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A.M. Best Affirms Ratings of StanCorp Financial Group, Inc. and Its Subsidiaries

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A.M. Best has affirmed the financial strength rating (FSR) of A (Excellent) and the issuer credit ratings (ICR) of “a” of the insurance subsidiaries of StanCorp Financial Group, Inc. (StanCorp) [NYSE:SFG]: Standard Insurance Company and The Standard Life Insurance Company of New York. Collectively, the group is referred to as Standard Insurance Group (The Standard) (headquartered in Portland, OR).

Concurrently, A.M. Best has affirmed the ICR of “bbb” and the existing debt ratings of StanCorp. The outlook for all ratings is stable. (See below for a detailed listing of debt ratings.)

The ratings reflect The Standard’s established presence in the market for employee benefits as it remains a top 10 provider of group disability income and group life products. The company continues to generate strong statutory and GAAP earnings, facilitating growth in capital which A.M. Best believes is currently sound.

While recent earnings have been modestly impacted by some claims volatility in the insurance services segment, this has been offset by increasing earnings in the asset management segment driven by growth in assets under management. Additionally, rate increases implemented over the past few years along with expense management initiatives have enhanced product profitability. Moreover, recent debt paydowns have reduced StanCorp’s financial leverage and improved interest coverage ratios, which remain well within A.M. Best’s expectations for the current ratings.

While operating results remain favorable, The Standard continues to face a competitive pricing environment within its core group life and disability product lines. This, coupled with continued economic uncertainty pressuring revenue growth and investment income, creates a challenging environment for group disability income carriers. Moreover, although The Standard continues to be successful in investing in niches within the commercial mortgage loan asset class, the group’s exposure is considerable relative to its capital and surplus position as well as to peers. The sheer size of the portfolio, the significant exposure to retail and office property types, and the geographic concentration of the loans (in California and the Pacific Northwest) expose The Standard to certain market, economic and natural disaster risks. However, A.M. Best notes that the holdings have a low average loan size, minimal delinquency rates, and most loans are written with personal guarantees from the borrowers.

A.M. Best believes that a positive rating action for StanCorp or its subsidiaries is unlikely over the near to medium term. A negative rating action could result from deterioration in operating results due to elevated benefit ratios, significant spread compression within interest-sensitive liabilities, or a material increase in investment losses within the commercial mortgage loan portfolio, which could lead to a considerable decline in risk-adjusted capital.

The following debt ratings have been affirmed:

StanCorp Financial Group, Inc.-
– “bbb” on $250 million 5.00% senior unsecured notes, due 2022
– “bb+” on $300 million 6.90% junior subordinated debentures, due 2067 (currently $253 million outstanding)

The following shelf ratings have been affirmed:

StanCorp Financial Group, Inc.-
– “bbb” on senior unsecured debt
– “bbb-” on subordinated debt
– “bb+” on preferred stock

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

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

Copyright (c) 2014 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

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