Fitch Downgrades StanCorp Financial Group's Ratings; Outlook Stable

Fitch Ratings has downgraded the Issuer Default Rating (IDR) of StanCorp Financial Group (SFG) to 'BBB+' from 'A-' and the Insurer Financial Strength (IFS) ratings of its subsidiaries, Standard Insurance Company and Standard Life Insurance Company of New York to 'A' from 'A+'. The Rating Outlook is Stable. A full rating list is shown below.

Today's rating action primarily reflects SFG's declining operating profitability over the past few years and weakened interest coverage. Given the challenging competitive conditions in the company's core markets, Fitch does not foresee a near-term return to previous performance for the company.

SFG's historically favorable earnings, driven by its group long-term disability (LTD) and group life insurance business, have weakened in recent years due to a competitive market environment and poor economic conditions. SFG reported pre-tax operating income of $202 million in 2011, down from $334 million in 2010. The benefit ratio for the company's group insurance segment, its primary earnings driver, has increased in each of the past four years from 73.6% in 2008 to 83.1% in 2011. These trends led to a decline in interest coverage to 6.2 times in 2011 from a historical range 9-11 times (x).

SFG's statutory total adjusted capital declined modestly in 2011 to $1.3 billion, and the NAIC risk based capital ratio of its insurance subsidiaries also declined modestly in 2011 to 327% from 331% in 2010. Fitch estimates the 2011 ratio benefited approximately 15 points from a reinsurance agreement executed at the end of the year. Statutory dividend capacity is expected to decline in 2012 relative to 2011.

SFG's ratings are supported by the company's adequate balance sheet fundamentals and solid competitive position in the U.S. group insurance market. The company's balance sheet fundamentals reflect strong asset quality, good risk adjusted capitalization, and reasonable financial leverage. SFG's total financing and commitments ratio was approximately 0.3x and adjusted financial leverage was 24% at Dec. 31, 2011. SFG has near-term refinancing risk from its $250 million debt maturity in October 2012. Fitch believes the holding company has sufficient financial capacity from existing cash, bank lines and insurance company dividends to meet this obligation.

Fitch believes that SFG's insurance subsidiaries maintain a high-quality bond portfolio. Below investment grade (BIG) bonds accounted for only 6% of the fixed maturity portfolio or a low 27% of total adjusted capital (TAC) at Dec. 31, 2011. Market values of SFG's fixed maturity investments continue to improve with the investment market, bringing gross unrealized losses down to just $20 million and gross unrealized gains up to $581 million at yearend 2011. The speed and amount of recovery reflects the conservative nature of SFG's bond portfolio and the relatively low amount of financial sector securities.

While SFG's commercial mortgage portfolio (approximately 40% of total invested assets at Dec. 31, 2011 with a geographical weight towards California) is much larger than the industry average, Fitch believes it is complementary to the company's stable liability structure. Commercial mortgage loan loss experience, although heightened in recent years, remains in line with Fitch's overall loss expectations and not far above industry delinquency experience. Longer-term concerns over the illiquidity of SFG's larger commercial mortgage portfolio persist.

The key rating triggers that could result in an upgrade include:

--A substantial increase in run-rate risk-adjusted capital above 350%, with no significant deterioration in capital quality;

--A long-term improving trend in the group benefit ratio substantially below its historic baseline of about 74%.

The key rating triggers that could result in a downgrade include:

--A prolonged deterioration in the company's group benefit ratio above the 2011 level of 83%;

--An increase in financial leverage above 30%;

--A decrease in RBC below 300%, or a significant decrease in the quality of capital supporting the company's RBC;

--A significant deterioration in the performance of the company's commercial mortgage loan portfolio.

Fitch downgrades the following ratings with a Stable Outlook:

StanCorp Financial Group

--IDR to 'BBB+' from 'A-';

--Senior debt rating to 'BBB' from 'BBB+';

--10-year 6.875% $250 million senior notes due Oct. 1, 2012 to 'BBB' from 'BBB+';

--Junior subordinated debt rating to 'BB+' from 'BBB-';

--60-year $300 million junior subordinated debt due May 29, 2067 to 'BB+' from 'BBB-'.

Standard Insurance Company

--IFS rating to 'A' from 'A+'.

Standard Life Insurance Co. of New York

--IFS rating to 'A' from 'A+'.

Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. The issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 22, 2011).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018

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