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STANCORP FINANCIAL GROUP INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Online, Inc.
The following management assessment of the financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes thereto contained in Item 8, "Financial Statements
and Supplementary Data." Our consolidated financial statements and certain
disclosures made in this Form 10-K 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 and
accumulated other comprehensive income ("AOCI") are non-GAAP measures. To
provide investors with a broader understanding of earnings, the Company provides
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.

Management believes that measuring net income per diluted share excluding AOCI
is important to investors because the turnover of the Company's portfolio of
fixed maturity securities may not be such that unrealized gains and losses
reflected in AOCI are ultimately realized. Furthermore, management believes
exclusion of AOCI provides investors with a better measure of return.

This management's discussion and analysis of financial condition and results of operations contain forward looking statements. See Part I, Item 1A, "Risk Factors-Forward-Looking Statements."



Executive Summary

Financial Results Overview

The following table sets forth selected consolidated financial results:



                                                                  Years ended
                                                                 December 31,
(Dollars in millions except per share
data)                                          2012                  2011                  2010
Net income                                 $       138.5         $       136.7         $       185.9
After-tax net capital losses                        (5.4 )                (4.5 )               (32.1 )

Net income excluding after-tax net
capital losses                             $       143.9         $       

141.2 $ 218.0


Diluted earnings per common share:
Net income                                 $        3.12         $        3.04         $        3.95
After-tax net capital losses                       (0.12 )               (0.10 )               (0.68 )

Net income excluding after-tax costs
net capital losses                         $        3.24         $        

3.14 $ 4.63


Diluted weighted-average common
shares outstanding                            44,359,891            45,016,070            47,006,228




The increase in GAAP results for 2012 compared to 2011 was primarily due to
higher net investment income from bond call premiums and commercial mortgage
loan prepayment fee revenues, higher premiums for the Insurance Services
segment, a lower effective income tax rate and higher earnings in the Company's
Asset Management segment. The increase was partially offset by a comparatively
higher group insurance benefit ratio as a result of a 95 basis point lower
average discount rate used for newly established long term disability claim
reserves.

The decrease in GAAP results for 2011 compared to 2010 was primarily due to a
comparatively higher benefit ratio in our Insurance Services segment as a result
of higher claims incidence in our group insurance business, partially offset by
higher earnings in our Asset Management segment. Diluted earnings per common
share for 2011 reflected the effect of a decrease in diluted weighted-average
common shares outstanding, which was primarily due to share repurchases.



                       22   STANCORP FINANCIAL GROUP, INC.

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Outlook for 2013

As we reflect on 2012, we were confronted with macro-economic factors that have
challenged the growth of our business over the past few years. A persistent low
interest rate environment has driven pricing changes in a very price sensitive
group insurance marketplace. In addition, high levels of unemployment and its
impact on the wage and employment growth of our customers, specifically in the
state and local public and education sectors, has led to a lack of organic
growth within our book of business. Despite these challenges we will continue to
focus on our long-term objectives and address challenges that arise with
financial discipline and from a position of financial strength. 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 intend to remain focused on preserving the value of our business by
continuing to provide excellent service to our customers. 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. We believe these actions position us well for growth as the economy
recovers.

For 2013, we have established the following expectations:

• Net income per diluted share, excluding after-tax net capital gains and

losses, to be in the range of $3.40 to $3.80.

• Return on average equity, excluding after-tax net capital gains and losses

      from net income and accumulated other comprehensive income and losses from
      equity, to be in the range of 8% to 9%.

Expectations and guidance for any specific year may vary due to short-term market trends, changes in the interest rate environment and other factors. More specifically, these expectations will be affected by the following items:

• Premiums-In 2013, we will continue to implement pricing actions for both new

and renewal long term disability business to address the impact of elevated

claims incidence and the low interest rate environment. Given these pricing

actions and the effect of the continued challenging economic environment on

the employment and wage levels of our group insurance customers, we expect a

low single digit decline in our group insurance premiums for 2013.

• Benefit ratio-We expect that the 2013 annual benefit ratio for the group

insurance business will be within the range of 81% to 84%. We expect a

continued low interest rate environment to place downward pressure on the new

money investment interest rate and the discount rate used for newly

established long term disability claim reserves. The annual group insurance

benefit ratio guidance range assumes that the low interest rate environment

will persist in 2013 and as a result the discount rate may be lowered 50 to

75 basis points during 2013.

• Effective income tax rate-We expect that the 2013 effective income tax rate

will be in the range of 22% to 23%. The lower effective income tax rate for

2013 is primarily the result of our previous purchases of tax-advantaged

      investments.



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 revenues growth in our Asset Management segment
have been the primary drivers of consolidated revenue growth.

The following table sets forth consolidated revenues:



                                                                 Years ended
                                                                 December 31,
                               

------------------------------------------------------------------------------

                                                  Percent                          Percent
(Dollars in millions)              2012            Change          2011            Change             2010
Revenues:
Premiums                        $   2,163.9            0.5 %    $   2,153.3             2.7 %      $   2,097.7
Administrative fees                   114.7           (0.7 )          115.5            (0.9 )            116.5
Net investment income                 628.5            2.6            612.8             1.7              602.5
Net capital losses                     (8.7 )        (26.1 )           (6.9 )          86.6              (51.6 )
                                - --------- --                  - --------- --                     - --------- --
Total revenues                  $   2,898.4            0.8      $   2,874.7             4.0        $   2,765.1



The increase in revenues for 2012 compared to 2011 was primarily due to an increase in our net investment income primarily due to higher bond call premiums and commercial mortgage loan prepayment fees and an increase in premiums



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from our Insurance Services segment. The increase in revenues for 2011 compared
to 2010 was primarily due to an increase in premiums from our Insurance Services
segment and a decrease in net capital losses. Net capital gains and losses are
reflected in the Other category. See "Business Segments-Other-Net Capital Gains
(Losses)."



Premiums

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.

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."

The following table sets forth premiums by segment:



                                                       Years ended
                                                      December 31,
                        

-----------------------------------------------------------------------

                                         Percent                       

Percent

 (Dollars in millions)      2012          Change          2011          Change          2010
 Premiums:
 Insurance Services      $   2,157.2          0.6 %    $   2,145.3          4.3 %    $   2,056.2
 Asset Management                6.7        (16.3 )            8.0        (80.7 )           41.5
                         - --------- -                 - --------- -                 - --------- -
 Total premiums          $   2,163.9          0.5      $   2,153.3          2.7      $   2,097.7




The overall increase in premiums for 2012 compared to 2011 was primarily due to
lower ERRs for 2012 in our Insurance Services segment. ERRs increased Insurance
Services premiums by $4.0 million for 2012, and decreased Insurance Services
premiums by $12.5 million for 2011. See "Business Segments-Insurance Services
Segment."

The overall increase in premiums for 2011 compared to 2010 was due to strong
sales and customer retention levels, and comparatively lower ERRs for 2011 in
our Insurance Services segment, partially offset by decreased premiums in our
Asset Management segment related to a decrease in sales of life-contingent
annuities. See "Business Segments-Insurance Services Segment" and "Business
Segments-Asset Management Segment."



Administrative Fee Revenues


The primary driver of administrative fee revenues is the level of assets under
administration in our Asset Management segment, which is 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:



                                                                    Years ended
                                                                    December 31,
                                                      Percent                        Percent
(Dollars in millions)                   2012          Change            2011          Change           2010
Administrative fee revenues:
Insurance Services                    $    13.9           13.0 %      $    12.3          28.1 %      $     9.6
Asset Management                          118.8           (0.9 )          119.9          (1.3 )          121.5
Other                                     (18.0 )         (7.8 )          (16.7 )       (14.4 )          (14.6 )
                                      - ------- --                    - ------- --                   - ------- --
Total administrative fee revenues     $   114.7           (0.7 )      $   115.5          (0.9 )      $   116.5




                       24   STANCORP FINANCIAL GROUP, INC.

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The decrease in administrative fee revenues in our Asset Management segment for
2012 compared to 2011 was primarily related to a decrease in average retirement
plan trust assets under administration.

The decrease in administrative fee revenues in our Asset Management segment for
2011 compared to 2010 was primarily due to decreased assets under administration
in our retirement plan trust assets and private client wealth management assets.
See "Business Segments-Asset Management Segment."



Net Investment Income


Net investment income is primarily 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 fee revenues and
bond call premiums on fixed maturity securities.

The following table sets forth net investment income by segment and associated
key indicators:



                                                                    Years ended
                                                                   December 31,
                                     

-----------------------------------------------------------------------

(Dollars in millions)                    2012         Change             2011         Change          2010
Net investment income:
Insurance Services                    $    339.7         (0.5 )%      $    341.3          0.7 %    $    338.9
Asset Management                           278.6          6.1              262.7          4.7           251.0
Other                                       10.2         15.9                8.8        (30.2 )          12.6
                                      - -------- --                   - -------- --                - -------- ---
Total net investment income           $    628.5          2.6         $    

612.8 1.7 $ 602.5

                                      - -------- --                   - -------- --                - -------- ---

Key indicators of net investment
income:
Contribution from the change in
fair value of the S&P 500 Index
options                               $      7.8      $   8.0         $     (0.2 )    $  (8.6 )    $      8.4
Commercial mortgage loan
prepayment fee revenues                     13.2          5.7                7.5          4.1             3.4
Bond call premiums                           8.0          0.9                7.1          2.7             4.4
Tax-advantaged investment
operating losses                           (13.3 )       (6.7 )             (6.6 )       (5.4 )          (1.2 )
Average invested assets                 12,312.3          6.9 %         11,521.0          6.1 %      10,858.2
Consolidated portfolio yields:
Fixed maturity securities                   4.66 %                          5.08 %                       5.31 %
Commercial mortgage loans                   6.09                            6.34                         6.45




The increase in net investment income for 2012 compared to 2011 was primarily
due to favorable changes in the fair value of our S&P 500 Index options and an
increase in bond call premiums and commercial mortgage loan prepayment fee
revenues. Also contributing to the increase in net investment income for 2012
was an increase in average retirement plan general account assets under
administration. Partially offsetting the increase to net investment income was
lower average yields for both fixed maturity securities and commercial mortgage
loans, and higher accrued operating losses on limited partnerships 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.

The increase in net investment income for 2011 compared to 2010 was primarily
due to an increase in average invested assets, which primarily resulted from
individual annuity sales. Also contributing to the increase in net investment
income for 2011 was higher commercial mortgage loan prepayment fee revenues and
bond call premiums. Partially offsetting these increases was a decrease in the
change in fair value of our S&P 500 Index options and a decrease in the
portfolio yields for fixed maturity securities and commercial mortgage loans.

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 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, excluding bonds with make-whole provisions and bonds with provisions that
allow the borrower to prepay near maturity, represented 4.1%, or $293.2 million,
of our fixed maturity securities portfolio at December 31, 2012. We also
originate commercial mortgage loans containing a make-whole prepayment provision



                                                           2012 ANNUAL REPORT   25

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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.
Approximately 2% of the 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.

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



                                                                     Years ended
                                                                    December 31,
                                        

-------------------------------------------------------------------

                                                        Dollar                        Dollar
(In millions)                             2012          Change          2011          Change          2010
Net capital losses                       $  (8.7 )      $  (1.8 )      $  (6.9 )      $  44.7        $ (51.6 )

Key components of net capital gains
(losses):
Net capital gains on fixed maturity
securities                               $   5.8        $  (3.3 )      $   9.1        $  (6.3 )      $  15.4
Net capital gains on real estate
investments                                    -          (34.7 )         34.7           25.1            9.6
Net capital losses on real estate
owned                                       (2.2 )         14.3          (16.5 )          6.4          (22.9 )
Provision to our commercial mortgage
loan loss allowance                        (13.4 )         19.3          (32.7 )         15.4          (48.1 )




Net capital losses for 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 increase in
net capital losses for 2012 compared to 2011 were primarily due to the net
capital gains on the sale of real estate investments for 2011, which did not
recur in 2012.

Net capital losses for 2011 were primarily related to our commercial mortgage
loan loss allowance provision and losses recognized on real estate acquired in
satisfaction of debt through foreclosure or the acceptance of deeds in lieu of
foreclosure on commercial mortgage loans ("Real Estate Owned"). These losses
were partially offset by net capital gains related to the sale of real estate
investments and certain fixed maturity securities. 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.




                       26   STANCORP FINANCIAL GROUP, INC.

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The following table sets forth benefits to policyholders by segment:



                                                                   Years ended
                                                                   December 31,
                                                      Percent                       Percent
(Dollars in millions)                   2012          Change           2011          Change          2010
Benefits to policyholders:
Insurance Services                   $   1,773.3           1.3 %    $   1,750.9         11.8 %    $   1,566.4
Asset Management                            19.7          (3.0 )           20.3        (62.0 )           53.4
                                     - --------- -                  - --------- -                 - --------- -
Total benefits to policyholders      $   1,793.0           1.2      $   1,771.2          9.3      $   1,619.8



The increase in benefits to policyholders for 2012 compared to 2011 was primarily due to a 95 basis point decrease in the average discount rate used for newly established long term disability claim reserves. See "Business Segments-Insurance Services Segment-Benefits and Expenses-Benefits to Policyholders (including interest credited)."

The increase in benefits to policyholders for 2011 compared to 2010 was primarily due to higher claims incidence in the group long term disability insurance business. See "Business Segments-Insurance Services Segment-Benefits and Expenses-Benefits to Policyholders (including interest credited)."

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:



                                                                   Years ended
                                                                   December 31,
(Dollars in millions)                   2012         Change            2011         Change           2010
Interest credited                    $     171.3     $  10.3        $     161.0     $   2.6       $     158.4

Key components of interest
credited:
Contribution from the change in
fair value of index-based
interest guarantees                  $       6.4     $   5.1        $       1.3     $  (4.5 )     $       5.8
Average individual annuity
assets under administration              3,091.1         9.2 %          2,830.0        11.5 %         2,537.6




The increases in interest credited for both 2012 and 2011 primarily reflected
growth in our average individual annuity assets under administration. The
increase in interest credited for 2012 from 2011 was also due to the change in
fair value of the index-based interest guarantees.



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Operating Expenses

The following table sets forth operating expenses:



                                                       Years ended
                                                       December 31,
                                          Percent                       Percent
   (Dollars in millions)     2012         Change           2011         Change          2010
   Operating expenses      $   470.5          (0.1 )%    $   471.2           5.6 %    $   446.2




The decrease in operating expenses for 2012 compared to 2011 was due to $11.0
million of project costs for information technology service changes in 2011,
which did not recur in 2012. The $11.0 million of project costs were recorded in
our Other category. The decrease was partially offset by an increase in
incentive compensation expenses for 2012 compared to 2011.

The increase in operating expenses for 2011 compared to 2010 was primarily related to business growth as evidenced by premium growth, and the project costs for information technology service changes in 2011. 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.

The following table sets forth commissions and bonuses:



                                                        Years ended
                                                        December 31,
                                           Percent                       Percent
  (Dollars in millions)       2012         Change           2011         Change          2010
  Commissions and bonuses   $   203.7          (6.9 )%    $   218.7           6.1 %    $   206.1



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

The increase in commissions and bonuses for 2011 compared to 2010 was primarily due to an increase in our Insurance Services segment sales 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 7.4 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."

For years when deferrals exceed amortization, the net increase to the balance of
DAC, VOBA and other intangibles results in an overall reduction to expense. For
years when amortization exceeds deferrals, the net decrease to the balance of
DAC, VOBA and other intangibles results in an overall increase to expense.



                       28   STANCORP FINANCIAL GROUP, INC.

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The following table sets forth the operating impact resulting from net increases to DAC, VOBA and other intangible assets:



                                                                    Years ended
                                                                    December 31,
                                                         Dollar                      Dollar
(In millions)                              2012          Change         2011         Change          2010
Deferral of acquisition costs            $  (71.4 )     $   10.3      $  (81.7 )     $  (5.7 )     $  (76.0 )
Amortization of DAC, VOBA and other
intangible assets                            70.5            3.3          67.2           8.3           58.9
                                         - ------ --    - ------ -    - ------ --    - ----- --    - ------ --
Net increase in DAC, VOBA and other
intangible assets                        $   (0.9 )     $   13.6      $  (14.5 )     $   2.6       $  (17.1 )




The decrease in deferrals for 2012 compared to 2011 was primarily due to lower
group insurance sales for 2012. The increase in the amortization of DAC for 2012
compared to 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 increase in DAC, VOBA and other intangible assets for
2012 compared to 2011.

The net increase in DAC, VOBA and other intangible assets was lower for 2011
compared to 2010 was primarily due to an increase in the amortization of DAC in
our Asset Management segment which was driven by an increase in net investment
income from bond call premiums and commercial mortgage loan prepayment fee
revenues. This increase was partially offset by losses due to the change in fair
value of our indexed-based guarantees and an increase in deferrals in our
Insurance services segment resulting from higher sales.



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.


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



                                                                  Years ended
                                                                  December 31,
                                                          2012        2011        2010

Combined federal and state effective income tax rates 24.5 % 28.6 % 33.2 %





During 2012, 2011 and 2010, we purchased tax-advantaged investments,
contributing to a decrease in our effective tax rate. The effective tax rate was
also lower due to favorable book-to-tax differences relative to a lower level of
income for 2012 and 2011.

At December 31, 2012, the years open for audit by the Internal Revenue Service
("IRS") were 2009 through 2012. The years 2009 through 2012 were also open for
audit by state authorities. See Item 8, "Financial Statements and Supplementary
Data-Notes to the Consolidated Financial Statements-Note 7-Income Taxes" for
more information on the change in the effective tax rate.



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,
origination and servicing of fixed-rate commercial mortgage loans, 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.



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



                                                 Years ended
                                                 December 31,
                                         2012        2011        2010
                   Insurance Services     86.1 %      86.5 %      85.3 %
                   Asset Management       13.9        13.5        14.7




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:



                                                                   Years ended
                                                                  December 31,
                                                    Percent                          Percent
(Dollars in millions)                 2012           Change            2011           Change          2010
Premiums                           $   2,157.2           0.6 %      $   2,145.3           4.3 %    $   2,056.2
Total revenues                         2,510.8           0.5            2,498.9           3.9          2,404.7
Income before income taxes               179.8         (10.6 )            201.2         (35.2 )          310.4
Sales (annualized new
premiums) reported at contract
effective date                           266.1         (25.8 )            358.6           2.0            351.7
Benefit ratios, including
interest credited (% of
premiums):
Insurance Services                        82.4 %                           81.8 %                         76.4 %
Group insurance                           83.9                             83.1                           77.2
Individual disability                     65.8                             67.3                           66.8
Operating expense ratio (% of
premiums)                                 16.2 %                           15.8 %                         16.1 %




Income before income taxes decreased for 2012 compared to 2011 primarily due to
a comparatively higher group insurance benefit ratio as a result of a 95 basis
point lower average discount rate used for newly established long term
disability claim reserves, partially offset by higher premiums for the Insurance
Services segment and a lower individual disability benefit ratio. In addition,
bond call premiums and commercial mortgage loan prepayment fee revenues added
$13.1 million of income before income taxes for 2012, compared to $4.9 million
for 2011, offsetting the effects of lower yields on invested assets.

Income before income taxes decreased for 2011 compared to 2010 primarily due to
less favorable claims experience in the group insurance business as a result of
higher group long term disability claims incidence.



Revenues


Revenues for the Insurance Services segment are driven primarily by growth in
Insurance Services premiums. The increase in revenues for 2012 compared to 2011
was primarily due to lower ERRs. ERRs increased revenue by $4.0 million for 2012
and decreased revenue by $12.5 million for 2011. The increase in revenues for
2011 compared to 2010 was primarily due to higher premiums in our group
insurance business



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.



                       30   STANCORP FINANCIAL GROUP, INC.

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



                                                                      Years ended
                                                                      December 31,
                                                       Percent                          Percent
(Dollars in millions)                     2012          Change           2011           Change           2010
Premiums:
Group life and AD&D                    $     883.7         (1.0 )%    $     892.6            6.8 %    $     835.7
Group long term disability                   801.4         (0.2 )           803.3            0.4            799.9
Group short term disability                  212.6          2.2             208.0            2.1            203.7
Group other                                   78.9         (3.3 )            81.6            0.1             81.5
Experience rated refunds                       4.0        132.0             (12.5 )         55.2            (27.9 )
                                       - --------- -                  - --------- --                  - --------- --
Total group insurance                      1,980.6          0.4           1,973.0            4.2          1,892.9
Individual disability                        176.6          2.5             172.3            5.5            163.3
                                       - --------- -                  - --------- --                  - --------- --
Total premiums                         $   2,157.2          0.6       $   2,145.3            4.3      $   2,056.2
                                       - --------- -                  - --------- --                  - --------- --

Key indicators of premiums: Total premiums excluding ERRs $ 2,153.2 (0.2 )% $ 2,157.8

            3.5 %    $   2,084.1
Group insurance sales (annualized
new premiums) reported at contract
effective date                               245.0        (27.2 )           336.4            1.8            330.6
Individual disability sales
(annualized new premiums)                     21.1         (5.0 )            22.2            5.2             21.1




The increase in group insurance premiums for 2012 compared to 2011 was primarily
due to more favorable ERRs, partially offset by lower group insurance sales and
persistency for 2012. The increase in group insurance premiums for 2011 compared
to 2010 was primarily due to strong group insurance sales and strong customer
retention levels, in addition to comparatively lower ERRs

Sales. Sales of our group insurance products reported as annualized new premiums
decreased for 2012 compared to 2011 primarily due to pricing competition as we
implemented pricing actions on our long term disability business to address the
impact of the elevated claims incidence and the continued low interest rate
environment.

Customer Retention. Customer retention, also referred to as persistency, decreased to 86.7% for 2012, compared to 88.8% for 2011. This decrease was primarily due to our pricing actions on our long term disability business. Persistency in our individual disability products remained above 90%.


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, including state and local public and education sectors, and
therefore has put downward pressure on our premiums.

We continue to make progress with the implementation of our pricing actions
related to the low interest rate environment and 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. By the end of the first quarter of 2013 we will have had the
opportunity to re-price about three-fourths of our long term disability
business. 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:



                                                        Years ended
                                                       December 31,
                                            Percent                     Percent
     (Dollars in millions)     2012         Change          2011        Change         2010
     Net investment income    $ 339.7           (0.5 )%    $ 341.3           0.7 %    $ 338.9




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Net investment income is primarily affected by changes in levels of invested assets, interest rates, bond call premiums and prepayment fees. 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.

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



                                                                     Years ended
                                                                    December 31,
                                                      Percent                           Percent
(Dollars in millions)                  2012           Change             2011           Change           2010
Benefits to policyholders,
including interest credited         $   1,777.5            1.3 %      $   1,755.5           11.7 %    $   1,571.2
Benefit ratios, including
interest credited (% of
premiums):
Insurance Services segment                 82.4 %                            81.8 %                          76.4 %
Group insurance                            83.9                              83.1                            77.2
Individual disability                      65.8                              67.3                            66.8




The increase in Insurance Services benefits to policyholders (including interest
credited) for 2012 compared to 2011 was primarily due to a 95 basis point
decrease in the average discount rate used for newly established long term
disability claim reserves. In addition, 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 for 2012. We recorded a net increase in individual
disability claims reserves of $3.6 million and made no similar adjustments to
group long term disability reserves for 2011.

The increase in Insurance Services benefits to policyholders (including interest
credited) for 2011 compared to 2010 was primarily due to higher claims incidence
in our group long term disability insurance business. In addition, there was a
reserve release for group long term disability claims of $14.6 million in 2010
and no similar release in 2011. These increases were partially offset by a
decrease in additional amounts recorded to our individual disability reserves,
which totaled $3.6 million for 2011 and $7.8 million for 2010.

The reserve releases related to our group long term disability insurance
business for 2010 were primarily due to favorable claims experience compared to
reserving assumptions for certain reserve items. Claims experience is one of the
factors we use in estimating our reserves. However, the favorable claims
experience seen in 2010 did not result in a significant change in our underlying
assumptions or methods used to determine the estimated reserves, primarily due
to the long-term nature of our group long term disability insurance business and
the materiality of other factors, including the potential impact of the economic
uncertainty during 2010. We carefully monitor trends in reserve assumptions and
when these trends become credible and are expected to persist, we incorporate
these factors into our reserves to ensure the best estimates are established.
For a complete discussion of our reserve methodology, see "Critical Accounting
Policies and Estimates-Reserves for Future Policy Benefits and Claims."



                       32   STANCORP FINANCIAL GROUP, INC.

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The group insurance benefit ratio for 2012 was outside of our 2012 annual
guidance range of 80% to 82%. We expect the benefit ratio to remain elevated
during continuing uncertainty in the economy and while 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 decreased for 2012
compared to 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.

In 2006, we adjusted the claim termination rate assumptions for the reserves on
a small block of individual disability claims based on an industry table. These
assumptions were further refined in 2012, 2011 and 2010 resulting in increases
in reserves of $4.9 million, $5.5 million and $12.5 million, respectively. Our
block of business is relatively small, and, as a result, we view a blend of the
released industry table 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, if
necessary, will adjust reserves accordingly.

We refined our reserve calculation for certain other individual disability claims in 2012, 2011 and 2010 which resulted in a decrease in our individual disability reserves of $1.1 million, $1.9 million and $4.7 million, respectively.

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



                                                  Years ended
                                                  December 31,
                                      2012            2011            2010
           Average discount rate         4.18 %          5.13 %          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 increase or decrease the discount rate. The lower
average discount rate for 2012 compared to 2011 and 2010 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 pre-tax income of $1.8 million per quarter. 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 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. The movement of future interest rates may result in
significantly higher or lower discount rates. A sustained low interest rate
environment, lower commercial mortgage loan originations and utilization of
other investments 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 December 31, 2012
and December 31, 2011 was 45 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:



                                                       Years ended
                                                      December 31,
                                          Percent                      Percent
   (Dollars in millions)     2012         Change          2011         Change          2010
   Operating expenses      $   349.1           3.1 %    $   338.7           2.1 %    $   331.8




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The increase in Insurance Services operating expenses for 2012 compared to 2011
was primarily related to increased compensation related costs. The increase in
Insurance Services operating expenses for 2011 compared to 2010 was primarily
related to business growth as evidenced by premium growth.



Asset Management Segment

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



                                                                    Years ended
                                                                    December 31,
                                                      Percent                       Percent
(In millions)                            2012          Change          2011          Change           2010
Revenues:
Premiums                               $     6.7         (16.3 )%    $     8.0         (80.7 )%     $    41.5
Administrative fees                        118.8          (0.9 )         119.9          (1.3 )          121.5
Net investment income                      278.6           6.1           262.7           4.7            251.0
                                       - ------- --                  - ------- --                   - ------- --
Total revenues                         $   404.1           3.5       $   390.6          (5.7 )      $   414.0
                                       - ------- --                  - ------- --                   - ------- --
Income before income taxes             $    64.0           4.4 %     $    

61.3 10.5 % $ 55.5


Sales (Individual annuity deposits)        364.2         (11.2 )         410.3          12.8            363.8

Interest credited (% of net
investment income):
Retirement plans                            53.7 %                        54.6 %                         56.5 %
Individual annuities                        68.1                          66.5                           69.0

Retirement plans annualized
operating expenses (% of
average assets under administration)        0.59 %                        0.58 %                         0.57 %




                                                                   At December 31,
                                                                                        Percent
(Dollars in millions)                                    2012              2011          Change
Assets under administration:
Retirement plans general account                     $    1,968.7      $    1,730.2         13.8 %
Retirement plans separate account                         5,154.3           

4,593.5 12.2

                                                     - ---------------------------- -
Total retirement plans group annuity products             7,123.0           6,323.7         12.6
Retirement plans trust products                           7,732.4           7,441.2          3.9
Individual annuities                                      3,206.4           2,975.7          7.8
Commercial mortgage loans for other investors             2,781.5           2,691.6          3.3
Private client wealth management                            849.0           

1,001.5 (15.2 )

                                                     - ---------------------------- -
Total assets under administration                    $   21,692.3      $   20,433.7          6.2




Income before income taxes increased for 2012 compared to 2011 primarily due to
the contribution from the change in fair value of the S&P 500 Index options and
the change in fair value adjustment of index-based guarantees. Income before
income taxes increased for 2011 compared to 2010 primarily due to higher bond
call premiums and commercial mortgage loan prepayment fee revenues. See "Note
11-Derivative Financial Instruments-Derivatives Not Designated as Hedging
Instruments".



Revenues

Revenues for the Asset Management segment include retirement plan administration
fees, 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.



                       34   STANCORP FINANCIAL GROUP, INC.

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The increase in revenue for 2012 compared to 2011 was 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."

The decrease in revenue for 2011 compared to 2010 was primarily due to a
decrease in individual annuity premiums, which were driven by decreased sales of
life-contingent annuities, which fluctuate widely in a price competitive market.
The decrease in individual annuity premiums was partially offset by an increase
in net investment income due to higher bond call premiums and commercial
mortgage loan prepayment fees.



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:



                                                      Years ended
                                                      December 31,
                                           Dollar                 Dollar
          (In millions)          2012      Change       2011      Change         2010
          Premiums:
          Retirement plans       $ 1.9     $  (0.1 )    $ 2.0     $   0.4      $    1.6
          Individual annuities     4.8        (1.2 )      6.0       (33.9 )        39.9

          Total premiums         $ 6.7     $  (1.3 )    $ 8.0     $ (33.5 )    $   41.5




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
group annuity products, retirement plan trust products, private client wealth
management and commercial mortgage loans under administration for other
investors.

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



                                                                     Years ended
                                                                     December 31,
                                                       Percent                        Percent
(Dollars in millions)                     2012         Change            2011         Change           2010
Administrative fee revenues:
Retirement plans                        $    88.0          (2.2 )%     $    90.0          (2.7 )%    $    92.5
Other financial services business            30.8           3.0             29.9           3.1            29.0

Total administrative fee revenues       $   118.8          (0.9 )      $   119.9          (1.3 )     $   121.5




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                                                                  At December 31,
                                                     

----------------------------------------

Percent

(Dollars in millions)                                    2012            2011          Change
Key indicators of administrative fee revenues:
Average assets under administration:
Retirement plan separate account                      $   5,044.2     $   4,717.6          6.9 %
Retirement plan trust products                            7,791.4         8,107.0         (3.9 )
Commercial mortgage loans for other investors             2,742.3         2,690.1          1.9
Private client wealth management                            974.6         1,099.4        (11.4 )




The decrease in administrative fee revenues for 2012 compared to 2011 was
primarily related to a decrease in average retirement plan trust assets under
administration. The decrease in administrative fee revenues for 2011 compared to
2010 was primarily due to a few large plan terminations in the our retirement
plan trust assets under administration in the first quarter and the fourth
quarter of 2011, and a decline in assets under administration in our private
client wealth management assets due to attrition associated with the loss of two
advisers.



Net Investment Income

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



                                                                     Years ended
                                                                    December 31,
                                         

-----------------------------------------------------------------

(Dollars in millions)                          2012       Change           2011       Change           2010
-------------------------------------     ---------      -------      ---------      -------      ---------
Net investment income:
Retirement plans                          $    94.9          5.0 %    $    90.4          3.4 %    $    87.4
Individual annuities                          170.6          6.0          161.0          6.6          151.0
Other financial services business              13.1         15.9           

11.3 (10.3 ) 12.6

                                          - ------- --                - ------- --                - ------- --
Total net investment income               $   278.6          6.1      $   

262.7 4.7 $ 251.0

                                          - ------- --                - ------- --                - ------- --

Key indicators of net investment
income:

Average assets under administration:
Retirement plan general account           $ 1,849.5         11.5 %    $ 1,658.7          6.1 %    $ 1,563.7
Individual annuities                        3,091.1          9.2        2,830.0         11.5        2,537.6
Contribution from the change in fair
value of the S&P 500 Index options        $     7.8      $   8.0      $    (0.2 )    $  (8.6 )    $     8.4
Commercial mortgage loan prepayment
fees                                            5.4          1.9            3.5          2.2            1.3
Bond call premiums                              2.6         (3.7 )          6.3          4.3            2.0

Commercial mortgage loan originations 1,184.2 17.5 % 1,007.7 13.5 % 887.5


Consolidated portfolio yields:
Fixed maturity securities                      4.66 %                      5.08 %                      5.31 %
Commercial mortgage loans                      6.09                        6.34                        6.45




The increase in net investment income for 2012 compared to 2011 was primarily
due to an increase in average individual annuity assets under administration and
an increase in average retirement plan general account assets under
administration. Net investment income also increased due to the change in fair
value of our S&P 500 Index options related to our indexed annuity products and
an increase in prepayment fees received on commercial mortgage loans. These
increases were partially offset by lower portfolio yields for fixed maturity
securities and commercial mortgage loans in addition to a decrease in bond call
premiums received on fixed maturity securities.

The increase in net investment income for 2011 compared to 2010 was primarily
due to increases in our average individual annuity assets under administration
and our average retirement plan general account assets under administration.
Also contributing to the increase in net investment income for 2011 compared to
2010 were increases in bond call premiums received on certain fixed maturity
securities, and in prepayment fees received on commercial



                       36   STANCORP FINANCIAL GROUP, INC.

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mortgage loans. These increases were partially offset by the change in fair
value of our S&P 500 Index options and a decline in the portfolio yield of our
fixed maturity securities and commercial mortgage loans. See Item 8, "Financial
Statements and Supplementary Data-Notes to Consolidated Financial
Statements-Note 11-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:



                                                         Years ended
                                                        December 31,
                             

-----------------------------------------------------------------

                                            Percent                     

Percent

  (Dollars in millions)         2012        Change           2011        

Change 2010

Benefits to policyholders $ 19.7 (3.0 )% $ 20.3 (62.0 )% $ 53.4




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:



                                                                      Years ended
                                                                      December 31,
                                         

--------------------------------------------------------------------

(Dollars in millions)                       2012          Change          2011         Change          2010
Interest credited                         $   167.1      $   10.7       $   156.4      $   2.8       $   153.6
Key indicators of interest credited:
Contribution from the change in fair
value of index-based interest
guarantees                                $     6.4      $    5.1       $     1.3      $  (4.5 )     $     5.8
Average individual annuity assets
under administration                        3,091.1           9.2 %       2,830.0         11.5 %       2,537.6




The increase in interest credited for 2012 compared to 2011 was primarily due to
the change in fair value of our index-based interest guarantees, and an increase
in our average individual fixed-rate annuity and retirement plan general account
assets under administration.

The increase in interest credited for 2011 compared to 2010 was primarily due to
growth in our individual fixed-rate annuity assets under administration, which
was partially offset by the change in fair value of the index-based interest
guarantees. See Item 8, "Financial Statements and Supplementary Data-Notes to
Consolidated Financial Statements-Note 11-Derivative Financial Instruments" for
further derivatives disclosure.



Operating Expenses


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



                                                       Years ended
                                                       December 31,
                          

--------------------------------------------------------------------

                                          Percent                      Percent
   (Dollars in millions)     2012         Change          2011         Change           2010
   Operating expenses      $   117.4           1.9 %    $   115.2          (3.2 )%    $   119.0



The increase in Asset Management operating expenses for 2012 compared to 2011 was primarily due to increased business related service and administrative costs.




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The decrease in Asset Management operating expenses for 2011 compared to 2010 was primarily due to continued operating expense containment in 2011.

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:



                                                    Years ended
                                                   December 31,
                                     

---------------------------------------

           (Dollars in millions)        2012           2011           2010
           Loss before income taxes   $   (60.4 )    $   (71.0 )    $   (87.8 )



The decrease in loss before income taxes for 2012 compared to 2011 was primarily due to higher operating expenses for 2011 related to project costs for information technology service changes, which did not recur in 2012.


The decrease in losses before income taxes for 2011 compared to 2010 was
primarily due to a decrease in net capital losses, partially offset by a
decrease in net investment income and an increase in operating expenses related
to project costs for information technology service changes. The project costs
related to information technology service changes were primarily severance and
outsourcing transition costs, which were reported in our Other category since
these costs were not representative of our segment operations.



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:



                                                                     Years ended
                                                                    December 31,
                                                     

-----------------------------------------

(In millions)                                           2012            2011            2010
Net capital gains (losses):
Fixed maturity securities                             $     5.8       $     9.1       $    15.4
Commercial mortgage loans                                 (11.9 )         (31.8 )         (46.9 )
Real estate investments                                       -            34.7             9.6
Real estate owned                                          (2.2 )         (16.5 )         (22.9 )
Other                                                      (0.4 )          (2.4 )          (6.8 )
                                                      - ------- --    - ------- --    - ------- --
Total net capital losses                              $    (8.7 )     $    (6.9 )     $   (51.6 )
                                                      - ------- --    - ------- --    - ------- --
Key components of net capital losses:
Provision in our commercial mortgage loan loss
allowance                                             $   (13.4 )     $   (32.7 )     $   (48.1 )
OTTI on fixed maturity securities                          (3.2 )          (1.8 )          (0.7 )
Impairments on real estate owned                           (3.0 )         (15.8 )         (25.7 )




Net capital losses for 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 decrease in net capital losses for 2011 compared to 2010 was primarily due
to higher net capital gains on the sale of real estate investments in 2011, and
a comparatively smaller increase in the provision for our commercial mortgage
loan loss allowance in 2011.



                       38   STANCORP FINANCIAL GROUP, INC.

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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 December 31, 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, excluding bonds
with make-whole provisions and bonds with provisions that allow the borrower to
prepay near maturity, represented 4.1%, or $293.2 million, of our fixed maturity
securities portfolio at December 31, 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 the commercial mortgage loan
portfolio contains this prepayment provision. Approximately 2% of the commercial
mortgage loan portfolio, without a make-whole prepayment provision, contains
fixed percentage prepayment fees that mitigate prepayments but may not fully
protect our expected cash flows in the event of prepayment.

Our financial instruments are exposed to financial market volatility and
potential disruptions in the market that may result in certain financial
instruments becoming less valuable. Financial market volatility includes
interest rate risk. We have analyzed the estimated loss in fair value of certain
market sensitive financial assets held at December 31, 2012 and 2011, using a
hypothetical 10% increase in interest rates and related qualitative information
on how we manage interest rate risk. The interest rate sensitivity analysis was
based upon our fixed maturity securities and commercial mortgage loans held at
December 31, 2012 and 2011. Interest rate sensitivity of our financial assets
was measured assuming a parallel shift in interest rates. All security yields
were increased by 10% of the year-end 10-year U.S. Government Treasury bond
yield, or 0.18% and 0.19% for the 2012 and 2011 analyses, respectively. The
change in fair value of each security was estimated as the change in the option
adjusted value of each security. Option adjusted values were computed using our
payment models and provisions for the effects of possible future changes in
interest rates. The analyses did not explicitly provide for the possibility of
non-parallel shifts in the yield curve, which would involve discount rates for
different maturities being increased by different amounts. The actual change in
fair value of our financial assets can be significantly different from that
estimated by the model. The hypothetical reduction in the fair value of our
financial assets that resulted from the model was estimated to be $99 million
and $98 million at December 31, 2012 and 2011, respectively.

Additionally, a cash management process is in place that anticipates short-term
cash needs. Depending upon capital market conditions, anticipated cash needs may
be covered by liquid asset holdings or a draw upon our line of credit. In almost
all cases, borrowed funds can be retired from normal operating cash flows in
conjunction with adjustments to long-term investing practice within half a year.
For more information about our line of credit, see "-Financing Cash Flows," and
Part I, Item 1A, "Risk Factors."



Operating Cash Flows


Net cash provided by operating activities is net income adjusted for non-cash
items and accruals, and was $375.7 million, $254.1 million and $355.1 million
for 2012, 2011 and 2010, respectively. These changes were mainly due to
fluctuations in other assets and other liabilities, mainly attributable to
timing differences. We typically generate positive cash flows from operating
activities, as premiums collected from our insurance products and income
received from our investments exceed policy acquisition costs, benefits paid,
redemptions and operating expenses. These positive cash flows are then invested
to



                                                           2012 ANNUAL REPORT   39

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support the obligations of our insurance products and required capital
supporting these products. Our cash flows from operating activities are affected
by the timing of premiums, fees, and investment income received and expenses
paid.



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 $763.0 million, $595.4 million and
$493.1 million for 2012, 2011 and 2010, respectively. The increase in net cash
used in investing activities for 2012 compared to 2011 was primarily due to an
increase in net purchases of fixed maturity securities and lower proceeds from
sales of real estate for 2012. The increase in net cash used in investing
activities for 2011 compared to 2010 was primarily due to higher commercial
mortgage loan originations for 2011, in addition to higher net purchases of
fixed maturity securities and other invested assets, resulting from higher
policyholder fund net deposits.

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 December 31, 2012, our portfolio consisted of
56.5% fixed maturity securities, 41.4% commercial mortgage loans, 1.3% 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 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:

December 31, 2012

--------------------------------------------------------------------

                                          Amortized         Unrealized      

Unrealized

(In millions)                               Cost              Gains              Losses           Fair Value
Fixed maturity securities:
Corporate bonds:
Basic industry                           $     386.1       $       33.3       $       (0.4 )      $     419.0
Capital goods                                  727.1               66.5               (0.8 )            792.8
Communications                                 302.0               34.9                  -              336.9
Consumer cyclical                              442.0               38.3               (0.4 )            479.9
Consumer non cyclical                          908.0              113.5               (0.5 )          1,021.0
Energy                                         484.4               51.1               (0.1 )            535.4
Finance                                      1,551.9              113.9               (1.1 )          1,664.7
Utilities                                      932.7              113.3               (0.4 )          1,045.6
Transportation and other                       207.8               22.9               (0.1 )            230.6
                                         - --------- -     -- --------- -     -- --------- --     - --------- -
Total corporate bonds                        5,942.0              587.7               (3.8 )          6,525.9
U.S. government and agency bonds               351.5               61.5                  -              413.0
U.S. state and political subdivision
bonds                                          151.6               16.8                  -              168.4
Foreign government bonds                        61.3               10.8                  -               72.1
S&P 500 Index options                           11.3                  -                  -               11.3
                                         - --------- -     -- --------- -     -- --------- --     - --------- -
Total fixed maturity securities          $   6,517.7       $      676.8       $       (3.8 )      $   7,190.7




                       40   STANCORP FINANCIAL GROUP, INC.

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                                                                 December 31, 2011

------------------------------------------------------------------

                                          Amortized         Unrealized      

Unrealized

(In millions)                               Cost              Gains              Losses         Fair Value
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
Utilities                                      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 fixed maturity securities and associated key
indicators:



                                                                   December 31,
                                                     

---------------------------------------

(Dollars in millions)                                   2012            2011          Change
Fixed maturity securities                             $ 7,190.7       $ 6,769.5           6.2 %
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             5.4 %           5.2 %         0.2 %
Managed by a third party                              $   349.5       $   311.3       $  38.2
Fixed maturity securities on our watch list:
Fair value                                                  1.7             8.9          (7.2 )
Amortized cost after OTTI                                   1.7            12.2         (10.5 )
Gross unrealized capital gains in our fixed
maturity securities portfolio                             676.8           580.5          16.6 %
Gross unrealized capital losses in our fixed
maturity securities portfolio                              (3.8 )         (20.9 )        81.8




We recorded OTTI of $3.2 million and $1.8 million for 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
December 31, 2012. At December 31, 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
December 31, 2012, fixed maturity securities issued by investment and commercial
banks headquartered in other euro zone countries represented 0.8%, or $55.2
million, of our fixed maturity securities portfolio. There were no impairments
on fixed maturity securities related to euro zone exposure for 2012.



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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.

The following table sets forth commercial mortgage loan originations:



                                                                      Years ended
                                                                     December 31,
                                       

-----------------------------------------------------------------------

                                                         Percent                        Percent
(Dollars in millions)                      2012          Change           

2011 Change 2010 Commercial mortgage loan originations $ 1,184.2 17.5 % $ 1,007.7 13.5 % $ 887.5

The increases in commercial mortgage loan originations for 2012 compared to 2011, and 2011 compared to 2010 was primarily due to increased activity in the commercial real estate market.

The following table sets forth commercial mortgage loan servicing data:

December 31,
                                                  

-------------------------------------------

Percent

(Dollars in millions)                                 2012             2011 

Change

Commercial mortgage loans serviced:
For subsidiaries of StanCorp                       $   5,266.8      $   4,901.0            7.5 %
For other institutional investors                      2,781.5          2,691.6            3.3

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 December 31, 2012. The average loan balance of our commercial
mortgage loan portfolio was approximately $0.8 million at December 31, 2012. We
have the contractual ability to pursue personal recourse on approximately 75% of
our loans and partial personal recourse on a majority of the remaining loans.
The average capitalization rate for the portfolio at December 31, 2012 was
approximately 9%. Capitalization rates are used internally to annually value our
commercial mortgage loan portfolio.

At December 31, 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.



                       42   STANCORP FINANCIAL GROUP, INC.

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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:



                                          December 31,                  December 31,
                                              2012                          2011
                                    ------------------------      ------------------------
  (Dollars in millions)               Amount        Percent         Amount        Percent
  Property type:
  Retail                            $   2,560.7         48.6 %    $   2,457.8         50.1 %
  Industrial                              995.8         18.9            900.4         18.4
  Office                                  960.8         18.2            911.1         18.6
  Hotel/motel                             280.8          5.3            241.9          4.9
  Commercial                              205.3          4.0            187.1          3.8
  Apartment and other                     264.0          5.0            204.0          4.2
                                    - --------- -   -- ----- --   - --------- -   -- ----- --
  Total commercial mortgage loans   $   5,267.4        100.0 %    $   4,902.3        100.0 %
                                    - --------- -   -- ----- --   - --------- -   -- ----- --
  Geographic region*:
  Pacific                           $   1,844.1         35.0 %    $   1,699.3         34.7 %
  South Atlantic                        1,069.2         20.2            953.8         19.5
  West South Central                      634.8         12.1            605.3         12.3
  Mountain                                612.7         11.6            585.8         11.9
  East North Central                      443.9          8.4            393.4          8.0
  Middle Atlantic                         240.3          4.6            243.8          5.0
  West North Central                      183.0          3.5            184.8          3.8
  East South Central                      150.5          2.9            129.9          2.6
  New England                              88.9          1.7            106.2          2.2
                                    - --------- -   -- ----- --   - --------- -   -- ----- --
  Total commercial mortgage loans   $   5,267.4        100.0 %    $   4,902.3        100.0 %
                                    - --------- -   -- ----- --   - --------- -   -- ----- --
  U.S. state:
  California                        $   1,436.3         27.3 %    $   1,332.0         27.2 %
  Texas                                   587.0         11.1            550.8         11.2
  Florida                                 331.9          6.3            305.3          6.2
  Georgia                                 311.5          5.9            270.1          5.5
  Other states                          2,600.7         49.4          2,444.1         49.9
                                    - --------- -   -- ----- --   - --------- -   -- ----- --

Total commercial mortgage loans $ 5,267.4 100.0 % $ 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 December 31, 2012, our ten largest borrowers represented less than 7% 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 consistent with our experience in other
states. We do not require earthquake insurance for the properties when we
underwrite new loans. However, we consider



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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 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 I, 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 December 31, 2012, we had outstanding
commitments to fund commercial mortgage loans totaling $144.8 million, with
fixed interest rates ranging from 4.50% to 5.50%. 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:

December 31,
                                                        

--------------------------------------

                                                                                       Percent
(Dollars in millions)                                      2012            2011         Change
Commercial mortgage loans sixty-day delinquencies:
Book value                                               $   21.3        $   17.1          24.6 %
Delinquency rate                                             0.40 %          0.34 %
In process of foreclosure                                $    9.8        $    5.1          92.2
Restructured commercial mortgage loans on a
statutory basis                                              77.6            93.7         (17.2 )




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:



                                                                      Years ended
                                                                     December 31,
                                          

-----------------------------------------------------------------

(Dollars in millions)                        2012        Change          2011        Change          2010
Number of loans foreclosed                       33           (16 )          49           (48 )           97
Book value of loans foreclosed             $   23.6     $   (16.7 )    $   40.3     $   (78.3 )    $   118.6
Number of properties foreclosed and
transferred to real estate owned                 27           (21 )          48           (47 )           95
Real estate acquired                       $   16.8     $    (6.0 )    $   22.8     $   (80.4 )    $   103.2




                       44   STANCORP FINANCIAL GROUP, INC.

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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 2012
decreased compared to 2011 primarily due to the decrease in properties acquired
in 2012. See "Critical Accounting Policies and Estimates-Investment
Valuations-Commercial Mortgage Loans" for our commercial mortgage loan loss
allowance policy.

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



                                                                        Years ended
                                                                        December 31,
                                            

------------------------------------------------------------------

                                                             Dollar                       Dollar
(In millions)                                  2012          Change          2011         Change         2010
Commercial mortgage loan loss allowance:
Beginning balance                            $   48.1       $   12.0       $   36.1      $   16.5      $   19.6
Provision                                        13.4          (19.3 )         32.7         (15.4 )        48.1
Charge-offs, net                                (14.9 )          5.8          (20.7 )        10.9         (31.6 )
                                             - ------ --    - ------ --    - ------ --   - ------ --   - ------ --
Ending balance                               $   46.6       $   (1.5 )     $   48.1      $   12.0      $   36.1




The lower provision and net charge-offs for the commercial mortgage loan loss
allowance for 2012 compared to 2011 were primarily due 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 for 2012. The decreases in the specific and general loan
loss allowances at December 31, 2012 compared to December 31, 2011 were
primarily due to a decrease in impaired commercial mortgage loans and the
composition of the commercial mortgage loan portfolio at December 31, 2012. The
lower provision for the commercial mortgage loan loss allowance for 2011
compared to 2010 was primarily due to a prior year provision related to a single
borrower, which is no longer in the commercial mortgage loan portfolio. The
lower charge-offs for 2011 compared to 2010 were primarily related to the prior
year acceptance of deeds in lieu of foreclosure associated with a single
borrower in the second quarter of 2010, which did not recur in 2011.

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

December 31,
                                                     

--------------------------------------

Dollar

(In millions)                                           2012           2011 

Change

Impaired commercial mortgage loans with specific
allowances for losses                                 $   74.1       $   75.8       $   (1.7 )
Impaired commercial mortgage loans without
specific allowances for losses                            25.7           28.9           (3.2 )
Specific allowance for losses on impaired
commercial mortgage loans, end of the period             (25.6 )        

(26.6 ) 1.0


Net carrying value of impaired commercial
mortgage loans                                        $   74.2       $   78.1       $   (3.9 )




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 original
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 at December 31, 2012 compared
to 2011 was primarily due to an increase in loan repayments and foreclosures of
impaired commercial mortgage loans for 2012.



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



                                                          Years ended
                                                          December 31,
                                 

------------------------------------------------------------

                                                Dollar                    

Dollar

    (In millions)                   2012        Change        2011        

Change 2010

Average recorded investment $ 101.3$ 9.0$ 92.3 $

 15.9     $   76.4




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.

The amount of interest income recognized on impaired commercial mortgage loans
was $4.1 million, $3.8 million and $2.8 million for 2012, 2011 and 2010,
respectively. The cash received by us in payment of interest on impaired
commercial mortgage loans was $4.0 million, $3.1 million and $3.3 million for
2012, 2011 and 2010, 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 $409.6 million,
$327.7 million and $181.7 million for 2012, 2011 and 2010, respectively. The
increase in funds provided by financing cash flows for 2012 compared to 2011 was
primarily due to a decrease in cash used to repurchase shares 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 ("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 $1.25 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
December 31, 2012, we had a total debt to total capitalization ratio of 23.6%
and consolidated net worth of $1.79 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
London Interbank Offered Rate ("LIBOR") plus the applicable margin, plus
facility and utilization fees. At December 31, 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 at par for the first 10 years (prior to June 1, 2017). The principal amount of



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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 LIBOR
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
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 365% of the Company Action Level RBC as of December 31,
2012. At December 31, 2012, statutory capital, adjusted to exclude asset
valuation reserves, for our regulated insurance subsidiaries totaled $1.38
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 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 either party.



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



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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, 2012, 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 $132.7 million and capital and surplus was
$1.19 billion. Based upon Standard's results for 2012, the amount of ordinary
dividends and other distributions available in 2013, without prior approval from
the Oregon Insurance Division is $132.7 million. 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 prior approval from the Oregon
Insurance Division was $144.0 million. As of December 31, 2012 Standard had
issued, upon approval of the Oregon Insurance Division, dividends in excess of
$144.0 million.

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. As a result of the extraordinary dividend, future dividends will
require the approval from the Oregon Insurance Division through August 14, 2013.

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 ordinary cash
dividends to StanCorp of $10.0 million and extraordinary cash dividends to
StanCorp of $310.0 million during 2012. Standard paid ordinary cash dividends to
StanCorp of $87.8 million and $244.0 million for 2011 and 2010, respectively.



Dividends to Shareholders

On November 13, 2012, our Board of Directors declared an annual cash dividend of
$0.93 per share. The dividend was paid on December 7, 2012 to shareholders of
record on November 23, 2012. In 2011 and 2010, we paid an annual cash dividend
of $0.89 and $0.86 per share, respectively. The Board of Directors has increased
the annual dividend per share to shareholders each year for the past 13
consecutive years. 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 distributions from
the insurance subsidiaries, the ability of the insurance subsidiaries to
maintain adequate capital and other factors deemed relevant by the Board of
Directors. In addition, the declaration and payment of dividends to shareholders
would be restricted if we elect to defer interest payments on our Subordinated
Debt issued May 7, 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.



Share Repurchases


On November 13, 2012, our Board of Directors approved a new share repurchase
authorization of up to 3.0 million shares of StanCorp common stock. The November
2012 authorization replaced the existing authorization and expires on
December 31, 2014. 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



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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. We will evaluate share repurchases
opportunistically based on our capital levels and our assessment of the
direction of the overall economy and equity market valuations.

The following table sets forth share repurchases activity:



                                                               Years ended
                                                              December 31,
                                                       ---------------------------
    (Dollars in millions except per share data)           2012            2011
    Share repurchases:
    Shares repurchased                                     279,700       2,180,100
    Cost of share repurchases                          $      10.0     $      90.3
    Volume weighted-average price per common share           35.68         

41.41

Shares remaining under repurchase authorizations 3,000,000 3,000,000

FINANCIAL STRENGTH AND CREDIT RATINGS

See Part I, Item 1, "Business-Financial Strength and Credit Ratings."

CONTINGENCIES AND LITIGATION

See Item 8, "Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 19-Commitments and Contingencies."

OFF-BALANCE SHEET ARRANGEMENTS

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

CONTRACTUAL OBLIGATIONS


Our financing obligations generally include debts, lease payment obligations and
commitments to fund commercial mortgage loans. The remaining obligations reflect
the long-term portion of other liabilities and our obligations under our
insurance and annuity product contracts.

The following table summarizes our contractual obligations by period in which
payments are due:



                                                    Less than 1                                             More than 5
(In millions)                        Total              year           1 to 3 Years       3 to 5 Years         Years
Contractual obligations:
Short-term debt and capital
lease obligations                 $        1.0      $        1.0      $            -     $            -     $          -
Long-term debt and capital
lease obligations                        551.4                 -                 1.3                  -            550.1
Interest on debt obligations             212.0              33.2                66.4               56.1             56.3
Operating lease obligations               39.5               9.8                15.3               11.7              2.7
Funding requirements for
commercial mortgage loans                144.8             144.8                   -                  -                -
Purchase obligations                      26.9              21.0                 5.9                  -                -
Insurance obligations(1)               7,561.5           1,230.4             1,196.7              927.1          4,207.3
Policyholder fund
obligations(2)                         5,237.4           4,522.5               106.3               90.1            518.5
Separate account
liabilities(3)                         5,154.3           5,154.3                   -                  -                -
Other short-term and long-term
obligations                              307.7              63.6                51.7               37.9            154.5
                                  - ---------- -    - ---------- -    -- ----------- -   -- ----------- -   -- --------- -
Total contractual obligations     $   19,236.5      $   11,180.6      $     

1,443.6 $ 1,122.9 $ 5,489.4


  (1)   The estimated payments expected to be due by period for insurance
        obligations reflect future estimated cash payments, for pending and future
        potential claims, to be made to policyholders and others for future policy

benefits, policyholders' account balances, policyholders' dividends, and

reinsurance payables. These future estimated net cash payments are based on

        mortality, morbidity, lapse and other assumptions comparable with our
        experience, consider future premium receipts on current policies in force,

and assume market growth and interest crediting consistent with assumptions

        used in amortizing DAC and VOBA. These




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net cash payments are undiscounted with respect to interest and, as a result,

the sum of the net cash payments shown for all years in the table of $7.56

billion exceeds the corresponding liability amount of $5.84 billion included

in the Consolidated Financial Statements as of December 31, 2012. We have made

significant assumptions to determine the future estimated net cash payments

related to the underlying policies and contracts. Due to the significance of

   the assumptions used, actual net cash payments will differ, possibly
   materially, from these estimates.


  (2)   While historical withdrawal patterns indicate withdrawal primarily occurs
        in periods in excess of one year, policyholder fund obligations in the

amount of $4.11 billion have been included in the less than one year column

of the table as they may be withdrawn upon request. These net cash payments

        are undiscounted with respect to interest but reflect an offsetting effect
        due to reinsurance receivables and, as a result, the sum of the net cash

payments shown for all years in the table of $5.24 billion differs from the

corresponding liability amount of $5.53 billion included in the

Consolidated Financial Statements as of December 31, 2012. Due to the

significance of the assumptions used, actual net cash payments will differ,

possibly materially, from these estimates.

(3) Separate account liabilities are legally insulated from general account

obligations, and it is generally expected these liabilities will be fully

funded by separate account assets and their related cash flows. While

historical withdrawal patterns indicate withdrawal primarily occurs in

periods in excess of one year, separate account liabilities in the amount

of $5.15 billion have been included in the less than one year column of the

        table as they may be withdrawn upon request.



Our debt obligations consisted primarily of the $250 million 5.00% 2022 Senior Notes and the $300 million 6.90% Subordinated Debt. See Item 8, "Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 18-Long-Term Debt" for additional information.


In the normal course of business, we commit to fund commercial mortgage loans
generally up to 90 days in advance. At December 31, 2012, we had outstanding
commitments to fund commercial mortgage loans totaling $144.8 million, with
fixed interest rates ranging from 4.50% to 5.50%. 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 deposit may be
refunded to the borrower, less an administrative fee.

The insurance obligations in the table are actuarial estimates of the cash
required to meet our obligations for future policy benefits and claims. These
estimates do not represent an exact calculation of our future benefit
liabilities, but are instead based on assumptions, which involve a number of
factors, including mortality, morbidity, recovery, the consumer price index,
reinsurance arrangements and other sources of income for people on claim.
Assumptions may vary by age and gender and, for individual policies occupation
class of the claimant, time elapsed since disablement, and contract provisions
and limitations. 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. Changes in one or more of these factors or incorrect assumptions
could cause actual results to be materially different from the information
presented in the table.

Policyholder fund obligations include payments based on currently scheduled withdrawals and annuity benefit payments stemming from liabilities shown on the balance sheet as policyholder funds.


Other long-term obligations reflected in our balance sheet at December 31, 2012,
consisted of $175.7 million in expected benefit payments for supplemental, home
office, and field office retirement plans, $39.9 million in expected benefit
payments for the postretirement benefit plan, $66.4 million in capital
commitments related to our tax-advantaged investments, a $13.9 million tax
reimbursement liability related to the block of life insurance business sold to
Protective Life Insurance Company ("Protective Life") in 2001, and a $10.5
million liability for our deferred compensation plan.



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 were $0.2 million and $0.9 million for
2012 and 2011, respectively. At December 31, 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 NAIC.



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Statutory accounting practices differ in some respects from GAAP. The principal statutory practices that differ from GAAP are:

• Bonds and commercial mortgage loans are reported principally at amortized

cost and adjusted carrying value, respectively.

• Asset valuation and the interest maintenance reserves are provided as

prescribed by the NAIC.

• Certain assets designated as non-admitted, principally deferred tax assets,

      furniture, equipment, and unsecured receivables, are not recognized as
      assets, resulting in a charge to statutory surplus.

• Annuity considerations with life contingencies, or purchase rate guarantees,

are recognized as revenue when received.

• Reserves for life and disability policies and contracts are reported net of

ceded reinsurance and calculated based on statutory requirements, including

required discount rates.

• Commissions, including initial commissions and expense allowance paid for

reinsurance assumed, and other policy acquisition expenses are expensed as

incurred.

• Initial commissions and expense allowance received for a block of reinsurance

ceded net of taxes are reported as deferred gains in surplus and recognized

as income in subsequent periods.

• Federal income tax expense includes current income taxes defined as current

year estimates of federal income taxes and tax contingencies for current and

      prior years and amounts incurred or received during the year relating to
      prior periods, to the extent not previously provided.

• Deferred tax assets, net of deferred tax liabilities, are included in the

regulatory financial statements but are limited to those deferred tax assets

that will be realized within three years.

• Annuity reserves follow the commissioner's annuity reserve valuation

methodology rather than GAAP guidance for investment contracts.

• Surplus notes are classified as equity for statutory reporting and are

classified as a liability for GAAP reporting.



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"):



                                                       Years ended
                                                      December 31,
                         

---------------------------------------------------------------------

                                          Dollar                        Dollar
  (In millions)             2012          Change         2011           Change          2010
  Statutory Results       $   182.3      $   (2.8 )    $   185.1      $   (132.3 )    $   317.4
  Adjusted GAAP Results       192.1          (6.3 )        198.4          (131.3 )        329.7
                          - ------- --   - ------ --   - ------- --   -
-------- --   - ------- --
  Difference              $    (9.8 )    $    3.5      $   (13.3 )    $     (1.0 )    $   (12.3 )

The decrease in Statutory Results for 2012 compared to 2011 was primarily due to an increase in group long term disability reserves due to higher claims experience. The decrease in Statutory Results for 2011 compared to 2010 was primarily due to an increase in group long term disability reserves.


The fluctuations in the difference between the Statutory Results and Adjusted
GAAP Results for 2012 compared to 2011 and 2011 compared to 2010 were primarily
due to differences in the prescribed accounting treatments between GAAP and
Statutory Accounting Requirements 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 noninsurance subsidiaries, and DAC.

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



                                                                  December 31,
                                                  

-------------------------------------------

Percent

(Dollars in millions)                                 2012             2011 

Change

Statutory capital adjusted to exclude asset
valuation reserves for our regulated insurance
subsidiaries                                       $   1,377.1      $   1,300.3            5.9 %
Asset valuation reserve                                  117.5            107.2            9.6




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Accounting Pronouncements

See Item 8, "Financial Statements and Supplementary Data- Notes to Consolidated Financial Statements-Note 1-Summary of Significant Accounting Policies-Accounting Pronouncements."

Critical Accounting Policies and Estimates


Our consolidated financial statements and certain disclosures made in this Form
10-K 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 December 31, 2012,
our fixed maturity securities watch list totaled $1.7 million at fair value and
$1.7 million at amortized cost. We recorded $3.2 million of OTTI related to
credit loss due to impairments for 2012, compared to $1.8 million for 2011. We
recorded no OTTI related to noncredit loss for 2012 and 2011. See Item 8,
"Financial Statements and Supplementary Data-Notes to Consolidated Financial
Statements-Note 1-Summary of Significant Accounting Policies-Investment
Valuations-Fixed Maturity Securities-Available-for-Sale" 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



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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 8, "Financial
Statements and Supplementary Data-Notes to Consolidated Financial
Statements-Note 9-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.



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, debt coverage ratios, loan to value ratios,
actual loan loss experience and individual loan analysis. 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. 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 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 $95.5 million at December 31, 2012, compared to $92.7 million at December 31, 2011. The $2.8 million increase in total real estate during 2012 was primarily due to a $3.8 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.

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.

In October 2010, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update ("ASU") No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU No. 2010-26 amends the



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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:



                                                             December 31,
                                                

------------------------------------

                                                                             Percent
   (Dollars in millions)                           2012          2011         Change
   DAC                                           $   284.9     $   274.4          3.8 %
   VOBA                                               23.4          26.4        (11.4 )
   Other intangible assets                            38.2          44.1        (13.4 )
                                                 - ------- -   - ------- -

Total DAC, VOBA and other intangible assets $ 346.5$ 344.9

      0.5




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. We
normally defer 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
50% 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. 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 $65.4 million and $62.4 million at
December 31, 2012 and 2011, respectively.



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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:



                                 December 31, 2012December 31, 2011
                             -------------------------      -  

-------------------------

     (Dollars in millions)     Amount         Percent             Amount         Percent
     DAC                     $      60.9          21.4 %        $      60.7          22.1 %
     VOBA                            5.9          25.2                  7.1          26.9



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:



                                                         Years ended
                                                        December 31,
                                  

-------------------------------------------------------

                                               Dollar                  Dollar
        (In millions)               2012       Change       2011       Change       2010
        Decrease to DAC and VOBA   $   1.7     $   0.8     $   0.9     $   0.4     $   0.5




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 an Asset Management business acquired and an individual
disability marketing agreement. Customer lists have a combined estimated
weighted-average remaining life of approximately 7.4 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 $36.5 million and $30.6 million at December 31, 2012 and 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.



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



                                             December 31,
                                      ---------------------------
                    (In millions)        2012            2011
                    Reserves:
                    Policy reserves   $   1,072.0     $   1,061.2
                    Claim reserves        4,771.2         4,622.4
                                      - --------- -   - --------- -
                    Total reserves    $   5,843.2     $   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.

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



                                       December 31,         Percent of          December 31,         Percent of
(Dollars in millions)                      2012               Total                 2011               Total
Reserves:
Reserves determined through
prescribed methodology                $      5,186.2               88.8 %      $      5,056.6               89.0 %
Reserves determined by
internally-developed formulas                  648.2               11.1                 620.7               10.9
Reserves based on subjective
judgment                                         8.8                0.1                   6.3                0.1
                                      -- ----------- -     -- --------- --     -- ----------- -     -- --------- --
Total reserves                        $      5,843.2              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:



                                                              December 31,
                                                       ---------------------------
   (In millions)                                          2012            2011
   Policy reserves:
   Individual disability insurance                     $     233.7     $    

219.8

Individual and group immediate annuity businesses 237.4

 244.2
   Individual life insurance                                 600.9           597.2
                                                       - --------- -   - --------- -
   Total policy reserves                               $   1,072.0     $   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.



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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.



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:



                                                     December 31,
                                              ---------------------------
            (In millions)                        2012            2011
            Claim reserves:
            Group disability insurance        $   3,250.7     $   3,135.2
            Individual disability insurance         755.2           721.8
            Group life insurance                    765.3           765.4
                                              - --------- -   - --------- -
            Total claim reserves              $   4,771.2     $   4,622.4




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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 insurance 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 average discount rate used for newly incurred long term disability claim reserves and life waiver reserves:



                                            Years ended December 31,
                                        ---------------------------------
                                          2012          2011        2010
                Average discount rate       4.18 %       5.13 %      5.00 %




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
decrease in the average discount rate from 2012 to 2011 was primarily the result
of a continued low interest rate environment. 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 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 2012 that would indicate a sustained underlying trend
that would affect the claim termination rates used in the calculation of
reserves.

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
$3.7 million in 2012, while we did not increase any IBNR claim reserves in 2011.
We released IBNR claim reserves totaling $11.7 million and claim reserves
totaling $2.9 million in 2010.



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We refined the claim termination rate assumptions for the reserves on a small
block of individual disability claims based on a blend of our experience and
industry data in 2012, 2011 and 2010 which resulted in an increase in reserves
of $4.9 million, $5.5 million and $12.5 million, respectively. 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 refined our reserve calculation for certain other individual disability claims in 2012, 2011 and 2010, which resulted in decreases in our individual disability reserves of $1.1 million, $1.9 million and $4.7 million, respectively.


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. The employee pension plan is sponsored by StanCorp and the agent pension
plan is sponsored by Standard. Both plans are administered by Standard
Retirement Services, Inc. and are closed for new participants. In addition,
eligible executive officers are covered by a non-qualified supplemental
retirement plan.

We also have a postretirement benefit plan that includes medical, prescription
drug benefits and group term life insurance. 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
2012, the postretirement benefit plan was amended to reduce future benefits to
plan participants that are either not eligible to or choose not to retire by
July 2, 2013. The 2012 amendment will not affect future benefits for employees
who retire prior to July 2, 2013. In addition, as of December 31, 2011, the
group term life insurance benefit was curtailed for plan participants who were
not retired at December 31, 2011.

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
       (In millions)                                  Increase       Decrease

Effect on total of service and interest cost $ 0.6 $ (0.5 )

Effect on postretirement benefit obligation 2.2 (1.8 )

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 8, "Financial Statements and Supplementary Data-Notes to 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 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 bases 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 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
asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term 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. See Item 8, "Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 7-Income Taxes."

FORWARD-LOOKING STATEMENTS


From time to time StanCorp or its representatives make written or oral
statements, including some of the statements contained or incorporated by
reference in this Annual Report on Form 10-K and in other reports, filings with
the Securities and Exchange Commission, press releases, conferences or
otherwise, that are other than purely historical information. These statements,
including estimates, projections, statements related to business plans,
strategies, objectives and expected operating results and the assumptions upon
which those statements are based, are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E
of the Exchange Act, as amended. Forward-looking statements also include,
without limitation, any statement that includes words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," "seeks," "will be,"
"will continue," "will likely result" and similar expressions that are
predictive in nature or that depend on or refer to future events or conditions.
Our forward-looking



                       60   STANCORP FINANCIAL GROUP, INC.

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statements are not guarantees of future performance and involve uncertainties
that are difficult to predict. They involve risks and uncertainties which may
cause actual results to differ materially from the forward-looking statements
and include, but are not limited to, the following:

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

administration including performance of equity investments in the separate

account, gross profits and profitability.

• Availability of capital required to support business growth and the effective

utilization of capital, including the ability to achieve financing through

debt or equity.

• Changes in our liquidity needs and the liquidity of assets in its investment

portfolio.

• 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 its 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 bond call premiums, commercial mortgage loan

prepayment fees and commercial mortgage loan 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.

• Environmental liability exposure resulting from commercial mortgage loan and

real estate investments.

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