Fitch Affirms StanCorp Financial Group's Ratings; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the Issuer Default Rating (IDR) of StanCorp Financial Group, Inc. (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

SFG's ratings reflect its strong competitive position in the group life and disability market, modest operating performance, strong capitalization and moderate financial leverage. The ratings also consider that premium growth and operating margins continue to be challenged by competitive market conditions and the weak economic environment, including persistently low interest rates and somewhat weak employment conditions.

The Stable Outlook reflects Fitch's belief that, while SFG continues to face economic headwinds, its profitability will continue to support the current rating. Despite slow employment growth and stagnant salary levels, premium growth reflects solid persistency, premium rate actions and strong sales. However, persistent low interest rates continue to present ongoing challenges to profitability improvements.

SFG reported pretax operating income of $301 million in 2014, an 8% decline from 2013. The deterioration was driven by lower group insurance premiums, reduced investment income and a return to a normalized level of operating expenses, partially offset by favorable claims experience in its group insurance business. SFG's group insurance benefit ratio improved to 77.8% in 2014 compared with 78.9% and 83.9% in 2013 and 2012, respectively.

SFG's ratings are supported by the company's solid balance sheet fundamentals, reflected by good risk adjusted capitalization, reasonable financial leverage and strong asset quality.

The company's NAIC risk-based capital ratio for its insurance subsidiaries improved to 445% in 2014 from 397% in 2013. This compares with the company's stated target of 300%. The company anticipates 2015 share repurchase activity to be equivalent to that of 2014, which totaled $147 million. Financial leverage remained moderate at 19.7% at Dec. 31, 2014.

Fitch believes that SFG's insurance subsidiaries maintain a high-quality bond portfolio, despite its increased allocation to 'BBB' rated bonds. Below investment grade (BIG) bonds accounted for a modest 6% of the fixed maturity portfolio at Dec. 31, 2014.

Fitch views SFG's above-average exposure to commercial mortgage loans, at 42% of statutory invested assets at Sept. 30, 2014, as complementary to its stable and long-duration 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'.

Additional information is available at 'www.fitchratings.com'.

THE ISSUER DID NOT PARTICIPATE IN THE RATING PROCESS, OR PROVIDE ADDITIONAL INFORMATION, BEYOND THE ISSUER'S AVAILABLE PUBLIC DISCLOSURE.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (September 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980337

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Contacts

Fitch Ratings
Primary Analyst
Dafina M. Dunmore, CFA
Director
+1 312-368-3136
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bradley S. Ellis, CFA
Director
+1 312-368-2089
or
Committee Chairperson
Keith M. Buckley, CFA
Managing Director
+1 312-368-3211
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Dafina M. Dunmore, CFA
Director
+1 312-368-3136
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bradley S. Ellis, CFA
Director
+1 312-368-2089
or
Committee Chairperson
Keith M. Buckley, CFA
Managing Director
+1 312-368-3211
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com