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TEXT-Fitch affirms StanCorp Financial Group ratings
July 2, 2012 / 6:11 PM / in 5 years

TEXT-Fitch affirms StanCorp Financial Group ratings

July 2 - Fitch Ratings has affirmed the long-term IDR of StanCorp Financial Group, Inc. (SFG) at ‘BBB+'. Fitch has also affirmed the Insurer Financial Strength (IFS) ratings of its subsidiaries (Standard Insurance Company and Standard Life Insurance Company of New York) at ‘A’. The Rating Outlook is Stable. A full rating list is shown below. Fitch’s affirmation reflects a moderate decline in SFG’s overall operating profitability in first quarter-2012 (1Q‘12) relative to 4Q‘11 and 1Q‘11, which is in line with Fitch’s expectations, and essentially stable financial leverage. SFG’s historically favorable earnings, driven by its group long-term disability (LTD) and group life insurance business, have weakened in recent years due to a competitive market environment and poor economic conditions. SFG reported pretax operating income of $198 million in 2011, down from $330 million in 2010. In 1Q‘12, SFG reported pretax operating income of $48 million, down from $52 million in 1Q‘11. The benefit ratio for SFG’s group insurance segment, its primary earnings driver, has increased in each of the past four years from 73.6% in 2008 to 83.1% in 2011. It increased further to 83.5 in 1Q‘12. SFG’s statutory total adjusted capital declined modestly in 2011 to $1.3 billion. The NAIC risk based capital ratio of its insurance subsidiaries also declined modestly in 2011 to 327% from 331% in 2010. Fitch estimates the 2011 ratio benefited approximately 15 points from a reinsurance agreement executed at the end of the year. Statutory dividend capacity is expected to decline in 2012 relative to 2011. SFG’s ratings are supported by the company’s adequate balance sheet fundamentals and solid competitive position in the U.S. group insurance market. SFG’s balance sheet fundamentals reflect strong asset quality, good risk adjusted capitalization, and reasonable financial leverage. SFG’s total financing and commitments ratio was approximately 0.4 times (x) and adjusted financial leverage was 27% at March 31, 2012. SFG has near term refinancing risk from its $250 million debt maturity in October 2012. Fitch believes the holding company has sufficient financial capacity from existing cash, bank lines and insurance company dividends to meet this obligation. Fitch believes that SFG’s insurance subsidiaries maintain a high-quality bond portfolio. Below investment grade bonds accounted for only 6% of the fixed maturity portfolio, a low 27% of total adjusted capital (TAC) at Dec. 31, 2011. Market values of SFG’s fixed maturity investments continue to improve with the investment market, bringing gross unrealized losses down to just $20 million and gross unrealized gains up to $581 million at year-end 2011. The speed and amount of recovery reflects the conservative nature of SFG’s bond portfolio and the relatively low amount of financial sector securities. SFG’s commercial mortgage allocation of approximately 40% of total invested assets at Dec. 31, 2011 is much higher than the industry average. However, Fitch believes a somewhat higher mortgage allocation is complementary to SFG’s stable liability structure. Commercial mortgage loan loss experience, although heightened in recent years, remains in line with Fitch’s overall loss expectations and not far above industry delinquency experience. Longer-term concerns over the illiquidity of SFG’s larger commercial mortgage portfolio persist. Key rating triggers that could result in an upgrade include: --A substantial increase in run-rate risk-adjusted capital above 350%, with no significant deterioration in capital quality; -- A long-term improving trend in the group benefit ratio substantially below its historic baseline of about 76%. Key rating triggers that could result in a downgrade include: -- A prolonged deterioration in SFG’s group benefit ratio above the 2011 level of 83%; --An increase in financial leverage above 30%; --A decrease in RBC below 300% or a significant decrease in the quality of capital supporting SFG’s RBC; --A significant deterioration in the performance of SFG’s commercial mortgage loan portfolio. Fitch affirms the following ratings with a Stable Outlook: StanCorp Financial Group --Long-term IDR at ‘BBB+'; --Senior debt rating at ‘BBB’; --10-year 6.875% $250 million senior notes due Oct. 1, 2012 at ‘BBB’; --Junior subordinated debt rating at ‘BB+'; --60-year $300 million junior subordinated debt due May 29, 2067 at ‘BB+'. Standard Insurance Company -- IFS at ‘A’. Standard Life Insurance Co. of New York --IFS at ‘A’.

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