Fitch Affirms StanCorp Financial Group's Ratings; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Issuer Default Rating (IDR) of StanCorp Financial Group, Inc. (SFG) at 'A-' 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

SFG's ratings reflect its strong competitive position in the group life and disability market, improved operating performance, strong capitalization and moderate financial leverage. The ratings also consider the intense competitive landscape and challenging macroeconomic conditions, including persistently low interest rates and somewhat soft wage growth.

The ratings consider SFG's status as a wholly owned subsidiary of Meiji Yasuda Life Insurance Company (MYL). MYL's IFS rating ('A'/Outlook Negative) is capped by Japan's Long-Term Local-Currency IDR ('A'/Outlook Negative) and is one notch below its unconstrained IFS rating of 'A+'. Following its acquisition by MYL, Fitch upgraded SFG's IDR, notching it based upon its new parent's unconstrained rating and considering its enhanced financial and capital resources. In the event of a downgrade of the Japan sovereign, Fitch would consider rating SFG one notch above MYL, due to its lack of direct exposure to Japan. Fitch views SFG as a 'Very Important' subsidiary within the MYL enterprise.

The Stable Outlook reflects Fitch's view that, while SFG faces economic headwinds, including the prolonged low interest rate environment, its profitability will continue to support the current rating. Despite soft wage growth, premium growth reflects solid persistency, rate actions and strong sales.

SFG's ratings are supported by its solid balance sheet fundamentals, demonstrated by its strong risk adjusted capitalization and reasonable financial leverage. Total adjusted capital (TAC) was fairly flat in 1H16, and Fitch estimates the company's RBC ratio was 403%, down modestly from 412% at year-end 2015, but above its stated target of 300%. SFG's PRISM capital model score was 'Very Strong' in 2015, which exceeds the current rating level. Financial leverage remained moderate at 19% as of Dec. 31, 2015.

SFG reported $324 million in pre-tax operating income for 2015, an 8% increase from 2014, as more favorable claims experience and higher premiums offset increased operating expenses and higher commissions and bonuses. The company's group benefit ratio continued its improving trend in 2015, falling to 77% from 78% and 79% in 2014 and 2013, respectively. SFG's asset management segment adds diversification to its core employee benefits segment and has become increasingly significant over time. In 1H16, statutory return on TAC of 13.9% was down moderately compared with the prior year period, as premium growth was more than offset by increased expenses.

While SFG has moderately increased its credit risk in recent years, the quality of its bond portfolio is in line with the life insurance industry. SFG's below investment grade bonds represent 43% of TAC as of 1H16, while 'BBB' bonds comprise 34% of total bonds, up from 28% and 25%, respectively as of year-end 201l. The company's risky assets ratio of 49% compares favorably to the industry's 80% in 2015, driven by its lack of exposure to Schedule BA assets and minimal unaffiliated common stock holdings.

SFG's investment portfolio is overweight commercial mortgage loans, which comprised 41% of its cash and invested assets as of 1H16, approximately four times the industry average. Fitch considers a higher commercial mortgage allocation to be complementary to SFG's long-duration and stable liability structure. The company enforces tight underwriting standards and its fairly diversified portfolio has performed well over recent years. However, Fitch views the company's concentration in this asset class and its increased liquidity risk relative to publicly traded bonds as a credit concern.

RATING SENSITIVITIES

SFG's holding company ratings are somewhat constrained by MYL's ratings, which are capped by Japan's Long-Term Local-Currency IDR of 'A'. Given that MYL's ratings have a Negative Outlook, an upgrade of SFG is unlikely in the near term.

Conversely, if MYL's ratings were downgraded by more than one notch, based on its own credit quality, or deterioration in Japan's sovereign rating, SFG's ratings will also likely be lowered in conjunction with its parent. As a 'Very Important' subsidiary, SFG could also be downgraded below the group rating if its standalone assessment is downgraded by three or more notches.

Fitch has affirmed the following with a Stable Outlook

StanCorp Financial Corp.

--IDR at 'A-';

--$250 million 5.000% senior notes due Aug. 15, 2022 at 'BBB+';

--60-year $253 million junior subordinated debt due June 1, 2067 at 'BBB-'.

Standard Insurance Company

--IFS at 'A'.

Standard Life Insurance Co. of New York

--IFS at 'A'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 15 Sep 2016)

https://www.fitchratings.com/site/re/887191

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013464

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013464

Endorsement Policy

https://www.fitchratings.com/regulatory

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Fitch Ratings
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Jamie R. Tucker, CPA
Associate Director
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Fitch Ratings, Inc.
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or
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Director
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or
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Managing Director
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or
Media Relations
Hannah James, + 1 646-582-4947
[email protected]

Source: Fitch Ratings

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