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Fitch Places StanCorp on Rating Watch Positive; Affirms IFS Ratings
October 20, 2015 / 8:13 PM / in 2 years

Fitch Places StanCorp on Rating Watch Positive; Affirms IFS Ratings

(The following statement was released by the rating agency) CHICAGO, October 20 (Fitch) Fitch Ratings has placed the ratings of StanCorp Financial Group, Inc. (SFG; Issuer Default Rating 'BBB+') on Rating Watch Positive. At the same time, the agency has affirmed the Insurer Financial Strength (IFS) ratings of SFG's life insurance subsidiaries at 'A'. A full list of rating actions follows at the end of this release. Fitch affirmed the ratings of SFG in a press release dated July, 27, 2015 following the announcement that SFG had agreed to be acquired by Japan-based Meiji Yasuda Life Insurance Company (MYL). KEY RATING DRIVERS The Positive Watch is based on Fitch's expectation that SFG's holding company ratings will likely be notched from the ratings of MYL (IDR 'A') at the close of the transaction. The acquisition is expected to close in the first quarter of 2016 (1Q16) subject to customary shareholder and regulatory approvals. Fitch views the proposed transaction as a credit positive for SFG based on the financial strength of MYL (IFS 'A') and related improved financial flexibility. MYL is the third-largest life insurance company in Japan and the market leader of group insurance in the Japanese market. The transaction reflects a broader strategic initiative by MYL to expand its life insurance business outside of Japan, with the proposed acquisition representing its first major overseas acquisition. Fitch expects that SFG's existing management team and operating strategies will largely remain in place following the close of the transaction. Today's affirmation of SFG's IFS rating reflects its strong competitive position in the U.S. group life and disability markets, improved operating performance, strong capitalization and moderate financial leverage. The ratings also consider that the company continues to face headwinds from intense competition and challenging macroeconomic conditions, including persistent low interest rates and soft wage growth. SFG reported pretax operating income of $176 million during first-half 2015 compared with $118 million in the prior year period. The increase was primarily due to premium growth and more favorable claims experience, partially offset by higher operating expenses and greater commissions and bonuses related to increased sales activity. After several years of soft premium growth due to competitive market conditions and ongoing macro-economic factors, SFG reported 4% growth in premiums during 1H15. This growth was driven by favorable persistency in employee benefits and sales growth. However, SFG continues to face headwinds from a very competitive market, a persistent low interest rate environment and soft wage growth. SFG's group insurance benefit ratio improved to 77.5% in 2Q15 compared with 82% in 2Q14. Fitch believes life insurers will be under increased pressure to rationalize long-term rate assumptions used to establish reserves, given the market's revised expectations for low rates. Fitch anticipates a heightening risk that life insurers could take charges in 3Q15 due to revised rate expectations. Fitch views SFG's capitalization as strong, demonstrated by an estimated risk-based capital (RBC) ratio of 435% at June 30, 2015. However, the company's RBC benefits from a reinsurance arrangement with a captive insurer. Financial leverage remained moderate at 19.5% at June 30, 2015. SFG maintains significant exposure to commercial mortgage loans at 41% of statutory invested assets as of June 30, 2015, which is approximately 4x the industry average. While this concentration constrains the company's liquidity somewhat, Fitch views it as complementary to the stable and long-duration nature of its liability structure. Additionally, loan loss experience remains in line with Fitch's overall loss expectations. SFG's commercial mortgage loan originations totaled $545 million for 2Q15, a record level and 47% greater than the prior year period. Given increased competition in the commercial real estate market, Fitch views this level of origination growth with caution. Fitch believes that SFG maintains a relatively high-quality bond portfolio with approximately 33% surplus exposure to below investment-grade bonds compared with 40% for the industry as of June 30, 2015. RATING SENSITIVITIES Fitch will evaluate the transaction upon its ultimate consummation and SFG's ratings could change based on the application of Fitch's group rating methodology, including the agency's view of SFG's strategic importance to MYL, and if SFG's ratings should be aligned with those of MYL upon the close of the acquisition. The impact of the relationship between SFG and MYL on rating triggers will also be determined following the close of the transaction. Key rating triggers that could result in an upgrade include: --Run-rate risk-adjusted capital maintained above 350%, with no significant deterioration in capital quality; --A long-term improving trend in the group benefit ratio substantially below its historical baseline of about 76%. The key rating triggers that could result in a downgrade include: --A prolonged deterioration in the company's group benefit ratio above the 2011 level of 83%; --An increase in financial leverage above 30%; --GAAP-based interest coverage below 6x for an extended period of time; --A decrease in RBC below 300%, or a significant decrease in the quality of capital supporting the company's RBC; --A significant deterioration in the performance of the company's commercial mortgage loan portfolio. Fitch has placed the following ratings on Rating Watch Positive: StanCorp Financial Group --IDR 'BBB+'; --$250 million 5.000% senior notes due Aug. 15, 2022 'BBB'; --60-year $253 million junior subordinated debt due June 1, 2067 'BB+'. Fitch affirms the following ratings with a Stable Outlook: Standard Insurance Company --IFS rating at 'A'. Standard Life Insurance Co. of New York --IFS rating at 'A'. Contact: Primary Analyst Dafina M. Dunmore, CFA Director +1-312-368-3136 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Bradley S. Ellis, CFA Director +1-312-368-2089 Committee Chairperson Keith M. Buckley, CFA Managing Director +1-312-368-3211 Media Relations: Hannah James, New York, Tel: + 1 212 908 0500, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 16 Sep 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=992603 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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