premiums or future profitability are inconsistent with our assumptions, we could be required to make adjustments to VOBA and related amortization. For the VOBA associated with the Minnesota Life block of business reinsured, the amortization period is up to 30 years and is amortized in proportion to future premiums. The amortization period of the intangible asset for the marketing agreement with Minnesota Life is up to 25 years. The VOBA associated with the TIAA transaction is comprised of two parts with differing amortization methods. The amortization periods are up to 10 years for VOBA that is amortized in proportion to premiums and up to 20 years for VOBA that is amortized in proportion to expected gross profits. VOBA totaled $34.4 million and $53.7 million at December 31, 2007 and 2006, respectively. Upon adoption of SOP 05-1, the premium portion of the VOBA related to TIAA was recorded as a $10.0 million reduction to retained earnings.

At December 31, 2007, DAC and VOBA balances amortized in proportion to expected gross profits accounted for 29.5% and 27.3%, or $59.7 million and $9.4 million of the total balance for DAC and VOBA, respectively. At December 31, 2006, DAC and VOBA balances amortized in proportion to expected gross profits accounted for 25.1% and 22.0% of the total balance for DAC and VOBA, or $52.4 million and $11.8 million, respectively.

Key assumptions, which will affect the determination of expected gross profits for the annuity products are persistency, the spread between investment yields and interest credited, and stock market performance for the group annuity products with assets held in equity funds. For VOBA related to the TIAA group long term disability claims for which no further premiums are due, that is amortized in proportion to expected gross profits, the key assumptions that affect the development of expected gross profits are the claim termination rates and investment yields. Although a change in a single assumption may have an impact on the calculated amortization of DAC or VOBA, it is the relationship of that change to the changes in other key assumptions that determines the ultimate impact on DAC and VOBA amortization. Because actual results and trends related to these assumptions do vary from those assumed, we revise these assumptions annually to reflect the Company’s 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. Due to unlocking, DAC and VOBA balances decreased $0.4 million for 2007, and increased $0.3 million for 2006. Based on past experience, future changes in DAC and VOBA balances due to changes in underlying assumptions are not expected to be material. However, significant, unanticipated changes in key assumptions, which affect the determination of expected gross profits may result in a large unlocking event, which could have a material adverse effect on the Company’s financial position or results of operations.

Our other intangible assets are subject to amortization and consist of certain customer lists and a marketing agreement. Customer lists with a value of $28.6 million and a weighted-average amortization period of 10 years were acquired by us during the third quarter of 2006, primarily in connection

with the purchase of Invesmart, and related to the Asset Management segment. Additional customer lists were acquired with the purchase of DPA, Inc. and with the acquisition by StanCorp Investment Advisers of small investment advisory firms. Customer lists have a combined estimated weighted-average remaining life of approximately 9.7 years. The marketing agreement accompanied the Minnesota Life transaction and provides access to Minnesota Life agents, some of whom now market Standard’s individual disability insurance products. The amortization period for the Minnesota Life marketing agreement is up to 25 years. Other intangible assets totaled $52.1 million and $47.0 million at December 31, 2007 and 2006, respectively.

Goodwill of $33.5 million was acquired by the Company during the third quarter of 2006, primarily in connection with the purchase of Invesmart, and related to the Asset Management segment. Goodwill totaled $36.0 million and $33.5 million at December 31, 2007 and 2006, respectively.

Reserves

Reserves represent amounts to pay future benefits and claims. Developing the estimates for reserves (and therefore the resulting impact on earnings) requires varying degrees of subjectivity and judgment, depending upon the nature of the reserve. For most of our reserves, the calculation methodology is prescribed by various accounting and actuarial standards, although judgment is required in the determination of assumptions to use in the calculation. At December 31, 2007, these reserves represented approximately 87% of total reserves held or $4.50 billion. We also hold reserves that lack a prescribed methodology but instead are determined by a formula that we have developed based on our own experience. Because this type of reserve requires a higher level of subjective judgment, we closely monitor its adequacy. These reserves, which are primarily incurred but not reported reserves associated with our disability products represented approximately 13% of total reserves held at December 31, 2007, or $653.2 million. Finally, a small amount of reserves is held based entirely upon subjective judgment. These reserves are generally set up as a result of unique circumstances that are not expected to continue far into the future and are released according to pre-established conditions and timelines. These reserves represented less than 1% of total reserves held at December 31, 2007, or $10.2 million.

Reserves include policy reserves for claims not yet incurred, and claim reserves for liabilities for unpaid claims and claim adjustment expenses for claims that have been incurred or are estimated to have been incurred but not yet reported to us. These reserves totaled $5.02 billion, $4.78 billion and

$4.55 billion at December 31, 2007, 2006 and 2005, respectively, and represented over 96% of total reserves.

Policy reserves totaled $908.3 million, $887.4 million and $871.5 million at December 31, 2007, 2006 and 2005, respectively. Policy reserves include reserves established for individual life and individual disability businesses.

Policy reserves for our individual disability block of business are established at the time of policy issuance using the net level premium method as prescribed by generally accepted accounting principles (“GAAP”) and represent the current value of projected future benefits including expenses less projected future premium. These reserves, related specifically to our individual disability block of business, totaled $164.4 million, $153.8 million and $144.5 million at December 31, 2007, 2006 and 2005, respectively.

We continue to maintain a policy reserve for as long as a policy is in force, even after a separate claim reserve is established.

Assumptions used to calculate individual disability policy reserves may vary by the age, sex and occupation class of the claimant, the year of policy issue and specific contract provisions and limitations.

Individual disability policy reserves are sensitive to assumptions and considerations regarding:

Policy reserves for our individual and group immediate annuity blocks of business totaled $141.8 million, $136.8 million and $138.3 million at December 31, 2007, 2006 and 2005, respectively. These reserves are established at the time of policy issue and represent the present value of future payments due under the annuity contracts. The contracts are single premium contracts and therefore there is no projected future premium.

Assumptions used to calculate immediate annuity policy reserves may vary by the age and sex of the annuitant and year of policy issue.

Immediate annuity policy reserves are sensitive to assumptions and considerations regarding:

Policy reserves for our individual life block of business totaled $664.5 million, $596.6 million and $588.6 million at December 31, 2007, 2006 and 2005, respectively. Effective January 1, 2001, substantially all of our individual life policies and the associated reserves were ceded to Protective Life Insurance Company under a reinsurance agreement.

Policy reserves are calculated using our best estimates of assumptions and considerations at the time the policy was issued, adjusted to allow for the effect of adverse deviations in actual experience. These assumptions are not subsequently modified unless policy reserves become inadequate at which time we may need to change assumptions to increase reserves.

Claim reserves are established when a claim is incurred or is estimated to have been incurred but not yet reported to us and, as prescribed by GAAP, equal our best estimate of the present value of the liability of future unpaid claims and claim adjustment expenses. Reserves for incurred but not reported claims (“IBNR”) are determined using company experience and consider actual historical incidence rates, claim-reporting patterns, and the average cost of claims. The reserves are calculated using a company derived formula based primarily upon premium, which is validated through a close examination of reserve runout experience.

These reserves are related to group life, and group and individual disability products offered by our insurance segment. The following table sets forth total claim reserves segregated between reserves associated with life versus disability products: