Good Competitive Position, Improved Leverage, Strong Capitalization Benefit StanCorp Financial Group (SFG) - Fitch

Fitch Ratings has affirmed the Issuer Default Rating (IDR) of StanCorp Financial Group (NYSE: SFG) at 'BBB+' and 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 list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Today's affirmation reflects SFG's improved operating performance in 2013, good competitive position in the group life and disability market, strong capitalization and improved financial leverage. The company's ratings also reflect continued challenges in terms of its overall operating profitability in a very competitive market environment, with persistently low market interest rates and poor economic conditions, which has resulted in slow employment growth and adverse claims experience in recent years.

SFG's operating performance improved significantly in 2013 after several years of declining performance driven by an intense competitive environment and poor economic conditions. SFG reported pretax operating income of $329 million in 2013, up from $192 million in 2012. In the first half of 2014, the company reported pretax operating income of $118 million, down from $143 million for the same period in 2013, with the decline driven by lower group insurance premiums, reduced investment income and increased operating expenses. The benefit ratio for the company's group insurance business, its primary earnings driver, was 78.9% in 2013, down significantly from 83.9% in 2012. For the first six months of 2014, the group insurance benefit ratio was 81.4%, down from 82.1% for the same period in 2013.

SFG's statutory total adjusted capital increased 8% in 2013 to $1.49 billion, and the NAIC risk based capital ratio of its insurance subsidiaries improved to 398% from 364% in 2012. Fitch estimates the company's RBC ratio receives a benefit of approximately 40 percentage points from a reinsurance agreement executed at the end of the 2011 and expanded in 2012.

SFG's ratings are supported by the company's solid balance sheet fundamentals and solid competitive position in the U.S. group insurance market. The company'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 0.3 times (x) and financial leverage was 20% at June 30, 2014.

Fitch believes that SFG's insurance subsidiaries maintain a high-quality bond portfolio. Below investment grade (BIG) bonds accounted for only 6% of the fixed maturity portfolio or a low 29% of total adjusted capital (TAC) at June 30, 2014. Market values of SFG's fixed maturity investments reflect the low interest rate environment and good quality portfolio, with gross unrealized losses $21 million and gross unrealized gains $473 million at June 30, 2014.

While SFG's commercial mortgage portfolio allocation of approximately 43% of total statutory invested assets at June 30, 2014, is much higher than the industry average, Fitch believes it is complementary to the company's stable liability structure, despite its lower liquidity relative to publicly traded bonds. Commercial mortgage loan loss experience, although heightened during the financial crisis, has improved significantly in recent years and remains in line with Fitch's overall loss expectations.

RATING SENSITIVITIES

The 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%.

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 affirms the following ratings with a Stable Outlook:

StanCorp Financial Group
--IDR at 'BBB+';
--$250 million 5.000% senior notes due Aug. 15, 2022 at 'BBB';
--60-year $253 million junior subordinated debt due June 1, 2067 at 'BB+'.

Standard Insurance Company
--IFS rating at 'A'.

Standard Life Insurance Co. of New York
--IFS rating at 'A'.

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