Assigns Rating to New Senior Notes

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) for the insurance subsidiaries of StanCorp Financial Group, Inc.(StanCorp) [NYSE: SFG]: Standard Insurance Companyand The Standard Life Insurance Company of New York. Collectively, the group is referred to as Standard Insurance Group (The Standard) (headquartered in Portland, OR). The outlook for the rating is stable.

Concurrently, A.M. Best has downgraded the issuer credit rating (ICR) to “bbb” from “bbb+” as well as the existing debt ratings of StanCorp. The outlook for these ratings has been revised to stable from negative. A.M. Best has also assigned a debt rating of “bbb” to StanCorp’s recent issuance of $250 million in 10-year senior unsecured notes. (See below for a detailed listing of ratings.)

The downgrades reflect continued elevated claims incidence and greater claims severity in various blocks of the group’s long-term disability (LTD) business, which have resulted in higher group insurance benefit ratios over the last several quarters. These trends have driven a decline in The Standard’s operating results that is inconsistent with historical performance and which A.M. Best believes could be prolonged. While the overall group LTD market has more recently shown an increase in claims incidence, The Standard, which has more significant exposure to the public and education sectors, has experienced a moderately higher level of claims volatility than its peers. The increase in claims incidence appears to be correlated to elevated levels of unemployment within The Standard’s current mix of business. While there was not a single driver of the increase in severity, the company saw concentrations in pockets of its manufacturing and services sectors.

Additionally, A.M. Best notes The Standard’s considerable exposure to commercial mortgage loans at approximately 40% of total invested assets and over three times statutory surplus. A significant portion of the mortgage loan portfolio is represented by retail and office properties, which have the potential to report increased delinquencies due to the continued weak economy. However, the company has reported declining 60-day delinquency rates over the last four quarters and has been able to issue high-quality mortgages at attractive spreads. A.M. Best believes that the low interest rate environment will continue to pressure LTD carriers, in general.

The ratings of The Standard recognize its sufficient risk-adjusted capitalization, excellent operating profitability and established presence within the employee benefits market. The group continues to report generally favorable sales trends and good persistency tied to its core group life, accidental death and dismemberment, short-term disability and LTD products, and offers innovative and value-added product options within its target market. Additionally, The Standard’s asset management segment generates meaningful revenue and provides additional diversification and cross-selling opportunities within the employee benefits market. The operating companies provide significant dividends to StanCorp to service its outstanding debt and to fund stockholder dividends and opportunistic share repurchases. As the proceeds from the new senior notes will be used to retire debt maturing October 1, 2012, StanCorp’s debt-to-capital ratio will remain below 24%. A.M. Best notes that the group’s interest coverage ratio is more than adequate to support its current level of debt.

A.M. Best considers StanCorp well positioned at its current rating level in the near to medium term. Key rating factors that may result in a negative rating action for StanCorp include persistent unfavorable operating trends within its core lines, deterioration in risk-adjusted capitalization and/or a substantial increase in delinquency and foreclosure activity within its mortgage loan portfolio.

The following debt ratings have been downgraded:

StanCorp Financial Group, Inc.—

-- to “bbb” from “bbb+” on $250 million 6.875% senior unsecured notes, due 2012

-- to “bb+” from “bbb-” on $300 million 6.90% junior subordinated debentures, due 2067

The following debt rating has been assigned:

StanCorp Financial Group, Inc.—

-- “bbb” on $250 million 5.00% senior unsecured notes, due 2022

The following indicative shelf ratings have been assigned:

StanCorp Financial Group, Inc.—

-- “bbb” on senior debt

-- “bbb-” on subordinated debt

-- “bb+” on preferred stock

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2012 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.

A.M. Best
Kate Steffanelli, 908-439-2200, ext. 5063
Senior Financial Analyst
kathryn.steffanelli@ambest.com
or
Rachelle Morrow, 908-439-2200, ext. 5378
Senior Manager, Public Relations
rachelle.morrow@ambest.com
or
Andrew Edelsberg, 908-439-2200, ext. 5182
Vice President
andrew.edelsberg@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com

Source: A.M. Best Co.