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STANCORP FINANCIAL GROUP INC - 10-Q - : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Edgar Online, Inc.
As used in this Form 10-Q, the terms "StanCorp," "Company," "we," "us" and "our"
refer to StanCorp Financial Group, Inc. and its subsidiaries, unless the context
otherwise requires. The following analysis of the consolidated financial
condition and results of operations of StanCorp should be read in conjunction
with the unaudited condensed consolidated financial statements and related notes
thereto. See Item 1, "Financial Statements."

Our filings with the Securities and Exchange Commission ("SEC") include our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, proxy statements, registration statements and amendments to those
reports. Access to all filed reports is available free of charge on our website
at www.stancorpfinancial.com as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. The SEC also
maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC at www.sec.gov.

The following management assessment of the financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes thereto in our 2011 Form 10-K and our current report on
Form 8-K dated July 18, 2012, which modified certain items in our annual report
on Form 10-K for the retrospective adoption of Accounting Standards Update
("ASU") No. 2012-26, Accounting for Costs Associated with Acquiring or Renewing
Insurance Contracts. Those consolidated financial statements and certain
disclosures made in this Form 10-Q have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP") and require us to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosures of contingent assets and
contingent liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during each reporting period. The estimates
most susceptible to material changes due to significant judgment are identified
as critical accounting policies. The results of these estimates are critical
because they affect our profitability and may affect key indicators used to
measure our performance. See "Critical Accounting Policies and Estimates."

Financial measures that exclude after-tax net capital gains and losses are non-GAAP measures. To provide investors with a broader understanding of earnings, we provide net income per diluted share excluding after-tax net capital gains and losses, along with the GAAP measure of net income per diluted share, because capital gains and losses are not likely to occur in a stable pattern.


We have made in this Form 10-Q, and from time to time may make in our public
filings, news releases and oral presentations and discussions, certain
statements, which are predictive in nature and not based on historical facts.
These statements are "forward-looking" and, accordingly, involve risks and
uncertainties that could cause actual results to differ materially from those
discussed or implied. Although such forward-looking statements have been made in
good faith and are based on reasonable assumptions, there is no assurance that
the expected results will be achieved. See "Forward-looking Statements."

Executive Summary

New Strategy to avoid RMDs

Financial Results Overview

The following table sets forth selected consolidated financial results:



                                              Three Months Ended                       Nine Months Ended
                                                September 30,                            September 30,
                                          2012                 2011                2012                 2011

                                                        (Dollars in millions except share data)
Net income                            $        44.9        $        47.0       $       100.1        $        98.1
After-tax net capital (losses)
gains                                          (1.7 )                4.8                (4.3 )               (5.2 )

Net income excluding after-tax
net capital (losses) gains            $        46.6        $        42.2       $       104.4        $       103.3

Diluted earnings per common
share:
Net income                            $        1.01        $        1.05       $        2.26        $        2.17
After-tax net capital (losses)
gains                                         (0.04 )               0.11               (0.09 )              (0.11 )

Net income excluding after-tax
net capital (losses) gains            $        1.05        $        0.94    

$ 2.35 $ 2.28



Diluted weighted-average common
shares outstanding                       44,238,372           44,577,667          44,349,725           45,256,407


The increase in net income excluding after-tax net capital gains and losses for
the third quarter of 2012 compared to the third quarter of 2011 was primarily
due to more favorable claims experience in the group insurance business, lower
operating expenses and an increase in net investment income in our Asset
Management segment. The comparatively lower benefit ratio in our group insurance
business was partially offset by less favorable claims experience in the
individual disability business and a 100 basis point decrease in our discount
rate used for newly established group long term disability claim reserves. The
increase in net income excluding after-tax net capital gains and losses for the
first nine months of 2012 compared to the first nine months of 2011 was
primarily due to an increase in net investment income in our Asset Management
segment and a lower effective income tax rate. See "Consolidated Results of
Operations-Income Taxes."



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Outlook


We manage for long-term profitability by focusing on business diversification,
disciplined product pricing, sound underwriting, effective claims management and
high-quality customer service. We will continue to address challenges that arise
with financial discipline.

Net income excluding after-tax net capital gains and losses for the third
quarter of 2012 was favorable compared to the same period of 2011, which
reflected comparatively favorable claims experience in the third quarter of 2012
in our group long term disability business, an increase in net investment
income, and lower operating expenses. The lower benefit ratio for the third
quarter of 2012, compared to the third quarter of 2011, was primarily due to
more favorable claim recoveries and improvement in claims incidence within our
group long term disability business. While claims incidence improved for the
third quarter of 2012 compared to the third quarter of 2011, it remains elevated
compared to historical levels. We are making progress on our pricing actions to
address the effects of the elevated group long term disability claims incidence
and historically low interest rates in this challenging economic environment.

As we stated in our 2012 second quarter Form 10-Q, and based on the results for
the first nine months of 2012, we expect that the 2012 annual benefit ratio for
the group insurance business will exceed the annual guidance range of 80% to 82%
that we provided earlier this year. We expect the benefit ratio to remain
elevated due to the economy and the effects of the continued low interest rates
putting pressure on the discount rate. As a result, we expect to be below our
2012 annual guidance range of $3.60 to $3.90 for net income per diluted share,
excluding after-tax net capital gains and losses, and below the annual guidance
range of 9% to 10% for return on average equity, excluding after-tax net capital
gains and losses from net income and accumulated other comprehensive income
("AOCI") from equity. Additionally, we expect our effective income tax rate for
2012 will be below our annual guidance range of 26% to 27%.

We remain focused on continuing to provide excellent products and services to
our customers, enhancing our financial strength and increasing value to our
shareholders. We will continue to focus on optimizing shareholder value through
sustainable profitability by investing in new product and service capabilities
and through the strategic use of capital, as we believe these actions position
us well for growth when the economy recovers.

Primary Drivers of 2012 Results

New Strategy to avoid RMDs


The primary drivers of our results continue to be the group insurance benefit
ratio and group insurance premium growth. Our group insurance benefit ratio for
the first nine months of 2012 was 84.0%, compared to 83.2% for the same period
for 2011, reflecting comparatively higher claims severity and continued high
claims incidence for the first half of 2012, with improvements in claim
recoveries and incidence rates for the third quarter of 2012. Claims experience
can fluctuate widely from quarter to quarter and tends to be more stable when
measured over a longer period of time. The benefit ratio is primarily affected
by reserves established based on growth of our in force block of business,
claims experience and assumptions used to establish related reserves, such as
our discount rate.

The interest rate environment and its effect on our discount rate is a major
driver in our reserve levels. The average discount rate used for the first nine
months of 2012 for newly established long term disability claim reserves was
4.25%, compared to 5.25% used for the first nine months of 2011. A 25 basis
point change in the discount rate results in a corresponding change in quarterly
pre-tax income of $1.8 million. The decrease in the discount rate from the third
quarter of 2011 was primarily the result of a continued low interest rate
environment. We expect that the continued low yield on U.S Treasuries, together
with additional spread compression, will continue to place pressure on interest
rates leading to potentially lower discount rates and therefore higher claim
reserves across the industry. We will maintain our disciplined approach to
interest rate management given the uncertainty of the future interest rate
environment and the corresponding impact on new investment yields and the
discount rates used to establish claim reserves.

Premiums for our Insurance Services segment increased 1.3% to $1.63 billion for
the first nine months of 2012, compared to $1.60 billion for the first nine
months of 2011 primarily due to the favorable impact of experience rated refunds
("ERRs"). Premium growth continues to be affected by the economic environment,
which has caused lower wage rate and job growth for our group insurance
customers. Sales for the group insurance businesses, reported as annualized new
premiums, were $171.6 million and $261.7 million for the first nine months of
2012 and 2011, respectively. The decrease in group insurance sales was primarily
due to pricing competition.

Consolidated Results of Operations

Revenues


Revenues consist of premiums, administrative fees, net investment income and net
capital gains and losses. Historically, premium growth in our Insurance Services
segment and administrative fee revenue growth in our Asset Management segment
have been the primary drivers of consolidated revenue growth.



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The following table sets forth consolidated revenues:



                                                       Three Months Ended                                               Nine Months Ended
                                                         September 30,                                                    September 30,
                                                                                 Percent                                                           Percent
                                         2012                 2011               Change                  2012                  2011                Change

                                                                                      (Dollars in millions)
Revenues:
Premiums                             $       528.7        $       539.8                (2.1 )%      $      1,630.1        $      1,610.6                  1.2 %
Administrative fees                           27.8                 28.5                (2.5 )                 86.2                  87.4                 (1.4 )
Net investment income                        159.8                147.3                 8.5                  470.9                 456.9                  3.1
Net capital (losses) gains                    (2.6 )                7.7               133.8                   (6.8 )                (7.9 )              (13.9 )

Total revenues                       $       713.7        $       723.3                (1.3 )       $      2,180.4        $      2,147.0                  1.6



The decrease in consolidated revenues for the third quarter of 2012 compared to
third quarter of 2011 was primarily due to a decrease in premiums from our
Insurance Services segment and an increase in net capital losses, partially
offset by an increase in net investment income. See "Business Segments-Other-Net
Capital Gains (Losses)."

The increase in consolidated revenues for the first nine months of 2012 compared
to the same period of 2011 was primarily due to an increase in premiums from our
Insurance Services segment and an increase in net investment income. See
"Consolidated Results of Operations-Revenues-Net Investment Income."

Premiums

New Strategy to avoid RMDs

Insurance Services segment premiums are the primary driver of consolidated premiums and are affected by the following factors:

  •   Sales.


  •   Customer retention.

• Organic growth in our group insurance businesses, which is derived from

        existing policyholders' employment and wage growth.


   •    Experience rated refunds ("ERRs"), which represent cost sharing

arrangements with certain group contract holders that provide refunds to

the contract holders when claims experience is more favorable than

contractual benchmarks, and provide for additional premiums to be paid when

claims experience is less favorable than contractual benchmarks. ERRs can

fluctuate widely from quarter to quarter depending on the underlying

experience of specific contracts.

The following table sets forth premiums by segment:



                                                   Three Months Ended                                           Nine Months Ended
                                                      September 30,                                               September 30,
                                                                            Percent                                                      Percent
                                       2012               2011              Change                 2012                2011              Change

                                                                                (Dollars in millions)
Premiums:
Insurance Services                 $       527.5      $       538.3        
      (2.0 )%     $      1,625.1      $      1,604.4                1.3 %
Asset Management                             1.2                1.5              (20.0 )                 5.0                 6.2              (19.4 )

Total premiums                     $       528.7      $       539.8               (2.1 )      $      1,630.1      $      1,610.6                1.2



The decrease in premiums from our Insurance Services segment for the third
quarter of 2012 compared to the same period of 2011 was primarily due to lower
group insurance sales for the first nine months of 2012 and a decrease in ERRs
for the third quarter of 2012 compared to the third quarter of 2011. ERRs
decreased premiums by $6.5 million for the third quarter of 2012, and decreased
premiums by $4.0 million for the same period of 2011.

The increase in premiums from our Insurance Services segment for the first nine
months of 2012 compared to the same period of 2011 was primarily driven by ERR
activity. ERRs for the first nine months of 2012 increased premiums by $4.7
million, while ERRs for the first nine months of 2011 decreased premiums by
$14.2 million. See "Business Segments-Insurance Services Segment."

Premiums from our Asset Management segment are generated from sales of life-contingent annuities, which are a single-premium product. Due to the competitive nature of single-premium products, premiums in the Asset Management segment can fluctuate widely from quarter to quarter. See "Business Segments-Asset Management Segment."

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Administrative Fee Revenues


The primary driver for administrative fee revenues is the level of assets under
administration in our Asset Management segment, which is largely driven by
equity market performance and net customer deposits. Administrative fee revenues
from our Insurance Services segment are primarily derived from insurance
products for which we provide only administrative services and absence
management services.

The following table sets forth administrative fee revenues by segment:



                                                         Three Months Ended                                               Nine Months Ended
                                                            September 30,                                                   September 30,
                                                                                     Percent                                                        Percent
                                           2012                  2011                Change                2012                 2011                Change

                                                                                       (Dollars in millions)
Administrative fee revenues:
Insurance Services                    $          3.1        $          3.0                  3.3 %      $        10.4        $         8.6                 20.9 %
Asset Management                                29.2                  29.7                 (1.7 )               89.1                 91.2                 (2.3 )
Other                                           (4.5 )                (4.2 )               (7.1 )              (13.3 )              (12.4 )               (7.3 )

Total administrative fee revenues $ 27.8 $ 28.5

               (2.5 )      $        86.2        $        87.4                 (1.4 )



The decrease in administrative fee revenues in our Asset Management segment for
the third quarter of 2012 compared to the same period for 2011 was primarily
related to non-recurring adjustments of $0.7 million recorded in the third
quarter of 2012. The decrease in administrative fee revenues in our Asset
Management segment for the first nine months of 2012 compared to the same period
for 2011 was primarily due to lower average retirement plan trust assets under
administration for the first nine months of 2012 compared to the first nine
months of 2011. See "Business Segments-Asset Management Segment."

The increases in administrative fee revenues in our Insurance Services segment
for the third quarter and first nine months of 2012 compared to the same periods
of 2011 were primarily due to an increase in administrative and absence
management service fees.

Net Investment Income


Net investment income is affected by changes in levels of invested assets,
interest rates, fluctuations in the fair value of our Standard & Poor's ("S&P")
500 Index call spread options ("S&P 500 Index options") related to our indexed
annuity product, commercial mortgage loan prepayment fees and bond call
premiums.



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The following tables set forth net investment income by segment and associated
key indicators:



                                                           Three Months Ended                                               Nine Months Ended
                                                             September 30,                                                    September 30,
                                             2012                  2011                Change                 2012                  2011                Change

                                                                                          (Dollars in millions)
Net investment income:
Insurance Services                      $         86.0        $         85.8                 0.2  %      $        254.2        $        255.6                (0.5 )%
Asset Management                                  72.3                  59.0                22.5                  210.0                 193.5                 8.5
Other                                              1.5                   2.5               (40.0 )                  6.7                   7.8               (14.1 )

Total net investment income             $        159.8        $        147.3                 8.5         $        470.9        $        456.9                 3.1

Key indicators of net investment
income:
Contribution from the change in
fair value of the S&P 500 Index
options                                 $          2.9        $         

(6.8 ) $ 9.7 $ 7.3 $ (3.0 )

  $       10.3
Commercial mortgage loan prepayment
fees                                               6.8                   2.7                 4.1                    9.8                   4.9                 4.9
Average invested assets                       12,457.5              11,667.9                 6.8  %            12,223.0              11,465.8                 6.6  %
Tax-advantaged investment operating
losses                                            (4.6 )                (1.2 )      $       (3.4 )                 (9.5 )                (3.4 )      $       (6.1 )




                                                  At September 30,
                                              2012                 2011
        Consolidated portfolio yields:
        Fixed maturity securities                  4.80  %             

5.14 %

        Commercial mortgage loans                  6.16                

6.38



The increases in net investment income for the third quarter and first nine
months of 2012 compared to the same periods for 2011 were primarily due to
favorable changes in fair value of our S&P 500 Index options and an increase in
commercial mortgage loan prepayment fees. Partially offsetting the increased net
investment income were higher accrued operating losses related to our
tax-advantaged investments. The benefits from these investments are recorded as
either a reduction to income taxes or a reduction of state premium taxes. See
"Critical Accounting Policies and Estimates-All Other Investments."

We may continue to experience lower new money investment rates in the future if
credit spreads continue to tighten and interest rates remain low. New money
investment rates are also affected by the current volume and mix of commercial
mortgage loan originations, the purchases of fixed maturity securities,
tax-advantaged investments and other investments.

We seek investments containing call or prepayment protection to ensure our
expected cash flow is not adversely affected by unexpected prepayments. Callable
bonds without make-whole provisions represented 8.3% of our fixed maturity
security portfolio at September 30, 2012. We also originate commercial mortgage
loans containing a make-whole prepayment provision requiring the borrower to pay
a prepayment fee. As interest rates decrease, potential prepayment fees
increase. These larger prepayment fees deter borrowers from refinancing during a
low interest rate environment. Approximately 97% of our commercial mortgage loan
portfolio contains this prepayment provision. Almost all of the remaining
commercial mortgage loans without a make-whole prepayment provision generally
contain fixed percentage prepayment fees that mitigate prepayments but may not
fully protect our expected cash flows in the event of prepayment. The increases
in commercial mortgage loan prepayment fees were primarily the result of a
continued low interest rate environment and the improvement in the commercial
real estate sales market.

Net Capital Gains (Losses)

Net capital gains and losses are reported in the Other category and are not
likely to occur in a stable pattern. Net capital gains and losses primarily
occur as a result of sales of our assets for more or less than carrying value,
other-than-temporary impairments ("OTTI") of assets in our bond portfolio,
provisions to our commercial mortgage loan loss allowance, losses recognized due
to impairment of real estate and impairments of tax-advantaged investments.



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The following table sets forth net capital gains and losses and associated key
components:



                                                      Three Months Ended                                                Nine Months Ended
                                                        September 30,                                                     September 30,
                                                                                   Dollar                                                           Dollar
                                       2012                   2011                 Change                2012                  2011                 Change

                                                                                         (In millions)
Net capital (losses) gains        $         (2.6 )       $          7.7         $      (10.3 )       $        (6.8 )       $        (7.9 )       $        1.1
Key components of net
capital gains (losses):
Fixed maturity securities         $          2.5         $          0.7         $        1.8         $         4.7         $         7.2         $       (2.5 )
Real estate investments                       -                    19.4                (19.4 )                  -                   27.9                (27.9 )
Real estate owned                           (0.2 )                 (3.6 )                3.4                  (0.9 )               (16.4 )               15.5
Commercial mortgage loan
loss allowance provision                    (5.0 )                 (7.5 )                2.5                 (11.4 )               (25.5 )               14.1


Net capital losses for the third quarter of 2012 were primarily related to our
commercial mortgage loan loss allowance provision. These losses were partially
offset by net capital gains related to the sale of certain fixed maturity
securities. The sale of real estate investments were the primary driver of the
net capital gains in the third quarter of 2011.

Net capital losses for the first nine months of 2012 were primarily related to
our commercial mortgage loan loss allowance provision, which were partially
offset by net capital gains related to the sale of certain fixed maturity
securities. The higher net capital losses for the first nine months of 2011 were
primarily due to a higher commercial mortgage loan loss allowance provision,
partially offset by capital gains from the sale of real estate investments. See
"Liquidity and Capital Resources-Investing Cash Flows-Commercial Mortgage Loans"
and "Business Segments-Other-Net Capital Gains (Losses)."

Benefits and Expenses

Benefits to Policyholders

Consolidated benefits to policyholders is primarily affected by the following factors:

• Reserves that are established in part based on premium levels.

• Claims experience-the predominant factors affecting claims experience are:

claims incidence, measured by the number of claims, and claims severity,

measured by the magnitude of the claim and the length of time a disability

claim is paid.

• Reserve assumptions-the assumptions used to establish the related reserves

reflect expected incidence and severity, and the discount rate. The

discount rate is affected by new money investment interest rates and the

        overall portfolio yield. See "Critical Accounting Policies and
        Estimates-Reserves for Future Policy Benefits and Claims."


  •   Current estimates for future benefits on life-contingent annuities.

The following table sets forth benefits to policyholders by segment:



                                                     Three Months Ended                                            Nine Months Ended
                                                        September 30,                                                September 30,
                                                                               Percent                                                       Percent
                                         2012                2011              Change                 2012                 2011              Change

                                                                                   (Dollars in millions)
Benefits to policyholders:
Insurance Services                   $       417.6       $       427.1              (2.2 )%      $      1,333.3       $      1,309.5               1.8  %
Asset Management                               4.8                 5.1              (5.9 )                 15.0                 15.2              (1.3 )

Total benefits to policyholders $ 422.4 $ 432.2

         (2.3 )       $      1,348.3       $      1,324.7               1.8



The decrease in benefits to policyholders for the third quarter of 2012 compared
to the same period of 2011 was primarily due to more favorable claim recoveries
and an improvement in claims incidence in the group long term disability
insurance business, partially offset by a 100 basis point decrease in the
discount rate used for newly established long term disability claim reserves to
4.00% for the third quarter of 2012 from 5.00% for the third quarter of 2011.
The lower discount rate for the third quarter of 2012 resulted in a
corresponding increase in benefits to policyholders of $7.2 million. See
"Business Segments-Insurance Services Segment-Benefits and Expenses-Benefits to
Policyholders (including interest credited)."



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The increase in benefits to policyholders for the first nine months of 2012
compared to the same periods of 2011 was primarily due to continued high claims
incidence and claims severity in our group long term disability business in the
first half of 2012, in addition to a decrease in the discount rate used for
newly established long term disability claim reserves. While we continue to see
improvement in claims incidence, the levels remain high when compared to
historical averages.

Interest Credited


Interest credited represents interest paid to policyholders on retirement plan
general account assets, individual fixed-rate annuity deposits and index-based
interest guarantees embedded in indexed annuities ("index-based interest
guarantees") in the Asset Management segment and interest paid on life insurance
proceeds on deposit in the Insurance Services segment.

Interest credited is primarily affected by the following factors:

  •   Growth in general account assets under management.


  •   Growth in individual fixed-rate annuity liabilities.

• Changes in new investment interest rates and overall portfolio yield, which

        influence our interest-crediting rate for our customers.


  •   Changes in customer retention.

• Changes in the fair value of the index-based interest guarantees. These

changes may fluctuate from quarter to quarter due to changes in interest

rates and equity market volatility. See "Business Segments-Asset Management

Segment-Benefits and Expenses-Interest Credited" for information regarding

the interest credited on our indexed annuity product.



The following table sets forth interest credited and associated key components
for the periods presented:



                                                      Three Months Ended                                              Nine Months Ended
                                                         September 30,                                                  September 30,
                                         2012                 2011                Change                 2012                 2011               Change

                                                                                    (Dollars in millions)
Interest credited                   $         43.9       $         36.7        $        7.2         $        130.3       $        117.1        $      13.2
Key components of interest
credited:
Contribution from the change in
fair value of index-based
interest guarantees                 $          2.5       $         (3.8 )      $        6.3         $          7.2       $         (1.7 )      $       8.9
Average individual annuity
assets under administration                3,132.8              2,907.8                 7.7  %             3,062.4              2,802.4                9.3  %


The increases in interest credited for the third quarter and first nine months
of 2012 compared to the same periods for 2011 were primarily due to the change
in fair value of our index-based interest guarantees, and an increase in our
average individual fixed-rate annuity assets under administration.

Operating Expenses

The following table sets forth operating expenses:



                                                Three Months Ended                                           Nine Months Ended
                                                   September 30,                                               September 30,
                                                                          Percent                                                     Percent
                                    2012                2011              Change                2012                2011              Change

                                                                             (Dollars in millions)
Operating expenses              $       115.3       $       120.7              (4.5 )%      $       355.9       $       357.1              (0.3 )%


The lower operating expenses for the third quarter and first nine months of 2012
were due to costs associated with information technology operations initiatives
and service changes in 2011, which did not recur in 2012. These costs were
recorded in our Other category. See "Business Segments."

Commissions and Bonuses


Commissions and bonuses primarily represent sales-based compensation, which can
vary depending on the product, the structure of the commission program and other
factors such as customer retention, sales, growth in assets under administration
and the profitability of business in each of our segments.



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The following table sets forth commissions and bonuses:



                                                    Three Months Ended                                            Nine Months Ended
                                                       September 30,                                                September 30,
                                                                               Percent                                                     Percent
                                        2012                 2011              Change                2012                2011              Change

                                                                                 (Dollars in millions)
Commissions and bonuses            $         49.6       $         53.1              (6.6 )%      $       156.3       $       166.1              (5.9 )%


The decrease in commissions and bonuses for the third quarter of 2012 compared to the third quarter of 2011 was primarily due to lower group insurance sales.

The decrease in commissions and bonuses for the first nine months of 2012 compared to the first nine months of 2011 was primarily due to lower group insurance and individual annuity business sales.

Net Change in Deferred Acquisition Costs ("DAC"), Value of Business Acquired ("VOBA") and Other Intangible Assets


We normally defer certain acquisition costs that vary and are directly related
to the origination of new business. Certain costs related to obtaining new
business and acquiring business through reinsurance agreements have been
deferred and will be amortized to accomplish matching against related future
premiums or gross profits as appropriate. We normally defer certain
acquisition-related commissions and incentive payments, certain costs of policy
issuance and underwriting, and certain printing costs. These costs are then
amortized into expenses over a period not to exceed the life of the related
policies, which for group insurance contracts is the initial premium rate
guarantee period and averages 2.5 years. VOBA primarily represents the
discounted future profits of business assumed through reinsurance agreements. A
portion of VOBA is amortized each year to achieve matching against expected
gross profits. Our other intangible assets, consisting of customer lists and
marketing agreements, are also subject to amortization. Customer lists were
obtained through acquisitions of Asset Management businesses and have a combined
estimated weighted-average remaining life of approximately 7.6 years. The
intangible asset associated with the individual disability marketing agreement
with the Minnesota Life Insurance Company ("Minnesota Life") will be fully
amortized by 2023. See "Critical Accounting Policies and Estimates-DAC, VOBA and
Other Intangible Assets."

The following table sets forth the operating impact resulting in a net decrease (increase) in DAC, VOBA and other intangible assets:



                                                    Three Months Ended                                           Nine Months Ended
                                                      September 30,                                                September 30,
                                                                               Dollar                                                      Dollar
                                      2012                 2011                Change              2012                 2011               Change

                                                                                    (In millions)
Deferral of acquisition costs     $       (16.9 )      $       (20.1 )      $        3.2       $       (55.3 )      $       (64.5 )      $       9.2
Amortization of DAC, VOBA and
other intangible assets                    17.2                 15.9                 1.3                53.4                 49.9                3.5

Net decrease (increase) in
DAC, VOBA and other
intangible assets                 $         0.3        $        (4.2 )      $        4.5       $        (1.9 )      $       (14.6 )      $      12.7



The decrease in deferrals for the third quarter and first nine months of 2012
compared to the same periods for 2011, was primarily due to lower group
insurance sales. The increase in the amortization of DAC for the third quarter
and first nine months of 2012 compared to the same periods for 2011, was
primarily due to higher Asset Management earnings, as amortization fluctuates
with changes in estimated gross profit. These changes resulted in an overall net
decrease in DAC, VOBA and other intangible assets for the third quarter and
first nine months of 2012 compared to the same periods for 2011.

Income Taxes

Income taxes may differ from the amount computed by applying the federal corporate tax rate of 35% to pre-tax income because of the net result of permanent differences between book and taxable income and because of the inclusion of state and local income taxes, net of the federal tax benefit.

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The following table sets forth the combined federal and state effective income
tax rates:



                                           Three Months Ended                             Nine Months Ended
                                              September 30,                                 September 30,
                                      2012                    2011                   2012                    2011
Combined federal and state
effective income tax rates                 26.8  %                 28.8  %                23.9  %                 29.9  %


During the first half of 2012, and throughout 2011, we purchased tax-advantaged
investments, contributing to a decrease in our effective tax rate. In addition,
the effective tax rate was also reduced by favorable book-to-tax differences
relative to a lower level of income in 2012. These investments, along with lower
pre-tax net income, were the primary drivers of the decreases in our effective
tax rate for the third quarter and first nine months of 2012 compared to the
same periods for 2011.

Business Segments

We operate through two reportable segments: Insurance Services and Asset
Management, as well as an Other category. Resources are allocated and
performance is evaluated at the segment level. The Insurance Services segment
offers group and individual disability insurance, group life and accidental
death and dismemberment ("AD&D") insurance, group dental and group vision
insurance, and absence management services. The Asset Management segment offers
full-service 401(k) plans, 403(b) plans, 457 plans, defined benefit plans, money
purchase pension plans, profit sharing plans and non-qualified deferred
compensation products and services. The Asset Management segment also offers
investment advisory and management services, financial planning services,
commercial mortgage loan origination and servicing, individual fixed-rate
annuity products, group annuity contracts and retirement plan trust products.
The Other category includes return on capital not allocated to the product
segments, holding company expenses, operations of certain unallocated
subsidiaries, interest on debt, unallocated expenses, net capital gains and
losses and adjustments made in consolidation.

The following table sets forth segment revenues measured as a percentage of total revenues, excluding revenues from the Other category:




                                            Three Months Ended                             Nine Months Ended
                                               September 30,                                 September 30,
                                       2012                    2011                   2012                    2011
Insurance Services                          85.7  %                 87.4  %                86.1  %                 86.5  %
Asset Management                            14.3                    12.6                   13.9                    13.5


Insurance Services Segment

The Insurance Services segment is our largest segment and substantially influences our consolidated financial results.

The following table sets forth key indicators that we use to manage and assess the performance of the Insurance Services segment:



                                                  Three Months Ended                                 Nine Months Ended
                                                    September 30,                                      September 30,
                                                                        Percent                                           Percent
                                        2012             2011            Change           2012            2011             Change
                                                                          (Dollars in millions)
Premiums                             $    527.5       $    538.3             (2.0 )%    $ 1,625.1       $ 1,604.4                1.3  %
Total revenues                            616.6            627.1             (1.7 )       1,889.7         1,868.6                1.1
Income before income taxes                 62.4             65.0             (4.0 )         131.8           147.9              (10.9 )
Sales (annualized new premiums)
reported at contract effective
date                                       27.1             70.5            (61.6 )         187.6           279.1              (32.8 )

Benefit ratios, including interest
credited (% of premiums):
Insurance Services                         79.4  %          79.5  %                          82.3  %         81.8  %
Group insurance                            79.7             80.7                             84.0            83.2
Individual disability                      75.7             66.3                             63.0            66.0

Operating expense ratio (% of
premiums)                                  16.2  %          15.6  %                          16.3  %         16.0  %




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Income before income taxes decreased for the third quarter of 2012 compared to
the third quarter of 2011 primarily due to lower group insurance premiums and
less favorable claims experience in the individual disability business,
partially offset by more favorable claims experience in the group insurance
business during the third quarter of 2012. In addition, commercial mortgage loan
prepayment fee revenues and bond call premiums added $4.9 million of income
before income taxes for the third quarter of 2012, compared to $1.5 million for
the third quarter of 2011.

Income before income taxes decreased for the first nine months of 2012 compared
to the first nine months of 2011 primarily due to continued high claims
incidence, an increased level of claims severity in our group long term
disability business and a decrease in the discount rate used for newly
established long term disability claim reserves. The decrease to income before
income taxes was partially offset by higher group insurance premiums for the
first nine months of 2012 compared to the first nine months of 2011.

Revenues


Revenues for the Insurance Services segment are driven primarily by growth in
Insurance Services premiums. The decrease in revenues for the third quarter of
2012 compared to third quarter of 2011 was primarily due to lower premiums in
our group insurance business and lower group insurance sales for the first nine
months of 2012. The increase in revenues for the first nine months of 2012
compared to first nine months of 2011 was primarily driven by ERRs, which
increased revenue for the first nine months of 2012 by $4.7 million, while
decreasing revenue by $14.2 million for the same period of 2011.

Premiums


The primary factors that affect premiums for the Insurance Services segment are
sales and customer retention for our insurance products and organic growth in
our group insurance businesses derived from existing group policyholders'
employment and wage growth. Premium levels can also be influenced by ERRs, which
represent cost sharing arrangements with certain group contract holders that
provide refunds to the contract holders when claims experience is more favorable
than contractual benchmarks, and provide for additional premiums to be paid when
claims experience is less favorable than contractual benchmarks. ERRs can
fluctuate widely from quarter to quarter depending on the underlying claims
experience of specific contracts.

The following table sets forth premiums and sales by line of business for the
Insurance Services segment:



                                                     Three Months Ended                                             Nine Months Ended
                                                       September 30,                                                  September 30,
                                                                                Dollar                                                         Dollar
                                       2012                 2011                Change                2012                 2011                Change
                                                                                   (Dollars in millions)
Premiums:
Group life and AD&D                $       218.3        $       224.7        $       (6.4 )      $        667.0       $        670.8        $       (3.8 )
Group long term disability                 199.1                200.5                (1.4 )               603.5                602.0                 1.5
Group short term disability                 52.5                 52.4                 0.1                 160.3                156.3                 4.0
Group other                                 19.7                 20.5                (0.8 )                59.2                 60.5                (1.3 )
Experience rated refunds                    (6.5 )               (4.0 )              (2.5 )                 4.7                (14.2 )              18.9

Total group insurance                      483.1                494.1      
        (11.0 )             1,494.7              1,475.4               
19.3
Individual disability                       44.4                 44.2                 0.2                 130.4                129.0                 1.4

Total premiums                     $       527.5        $       538.3        $      (10.8 )      $      1,625.1       $      1,604.4        $       20.7

Key indicators of premiums:
Total premiums excluding ERRs      $       534.0        $       542.3        $       (8.3 )      $      1,620.4       $      1,618.6        $        1.8
Group insurance sales
(annualized new premiums)
reported at contract effective
date                                        20.5                 63.7               (43.2 )               171.6                261.7               (90.1 )
Individual disability sales
(annualized new premiums)                    6.6                  6.8                (0.2 )                16.0                 17.4                (1.4 )


The decrease in group insurance premiums for the third quarter of 2012 compared
to the third quarter of 2011 was primarily due to lower group insurance sales
for the first nine months of 2012 and a decrease in ERRs for the third quarter
of 2012 compared to the third quarter of 2011.

The increase in group insurance premiums for the first nine months of 2012
compared to the first nine months of 2011 was primarily driven by ERR activity.
ERRs increased premiums by $4.7 million for the first nine months of 2012, while
ERRs decreased premiums by $14.2 million for the same period of 2011. Group
insurance premiums for the first nine months of 2012 reflected a decline in our
group insurance sales.

Sales.  Sales of our group insurance products reported as annualized new
premiums decreased for the first nine months of 2012 compared to the first nine
months of 2011. The market remains competitive and our pricing increases have
put pressure on new sales.



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Persistency.  Persistency is reported annually. Premium growth is affected by
customer retention levels from 2012 and 2011. Due to our pricing actions and a
continued competitive market place, we do not anticipate achieving the
persistency levels we have experienced over the last two years.

Organic Growth.  Premium growth in our group insurance in force business is
affected by employment and wage growth in our existing customer base, changes in
price per insured and the average age of employees. The economy has continued to
negatively affect wage rate and employment levels in a significant portion of
our customer base, and therefore has put negative pressure on our premiums.

We continue to make progress with the implementation of our pricing actions that
began in 2011 related to higher claims incidence. Our pricing reflects our
long-term expectations of claims experience, demographic changes, return
objectives and interest rates. As of the end of our January 2012 renewal season
we have had the opportunity to re-price approximately one-third of our long term
disability business, and as of the end of the third quarter we have re-priced
approximately one-half. By the end of the January 2013 renewal season we will
have had the opportunity to re-price about three-fourths of our long term
disability business. In the second quarter of 2012, we announced a low
single-digit price increase on our group insurance business due to the continued
low interest rate environment. Our sales force is communicating and selling our
unique value proposition, while the rest of our employees are delivering the
quality service on which we have based our reputation in the employee benefits
marketplace.

Net Investment Income

The following table sets forth net investment income for the Insurance Services
segment:



                                                     Three Months Ended                                            Nine Months Ended
                                                       September 30,                                                 September 30,
                                                                               Percent                                                      Percent
                                        2012                 2011               Change                2012                2011              Change
                                                                                 (Dollars in millions)
Net investment income              $         86.0       $         85.8                0.2  %      $       254.2       $       255.6              (0.5 )%


Net investment income is primarily affected by changes in levels of invested
assets and interest rates. See "Consolidated Results of Operations-Revenues-Net
Investment Income."

Benefits and Expenses

Benefits to Policyholders (including interest credited)

Benefits to policyholders is primarily affected by the following factors:

• Reserves that are established in part based on premium levels.

• Claims experience - the predominant factors affecting claims experience

are: claims incidence, measured by the number of claims, and claims

severity, measured by the magnitude of the claim and the length of time a

disability claim is paid.

• Reserve assumptions - the assumptions used to establish the related

reserves reflect claims incidence and severity, and the discount rate. The

discount rate is affected by the new money investment interest rates and

the overall portfolio yield. See "Critical Accounting Policies and

Estimates-Reserves for Future Policy Benefits and Claims."

The benefit ratio, calculated as benefits to policyholders and interest credited as a percentage of premiums, is utilized to provide a measurement of claims normalized for growth in our in force block.

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The following table sets forth benefits to policyholders (including interest credited) and the benefit ratios for the Insurance Services segment:



                                                                       Three Months Ended                                             Nine Months Ended
                                                                          September 30,                                                 September 30,
                                                                                                  Percent                                                        Percent
                                                          2012                 2011               Change                2012                  2011                Change
                                                                                                      (Dollars in millions)
Benefits to policyholders, including interest
credited                                              $       418.6        $       428.0               (2.2 )%     $      1,336.9        $      1,313.0                 1.8  %

Benefit ratios, including interest credited (% of
premiums):
Insurance Services segment                                     79.4  %              79.5  %                                  82.3  %               81.8  %
Group insurance                                                79.7                 80.7                                     84.0                  83.2
Individual disability                                          75.7                 66.3                                     63.0                  66.0


The decrease in Insurance Services benefits to policyholders (including interest
credited) for the third quarter of 2012 compared to the third quarter of 2011
was primarily due to more favorable claim recoveries and an improvement in
claims incidence in the group long term disability insurance business. Partially
offsetting the favorable claim recoveries and an improvement in claims incidence
was the 100 basis point decrease in the discount rate used for newly established
long term disability claim reserves. In addition, during the third quarter of
2012 we recorded a net increase in group long term disability reserves of $3.7
million, and a net increase in individual disability reserves of $3.8 million as
part of our regular annual assessments of the adequacy of reserves. During the
third quarter of 2011 we recorded a net increase in individual disability claims
reserves of $3.6 million. There were no similar adjustments made to group long
term disability reserves during the first nine months of 2011.

The increase in Insurance Services benefits to policyholders (including interest
credited) for the first nine months of 2012 compared to first nine months of
2011 was primarily due to the decrease in the discount rate used for newly
established long term disability claim reserves, continued high claims
incidence, and an increased level of claims severity in our group long term
disability business.

The group insurance benefit ratio for the first nine months of 2012 was outside
our estimated annual range for 2012 of 80% to 82%. We expect the benefit ratio
to remain elevated during continuing uncertainty in the economy and the effects
of our pricing actions take hold. Claims experience can fluctuate widely from
quarter to quarter and tends to be more stable when measured over a longer
period of time.

The benefit ratio for individual disability insurance increased for the third
quarter of 2012 and decreased for the first nine months of 2012, compared to the
same periods of 2011. We generally expect the individual disability benefit
ratio to trend down over the long term to reflect growth in the business outside
of the large block of individual disability business assumed in 2000 from
Minnesota Life, and we expect there to be a corresponding shift in revenues from
net investment income to premiums. The anticipated general increase or decrease
in the expected benefit ratio does not necessarily indicate a corresponding
shift in profitability; rather it reflects a change in the mix of revenues from
the business from investment income to premiums.

We evaluate the claim termination rate assumptions for the reserves on a small
Minnesota Life block of individual disability claims annually. These assumptions
were refined in the third quarter of 2012, resulting in an increase in reserves
of $4.9 million. Our block of business is relatively small, and as a result, we
view a blend of established industry tables and our own experience as a more
appropriate method for establishing reserve levels compared solely to our own
experience. We will continue to monitor the credibility of our developing
experience and the use of available industry tables, and if necessary, will
adjust reserves accordingly. We also refined our reserve calculation for certain
other individual disability reserves in the third quarter of 2012, which
resulted in a net decrease in our individual disability reserves of $1.1
million. The combination of these adjustments resulted in a net increase to
individual disability reserves of $3.8 million. Reserve adjustments made in the
third quarter of 2011 totaled $3.6 million. For a complete discussion of our
reserve methodology, see "Critical Accounting Policies and Estimates-Reserves
for Future Policy Benefits and Claims."

The following table sets forth the discount rate used for newly incurred long term disability claim reserves and life waiver reserves:



                                             Three Months Ended
                          September 30,           June 30,           September 30,
                              2012                  2012                  2011
       Discount rate                 4.00  %            4.00  %                 5.00  %

The discount rate is based on the average rate we receive on newly invested assets during the previous 12 months, less a margin. We also consider our average investment yield and average discount rate on our entire block of claims when deciding whether to




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increase or decrease the discount rate. The discount rate used for newly
established long term disability claim reserves decreased 100 basis points to
4.00% for the third quarter of 2012, from 5.00% for the third quarter of 2011
resulting in a corresponding increase in benefits to policyholders of $7.2
million for the quarter. The lower discount rate for the third quarter of 2012
compared to the third quarter of 2011 was primarily the result of the continued
low interest rate environment. A 25 basis point increase or decrease in the
discount rate results in a corresponding increase or decrease in quarterly
pre-tax income of $1.8 million. Any offsetting adjustments of group insurance
premium rates due to sustained changes in investment yields can take from one to
three years given that most new contracts have rate guarantees in place.

If investment rates prove to be lower than provided for in the margin between
the new money investment rate and the reserve discount rate, we could be
required to increase reserves, which could cause expense for benefits to
policyholders to increase. Given the movement of future interest rates, this may
result in significantly higher or lower discount rates. A sustained low interest
rate environment and lower commercial mortgage loan originations and
tax-advantaged investments utilization in future quarters could result in future
reductions to the discount rate. The margin in our overall block of business for
group insurance between the invested asset yield and the weighted-average
reserve discount rate at September 30, 2012 and 2011 was 41 and 40 basis points,
respectively. See "Liquidity and Capital Resources-Asset-Liability Matching and
Interest Rate Risk Management," for additional information regarding our
investments and corresponding interest rate risks.

Operating Expenses


The following table sets forth operating expenses for the Insurance Services
segment:



                                                 Three Months Ended                                           Nine Months Ended
                                                    September 30,                                               September 30,
                                                                            Percent                                                    Percent
                                     2012                 2011              Change               2012                2011              Change
                                                                             (Dollars in millions)
Operating expenses              $         85.4       $         84.2              1.4  %      $       264.5       $       256.4              3.2  %


The increases in Insurance Services operating expenses for the third quarter and
first nine months of 2012 compared to the same periods of 2011 were primarily
related to project costs and increased compensation related costs.



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Asset Management Segment

The following tables set forth key indicators that we use to manage and assess the performance of the Asset Management segment:



                                                                 Three Months Ended                                                       Nine Months Ended
                                                                   September 30,                                                            September 30,
                                                                                               Percent                                                                 Percent
                                               2012                     2011                   Change                   2012                    2011                   Change
                                                                                                   (Dollars in millions)
Revenues:
Premiums                                   $         1.2           $          1.5                   (20.0 )%        $         5.0           $         6.2                   (19.4 )%
Administrative fees                                 29.2                     29.7                    (1.7 )                  89.1                    91.2                    (2.3 )
Net investment income                               72.3                     59.0                    22.5                   210.0                   193.5                     8.5

Total revenues                             $       102.7           $         90.2                    13.9           $       304.1           $       290.9                     4.5

Income before income taxes                 $        17.5           $         12.3                    42.3  %        $        47.7           $        47.3                     0.8  %
Sales (Individual annuity deposits)                 63.0                     60.2                     4.7                   263.1                   325.8                   (19.2 )
Interest credited (% of net
investment income):
Retirement plans                                    53.3  %                  56.0  %                                         53.2  %                 55.0  %
Individual annuities                                67.6                     69.5                                            68.9                    65.5
Retirement plans annualized
operating expenses (% of average
assets under administration)                        0.57  %                  0.58  %                                         0.60  %                 0.59  %




                                                                   At September 30,
                                                                                            Percent
                                                      2012                2011              Change

                                                                 (Dollars in millions)
Assets under administration:
Retirement plans general account                 $      1,812.6      $      1,675.2                8.2  %
Retirement plans separate account                       5,071.8             4,205.6               20.6

Total retirement plans insurance products               6,884.4             5,880.8               17.1
Retirement plans trust products                         7,852.3             7,699.6                2.0
Individual annuities                                    3,149.0             2,920.5                7.8
Commercial mortgage loans for other investors           2,781.8             2,699.2                3.1
Private client wealth management                          985.7               965.8                2.1


Total assets under administration                $     21,653.2      $     20,165.9                7.4



Income before income taxes in the Asset Management segment increased for the
third quarter and first nine months of 2012 compared to the same periods of 2011
primarily due to higher net investment income from commercial mortgage loan
prepayment fee revenues and bond call premiums and the contribution from the
change in fair value of the S&P 500 Index and the change in fair value
adjustment of index-based guarantees. See Item 1, "Financial Statements-Notes to
Unaudited Condensed Consolidated Financial Statements-Note 8-Derivative
Financial Instruments" for further derivatives disclosure.

Revenues


Revenues for the Asset Management segment include retirement plan administration
fees, fees on investments held in separate account assets and private client
wealth management assets under administration, and investment income on general
account assets under administration. Premiums and benefits to policyholders
reflect both the sale of life-contingent annuities by our individual annuity
business and the conversion of retirement plan assets into life-contingent
annuities. Most of the sales for this segment are recorded as deposits and are
therefore not reflected as premiums. Individual fixed-rate annuity deposits earn
investment income, a portion of which is credited to policyholders.



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The increases in revenue for the third quarter and first nine months of 2012
compared to the same periods for 2011 were primarily due to an increase in net
investment income due to higher commercial mortgage loan prepayment fee revenues
and bond call premiums, and the contribution from the change in fair value of
our S&P 500 Index options. See "Business Segments-Asset Management Segment-Net
Investment Income."

Premiums

Premiums for the Asset Management segment are generated from the sale of
life-contingent annuities, which are primarily a single-premium product.
Premiums and benefits to policyholders reflect both the sale of immediate
annuities by our individual annuity business and the conversion of retirement
plan assets into life-contingent annuities, which can be selected by plan
participants at the time of retirement. Premiums for the segment can vary
significantly from quarter to quarter due to low sales volume of life-contingent
annuities and the varying size of single premiums. Increases or decreases in
premiums for life-contingent annuities generally correlate with corresponding
increases or decreases in benefits to policyholders.

The following table sets forth premiums by line of business for the Asset
Management segment:



                                                  Three Months Ended                                             Nine Months Ended
                                                     September 30,                                                 September 30,
                                                                             Dollar                                                       Dollar
                                     2012                 2011               Change                2012                2011               Change

                                                                                   (In millions)
Premiums:
Retirement plans                $           0.1       $         0.7       $        (0.6 )      $         1.3       $         1.4       $        (0.1 )
Individual annuities                        1.1                 0.8                 0.3                  3.7                 4.8                (1.1 )


Total premiums                  $           1.2       $         1.5       $        (0.3 )      $         5.0       $         6.2       $        (1.2 )


The decreases in premiums for the third quarter and first nine months of 2012 compared to the same periods for 2011 were primarily due to the decrease in sales of life-contingent annuities.

Administrative Fee Revenues


Administrative fee revenues for the Asset Management segment include asset-based
and plan-based fees related to our retirement plans and private client wealth
management businesses, and fees related to the origination and servicing of
commercial mortgage loans. The primary driver for administrative fee revenues is
the level of assets under administration for retirement plans, which is driven
by equity market performance and net customer deposits. Assets under
administration that produce administrative fee revenues include retirement plan
separate account, retirement plan trust products, private client wealth
management and commercial mortgage loans under administration for other
investors.



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The following tables set forth administrative fee revenues by line of business and associated key indicators for the Asset Management segment:



                                              Three Months  Ended                            Nine Months  Ended
                                                 September 30,                                  September 30,
                                                                   Percent                                        Percent
                                       2012           2011         Change             2012           2011         Change

                                                                    (Dollars in millions)
Administrative fee revenues:
Retirement plans                    $     21.5     $     22.3          (3.6 

) % $ 66.0$ 68.5 (3.6 ) % Other financial services business 7.7

            7.4           4.1              23.1           22.7           1.8


Total administrative fee revenues   $     29.2     $     29.7          (1.7 )      $     89.1     $     91.2          (2.3 )





                                                                      At September 30,
                                                                                                Percent
                                                        2012                 2011               Change

                                                                    (Dollars in millions)
Key indicators of administrative fee revenues:
Assets under administration:
Retirement plan separate account                   $      5,071.8       $      4,205.6                20.6  %
Retirement plan trust products                            7,852.3              7,699.6                 2.0
Commercial mortgage loans for other investors             2,781.8              2,699.2                 3.1
Private client wealth management                            985.7                965.8                 2.1


The decrease in administrative fee revenues in our Asset Management segment for
the third quarter of 2012 compared to the same period for 2011 was primarily
related to non-recurring adjustments of $0.7 million recorded in the third
quarter of 2012.

The decrease in administrative fee revenues in our Asset Management segment for
the first nine months of 2012 compared to the same period of 2011 was primarily
due to lower average retirement plan trust assets under administration for the
first nine months of 2012 compared to the first nine months of 2011.



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Net Investment Income

The following tables set forth net investment income and associated key indicators for the Asset Management segment:




                                            Three Months Ended                           Nine Months Ended
                                              September 30,                                September 30,
                                     2012           2011         Change           2012           2011         Change

                                                                 (Dollars in millions)
Net investment income:
Retirement plans                  $     24.2     $     22.5          7.6  %    $     71.0     $     66.9          6.1  %
Individual annuities                    44.4           33.4         32.9            129.0          117.2         10.1
Other financial services
business                                 3.7            3.1         19.4             10.0            9.4          6.4

Total net investment income       $     72.3     $     59.0         22.5       $    210.0     $    193.5          8.5

Key indicators of net
investment income:
Average assets under
administration:
Retirement plan general account   $  1,800.9     $  1,651.3          9.1  %    $  1,771.4     $  1,631.2          8.6  %
Individual annuities                 3,132.8        2,907.8          7.7          3,062.4        2,802.4          9.3
Contribution from the change in
fair value of the S&P 500 Index
options                           $      2.9     $     (6.8 )    $   9.7       $      7.3     $     (3.0 )    $  10.3
Commercial mortgage loan
prepayment fees                          2.3            1.4          0.9              3.5            2.3          1.2
Commercial mortgage loan
originations                           347.3          271.7         27.8  %         857.0          770.7         11.2  %




                                                  At September 30,
                                              2012                 2011
        Consolidated portfolio yields:
        Fixed maturity securities                  4.80  %              5.14  %
        Commercial mortgage loans                  6.16                 6.38


The increases in net investment income for the third quarter and first nine
months of 2012 compared to the same periods of 2011 were primarily due to a
change in fair value of our S&P 500 Index options in our individual annuities
business and higher bond call premiums and prepayment fees received on
commercial mortgage loans. Net investment income also increased due to an
increase in average individual annuity assets under administration and an
increase in average retirement plan general account assets under administration.
These increases were partially offset by lower portfolio yields for fixed
maturity securities and commercial mortgage loans. See Item 1, "Financial
Statements-Notes to Unaudited Condensed Consolidated Financial Statements-Note
8-Derivative Financial Instruments" for further derivatives disclosure.

Benefits and Expenses

Benefits to Policyholders


Benefits to policyholders for the Asset Management segment primarily represent
current and future benefits on life-contingent annuities. Changes in the level
of benefits to policyholders will generally correlate to changes in premium
levels because these annuities are primarily single-premium life-contingent
annuity products with a significant portion of all premium payments established
as reserves.

The following table sets forth benefits to policyholders for the Asset
Management segment:



                                            Three Months Ended                            Nine Months Ended
                                               September 30,                                September 30,
                                                                Percent                                       Percent
                                     2012          2011         Change            2012           2011         Change

                                                                  (Dollars in millions)
Benefits to policyholders          $     4.8     $     5.1          (5.9 )%    $     15.0     $     15.2          (1.3 )%




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Interest Credited


Interest credited represents interest paid to policyholders on retirement plan
general account assets, individual fixed-rate annuity deposits and index-based
interest guarantees.

The following table sets forth interest credited and associated key indicators for the Asset Management segment for the periods presented:



                                          Three Months Ended                           Nine Months Ended
                                            September 30,                                September 30,
                                                               Dollar                                       Dollar
                                  2012           2011          Change          2012           2011          Change

                                                                   (In millions)
Interest credited              $     42.9     $     35.8      $     7.1     $    126.7     $    113.6      $    13.1

Key indicators of interest
credited:
Contribution from the change
in fair value of index-based
interest guarantees            $      2.5     $     (3.7 )    $     6.2     $      7.2     $     (1.7 )    $     8.9


The increases in interest credited for the third quarter and first nine months
of 2012 compared to the same periods for 2011 were primarily due to the change
in fair value of our index-based interest guarantees, and an increase in our
average individual fixed-rate annuity assets under administration. See Item 1,
"Financial Statements-Notes to Unaudited Condensed Consolidated Financial
Statements-Note 8-Derivative Financial Instruments" for further derivatives
disclosure.

Operating Expenses


The following table sets forth operating expenses for the Asset Management
segment:



                                           Three Months Ended                              Nine Months Ended
                                              September 30,                                  September 30,
                                                                Percent                                        Percent
                                    2012           2011         Change             2012           2011         Change

                                                                 (Dollars in millions)
Operating expenses               $     28.7     $     28.9          (0.7 ) %    $     88.2     $     87.2           1.1  %


The increase in Asset Management operating expenses for the first nine months of 2012 compared to first nine months of 2011 was primarily due to increased administrative and service costs.

Other


In addition to our two segments, we report our holding company and corporate
activities in the Other category. This category includes return on capital not
allocated to the product segments, holding company expenses, operations of
certain unallocated subsidiaries, interest on debt, unallocated expenses, net
capital gains and losses and adjustments made in consolidation.

The following table sets forth results for the Other category:



                                             Three Months Ended                            Nine Months Ended
                                                September 30,                                September 30,
                                                                  Percent                                      Percent
                                      2012           2011         Change            2012           2011         Change

                                                                  (Dollars in millions)
Loss before income taxes           $     18.6     $     11.3          64.6  %    $     47.9     $     55.2        (13.2 )%


The increase in loss before income taxes for the third quarter of 2012 compared
to the third quarter of 2011 was primarily due to capital gains recorded on the
sales of real estate investments during the third quarter of 2011, which did not
recur in the third quarter of 2012.

The decrease in loss before income taxes for the first nine months of 2012
compared to the first nine months of 2011 was primarily due to an increase in
operating expenses during the first nine months of 2011 related to increased
project costs for information technology service changes.



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Net Capital Gains (Losses)


Net capital gains and losses are reported in the Other category and are not
likely to occur in a stable pattern. Net capital gains and losses primarily
occur as a result of sales of our assets for more or less than carrying value,
OTTI of assets in our bond portfolio, provisions to our commercial mortgage loan
loss allowance, losses recognized due to impairment of real estate and
impairments of tax-advantaged investments.

The following table sets forth net capital gains and losses and associated key
components:



                                                       Three Months Ended            Nine Months Ended
                                                         September 30,                 September 30,
                                                      2012           2011           2012           2011

                                                                        (In millions)
Net capital gains (losses):
Fixed maturity securities                           $     2.5      $     0.7      $     4.7      $     7.2
Commercial mortgage loans                                (4.4 )         (7.2 )        (10.2 )        (24.8 )
Real estate investments                                    -            19.4             -            27.9
Real estate owned                                        (0.2 )         (3.6 )         (0.9 )        (16.4 )
Other                                                    (0.5 )         (1.6 )         (0.4 )         (1.8 )


Total net capital (losses) gains                    $    (2.6 )    $     

7.7 $ (6.8 ) $ (7.9 )


Key components of net capital (losses) gains:
Commercial mortgage loan loss allowance provision   $    (5.0 )    $    (7.5 )    $   (11.4 )    $   (25.5 )
OTTI on fixed maturity securities                        (0.7 )         (0.3 )         (3.2 )         (1.7 )
Impairments on real estate owned                         (0.8 )         

(3.6 ) (1.7 ) (15.3 )



Net capital losses for the third quarter and the first nine months of 2012 were
primarily related to our commercial mortgage loan loss allowance provision.
These losses were partially offset by net capital gains related to the sale of
certain fixed maturity securities.

Liquidity and Capital Resources

Asset-Liability Matching and Interest Rate Risk Management


Asset-liability management is a part of our risk management structure. The risks
we assume related to asset-liability mismatches vary with economic conditions.
The primary sources of economic risk are interest rate related and include
changes in interest rate term risk, credit risk and liquidity risk. It is
generally management's objective to align the characteristics of assets and
liabilities so that our financial obligations can be met under a wide variety of
economic conditions. From time to time, management may choose to liquidate
certain investments and reinvest in different investments so that the likelihood
of meeting our financial obligations is increased. See "-Investing Cash Flows."

We manage interest rate risk, in part, through asset-liability analyses. In accordance with presently accepted actuarial standards, we have made adequate provisions for the anticipated cash flows required to meet contractual obligations and related expenses through the use of statutory reserves and related items at September 30, 2012.


Our interest rate risk analysis reflects the influence of call and prepayment
rights present in our fixed maturity securities and commercial mortgage loans.
The majority of these investments have contractual provisions that require the
borrower to compensate us in part or in full for reinvestment losses if the
security or loan is retired before maturity. Callable bonds without make-whole
provisions represented 8.3% of our fixed maturity security portfolio at
September 30, 2012. We also originate commercial mortgage loans containing a
make-whole prepayment provision requiring the borrower to pay a prepayment fee.
As interest rates decrease, potential prepayment fees increase. These larger
prepayment fees deter borrowers from refinancing during a low interest rate
environment. Approximately 97% of our commercial mortgage loan portfolio
contains this prepayment provision. Almost all of the remaining commercial
mortgage loans without a make-whole prepayment provision generally contain fixed
percentage prepayment fees that mitigate prepayments but may not fully protect
our expected cash flows in the event of prepayment.

Operating Cash Flows


Net cash provided by operating activities is net income adjusted for non-cash
items and accruals, and was $318.3 million for the first nine months of 2012,
compared to $245.8 million for the first nine months of 2011. This increase was
driven by an $8.5 million increase in our deferred tax liability, in addition to
a $124.5 million increase in other liabilities, partially offset by a $32.7
million increase in other assets, mainly attributable to timing differences.



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Investing Cash Flows


We maintain a diversified investment portfolio primarily consisting of fixed
maturity securities and fixed-rate commercial mortgage loans. Investing cash
inflows primarily consist of the proceeds of investments sold, matured or
repaid. Investing cash outflows primarily consist of payments for investments
acquired or originated.

Net cash used in investing activities was $524.6 million and $481.3 million for
the first nine months of 2012 and 2011, respectively. The increase in net cash
used in investing activities for the first nine months of 2012 compared to the
first nine months of 2011 was primarily due to an increase in net purchases of
fixed maturity securities during the first nine months of 2012.

Our target investment portfolio allocation is approximately 60% fixed maturity
securities and 40% commercial mortgage loans with a maximum allocation of 45% to
commercial mortgage loans. At September 30, 2012, our portfolio consisted of
56.7% fixed maturity securities, 41.0% commercial mortgage loans, 1.5% other
invested assets and 0.8% real estate.

Fixed Maturity Securities


We maintain prudent diversification across industries, issuers and maturities.
We have avoided the types of structured products that do not meet an adequate
level of transparency for good decision making. Our corporate bond industry
diversification targets are based on the Bank of America Merrill Lynch U.S.
Corporate Master Index, which is reasonably reflective of the mix of issuers
broadly available in the market. Our fixed maturity securities below investment
grade are primarily managed by a third party.

Our fixed maturity securities portfolio generates unrealized gains or losses
primarily resulting from market interest rates that are lower or higher relative
to our book yield at the reporting date. In addition, changes in the spread
between the risk-free rate and market rates for any given issuer can fluctuate
based on the demand for the instrument, the near-term prospects of the issuer
and the overall economic climate.

The following tables set forth the composition of our fixed maturity securities
portfolio by industry category with the associated unrealized gains and losses:



                                                                   September 30, 2012
                                      Amortized             Unrealized             Unrealized                Fair
                                        Cost                  Gains                  Losses                 Value
                                                                      (In millions)
Fixed maturity securities:
Corporate bonds:
Basic industry                     $         375.2       $           34.5       $           (0.8 )      $        408.9
Capital goods                                721.4                   72.7                   (0.2 )               793.9
Communications                               302.7                   36.1                     -                  338.8
Consumer cyclical                            412.7                   39.5                   (0.1 )               452.1
Consumer non cyclical                        920.9                  122.8                   (0.3 )             1,043.4
Energy                                       449.8                   52.4                   (0.2 )               502.0
Finance                                    1,502.8                  109.4                   (0.9 )             1,611.3
Utility                                      929.3                  119.2                   (0.3 )             1,048.2
Transportation and other                     204.2                   24.7                     -                  228.9

Total corporate bonds                      5,819.0                  611.3                   (2.8 )             6,427.5
U.S. government and agency
bonds                                        365.6                   64.7                     -                  430.3
U.S. state and political
subdivision bonds                            158.7                   17.8                     -                  176.5
Foreign government bonds                      61.4                   10.9                     -                   72.3
S&P 500 Index options                         13.8                     -                      -                   13.8

Total fixed maturity
securities                         $       6,418.5       $          704.7       $           (2.8 )      $      7,120.4





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                                                                    December 31, 2011
                                         Amortized             Unrealized             Unrealized             Fair
                                           Cost                  Gains                  Losses               Value
                                                                      (In millions)
Fixed maturity securities:
Corporate bonds:
Basic industry                        $         378.6       $           30.4       $           (1.4 )      $   407.6
Capital goods                                   734.2                   64.9                   (1.1 )          798.0
Communications                                  304.2                   27.1                   (1.8 )          329.5
Consumer cyclical                               392.7                   33.1                   (1.2 )          424.6
Consumer non cyclical                           922.9                  108.9                   (0.2 )        1,031.6
Energy                                          435.6                   45.0                   (0.7 )          479.9
Finance                                       1,287.1                   53.2                  (13.9 )        1,326.4
Utility                                         931.9                  106.2                   (0.6 )        1,037.5
Transportation and other                        201.2                   23.0                     -             224.2

Total corporate bonds                         5,588.4                  491.8                  (20.9 )        6,059.3
U.S. government and agency bonds                387.8                   64.3                     -             452.1
U.S. state and political
subdivision bonds                               164.8                   14.0                     -             178.8
Foreign government bonds                         61.7                   10.4                     -              72.1
S&P 500 Index options                             7.2                     -                      -               7.2

Total fixed maturity securities $ 6,209.9 $ 580.5 $ (20.9 ) $ 6,769.5




The following table sets forth key indicators of our fixed maturity securities
portfolio:



                                                                                    September 30,         December 31,
                                                                                        2012                  2011              Change
                                                                                                   (Dollars in millions)
Fixed maturity securities                                                          $       7,120.4       $      6,769.5              5.2  %

Weighted-average credit quality of our fixed maturity securities portfolio (S&P)

           A                     A

Fixed maturity securities below investment grade:
As a percent of total fixed maturity securities                                                5.6  %               5.2  %
Managed by a third party                                                           $         351.6       $        311.3             12.9  %

Fixed maturity securities on our watch list:
Fair value                                                                                     5.3                  8.9       $     (3.6 )
Amortized cost after OTTI                                                                      5.5                 12.2             (6.7 )

Gross unrealized capital gains in our fixed maturity securities portfolio

                 704.7                580.5             21.4  %

Gross unrealized capital losses in our fixed maturity securities portfolio

                   (2.8 )              (20.9 )           86.6


We recorded OTTI of $0.7 million and $3.2 million, and $0.3 million and $1.7
million for the third quarter and first nine months of 2012 and 2011,
respectively. See "Critical Accounting Policies and Estimates-Investment
Valuations-Fixed Maturity Securities." We did not have any direct exposure to
sub-prime or Alt-A mortgages in our fixed maturity securities portfolio at
September 30, 2012. At September 30, 2012, we did not have any direct exposure
to euro zone government issued debt or debt issued by investment and commercial
banks headquartered in Portugal, Ireland, Italy, Greece or Spain. At
September 30, 2012, fixed maturity securities issued by investment and
commercial banks headquartered in other euro zone countries represented 0.8%, or
$54.7 million, of our fixed maturity securities portfolio. There were no
impairments on fixed maturity securities related to euro zone exposure during
the first nine months of 2012.

Commercial Mortgage Loans

StanCorp Mortgage Investors, LLC originates and services fixed-rate commercial
mortgage loans for the investment portfolios of our insurance subsidiaries and
generates additional fee income from the origination and servicing of commercial
mortgage loans participated to institutional investors. The level of commercial
mortgage loan originations in any period is influenced by market conditions as
we respond to changes in interest rates, available spreads and borrower demand.



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The following table sets forth commercial mortgage loan originations:



                                            Three Months Ended                              Nine Months Ended
                                               September 30,                                  September 30,
                                                                  Percent                                        Percent
                                   2012            2011           Change            2012            2011          Change
                                                                  (Dollars in millions)
Commercial mortgage loan
originations                    $     347.3     $     271.7           27.8  %    $     857.0     $     770.7        11.2  %


The increase in commercial mortgage loan originations for the third quarter and
first nine months of 2012 compared to the same periods for 2011 were primarily
due to increased activity in the commercial real estate market during 2012.

The following table sets forth commercial mortgage loan servicing data:



                                                 September 30,       December 31,        Percent
                                                      2012               2011            Change
                                                              (Dollars in millions)
Commercial mortgage loans serviced:
For subsidiaries of StanCorp                     $      5,148.4      $     4,901.0            5.0  %
For other institutional investors                       2,781.8            2,691.6            3.4

Capitalized commercial mortgage loan
servicing rights associated with commercial
mortgage loans serviced for other
institutional investors                                     7.4                7.2            2.8


The estimated average loan to value ratio for the overall portfolio was less
than 70% at September 30, 2012. The average loan balance of our commercial
mortgage loan portfolio was approximately $0.8 million at September 30, 2012. We
have the contractual ability to pursue personal recourse on approximately 74% of
our loans and partial personal recourse on a majority of the remaining loans.
The weighted average capitalization rate for the portfolio at September 30, 2012
was approximately 9%. Capitalization rates are used internally to value our
commercial mortgage loan portfolio annually.

At September 30, 2012, we did not have any direct exposure to sub-prime or Alt-A
mortgages in our commercial mortgage loan portfolio. When we undertake mortgage
risk, we do so directly through loans that we originate ourselves rather than in
packaged products such as commercial mortgage-backed securities. Given that we
service the vast majority of loans in our portfolios, we are prepared to deal
with them promptly and proactively. Should the delinquency rate or loss
performance of our commercial mortgage loan portfolio increase significantly,
the increase could have a material adverse effect on our business, financial
position, results of operations or cash flows.



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The following table sets forth our commercial mortgage loan portfolio by property type, by geographic region within the U.S., and by U.S. state:




                                           September 30, 2012                   December 31, 2011
                                         Amount          Percent             Amount          Percent

                                                            (Dollars in millions)
Property type:
Retail                                $    2,492.2             48.4  %    $    2,457.8             50.1  %
Industrial                                   967.4             18.8              900.4             18.4
Office                                       944.7             18.3              911.1             18.6
Hotel/motel                                  297.5              5.8              241.9              4.9
Commercial                                   199.4              3.9              187.1              3.8
Apartment and other                          247.8              4.8              204.0              4.2


Total commercial mortgage loans       $    5,149.0            100.0  %    $    4,902.3            100.0  %

Geographic region*:
Pacific                               $    1,811.2             35.2  %    $    1,699.3             34.7  %
South Atlantic                             1,028.9             20.0              953.8             19.5
West South Central                           629.6             12.2              605.3             12.3
Mountain                                     609.1             11.8              585.8             11.9
East North Central                           420.3              8.2              393.4              8.0
Middle Atlantic                              241.8              4.7              243.8              5.0
West North Central                           183.9              3.6              184.8              3.8
East South Central                           131.7              2.5              129.9              2.6
New England                                   92.5              1.8              106.2              2.2


Total commercial mortgage loans       $    5,149.0            100.0  %    $    4,902.3            100.0  %

U.S. state:
California                            $    1,418.4             27.5  %    $    1,332.0             27.2  %
Texas                                        574.0             11.1              550.8             11.2
Florida                                      316.0              6.2              305.3              6.2
Georgia                                      304.3              5.9              270.1              5.5
Other states                               2,536.3             49.3            2,444.1             49.9


Total commercial mortgage loans       $    5,149.0            100.0  %    $    4,902.3            100.0  %




* Geographic regions obtained from the American Council of Life Insurers

Mortgage Loan Portfolio Profile.



Our largest concentration of commercial mortgage loan property type was retail
properties and primarily consisted of convenience related properties in strip
malls, convenience stores and restaurants. Our exposure to retail properties is
diversified among various borrowers, properties and geographic regions. In
addition, retail commercial lending represents an area of experience and
expertise, where careful underwriting and consistent surveillance mitigate risks
surrounding our commercial mortgage lending in this area.

At September 30, 2012, our ten largest borrowers represented less than 8% of our
total commercial mortgage loan portfolio balance. Our largest borrower
concentrations within our commercial mortgage loan portfolio consisted of one
borrower that comprised less than 2% of our total commercial mortgage loan
portfolio balance. The second largest borrower comprised less than 1% of our
total commercial mortgage loan portfolio balance.

Through our concentration of commercial mortgage loans in California, we are
exposed to potential losses from an economic downturn in California as well as
to certain catastrophes, such as earthquakes and fires that may affect certain
areas of the western region. We require borrowers to maintain fire insurance
coverage. We diversify our commercial mortgage loan portfolio within California
by both location and type of property in an effort to reduce certain catastrophe
and economic exposure. However, diversification may not always eliminate the
risk of such losses. Historically, the delinquency rate of our California-based
commercial mortgage loans has been substantially below the industry average and
is consistent with our experience in other states. We do not require earthquake
insurance for the properties when we underwrite new loans. However, we consider
the potential for earthquake loss based upon seismic surveys and structural
information specific to each property. We do not expect a catastrophe or
earthquake damage in the western region to have a material adverse effect on our
business, financial position, results of operations or cash flows. Currently,
our California exposure is primarily in Los Angeles County, Orange County, San
Diego County and the Bay Area



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Counties. We have a smaller concentration of commercial mortgage loans in the
Inland Empire and the San Joaquin Valley where there has been greater economic
decline. Due to the concentration of commercial mortgage loans in California, a
continued economic decline in California could have a material effect on our
business, financial position, results of operations or cash flows. See Part II,
Item 1A, "Risk Factors."

Under the laws of certain states, environmental contamination of a property may
result in a lien on the property to secure recovery of the costs of cleanup. In
some states, such a lien has priority over the lien of an existing mortgage
against such property. As a commercial mortgage lender, we customarily conduct
environmental assessments prior to making commercial mortgage loans secured by
real estate and before taking title through foreclosure on real estate
collateralizing delinquent commercial mortgage loans held by us. Based on our
environmental assessments, we believe that any compliance costs associated with
environmental laws and regulations or any remediation of affected properties
would not have a material effect on our business, financial position, results of
operations or cash flows. However, we cannot provide assurance that material
compliance costs will not be incurred by us.

In the normal course of business, we commit to fund commercial mortgage loans
generally up to 90 days in advance. At September 30, 2012, we had outstanding
commitments to fund commercial mortgage loans totaling $128.3 million, with
fixed interest rates ranging from 4.500% to 5.875%. These commitments generally
have fixed expiration dates. A small percentage of commitments expire due to the
borrower's failure to deliver the requirements of the commitment by the
expiration date. In these cases, we will retain the commitment fee and good
faith deposit. Alternatively, if we terminate a commitment due to the
disapproval of a commitment requirement, the commitment fee and good faith
deposit may be refunded to the borrower, less an administrative fee.

The following table sets forth key commercial mortgage loan statistics:



                                               September 30,           December 31,          Percent
                                                   2012                    2011               Change

                                                               (Dollars in millions)
Commercial mortgage loans sixty-day
delinquencies:
Book value                                    $          15.6         $         17.1             (8.8 ) %
Delinquency rate                                         0.30  %                0.34  %
In process of foreclosure                     $           9.9         $          5.1             94.1

Restructured commercial mortgage loans on
a statutory basis                                        82.4                   93.7            (12.1 )


The performance of our commercial mortgage loan portfolio may fluctuate in the
future. However, based on our business approach of diligently underwriting
high-quality loans, we believe our delinquency rate will remain contained. We
have steadfastly avoided the types of structured products that do not meet an
adequate level of transparency for good decision making.

The following table sets forth details of our commercial mortgage loans foreclosed or accepted as deeds in lieu of foreclosure:



                                                Three Months Ended                             Nine Months Ended
                                                   September 30,                                 September 30,
                                        2012          2011          Change            2012           2011          Change

                                                              (Dollars in millions)
Number of loans                               4            10              (6 )            26             31              (5 )
Book value                            $     1.9     $     7.0     $      

(5.1 ) $ 18.8$ 26.0 $ (7.2 ) Number of properties foreclosed and transferred to real estate owned

              3             8              (5 )            22             30              (8 )
Real estate acquired                  $     1.0     $     2.9     $      (1.9 )    $     14.3     $     13.0     $       1.3


Commercial mortgage loan foreclosures may result in the sale of the property to
a third party at the time of foreclosure, resulting in fewer properties
transferred to real estate owned than the number of loans foreclosed during the
period. Commercial mortgage loans may have multiple properties as collateral,
resulting in more properties transferred to real estate owned than the number of
loans foreclosed during the period. Real estate acquired through foreclosure or
accepted as deeds in lieu of foreclosure is initially recorded at the lower of
cost or estimated net realizable value, which includes an estimate for disposal
costs. These amounts may be adjusted in a subsequent period as additional market
information is received. The book value of real estate acquired during the third
quarter of 2012 compared to the third quarter of 2011 decreased primarily due to
fewer properties being acquired in the third quarter of 2012. The book value of
real estate acquired during the first nine months of 2012 increased compared to
the same period of 2011 primarily due to the properties acquired having higher
average net realizable values in the first nine months of 2012. See "Critical
Accounting Policies and Estimates-Investment Valuations-Commercial Mortgage
Loans" for our commercial mortgage loan loss allowance policy.



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The following table sets forth changes in the commercial mortgage loan loss
allowance:



                                           Three Months Ended                             Nine Months Ended
                                              September 30,                                 September 30,
                                                                 Dollar                                        Dollar
                                   2012            2011          Change          2012           2011           Change

                                                                     (In millions)
Commercial mortgage loan loss
allowance:
Beginning balance               $     45.6      $     43.5      $     2.1      $   48.1      $     36.1      $     12.0
Provision                              5.0             7.5           (2.5 )        11.4            25.5           (14.1 )
Charge-offs, net                      (2.6 )          (3.9 )          1.3         (11.5 )         (14.5 )           3.0

Ending balance                  $     48.0      $     47.1      $     0.9      $   48.0      $     47.1      $      0.9



The higher commercial mortgage loan loss allowance as of September 30, 2012
compared to September 30, 2011 was primarily due to the increase in the general
loan loss allowance as of September 30, 2012 compared to September 30, 2011. The
decrease in the provision and charge-offs for the third quarter and first nine
months of 2012 compared to the same periods of 2011 were primarily related to
lower losses associated with foreclosures, accepted deeds in lieu of foreclosure
on commercial mortgage loans and other related charges associated with
commercial mortgage loans leaving the portfolio during the third quarter and
first nine months of 2012.

The following table sets forth impaired commercial mortgage loans identified in
management's specific review of probable loan losses and the related allowance:



                                                September 30,         December 31,          Dollar
                                                    2012                  2011              Change

                                                                   (In millions)
Impaired commercial mortgage loans with
specific allowances for losses                 $          74.6       $         75.8       $      (1.2 )
Impaired commercial mortgage loans without
specific allowances for losses                            24.0                 28.9              (4.9 )
Specific allowance for losses on impaired
commercial mortgage loans,
end of the period                                        (25.0 )              (26.6 )             1.6

Net carrying value of impaired commercial
mortgage loans                                 $          73.6       $         78.1       $      (4.5 )



An impaired commercial mortgage loan is a loan where we do not expect to receive
contractual principal and interest in accordance with the terms of the loan
agreement. A specific allowance for losses is recorded when a loan is considered
to be impaired and it is probable that all amounts due will not be collected. We
also hold specific allowances for losses on certain performing loans that we
continue to monitor and evaluate. Impaired commercial mortgage loans without
specific allowances for losses are those for which we have determined that it
remains probable that we will collect all amounts due. The decrease in the
impaired commercial mortgage loans balance at September 30, 2012 compared to
December 31, 2011 was primarily due to loan repayments and foreclosures during
the first nine months of 2012.

The following table sets forth the average recorded investment in impaired commercial mortgage loans before specific allowance for losses:



                                            Three Months Ended                         Nine Months Ended
                                               September 30,                             September 30,
                                                                Dollar                                    Dollar
                                     2012          2011         Change         2012          2011         Change

                                                                    (In

millions)

Average recorded investment $ 99.0$ 91.9$ 7.1

$ 101.7$ 89.2$ 12.5



Interest income is recorded in net investment income. We continue to recognize
interest income on delinquent commercial mortgage loans until the loans are more
than 90 days delinquent. Interest income and accrued interest receivable are
reversed when a loan is put on non-accrual status. For loans that are less than
90 days delinquent, we may reverse interest income and the accrued interest
receivable if there is a question on the collectability of the interest.
Interest income on loans in the 90-day delinquent category is recognized in the
period the cash is collected. We resume the recognition of interest income when
the loan becomes less than 90 days delinquent and we determine it is probable
that the loan will remain performing.



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The amount of interest income recognized on impaired commercial mortgage loans
was $1.0 million and $0.7 million for the third quarters of 2012 and 2011,
respectively, and was $3.1 million and $2.8 million for the first nine months of
2012 and 2011, respectively. The cash received by us in payment of interest on
impaired commercial mortgage loans was $1.0 million and $0.7 million for the
third quarters of 2012 and 2011, respectively, and was $3.0 million and $2.1
million for the first nine months of 2012 and 2011, respectively.

Financing Cash Flows


Financing cash flows primarily consist of policyholder fund deposits and
withdrawals, borrowings and repayments on the line of credit, borrowings and
repayments on long-term debt, repurchases of common stock and dividends paid on
common stock. Net cash provided by financing activities was $240.3 million and
$255.7 million for the first nine months of 2012 and 2011, respectively. The
decrease in funds provided by financing cash flows for the comparative periods
was primarily due to a decrease in the level of policyholder funds, net of
withdrawals, partially offset by a decrease in repurchases of common stock. See
"Capital Management-Share Repurchases" for further discussion on share
repurchases.

On June 22, 2012, we entered into an agreement for a four-year, $250 million
credit facility (the "Facility"). Additionally, upon our request and with
consent of the lenders under the Facility, the Facility can be increased to $350
million. The termination date of the Facility is June 22, 2016 though, at our
option and with the consent of the lenders under the Facility, the termination
date can be extended for two additional one year periods. Borrowings under the
Facility will be used to provide for working capital, for issuance of letters of
credit and for our general corporate purposes.

Under the agreement, we are subject to customary covenants that take into
consideration the impact of material transactions, changes to the business,
compliance with legal requirements and financial performance. The two financial
covenants are based on our total debt to total capitalization ratio and
consolidated net worth. Under the two financial covenants, we are required to
maintain a total debt to capitalization ratio that does not exceed 35% and a
consolidated net worth that is equal to at least $1.24 billion. The financial
covenants exclude the unrealized gains and losses related to fixed maturity
securities that are held in accumulated other comprehensive income (loss). At
September 30, 2012, we had a total debt to total capitalization ratio of 23.7%
and consolidated net worth of $1.78 billion as defined by the financial
covenants. The Facility is subject to performance pricing based upon the
Company's publicly announced debt ratings and includes an interest rate option
at the election of the borrower of a base rate plus the applicable margin or the
LIBOR rate plus the applicable margin, plus facility and utilization fees. At
September 30, 2012, we were in compliance with all covenants under the Facility
and had no outstanding balance on the Facility. We believe we will continue to
meet the financial covenants throughout the life of the Facility.

On August 10, 2012, we issued $250 million of 5.00%, 10-year senior notes ("2022
Senior Notes") which mature on August 15, 2022. Interest will be paid
semi-annually on February 15 and August 15, beginning on February 15, 2013. We
used the net proceeds from the issuance of the 2022 Senior Notes to repay the
$250 million of 6.875%, 10-year senior notes ("2012 Senior Notes"), on
September 28, 2012.

We have $300 million of 6.90%, junior subordinated debentures ("Subordinated
Debt"). The Subordinated Debt has a final maturity on June 1, 2067, is
non-callable for the first 10 years (prior to June 1, 2017). The principal
amount of the Subordinated Debt is payable at final maturity. Interest is
payable semi-annually at 6.90% in June and December for the first 10 years up to
June 1, 2017, and quarterly thereafter at a floating rate equal to three-month
London Interbank Offered Rate plus 2.51%. We have the option to defer interest
payments for up to five years. We have not deferred interest on the Subordinated
Debt.

Capital Management

State insurance departments require insurance enterprises to maintain minimum
levels of capital and surplus. The target for our insurance subsidiaries is
generally to maintain statutory capital at 300% of the Company Action Level of
Risk-based Capital ("RBC") required by regulators, which is 600% of the
Authorized Control Level RBC required by our states of domicile. The insurance
subsidiaries held estimated statutory capital of 364% of the Company Action
Level RBC at September 30, 2012. At September 30, 2012, statutory capital,
adjusted to exclude asset valuation reserves, for our regulated insurance
subsidiaries totaled $1.37 billion.

Statutory capital growth from our insurance subsidiaries is generally a result
of generated income, less a charge for business growth, measured by insurance
premium growth, which includes individual annuity sales. The level of capital in
excess of targeted RBC we generate varies inversely in relation to the level of
our premium growth. As premium growth increases, capital is utilized to fund
additional reserve requirements, meet increased regulatory capital requirements
based on premium and cover certain acquisition costs associated with policy
issuance, leaving less available capital beyond our target level. Higher levels
of premium growth can result in increased utilization of capital beyond that
which is generated by the business, and at very high levels of premium growth,
we could generate the need for capital infusions. At lower levels of premium
growth, additional capital produced by the business exceeds the capital utilized
to meet these requirements, which can result in additional capital above our
targeted RBC level. In assessing our capital position, we also consider cash and
capital at the holding company and non-insurance subsidiaries.

In the third quarter of 2012 we amended our Yearly Renewable Term reinsurance
agreement with Canada Life Assurance Company ("Canada Life"). The amendment
increased the amount of group life insurance risk to be ceded to Canada Life.
The amended agreement limits our exposure to losses in the event of a
catastrophe. This amendment to our reinsurance agreement released approximately
$100 million of additional net capital, for a total release of approximately
$170 million. This release of capital can fluctuate based on a percentage of our
in-force business. The agreement is periodically subject to termination by both
parties.



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Investments


The insurance laws of the states of domicile and other states in which the
insurance subsidiaries conduct business regulate the investment portfolios of
the insurance subsidiaries. Relevant laws and regulations generally limit the
admissibility of investments to bonds and other fixed maturity securities,
commercial mortgage loans, common and preferred stock and real estate. Decisions
to acquire and dispose of investments are made in accordance with guidelines
adopted and modified from time to time by the Boards of Directors of our
insurance subsidiaries. Each investment transaction requires the approval of one
or more members of senior investment staff, with increasingly higher approval
authorities required for transactions that are more significant. Transactions
are reported quarterly to the Audit Committee of the Board of Directors for
Standard Insurance Company ("Standard") and to the Board of Directors for The
Standard Life Insurance Company of New York.

Dividends from Standard


Our ability to pay dividends to our shareholders, repurchase our shares and meet
our obligations substantially depends upon the receipt of distributions from our
subsidiary Standard. Standard's ability to pay dividends to StanCorp is affected
by factors deemed relevant by Standard's Board of Directors. One factor
considered by the Board is the ability to maintain adequate capital according to
Oregon statute. Under Oregon law, Standard may pay dividends and other
distributions only from the earned surplus arising from its business. If the
proposed dividend or other distribution exceeds certain statutory limitations,
Standard must receive the prior approval of the Director of the Oregon
Department of Consumer and Business Services-Insurance Division ("Oregon
Insurance Division"). The current statutory limitations are the greater of
(a) 10% of Standard's combined capital and surplus as of December 31 of the
preceding year, or (b) the net gain from operations after dividends to
policyholders and federal income taxes and before realized capital gains or
losses for the 12-month period ended on the preceding December 31. In each case,
the limitation must be determined under statutory accounting practices. Oregon
law gives the Oregon Insurance Division broad discretion to approve or decline
requests for dividends and other distributions in excess of these limits. With
the exception of StanCorp Equities, Inc., a limited broker-dealer and member of
the Financial Industry Regulatory Authority, there are no regulatory
restrictions on dividends from our non-insurance subsidiaries.

As of December 31, 2011, Standard's net gain from operations after dividends to
policyholders and federal income taxes and before capital gains or losses for
the 12-month period then ended was $144.0 million and capital and surplus was
$1.14 billion. Based upon Standard's results for 2011, the amount of ordinary
dividends and other distributions available in 2012, without additional approval
from the Oregon Insurance Division is $144.0 million. As of September 30, 2012
Standard had issued, upon approval of the Oregon Insurance Division, dividends
in excess of $144.0 million. Therefore, future dividends will require the
approval from the Oregon Insurance Division through August 14, 2013.

In August 2012, Standard paid an extraordinary cash distribution of $250.0
million to StanCorp from its paid-in and contributed surplus. Concurrently with
the distribution, Standard issued a $250.0 million subordinated surplus note
("Surplus Note"), payable to StanCorp. The Surplus Note matures in 2027 and
bears an interest rate of 5.25%, with interest payments due
September 30, December 31, March 31 and June 30 of each year. Standard has the
right to prepay the principal balance of the Surplus Note, in whole or in part,
at any time or from time to time, without penalty. In accordance with the
requirements of the National Association of Insurance Commissioners ("NAIC"),
the Surplus Note provides that no interest or principal payments may be made by
Standard without the prior approval of the Oregon Insurance Division, interest
will not be represented as an addition to the instrument, interest will not
accrue additional interest and any payments with respect to the Surplus Note
will be subordinate to Standard's other obligations to policyholders, lenders
and creditors. Any cash dividends paid by Standard to StanCorp through
August 14, 2013 will be considered extraordinary.

Dividends paid from Standard to StanCorp will be based on levels of available
capital and needs at the holding company, which are driven by the financial
results of Standard and the Company as a whole. Standard paid $30.0 million of
extraordinary cash dividends to StanCorp during the third quarter of 2012 in
addition to the $250.0 million discussed above. Standard did not pay any
dividends to StanCorp during the third quarter of 2011. Standard paid ordinary
cash dividends to StanCorp of $10.0 million and extraordinary cash dividends to
StanCorp of $280.0 million for the first nine months of 2012. Standard paid
ordinary cash dividends to StanCorp of $57.8 million for the first nine months
of 2011.

Dividends to Shareholders

The declaration and payment of dividends to shareholders in the future is
subject to the discretion of our Board of Directors. It is anticipated that
annual dividends to shareholders will be paid in December of each year depending
on our financial condition, results of operations, cash requirements, future
prospects, regulatory restrictions on dividends from the insurance subsidiaries,
the ability of the insurance subsidiaries to maintain adequate capital and other
factors deemed relevant by our Board of Directors. In addition, the declaration
and payment of dividends would be restricted if we elect to defer interest
payments on our Subordinated Debt dated as of May 21, 2007. If elected, the
restriction would be in place during the interest deferral period, which cannot
exceed five years. We have not deferred interest on the Subordinated Debt, and
have paid dividends each year since our initial public offering in 1999. In the
fourth quarter of 2011, StanCorp paid an annual cash dividend of $0.89 per
share, totaling $39.3 million.



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Share Repurchases


On May 16, 2011, our Board of Directors authorized an additional 3.0 million
shares of StanCorp common stock for its share repurchase program. The May 2011
authorization took effect upon the expiration of the February 2010 authorization
and expires on December 31, 2012. Share repurchases under the repurchase program
are made in the open market or in negotiated transactions in compliance with the
safe harbor provisions of Rule 10b-18 under regulations of the Securities
Exchange Act of 1934 ("Exchange Act"). Execution of the share repurchase program
is based upon management's assessment of market conditions for its common stock,
capital levels, our assessment of the overall economy and other potential growth
opportunities or priorities for capital use. Repurchases are made at market
prices on the transaction date.

The following table sets forth share repurchases activity:



                                              Three Months Ended                 Nine Months Ended
                                                September 30,                      September 30,
                                            2012             2011              2012              2011

                                                   (Dollars in millions except per share data)
Share repurchases:
Shares repurchased                                -           357,000           279,700         2,170,000
Cost of share repurchases                $        -       $       9.7      $       10.0      $       90.0
Weighted-average price per common
share                                            N/A            27.16             35.68             41.46

Shares remaining under repurchase
authorizations                             2,720,300        3,138,900       

2,720,300 3,138,900

Financial Strength and Credit Ratings


Financial strength ratings are gauges of our claims paying ability and are an
important factor in establishing the competitive position of insurance
companies. In addition, ratings are important for maintaining public confidence
in our company and in our ability to market our products. Rating organizations
regularly review the financial performance and condition of insurance companies.
In addition, credit ratings on our Senior Notes and Subordinated Debt are tied
to our financial strength ratings. A ratings downgrade could increase surrender
levels for our annuity products, adversely affect our ability to market our
products and increase costs of future debt issuances.

S&P, Moody's Investors Service, Inc. ("Moody's") and A.M. Best Company ("A.M. Best") provide financial strength ratings on Standard.

Standard's financial strength ratings as of October 2012 were:



                    S&P               Moody's            A.M. Best
                A+ (Strong)          A2 (Good)       A (Excellent)(1)
             5th of 20 ratings   6th of 21 ratings   3rd of 13 ratings
             Outlook: Negative   Outlook: Negative    Outlook: Stable




  (1) Also includes Standard Life Insurance Company of New York


Credit ratings assess credit quality and the likelihood of issuer default. S&P,
Moody's and A.M. Best provide ratings on StanCorp's Senior Notes and
Subordinated Debt. S&P and A.M. Best also provide issuer credit ratings for both
Standard and StanCorp.

Our debt ratings and issuer credit ratings as of October 2012, which we believe are indicators of our liquidity and ability to make payments, were:



                                      S&P        Moody's       A.M. Best
           StanCorp debt ratings:
           2022 Senior Notes          BBB+        Baa2            bbb
           Subordinated Debt          BBB-        Baa3            bb+

           Issuer credit ratings:
           Standard                    A+          -             a(1)
           StanCorp                   BBB+         -              bbb

           Outlook                  Negative    Negative       Stable(1)




  (1) Also includes Standard Life Insurance Company of New York


In April 2012, Moody's lowered the financial strength rating for Standard and
the debt and issuer credit ratings for StanCorp. Moody's downgraded the
insurance financial strength rating of Standard to "A2", our senior unsecured
debt to "Baa2" and our subordinated debt to "Baa3".



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In July 2012, both Moody's and S&P changed their outlook for the ratings of Standard and StanCorp to Negative from Stable.


In August 2012, A.M. Best affirmed the financial strength rating of "A" for
Standard and Standard Life Insurance Company of New York with a Stable outlook.
A.M. Best lowered the issuer credit ratings for Standard and Standard Life
Insurance Company of New York to "a" from "a+" and StanCorp to "bbb" from
"bbb+". A.M. Best also lowered the debt ratings on StanCorp's Subordinated Debt
to "bb+" from "bbb-". A.M. Best also changed their outlook for the credit and
debt ratings of Standard, Standard Life Insurance Company of New York and
StanCorp to Stable from Negative.

These changes in ratings and outlook were primarily due to less favorable claims
experience in our group long term disability business, which lowered earnings
and capital generation for the first half of 2012. Our ratings continue to be
high quality investment grade, and we are well positioned within the insurance
industry.

We believe our well-managed underwriting and claims operations, high-quality
invested asset portfolios, enterprise risk management processes and strong
capital position will continue to support our financial strength ratings and
strong credit standing. See "Liquidity and Capital Resources-Asset-Liability
Matching and Interest Rate Risk Management," and "Capital Management." In
addition, we remain well within our line of credit financial covenants. See
"Liquidity and Capital Resources-Financing Cash Flows."

Contingencies and Litigation

See Item 1, "Financial Statements-Notes to Unaudited Condensed Consolidated Financial Statements-Note 10-Commitments and Contingencies."

Off-Balance Sheet Arrangements

See discussion of loan commitments, "Liquidity and Capital Resources-Investing Cash Flows-Commercial Mortgage Loans."

Insolvency Assessments


Insolvency regulations exist in many of the jurisdictions in which our
subsidiaries do business. Such regulations may require insurance companies
operating within the jurisdiction to participate in guaranty associations. The
associations levy assessments against their members for the purpose of paying
benefits due to policyholders of impaired or insolvent insurance companies.
Association assessments levied against us from January 1, 2010 through
September 30, 2012 aggregated $1.2 million. At September 30, 2012, we maintained
a reserve of $0.5 million for future assessments with respect to currently
impaired, insolvent or failed insurers.

Statutory Financial Accounting

Standard and The Standard Life Insurance Company of New York prepare their
statutory financial statements in accordance with accounting practices
prescribed or permitted by their states of domicile. Prescribed statutory
accounting practices include state laws, regulations and general administrative
rules, as well as the Statements of Statutory Accounting Principles set forth in
publications of the National Association of Insurance Commissioners.

The following table sets forth the difference between the statutory net gains
from insurance operations before federal income taxes and net capital gains and
losses ("Statutory Results") and GAAP income before income taxes excluding net
capital gains and losses ("Adjusted GAAP Results"):



                                       Three Months Ended                            Nine Months Ended
                                          September 30,                                September 30,
                                                            Dollar                                         Dollar
                                2012           2011         Change          2012            2011           Change
                                                                 (In millions)
Statutory Results            $     76.5     $     68.1     $     8.4     $     149.6     $     144.4      $     5.2
Adjusted GAAP Results              63.9           58.3           5.6           138.4           147.9           (9.5 )

Difference                   $     12.6     $      9.8     $     2.8     $      11.2     $      (3.5 )    $    14.7



The increases in Statutory Results for the third quarter and first nine months
of 2012 compared to the same periods of 2011 were primarily due to more
favorable claim recoveries and an improvement in claims incidence in the group
long term disability insurance business. Partially offsetting the favorable
claim recoveries and improved claims incidence was the 75 basis point decrease
in the statutory discount rate used for newly established long term disability
claim reserves from 4.00% for the third quarter of 2011, to 3.25% for the third
quarter of 2012.

The increases in the difference between the Statutory Results and Adjusted GAAP
Results for the third quarter and first nine months of 2012 compared to the same
periods of 2011 were primarily due to differences in the prescribed accounting
treatments between GAAP and Statutory for the changes in the fair value of our
S&P 500 Index Options, reinsurance ceding commission, the discount rate used for
newly established long term disability claim reserves, net income or loss from
the holding company and non-insurance subsidiaries, and DAC.



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The following table sets forth statutory capital and the associated asset
valuation reserve:



                                                 September 30,       December 31,        Percent
                                                      2012               2011            Change
                                                              (Dollars in millions)
Statutory capital adjusted to exclude asset
valuation reserves for our regulated
insurance subsidiaries                           $      1,374.0      $     1,300.3           5.7  %
Asset valuation reserve                                   116.7              107.2            8.9


Accounting Pronouncements

See Item 1, "Financial Statements-Notes to Unaudited Condensed Consolidated Financial Statements-Note 11-Accounting Pronouncements."

Critical Accounting Policies and Estimates


Our consolidated financial statements and certain disclosures made in this Form
10-Q have been prepared in accordance with GAAP and require us to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosures of contingent assets and contingent liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. The estimates most susceptible to material changes due to
significant judgment (identified as the "critical accounting policies") are
those used in determining investment valuations, DAC, VOBA and other intangible
assets, the reserves for future policy benefits and claims, pension and
postretirement benefit plans and the provision for income taxes. The results of
these estimates are critical because they affect our profitability and may
affect key indicators used to measure our performance. These estimates have a
material effect on our results of operations and financial condition.

Investment Valuations

Fixed Maturity Securities


Fixed maturity security capital gains and losses are recognized using the
specific identification method. If a debt security's fair value declines below
its amortized cost, we must assess the security's impairment to determine if the
impairment is other than temporary.

In our quarterly fixed maturity security impairment analysis, we evaluate whether a decline in value of the fixed maturity security is other than temporary by considering the following factors:

  •   The nature of the fixed maturity security.


  •   The duration until maturity.


  •   The duration and extent the fair value has been below amortized cost.


  •   The financial quality of the issuer.

• Estimates regarding the issuer's ability to make the scheduled payments

        associated with the fixed maturity security.


   •    Our intent to sell or whether it is more likely than not we will be
        required to sell a fixed maturity security before recovery of the

security's cost basis through the evaluation of facts and circumstances

including, but not limited to, decisions to rebalance our portfolio,

current cash flow needs and sales of securities to capitalize on favorable

pricing.



If it is determined an OTTI exists, we separate the OTTI of debt securities into
an OTTI related to credit loss and an OTTI related to noncredit loss. The OTTI
related to credit loss represents the portion of losses equal to the difference
between the present value of expected cash flows, discounted using the
pre-impairment yields, and the amortized cost basis. All other changes in value
represent the OTTI related to noncredit loss. The OTTI related to credit loss is
recognized in earnings in the current period, while the OTTI related to
noncredit loss is deemed recoverable and is recognized in other comprehensive
income. The cost basis of the fixed maturity security is permanently adjusted to
reflect the credit related impairment. Once an impairment charge has been
recorded, we continue to review the OTTI securities for further potential
impairment.

We maintain an internally identified list of securities with characteristics
that could indicate potential impairment ("watch list"). At September 30, 2012,
our fixed maturity securities watch list totaled $5.3 million at fair value and
$6.2 million at amortized cost. We recorded $0.7 million and $3.2 million of
OTTI related to credit loss due to impairments for the third quarter and first
nine months of 2012, compared to credit losses of $0.3 million and $1.7 million
of OTTI for the third quarter and first nine months of 2011, respectively. We
recorded no OTTI related to noncredit loss for the third quarter and first nine
months of 2012 and 2011. See Item 1, "Financial Statements-Notes to Unaudited
Consolidated Financial Statements-Note 7-Investments" for further disclosures.

We will continue to evaluate our holdings; however, we currently expect the fair
values of our investments to recover either prior to their maturity dates or
upon maturity. Should the credit quality of our fixed maturity securities
significantly decline, there could be a material adverse effect on our business,
financial position, results of operations or cash flows.

In conjunction with determining the extent of credit losses associated with debt
securities, we utilize certain information in order to determine the present
value of expected cash flows discounted using pre-impairment yields. Some of
these input factors include, but are not limited to, original scheduled
contractual cash flows, current market spread information, risk-free rates,
fundamentals of the industry and sector in which the issuer operates, and
general market information.

Fixed maturity securities are classified as available-for-sale and are carried
at fair value on the consolidated balance sheet. See Item 1, "Financial
Statements-Notes to Unaudited Consolidated Financial Statements-Note 6-Fair
Value" for a detailed explanation of the valuation methods we use to calculate
the fair value of our financial instruments. Valuation adjustments for fixed
maturity securities not accounted for as OTTI are reported as net increases or
decreases to other comprehensive income (loss), net of tax, on the consolidated
statements of comprehensive income.



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Commercial Mortgage Loans


The carrying value of commercial mortgage loans represents the outstanding
principal balance less a loan loss allowance for probable uncollectible amounts.
The commercial mortgage loan loss allowance is estimated based on evaluating
known and inherent risks in the loan portfolio and consists of a general loan
loss allowance and a specific loan loss allowance. The general loan loss
allowance is based on our analysis of factors including changes in the size and
composition of the loan portfolio, actual loan loss experience and individual
loan analysis. An impaired commercial mortgage loan is a loan that is not
performing to the contractual terms of the loan agreement. A specific allowance
for losses is recorded when a loan is considered to be impaired. We also hold
specific allowances for losses on certain performing loans that we continue to
monitor and evaluate. Impaired commercial mortgage loans without specific
allowances for losses are those for which we have determined that it remains
probable that we will collect all amounts due. In addition, for impaired
commercial mortgage loans, we evaluate the loss to dispose of the underlying
collateral, any significant out of pocket expenses the loan may incur, the
loan-to-value ratio and other quantitative information we have concerning the
loan. Portions of loans that are deemed uncollectible are generally written off
against the allowance, and recoveries, if any, are credited to the allowance.
See "Liquidity and Capital Resources-Investing Cash Flows-Commercial Mortgage
Loans."

Real Estate

Real estate is comprised of two components: real estate investments and real estate owned.


Our real estate investments are stated at cost less accumulated depreciation.
Generally, we depreciate this real estate using the straight-line depreciation
method with property lives varying from 30 to 40 years.

We record impairments when it is determined that the decline in fair value of an
investment below its carrying value is other than temporary. The impairment loss
is charged to net capital losses, and the cost basis of the investment is
permanently adjusted to reflect the impairment.

Real estate owned is initially recorded at the lower of cost or estimated net
realizable value, which includes an estimate for disposal costs. This amount may
be adjusted in a subsequent period as additional information is received. Our
real estate owned is initially considered an investment held for sale and is
expected to be sold within one year from acquisition. For any real estate
expected to be sold, an impairment charge is recorded if we do not expect the
investment to recover its carrying value prior to the expected date of sale.
Once an impairment charge has been recorded, we continue to review the
investment for further potential impairment.

Total real estate was $101.5 million at September 30, 2012, compared to $92.7
million at December 31, 2011. The $8.8 million increase in total real estate
during the first nine months of 2012 was primarily due to a $9.5 million net
increase in real estate owned that was acquired in satisfaction of debt through
foreclosure or the acceptance of deeds in lieu of foreclosure on commercial
mortgage loans.

All Other Investments


All other investments include tax-advantaged investments, derivative financial
instruments and policy loans. Valuation adjustments for these investments are
recognized using the specific identification method.

Tax-advantaged investments are accounted for under the equity method of
accounting. These investments are structured as limited partnerships for the
purpose of investing in the construction and rehabilitation of low-income
housing and to provide favorable returns to investors. We have invested in
tax-advantaged investments due to the attractive returns associated with these
investments relative to their perceived risk. The primary sources of investment
return are tax credits and the tax benefits derived from passive losses on the
investments, both of which may exhibit variability over the life of the
investment. Tax credits received from these investments are reported in our
consolidated statements of income as either a reduction of state premium taxes,
or a reduction of income tax. Our share of the operating losses of the limited
partnerships decrease our basis in the investments and are reported as a
component of net investment income.

If the net present value of expected future cash flows of the investments is
less than the current book value of the investments, we evaluate whether a
decline in value is other than temporary. If it is determined an OTTI exists,
the investment is written down to the net present value of expected future cash
flows and the OTTI is recognized in net capital losses.

Derivative financial instruments are carried at fair value, and valuation adjustments are reported as a component of net investment income. See "Note 8-Derivative Financial Instruments."

Policy loans are stated at their aggregate unpaid principal balances and are secured by policy cash values.

Net investment income and capital gains and losses related to separate account assets and liabilities are included in the separate account assets and liabilities.

DAC, VOBA and Other Intangible Assets

DAC, VOBA and other acquisition related intangible assets are generally originated through the issuance of new business or the purchase of existing business, either by purchasing blocks of insurance policies from other insurers or by the outright purchase of other companies. Our intangible assets are subject to impairment tests on an annual basis or more frequently if circumstances indicate that carrying values may not be recoverable.

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In October 2010, the FASB issued ASU No. 2010-26, Accounting for Costs
Associated with Acquiring or Renewing Insurance Contracts. ASU No. 2010-26
amends the codification guidance for insurance entities to eliminate the
diversity of accounting treatment related to deferred acquisition costs. We have
adopted this standard retrospectively as of January 1, 2012, and comparative
financial statements of prior periods have been adjusted.

The following table sets forth the balances of DAC, VOBA and other intangible
assets:



                                         September 30,                   December 31,                 Percent
                                              2012                           2011                     Change

                                                                (Dollars in millions)
DAC                                 $                   280.5         $            274.4                       2.2  %
VOBA                                                     23.8                       26.4                      (9.8 )
Other intangible assets                                  39.7                       44.1                     (10.0 )

Total DAC, VOBA and other
intangible assets                   $                   344.0         $            344.9                      (0.3 )



We defer certain acquisition costs that vary with and are directly related to
the origination of new business and placing that business in force. Certain
costs related to obtaining new business and acquiring business through
reinsurance agreements have been deferred and will be amortized to accomplish
matching against related future premiums or gross profits as appropriate. The
Company normally defers certain acquisition-related commissions and incentive
payments, certain costs of policy issuance and underwriting, and certain
printing costs. Assumptions used in developing DAC and amortization amounts each
period include the amount of business in force, expected future persistency,
withdrawals, interest rates and profitability. These assumptions are modified to
reflect actual experience when appropriate. Additional amortization of DAC is
charged to current earnings to the extent it is determined that future premiums
or gross profits are not adequate to cover the remaining amounts deferred.
Changes in actual persistency are reflected in the calculated DAC balance. Costs
that are not directly associated with the acquisition of new business are not
deferred as DAC and are charged to expense as incurred. Generally, annual
commissions are considered expenses and are not deferred.

DAC for group and individual disability insurance products and group life
insurance products is amortized over the life of related policies in proportion
to future premiums. We amortize DAC for group disability and life insurance
products over the initial premium rate guarantee period, which averages 2.5
years. DAC for individual disability insurance products is amortized in
proportion to future premiums over the life of the contract, averaging 20 to 25
years with approximately 50% and 75% expected to be amortized by years 10 and
15, respectively.

Our individual deferred annuities and group annuity products are classified as
investment contracts. DAC related to these products is amortized over the life
of related policies in proportion to expected gross profits. For our individual
deferred annuities, DAC is generally amortized over 30 years with approximately
55% and 95% expected to be amortized by years 5 and 15, respectively. DAC for
group annuity products is amortized over 10 years with approximately 80%
expected to be amortized by year five.

VOBA primarily represents the discounted future profits of business assumed
through reinsurance agreements. We have established VOBA for a block of
individual disability business assumed from Minnesota Life and a block of group
disability and group life business assumed from Teachers Insurance and Annuity
Association of America ("TIAA"). VOBA is generally amortized in proportion to
future premiums for group and individual disability insurance products and group
life products. However, the VOBA related to the TIAA transaction associated with
an in force block of group long term disability claims for which no ongoing
premium is received is amortized in proportion to expected gross profits. If
actual premiums or future profitability are inconsistent with our assumptions,
we could be required to make adjustments to VOBA and related amortization.
During the first quarter of 2012, we recorded a $0.8 million impairment to VOBA
due to experience related to the block of claims assumed from TIAA. The VOBA
associated with the TIAA transaction is amortized in proportion to expected
gross profits with an amortization period of up to 20 years. For the VOBA
associated with the Minnesota Life block of business assumed, the amortization
period is up to 30 years and is amortized in proportion to future premiums. The
accumulated amortization of VOBA was $65.0 million and $62.4 million at
September 30, 2012 and December 31, 2011, respectively.

The following table sets forth the amount of DAC and VOBA balances amortized in
proportion to expected gross profits and the percentage of the total balance of
DAC and VOBA amortized in proportion to expected gross profits:



                       September 30, 2012                  December 31, 2011
                    Amount           Percent            Amount           Percent

                                       (Dollars in millions)
          DAC    $       57.1             20.4  %    $       60.7             22.1  %
          VOBA            6.0             25.2                7.1             26.9




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Key assumptions, which will affect the determination of expected gross profits for determining DAC and VOBA balances, are:

• Persistency.

• Interest rates, which affect both investment income and interest credited.


  •   Stock market performance.


  •   Capital gains and losses.


  •   Claim termination rates.


  •   Amount of business in force.


These assumptions are modified to reflect actual experience when appropriate.
Although a change in a single assumption may have an impact on the calculated
amortization of DAC or VOBA for balances associated with investment contracts,
it is the relationship of that change to the changes in other key assumptions
that determines the ultimate impact on DAC or VOBA amortization. Because actual
results and trends related to these assumptions vary from those assumed, we
revise these assumptions annually to reflect our current best estimate of
expected gross profits. As a result of this process, known as "unlocking," the
cumulative balances of DAC and VOBA are adjusted with an offsetting benefit or
charge to income to reflect changes in the period of the revision. An unlocking
event that results in an after-tax benefit generally occurs as a result of
actual experience or future expectations being favorable compared to previous
estimates. An unlocking event that results in an after-tax charge generally
occurs as a result of actual experience or future expectations being unfavorable
compared to previous estimates. As a result of unlocking, the amortization
schedule for future periods is also adjusted.

The following table sets forth the impact of unlocking on DAC and VOBA balances:



                                   Three Months Ended             Nine Months Ended
                                      September 30,                 September 30,
                                  2012            2011          2012             2011
                                                     (In millions)
     Decrease to DAC and VOBA   $     0.3       $     0.2     $     1.4       $      0.8


Significant, unanticipated changes in key assumptions, which affect the
determination of expected gross profits, may result in a large unlocking event
that could have a material adverse effect on our financial position or results
of operations. However, future changes in DAC and VOBA balances due to changes
in underlying assumptions are not expected to be material.

Our other intangible assets are subject to amortization and consist of certain
customer lists from Asset Management business acquired and an individual
disability marketing agreement. Customer lists have a combined estimated
weighted-average remaining life of approximately 7.6 years. The marketing
agreement accompanied the Minnesota Life transaction and provides access to
Minnesota Life agents, some of whom now market Standard's individual disability
insurance products. The Minnesota Life marketing agreement will be fully
amortized by the end of 2023. The accumulated amortization of other intangible
assets was $35.0 million and $30.6 million at September 30, 2012 and
December 31, 2011, respectively.

Reserves for Future Policy Benefits and Claims


Reserves include policy reserve liabilities and claim reserve liabilities and
represent amounts to pay future benefits and claims. Claim reserve liabilities
are for claims that have been incurred or are estimated to have been incurred
but not yet reported to us. Policy reserve liabilities reflect our best estimate
of assumptions at the time of policy issuance including adjustments for adverse
deviations in actual experience.

The following table sets forth total reserve balances by reserve type:



                               September 30,              December 31,
                                   2012                        2011
                                             (In millions)
         Reserves:
         Policy reserves   $             1,072.2     $                1,061.2
         Claim reserves                  4,749.3                      4,622.4


         Total reserves    $             5,821.5     $                5,683.6



Developing the estimates for reserves, and thus the resulting impact on
earnings, requires varying degrees of subjectivity and judgment, depending upon
the nature of the reserve. For most of our reserves, the reserve calculation
methodology is prescribed by various accounting and actuarial standards,
although judgment is required in the determination of assumptions used in the
calculation. We also hold reserves that lack a prescribed methodology but
instead are determined by a formula that we have developed based on our own
experience. Because this type of reserve requires a higher level of subjective
judgment, we closely monitor its adequacy. These reserves are primarily incurred
but not reported ("IBNR") claim reserves associated with our disability
products. Finally, a small amount of reserves is held based entirely upon
subjective judgment. These reserves are generally set up as a result of unique
circumstances that are not expected to continue far into the future and are
released according to pre-established conditions and timelines.



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The following table sets forth total reserve balances by calculation
methodology:



                                       September 30,           Percent            December 31,           Percent
                                           2012               of Total                2011              of Total
                                                                  (Dollars in millions)
Reserves:
Reserves determined through
prescribed methodology                $       5,170.8                88.8 %      $      5,056.6                89.0 %
Reserves determined by
internally-developed formulas                   641.6                11.0                 620.7                10.9
Reserves based on subjective
judgment                                          9.1                 0.2                   6.3                 0.1


Total reserves                        $       5,821.5               100.0 %      $      5,683.6               100.0 %



Policy Reserves

Policy reserves include reserves established for individual disability
insurance, individual and group immediate annuity businesses and individual life
insurance. Policy reserves are calculated using our best estimates of
assumptions and considerations at the time the policy was issued, adjusted for
the effect of adverse deviations in actual experience. These assumptions are not
subsequently modified unless policy reserves become inadequate, at which time we
may need to change assumptions to increase reserves. We maintain a policy
reserve for as long as a policy is in force, even after a separate claim reserve
is established.

The following table sets forth policy reserves by block of business:



                                                 September 30,                   December 31,
                                                      2012                            2011
                                                                  (In millions)
Policy reserves:
Individual disability insurance               $               229.2         $                  219.8
Individual and group immediate annuity
businesses                                                    241.2                            244.2
Individual life insurance                                     601.8                            597.2


Total policy reserves                         $             1,072.2         $                1,061.2



Individual disability insurance.  Policy reserves for our individual disability
block of business are established at the time of policy issuance using the net
level premium method as prescribed by GAAP and represent the current value of
projected future benefits including expenses less projected future premium.
Assumptions used to calculate individual disability policy reserves may vary by
the age, gender and occupation class of the insured, the year of policy issue
and specific contract provisions and limitations.

Individual disability policy reserves are sensitive to assumptions and considerations regarding:

  •   Claim incidence rates.


  •   Claim termination rates.

• Discount rates used to value expected future claim payments and premiums.


  •   Persistency rates.

• The amount of monthly benefit paid to the insured less reinsurance

        recoveries and other offsets.


  •   Expense rates including inflation.


Individual and group immediate annuity businesses.  Policy reserves for our
individual and group immediate annuity blocks of business are established at the
time of policy issue and represent the present value of future payments due
under the annuity contracts. The contracts are single premium contracts, and,
therefore, there is no projected future premium. Assumptions used to calculate
immediate annuity policy reserves may vary by the age and gender of the
annuitant and year of policy issue.

Immediate annuity policy reserves are sensitive to assumptions and considerations regarding:

  •   Annuitant mortality rates.


  •   Discount rates used to value expected future annuity payments.


Individual life insurance.  Effective January 1, 2001, substantially all of our
individual life policies and the associated reserves were ceded to Protective
Life Insurance Company ("Protective Life") under a reinsurance agreement. If
Protective Life were to become unable to meet its obligations, Standard would
retain the reinsured liabilities. Therefore, the associated reserves remain on
Standard's consolidated balance sheets and an equal amount is recorded as a
recoverable from the reinsurer. We also retain a small number of individual
policies arising out of individual conversions from our group life policies.



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Claim Reserves


Claim reserves are established when a claim is incurred or is estimated to have
been incurred but not yet reported to us and, as prescribed by GAAP, equal our
best estimate of the present value of the liability of future unpaid claims and
claim adjustment expenses. Reserves for IBNR claims are determined using our
experience and consider actual historical incidence rates, claim-reporting
patterns and the average cost of claims. The IBNR claim reserves are calculated
using a company derived formula based primarily upon premiums, which is
validated through a close examination of reserve run-out experience. The claim
reserves are related to group and individual disability insurance and group life
insurance products offered by our Insurance Services segment.

Claim reserves are subject to revision based on credible changes in claim
experience and expectations of future factors that may influence claim
experience. During each quarter, we monitor our emerging claim experience to
ensure that the claim reserves remain appropriate. We make adjustments to our
assumptions based on emerging trends that are credible and are expected to
persist, and expectations of future factors that may influence our claim
experience. Assumptions used to calculate claim reserves may vary by the age,
gender and occupation class of the claimant, the year the claim was incurred,
time elapsed since disablement, and specific contract provisions and
limitations.

The following table sets forth total claim reserves by block of business:



                                                 September 30,                     December 31,
                                                      2012                              2011
                                                                  (In millions)
Claim reserves:
Group disability insurance                  $                 3,238.2         $                3,135.2
Individual disability insurance                                 740.4                            721.8
Group life insurance                                            770.7                            765.4


Total claim reserves                        $                 4,749.3         $                4,622.4


Group and individual disability insurance. Claim reserves for our disability products are sensitive to assumptions and considerations regarding:

  •   Claim incidence rates for IBNR claim reserves.


  •   Claim termination rates.


  •   Discount rates used to value expected future claim payments.

• The amount of monthly benefit paid to the insured less reinsurance

        recoveries and other offsets.


  •   Expense rates including inflation.


  •   Historical delay in reporting of claims incurred.


Certain of these factors could be materially affected by changes in social
perceptions about work ethics, emerging medical perceptions and legal
interpretations regarding physiological or psychological causes of disability,
emerging or changing health issues and changes in industry regulation. If there
are changes in one or more of these factors or if actual claims experience is
materially inconsistent with our assumptions, we could be required to change our
reserves.

Group life insurance.  Claim reserves for our group life products are
established for death claims reported but not yet paid, IBNR for death and
waiver claims and waiver of premium benefits. The death claim reserve is based
on the actual amount to be paid. The IBNR claim reserves are calculated using
historical information, and the waiver of premium benefit is calculated using a
tabular reserve method that takes into account company experience and published
industry tables.

Trends in Key Assumptions

Key assumptions affecting our reserve calculations are:

  •   The discount rate.


  •   The claim termination rate.

• The claim incidence rate for policy reserves and IBNR claim reserves.

The following table sets forth the discount rate used for newly incurred long term disability claim reserves and life waiver reserves:



                                           Three Months Ended
                     September 30,              June 30,              September 30,
                         2012                     2012                    2011
  Discount rate                 4.00  %                 4.00  %                  5.00  %




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Reserve discount rates for newly incurred claims are reviewed quarterly and, if
necessary, are adjusted to reflect our current and expected new investment
yields. The discount rate is based on the average rate we received on newly
invested assets during the previous 12 months, less a margin. We also consider
our average investment yield and average discount rate on our entire block of
claims when deciding whether to increase or decrease the discount rate. The 100
basis point decrease in the discount rate for the third quarter of 2012 compared
to the third quarter of 2011 was primarily the result of a continued low
interest rate environment and fewer investments in high yielding tax-advantage
investments. A 25 basis point decrease in the discount rate for newly incurred
claims results in a corresponding decrease in quarterly pre-tax income of $1.8
million. We do not adjust group insurance premium rates based on short-term
fluctuations in investment yields. Any offsetting adjustments of group insurance
premium rates due to sustained changes in investment yields can take from one to
three years given that most new contracts have rate guarantees in place.

Claim termination rates can vary widely from quarter to quarter. The claim
termination assumptions used in determining our reserves represent our
expectation for claim terminations over the life of our block of business and
will vary from actual experience in any one quarter. While we have experienced
some variation in our claim termination experience, we did not see any prolonged
or systemic change in the third quarter of 2012 that would indicate a sustained
underlying trend that would affect the claim termination rates used in the
calculation of reserves.

The claims incidence rate for policy reserves and IBNR claim reserves can also
fluctuate widely from quarter to quarter and tends to be more stable when
measured over a longer period of time. While we continue to see improvement in
claims incidence, the levels remain high when compared to historical levels.

As a result of studies of our long-term trends compared to reserving assumptions
for our group long term disability insurance, we increased IBNR claim reserves
totaling $3.7 million during the third quarter of 2012. We did not release any
IBNR claim reserves during the third quarter of 2011.

We evaluate the claim termination rate assumptions for the reserves on a small
Minnesota Life block of individual disability claims annually. These assumptions
were refined in the third quarter of 2012, resulting in an increase in reserves
of $4.9 million. Our block of business is relatively small, and as a result, we
view a blend of established industry tables and our own experience as a more
appropriate method for establishing reserve levels compared solely to our own
experience. We will continue to monitor the credibility of our developing
experience and the use of available industry tables, and if necessary, will
adjust reserves accordingly. We also refined our reserve calculation for certain
other individual disability reserves in the third quarter of 2012, which
resulted in a net decrease in our individual disability reserves of $1.1
million. The combination of these adjustments resulted in a net increase to
individual disability reserves of $3.8 million. Reserve adjustments made in the
third quarter of 2011 totaled $3.6 million.

We monitor the adequacy of our reserves relative to our key assumptions. In our
estimation, scenarios based on reasonably possible variations in claim
termination assumptions could produce a percentage change in reserves for our
group insurance lines of business of approximately +/-0.2% or $8.0 million.
However, given that claims experience can fluctuate widely from quarter to
quarter, significant unanticipated changes in claim termination rates over time
could produce a change in reserves for our group insurance lines outside of this
range.

Pension and Postretirement Benefit Plans


We have two non-contributory defined benefit pension plans: the employee pension
plan and the agent pension plan. The employee pension plan is for all eligible
employees and the agent pension plan is for former field employees and agents.
The defined benefit pension plans provide benefits based on years of service and
final average pay. Participation in the defined benefit pension plans is
generally limited to eligible employees whose date of employment began before
2003. These plans are sponsored by Standard and administered by Standard
Retirement Services, Inc. and are closed for new participants.

We also have a postretirement benefit plan that includes medical and
prescription drug benefits. A group term life insurance benefit was curtailed as
of December 31, 2011. Eligible retirees are required to contribute specified
amounts for medical and prescription drug benefits that are determined
periodically and are based on retirees' length of service and age at retirement.
Participation in the postretirement benefit plan is limited to employees who had
reached the age of 40 or whose combined age and length of service was equal to
or greater than 45 years as of January 1, 2006. This plan is sponsored and
administered by Standard and is closed for new participants.

In addition, eligible executive officers are covered by a non-qualified supplemental retirement plan.


We are required to recognize the funded status of our pension and postretirement
benefit plans as an asset or liability on the balance sheet. For pension plans,
this is measured as the difference between the plan assets at fair value and the
projected benefit obligation as of the year-end balance sheet date. For our
postretirement plan, this is measured as the difference between the plan assets
at fair value and the accumulated benefit obligation as of the year-end balance
sheet date. Unrecognized actuarial gains or losses, prior service costs or
credits, and transition assets are amortized, net of tax, out of accumulated
other comprehensive income or loss as components of net periodic benefit cost.

In accordance with the accounting principles related to our pension and other postretirement plans, we are required to make a significant number of assumptions in order to calculate the related liabilities and expenses each period. The major assumptions that affect net periodic benefit cost and the funded status of the plans include the weighted-average discount rate, the expected return on plan assets, and the rate of compensation increase.


The weighted-average discount rate is an interest assumption used to convert the
benefit payment stream to present value. The discount rate is selected based on
the yield of a portfolio of high quality corporate bonds with durations that are
similar to the expected distributions from the employee benefit plan.

The expected return on plan assets assumption is the best long-term estimate of
the average annual return that will be produced from the pension trust assets
until current benefits are paid. Our expectations for the future investment
returns of the asset categories are based on a combination of historical and
projected market performance. The expected return for the total portfolio is
calculated based on each plan's strategic asset allocation.



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The long-term rate of return for the employee pension plan portfolio is derived
by calculating the average return for the portfolio monthly, from 1971 to the
present, using the average mutual fund manager returns in each asset category,
weighted by the target allocation to each category.

The rate of compensation increase is a long-term assumption that is based on an
estimated inflation rate in addition to merit and promotion-related compensation
increase components.

For the postretirement benefit plan, the assumed health care cost trend rates
are also major assumptions that affect expenses and liabilities. Assumed health
care cost trend rates have a significant effect on the amounts reported for the
health care plans. A one-percentage-point change in assumed health care cost
trend rates would have the following effects:



                                                  1% Point                           1% Point
                                                  Increase                           Decrease
                                                                  (In millions)
Effect on total of service and
interest cost                               $                 0.5            $                   (0.4 )
Effect on postretirement benefit
obligation                                                    7.1                                (5.6 )


Our discount rate assumption is reviewed annually, and we use a December 31 measurement date for each of our plans. For more information concerning our pension and postretirement plans, see Item 1, "Financial Statements-Notes to Unaudited Condensed Consolidated Financial Statements-Note 4-Retirement Benefits."

Income Taxes


We file a U.S. consolidated income tax return that includes all subsidiaries.
Our U.S. income tax is calculated using regular corporate income tax rates on a
tax base determined by laws and regulations administered by the Internal Revenue
Service ("IRS"). We also file corporate income tax returns in various states.
The provision for income taxes includes amounts currently payable and deferred
amounts that result from temporary differences between financial reporting and
tax basis of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply when the temporary
differences are expected to reverse.

GAAP requires management to use a more likely than not standard to evaluate
whether, based on available evidence, each deferred tax asset will be realized.
A valuation allowance is recorded to reduce a deferred tax asset to the amount
expected to be realized. We have recorded a deferred tax asset for certain loss
carry forwards. Realization is dependent on generating sufficient taxable income
prior to expiration of the loss carryforwards. Although realization is not
assured, management believes it is more likely than not that all of the deferred
tax assets without a valuation allowance will be realized. The amount of the
deferred tax asset considered realizable is evaluated at least annually and
could be reduced if estimates of future taxable income during the carryforward
period are reduced.

Management is required to determine whether tax return positions are more likely than not to be sustained upon audit by taxing authorities. Tax benefits of uncertain tax positions, as determined and measured by this interpretation, cannot be recognized in our financial statements.

We record income tax interest and penalties in the income tax provision according to our accounting policy.

Currently, years 2009 through 2011 are open for audit by the IRS.

Forward-looking Statements


Some of the statements contained in this Form 10-Q, including those relating to
our strategy, growth prospects and other statements that are predictive in
nature, that depend on or refer to future events or conditions or that include
words such as "expects," "anticipates," "intends," "plans," "believes,"
"estimates," "seeks" and similar expressions, are forward-looking statements
within the meaning of Section 21E of the Exchange Act, as amended. These
statements are not historical facts but instead represent only management's
expectations, estimates and projections regarding future events. Similarly,
these statements are not guarantees of future performance and involve
uncertainties that are difficult to predict, which may include, but are not
limited to, the factors discussed below. As a provider of financial products and
services, our results of operations may vary significantly in response to
economic trends, interest rate changes, investment performance and claims
experience. Caution should be used when extrapolating historical results or
conditions to future periods.

Our actual results and financial condition may differ, perhaps materially, from
the anticipated results and financial condition in any such forward-looking
statements. Because such statements are subject to risks and uncertainties,
actual results in future periods may differ materially from those expressed or
implied by such forward-looking statements. Given these uncertainties or
circumstances, readers are cautioned not to place undue reliance on such
statements. We assume no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.

The following factors could cause results to differ materially from management expectations as suggested by such forward-looking statements:

• Growth of sales, premiums, annuity deposits, cash flows, assets under

administration including performance of equity investments in the separate

        account, gross profits and profitability.




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   •    Availability of capital required to support business growth and the
        effective utilization of capital, including our ability to achieve
        financing through debt or equity.


   •    Changes in our liquidity needs and the liquidity of assets in our
        investment portfolios.

• Integration and performance of business acquired through reinsurance or

        acquisition.


  •   Changes in financial strength and credit ratings.


   •    Changes in the regulatory environment at the state or federal level
        including changes in income tax rates and regulations or changes in U.S.
        GAAP accounting principles, practices or policies.


  •   Findings in litigation or other legal proceedings.

• Intent and ability to hold investments consistent with our investment

        strategy.


  •   Receipt of dividends from, or contributions to, our subsidiaries.

• Adequacy of the diversification of risk by product offerings and customer

industry, geography and size, including concentration of risk, especially

        inherent in group life products.


  •   Adequacy of asset-liability management.

• Events of terrorism, natural disasters or other catastrophic events,

including losses from a disease pandemic.

• Benefit ratios, including changes in claims incidence, severity and

        recovery.


  •   Levels of persistency.


  •   Adequacy of reserves established for future policy benefits.

• The effect of changes in interest rates on reserves, policyholder funds,

investment income and commercial mortgage loan prepayment fees.

• Levels of employment and wage growth and the impact of rising benefit costs

on employer budgets for employee benefits.

• Competition from other insurers and financial services companies, including

        the ability to competitively price our products.


  •   Ability of reinsurers to meet their obligations.


   •    Availability, adequacy and pricing of reinsurance and catastrophe
        reinsurance coverage and potential charges incurred.


  •   Achievement of anticipated levels of operating expenses.

• Adequacy of diversification of risk within our fixed maturity securities

portfolio by industries, issuers and maturities.

• Adequacy of diversification of risk within our commercial mortgage loan

        portfolio by borrower type, property type and geographic region.


  •   Credit quality of the holdings in our investment portfolios.

• The condition of the economy and expectations for interest rate changes.

• The effect of changing levels of commercial mortgage loan prepayment fees

and participation levels on cash flows.

• Experience in delinquency rates or loss experience in our commercial

        mortgage loan portfolio.


  •   Adequacy of commercial mortgage loan loss allowance.

• Concentration of commercial mortgage loan assets collateralized in certain

        states such as California.


  •   Concentration of commercial mortgage loan assets by borrower.

• Environmental liability exposure resulting from commercial mortgage loan

and real estate investments.

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