StanCorp Financial Group Inc. Q3 2008 Earnings Conference Call Transcript

| About: StanCorp Financial (SFG)

StanCorp Financial Group, Inc. (NYSE:SFG)

Q3 FY08 Earnings Call

October 23, 2008, 12:00 PM ET

Executives

Jeffrey J. Hallin - Second VP of IR and Financial Planning

Eric E. Parsons - Chairman and CEO

Floyd F. Chadee - Sr. VP and CFO

Greg Ness - President and COO

Kim W. Ledbetter - Sr. VP, Asset Management Group

Analysts

Keith Walsh - Citigroup

Eric Berg - Barclays Capital

Elizabeth Malone - KeyBanc

John M. Nadel - Sterne Agee

Mark Finkelstein - Fox Pitt Kelton

Jukka Lipponen - Keefe, Bruyette & Woods

Dustin Brumbaugh - Ragen Macjenzie

Operator

Welcome to the StanCorp Financial Group Incorporated Third Quarter 2008 Financial Review Conference Call. All lines have been placed on mute to prevent any background noise. Today's conference call is being webcast live over the internet and is also being recorded. A question-and-answer session will follow today's presentation. [Operator Instructions].

At this time, I would like to turn the call over to Mr. Jeff Hallin, StanCorp's Second Vice President of Investor Relations for opening remarks and introductions. Please go ahead, sir.

Jeffrey J. Hallin - Second Vice President of Investor Relations and Financial Planning

Thank you, Leslie and welcome to StanCorp's third quarter 2008 financial review conference call. Here to-date to discuss the company's third quarter results are Eric Parsons, Chairman and Chief Executive Officer; Floyd Chadee, Senior Vice President and Chief Financial Officer; Greg Ness, President and Chief Operating Officer; Kim Ledbetter, Senior Vice President, Asset Management Group; and Rob Erickson, Vice President and Controller.

Today's call will begin with some brief comments from Eric, Floyd, and Greg. And then we'll open it up for questions.

Before we begin, I need to remind you that certain comments made during this conference call will include statements regarding growth plans and other anticipated developments for StanCorp's businesses and the intent, belief, and expectation of StanCorp's management regarding its future performance.

Some of the statements made are not historical facts, but are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements are subject to risks and uncertainties, actual results may differ from those expressed or implied. Factors that could cause actual results to differ materially from those expressed or implied have been disclosed as risk factors in the company's third quarter earnings release and 2007 Form 10-K.

With that, I would like now like to turn the call over to Eric. Eric?

Eric E. Parsons - Chairman and Chief Executive Officer

Thank you, Jeff and thanks to all of you who have joined us for our third quarter earnings call. In the midst of turbulent times, StanCorp Financial Group continues to perform well. Earnings in the third quarter were strong, and we remained well capitalized despite securities impairments driven primarily by our previously disclosed holdings in Lehman Brothers, AIG and Washington Mutual.

Third quarter net income excluding after tax net capital gains and losses was $1.46 per diluted share, a 13.2% increase over the third quarter of 2007. This increase was primarily driven by comparatively favorable claims experience in our group insurance businesses. All claims experience is inherently volatile when viewed on a quarterly basis. We're very pleased to have had three consecutive quarters of favorable claims experience in 2008.

Our asset management segment also delivered solid results. Although, headwinds in the current equity markets reduced overall assets under administration, profits remained stable and net cash flows in our retirement plans business continued to be positive.

Aside from earnings, we recognized that investors in life insurance companies are paying particular attention to investment portfolios and capital positions. At StanCorp, both remained strong.

As I mentioned and like most financial institutions, we realized some capital losses on securities during the third quarter. But our capital position continues to grow. Our commercial mortgage loan portfolio continues its long history of excellent performance. We have no direct exposure to sub-prime or Alt-A mortgages and there were no material losses in our mortgage portfolio during the quarter.

As Mark Fisher, the officer who manages our mortgage loan business likes to remind me; we made our first mortgage loan more than a 100 years ago, before we sold our first insurance policy. We've continued to build our loan underwriting expertise ever since.

Your management team continues to grow as well. In September, we announced the appointment of Greg Ness, as President and Chief Operating Officer of StanCorp Financial Group and Standard Insurance Company.

As you know, Greg has been leading our insurance services business for more than four years now. With his added responsibility for the asset management group, Greg will focus on identifying ways to use our combined expertise and strong brand among employers and producers to enhance the ability of our field force to open more doors and close more sales.

You'll hear from Greg shortly. But first, I'll turn the call over to Floyd, to discuss the financial results. We'll leave plenty of time at the end for your questions.

Floyd F. Chadee - Senior Vice President and Chief Financial Officer

Thank you, Eric. As we announced yesterday, our earnings per diluted share excluding after-tax net capital gains and losses were $1.46 for the quarter, compared to $1.29 for the third quarter of last year. As Eric mentioned, these results were driven mainly by very favorable claims experience in our group insurance business.

We currently have approximately a $170 million of excess of capital and excess of our target RBC ratio of 300%. Risk-based capital, other insurance subsidiaries were 327%. As these numbers illustrate, we're very well capitalized.

During the quarter, we continued to grow book value, in spite of having recognized some losses on our fixed maturity securities.

In the third quarter, we repurchased 177,500 shares at a total cost of $8.4 million, on an average price of $47.40 per share. We will continue to evaluate our share repurchase activity in the midst of an extremely unusual economy combined with volatile equity markets.

In the Insurance Services segment, income before income taxes for the third quarter was a $103.4 million, compared to $93.3 million in the third quarter of last year. Greg will talk further about the very favorable benefit ratio in our group insurance business that drove these results.

During the third quarter, we have the discount rates used to establish new reserves at 5.25%. The average new money interest rate margin over the average discount rate for the previous 12 months was 46 basis points and the overall portfolio margin at the end of the quarter was 44 basis points.

Moving to investments, we target a portfolio mix consisting of approximately 60% fixed maturity securities and 40% commercial mortgage loan. Our fixed maturity securities portfolio is well diversified and continues to perform well. With a current portfolio each year the 5.55% and then average portfolio rating of A is measured by Standard in forward.

The after tax capital losses for the quarter amounting to $31.6 million, mainly reflected recognition of other than temporary impairments of previously disclosed holdings of Lehman Brothers, AIG and Washington Mutual.

During the quarter, we also sold some loans received by small regional banks to further reduce the exposure to financial institutions. We monitor our holdings by both industry and individual company and we limit our exposures to any single industry or company.

We target our diversification to the Lehman credit index, modified for a target government holding to avoid risk related industry concentration. And we generally keep our corporate into exposures to less than 1% of the bond portfolio, which translates into 0.6% of the investments portfolio.

Net unrealized losses totaled a $150.6 million. Most of the unrealized losses are related to changes in interest rates rather than credit problem with a particular issuance. We stress that our fixed maturity securities portfolio contains no CDOs, CMBSs or Alt-A risks. It is times like these that the value of a conservative investment approach becomes apparent.

Our investment approach has statistically avoided the types of structured products that did not need meet some adequate level of transparency for good decision making.

When we undertake mortgage risks, we do so directly through loans that we originate and underwrite ourselves rather than in the package products such as CMBSs.

So with that, we can turn into the mortgage side of our investment portfolio where we continue to see good results. The delinquency reached quite up modestly, continues to be extremely small at 16 basis points. This portfolio of fixed-rate commercial loans, which we underwrite and service ourselves, provides a unique investment opportunity to achieve high yields with lower risks.

The commercial mortgage loan portfolio yield for the quarter was 6.38%; loan originations for the quarter were $347 million. The current state of the mortgage industry continues to create opportunities for us to originate high quality loans with widest spreads to well qualified borrowers.

On new loan, we are achieving spreads of 275 to 325 basis points over comparable treasuries. These loans are first mortgages to creditworthy business people for a amount that are substantially below the value of the properties. At $2.43 billion, mortgage loans managed for third-party investors were 39% higher at September 30, 2008 compared to a year ago. These results reflect third-party investors continued confidence in the high quality fixed-rate commercial loans that we originate in service. We have good diversification by property types and geographies.

California loans represent about 30% of our portfolio, down from around 60% in 1995. Loans in California concentrated more in the coastal, metropolitan areas where the economy is better rather than in the inland valleys where most of the sub-prime problems are occurring.

We view the results for this quarter as solid on many fronts. In an economic environment in which many financial institutions have seen a substantial revision of their balance sheet, our conservative investment approach was kept asset impairments relatively contained.

Our mortgage portfolio has demonstrated a value of our underwriting expertise by outperforming many other asset classes, once viewed as having higher credit qualities. And our insurance business continues to demonstrate the value of pricing and discipline and underwriting expertise.

So with that, I'll now turn the call to Greg for a discussion of our insurance services and asset management businesses. Greg?

Greg Ness - President and Chief Operating Officer

Thank you, Floyd. The Insurance Services segment had a strong third quarter with income before income taxes up 10.8%, compared to a strong third quarter of last year. These results were driven by extremely favorable claims experience in our group insurance business.

Premiums for the Insurance Services segment for the third quarter of 2008 were up slightly from the third quarter of last year. As we mentioned last quarter, premium growth in third and fourth quarters will be negatively affected by two large case terminations as well as difficult comparisons to the second half of 2007 due to strong premium growth from jumbo size cases written last year.

Year-over-year sales comparisons also reflect the effects of large case sales. To put this in perspective, more than $65 million of sales came from three large cases during the third quarter of the last year.

While we will always compete for large cases where the opportunity for long-term profitable partnerships exist, we continued to grow our business in the small and medium sized employer markets, supporting a broad split of risk in our book of business, where the pricing meets our profit objectives.

The sales environment in all segments continues to be extremely competitive, with some competitors pricing irrationally to achieve growth.

Our group insurance benefit ratio at 71.1% was the lowest quarterly benefit ratio we have had since we became a public company. Although, experience over the past three quarters was more favorable than our annual expectation, we consider these results to be a normal fluctuation when measured over a very short timeframe. We do not see a correlation between the current economic conditions and our claim incidents rates. It's also further evidenced of our strategy to get the right rate on the right risk and provide expert claim services.

The primary focus of our claim staff is to pay every legitimate claim as quickly as possible. In addition, our claim team works with disability claimants and employers to see that those out on claim are able to return to work as soon as they reasonably can.

Despite the economic events of the quarter, the core business continues to perform well. Our continued focus on writing profitable business in the appropriate industries, where risk profiles and growth prospects are favorable helps us weather many economic scenarios.

Premiums in our individual disability business were up more than 7.5% during the quarter. Claims experience was higher than the third quarter of last year, but this is a relatively small block of business and claims may fluctuate widely from quarter-to-quarter.

Sales of individual disability contracts continue to be steady and grew 9.5% to $6.9 million this quarter when compared to the third quarter of last year.

As I am asked to assume additional responsibilities, we are fortunate to have very strong bench strength at StanCorp. This includes numerous individuals with the knowledge, experience and cultural attributes to continue our disciplined history and manage for the long-term.

My former insurance services responsibilities have been split between two such individuals; Jim Harbolt. He is 16 year veteran of the Standard, including stints and benefits, legal and running our individual disability line, we're now working conjunction with Dan MacMillan, who has been with us for 19 years in a variety of different rolls.

Dan's experience includes a firsthand understanding and knowledge of all aspects of customer delivery, operations and key large scale systems and other initiatives. I'm very pleased with the opportunity to continue to work closely with both Jim and Dan as I have over the last few years.

Turning now to the Asset Management segment, pre-tax income of $10.8 million was slightly lower than the third quarter of 2007, primarily reflecting the impact of declining equity markets on revenues and amortization of deferred acquisition cost, as well as higher expense levels due to integration and infrastructure work in our retirement plans business. Despite very strong net cash flows in our retirement plans business, the decline in equity markets more than offset the growth in assets under administration.

Individual annuities sales continued to exhibit exceptional growth during the third quarter. At $89.4 million, sales were 92% higher in the third quarter of 2007, reflecting strong growth in our distribution channels and less competition from banks and alternative investments.

Looking ahead and given the uncertain economic conditions, we expect our premium growth to be below the low end of the range we previously provided in our 2008 guidance. In addition to general economic condition, we are seeing fewer large cases come to market, which can have a substantial impact on premium growth. We'll continue to be selective in the cases we write, and we won't compromise the bottom line to make the top-line look good. And if there was ever a time to be disciplined, this is it. We continue to manage this business for the long-term.

We continued to sell and to retain customers in several recession resistant sectors where stronger employment growth is present despite the current economic slowdown. Our focus remains on our core expertise in customer service, risk selection, pricing discipline all delivering superior value to our customers in this very competitive environment.

We have operated this business profitably through several recessions and our prior experience and continued discipline leads me to believe our success will continue.

And with that, I'll now turn the call back Jeff to begin the question-and-answer session. Jeff?

Jeffrey J. Hallin - Second Vice President of Investor Relations and Financial Planning

Thank you, Greg. Leslie, we are now ready to take questions from our participants.

Question And Answer

Operator

Thank you. Once again, today's question-and-answer session will be conducted electronically. [Operator Instructions]. We will now take our first question from Keith Walsh of Citi. Your line is open.

Keith Walsh - Citigroup

Hey. Good afternoon everybody and congrats on a really strong quarter in a very tough market. First off, just for Greg on the loss ratio. I hear what you're saying, but you're looking at this two standard deviation move this quarter, probably two consecutive quarters or your lowest loss ratio ever. Is there a fundamental change in the way you are running this business, whether it would improvements in your claim center of pricing that is driving some of this downward trend? And then I got follow-up for Floyd. Thanks.

Greg Ness - President and Chief Operating Officer

Good morning, Keith. This is Greg. Good question. I think one that we're watching very closely as you might suspect. Let me give you a little bit of background on why we saw the results for we did, because it's interesting. First of all, I want to continue to reiterate that we are not seeing any correlation with our claims experience and what's going on in the economy.

As an example, we monitor things like claims that are susceptible to economic pressures such as a middle nervous claim back or muscular claims, all of those are very much within our anticipated ranges. So, we are not seeing anything going on there at all.

In the LTV side, we've got about 66% of our block that's in industries that experience job growth. And that's very different than I take many of our competitors would see. On the life side, we saw significantly lower severity of claims and on a life claim you should assume that means that if you normally paid up $30,000 maybe you pay out $28,000 this time around or so on.

Likewise, on the AD&D side, we also saw the exact same phenomenon there. And summer it's a difficult time for AD&D claims. We did not see increase in AD&D claims in the summer as we often times do. And again saw the severity decrease there as well.

And finally on the LTV side, one of things we're seeing is much higher claim recoveries in our early duration periods in one to two year range. And we're also seeing higher source security approvals on our continuing claims, again no sign of adverse claim impacts whatsoever.

Keith Walsh - Citigroup

Okay. And then just for Floyd, and more of a theoretical question, it's one that always bothers me or I've always asked you guys at every investor day. But, you guys run an RBC 300 or now it's over the 170 million of excess capital over your 300 target. And you have no issues with rating agencies, whereas I see a lot of companies out in the life space running 450 RBCs are higher, having capital raises and other issues with rating agencies putting them on negative watch, et cetera. How do you reconcile that difference? What is the difference in your mix of business and why don't you have those issues that others do? Thanks.

Floyd F. Chadee - Senior Vice President and Chief Financial Officer

Yes, I think Keith it's a valid question and interesting one that we have certainly looked out in the past. The question you are asking really says, here is the RBC calculation and here is 100% of RBC. But, when you target a certain percentage of that whether it's 300% or 400%, you're really making a statement about your assessments of the underlying economic capital that's required to support the risk in that business.

So we have certainly seen a lot of companies within the life space target much higher ratios 400%, 450% whereas I don't think that necessarily the sort of common view amongst sort of ancillary benefit and carriers... group ancillary benefits carriers like us. We, in fact, we look at the underlying measures of risk and think that risk is actually way less than some of these other business like variable annuity for example. Many variable annuity carriers would think that 400%, 450% might be normal. And I think recent events would show that their substantial risk in that kind of business the asset risk, the withdraw ability risk, the doc overhang risk, all huge risk that could hit you on in bad economic circumstances.

And, if we look at the risk associated with disability, for example, there is always that notion that you're going to see greater incidents in bad economic times as Greg just reiterated. We are not seeing that. So, that risk we think is far overstated.

But probably much more importantly, if you look at the risks related in the RBC calculation, so that reserves that you hold on the books, when you get the reserves, those reserves are not withdrawable. So, hence one dimension of lower risk relative to variable annuities; two, by the time you get to a season claim, the cash flow related to that season claim and season claim cleanly comes season anywhere from three to five years in duration.

The cash flow related to that is very, very predictable. So you have a liability on our book with way less risk than in some other types of life businesses.

So the point... the summary here is that within the life businesses, there are different types of risks. And I think the 300% is quite appropriate for the type of risk that we carry.

Keith Walsh - Citigroup

Thank you very much.

Operator

Your next question comes from Eric Berg of Barclays Capital. Your line is open.

Eric Berg - Barclays Capital

Thanks very much and good morning to everyone at StanCorp. So, the first thing I wanted to do is to follow up on Keith's question because I think, what I took away from the answer was sort of an explanation of what's going on. But I'm not sure whether we've really gotten that yet, whether you view the results. Maybe we have it.

I just want to confirm that you view the results as anomalous and not sustainable and not representative of a fundamental change in your business. You explain what was happening. You just didn't hit head-on in my judgment, whether you view the results as not sustainable?

Greg Ness - President and Chief Operating Officer

Eric, this is Greg. Let me give it another try then. I think what the takeaway here is that the at StanCorp, it's a very good time to have underwriting expertise firm, pricing, excellent claims management, targeted industries and a field force that understands how those pieces of together to make this thing work.

Eric Berg - Barclays Capital

Right.

Greg Ness - President and Chief Operating Officer

We have refined very much our underwriting and rotated into sectors that we think are recession resistant. We have maintained a very firm pricing in this particular marketplace. We have sharpened our claims practices at the same time. And so, while I won't comment on whether or not this is sustainable at this particular level, I don't think it's by mere accident either.

Eric Berg - Barclays Capital

But you are getting, I mean I know we don't to press on it; you are getting results materially different from your stated expectations. It would appear if you are been surprised. So the natural conclusion would be that's its not sustainable. But, I just don't know what to think about it.

Greg Ness - President and Chief Operating Officer

Go ahead.

Floyd F. Chadee - Senior Vice President and Chief Financial Officer

Yes, Eric, this is Floyd. So, just to add to that, I think you... when we reiterate, we reiterated into this business, you never look at anyone's quarter and ask the questions is that sustainable or not. So, the 71.1% that we saw this quarter clearly is unusual. It's the best loss ratio we've seen in any one quarters since becoming public. So if you... but your question is still valid. If you look at the average over the last three quarters, we've certainly seeing good results.

So the question then becomes is that sustainable. I think Greg, Greg has pointed out that we do a lot of things that should drive us in that direction. We feel we continue to do all those good things. So, certainly you should not look at the loss ratio for this quarter, any one quarter and think of it as sustainable.

Eric Berg - Barclays Capital

Okay, that's... but two comments together, very helpful. My next question concerns the guidance and the language that appears in the narrative of your news release. When you say that you provide annual guidance, I presume that doesn't... that means that you provide guidance once a year, not full year guidance many times during the year. Is that correct? When you to say company provides annual guidance?

Floyd F. Chadee - Senior Vice President and Chief Financial Officer

Yes. So, we usually provide guidance at the beginning of the year for an expectation for that calendar year. And, as we see trends for the year, we do update that, so for example last quarter we've updated our revenue growth guidance. As we trying not to get into a situation where we're giving quarterly guidance on things that fluctuate a lot, particularly our benefit ratio, so as you find as we get to the end of the year, we certainly don't want to try to predict what the loss ratio is going to be in this single quarter left for the year.

Eric Berg - Barclays Capital

The only reason Floyd I was seeking clarification is because I was sensitive to the fact that in your news release you purposefully wrote that the company previously reported as expected. In other words, it would appear from your news release that all you are doing is restating something that you had said at the end of the June quarter. But I wasn't sure from the wording whether you are attempting to say and today we are affirming this guidance, that's my question?

Floyd F. Chadee - Senior Vice President and Chief Financial Officer

I think you are absolutely right. We were restating, what is that we previously said. We were trying to avoid getting into the difficulty of trying to predict a single quarter loss ratio.

Eric Berg - Barclays Capital

Are you...but were you also trying to say and the guidance that we previously provided is still valid on your judgment. Is... were you trying to say that as well in this news release?

Floyd F. Chadee - Senior Vice President and Chief Financial Officer

Well I think we have said things that we have changed. We certainly did modify our premium growth guidance. So... which I think Greg has also described in his...

Eric Berg - Barclays Capital

Yes.

Floyd F. Chadee - Senior Vice President and Chief Financial Officer

So, but also. But, I think if you look at... it's a fairly wide range between our expectations for the benefit ratio that we set at the beginning of the year and we have the three quarters as come out. So...

Eric Berg - Barclays Capital

Last question has the... for you Floyd, has to do with the change in the unrealized loss. Several companies and now StanCorp included have said that it is biggest different phrases, I think some people have said its just credit spreads and I think that you referenced the change in the interest rates. Interest rates actually by my aspect, by the 10 year treasury no deal actually fell. I presume when you are referencing interest rates you meant the widening of credit spreads.

My question is assuming I have that premise correct, why is that a mitigating factor? In other words, I certainly understand that that's better than a credit event, such as a bankruptcy. But why should we somehow feel better about the fact that it is credits spreads widening that's causing this. I mean doesn't that mean that the market is more concerned about the recoverability of principle?

Floyd F. Chadee - Senior Vice President and Chief Financial Officer

I would say under normal economic circumstances one may try to tease out that difference between sort of the changes in the risk free rate and changes in the spreads, and attribute ones to sort of general movement in interest rates, and one towards the assessment of risk.

Eric Berg - Barclays Capital

Yes.

Floyd F. Chadee - Senior Vice President and Chief Financial Officer

Now, your guess is as good as mine in terms of being able to explain all the movements and spreads that have occurred over the last three to five months say. And in a market in which we've seen credit squeeze, it's very difficult to look at the spreads... ineffective spreads for example, and say, well that it's just cleared that is an indication of particular risk if you are associated with that sector.

We have seen a credit environment that is unlike anything that is occurred before. So I think when we make a statement of cheesing out a separation between movements and interest rates and assessment of risks, what we are saying that we have looked at the particular securities that we have within those sectors and made assessments internally off. We think that anything is about those particular companies that would lead us to have concern about those particular securities. Or does it reflect the general assessment of increasing risk in the economy as a whole that's leading to the movements in interest rates.

So, I think we are trying to make a difference between sort of recognizable risks associated with particular issues versus general movements and risk free rates and spreads and affect our spreads.

Eric Berg - Barclays Capital

Thank you.

Operator

Your next question comes from Beth Malone of KeyBanc. Your line is open.

Elizabeth Malone - KeyBanc

Thank you. Good morning. One of the questions I had was on the benefit ratio and I know you've discussed a quite a bit here. But could you... is there a reserve development that is related to the benefit ratio that we... that you disclosed?

Greg Ness - President and Chief Operating Officer

Beth, thisis as Greg. There is not.

Elizabeth Malone - KeyBanc

Okay. So, and do you disclose what your reserve developments are in that... in the employee benefits?

Greg Ness - President and Chief Operating Officer

If there were specific reserve developments, we very likely would disclose that and make you aware of it.

Elizabeth Malone - KeyBanc

But there is none in this quarter?

Greg Ness - President and Chief Operating Officer

That is correct.

Elizabeth Malone - KeyBanc

Okay. And so going... so and also the change in the interest rate I realized it was unchanged from second to third quarter. But year-over-year it was reduced. And I'm just curious what factors do you consider in that? Is it all based on the yield that you're getting on your investments that you make that assessment?

Greg Ness - President and Chief Operating Officer

Absolutely. I mean, Beth what we do is we try to set a discount rate for new claims coming in. So, what we would do is we would look at the yields that we're achieving on new money. And we try not to just look at the yields for the single quarter because that would fluctuate all over the place. So, we do a 12 month averaging and we try to maintain a reasonable margin between the new money rates that we are seeing in the discount rates, even new claims.

So what you see here is the reflection of that process. We would have used exactly the same process exactly the same methodology last year that we used this quarter. We also, when we look at that margin between the... over the 12 months period between new money rates and discount... average discount rate over that period. We also make sure we do an overall check with our entire portfolio to see that we're maintaining a proper margin on the entire portfolio.

Again, exactly the same process as last year. So, any movement that you see between this quarter and a year ago would reflect that difference in new money rates.

Elizabeth Malone - KeyBanc

Okay. And then on the share repurchase program, I mean that's always been a big part of StanCorp. And you all bought back not a significant amount of shares as you have maybe in some previous quarters. And with stock under significant pressure here, what are that factors that you've consider and especially given the fact that you've discussed having more then adequate capital to decide to buyback stock?

Floyd F. Chadee - Senior Vice President and Chief Financial Officer

So last year, we did a significant amount of buyback after the issuance of our hybrid debt. When we started off this year, we stated in intention of the... in the first quarter, to anticipate buybacks from the order of $10 million a quarter, $10 million of third quarter, which we did in the first quarter.

And then, we did less than the second quarter. It is unclear in this environment, what's the best use of excess capital. I agree with you that we've seen our stock at a price that would not have been anticipated at the beginning of the year. But then, when we look at other assets out in the market and other stock, it's clear that they are significantly down too.

It's also a period of significant... just general uncertainty in the economic environment. And we feel it might be prudent to look very closely at the various possible leases of our capital and just how much we need to keep in that environmental of uncertainty. So, we see the StanCorp stock as a great buying opportunity, but there are lot of other buying opportunities out there too and also in the certain environment probably a lot of other possible uses for that capital.

Elizabeth Malone - KeyBanc

Okay, thank you. And one last question on the mortgage business. The increase in the non-StanCorp investors in your mortgage is pretty substantial and I just... I understand its greater confidence from the general market and your capabilities. But also is there been a change in your strategy of marketing to these other entities to attract that, those assets?

Floyd F. Chadee - Senior Vice President and Chief Financial Officer

I wouldn't say there is has been change. But certainly it's been relationship that been, the building up over a period of time, that buildup demonstrates a way to confidence from those entities in the quality of mortgage loans that we do originate. So, no change, but I would expect, as you quite rightly point out there has been growth in that area.

Elizabeth Malone - KeyBanc

And should we assume that kind of growth is sustainable?

Floyd F. Chadee - Senior Vice President and Chief Financial Officer

Well I think, we certainly strive for growth, whether we'll see to the levels that we have is another question. So, it's an interesting sort of environment now for mortgage loans.

On the one hand, one sort of very carefully and the risk one is undertaking, but there is less capital out there competing for those mortgage loan. So, there are opportunities to get good loans with great spreads, very tightly underwritten loans to well qualified borrowers. So, but on the other hand there I mean, potentially less activity to do so, but less activity less competition. So it's hard to say in this uncertain environment whether the growth will be at the levels we've seen or not.

Elizabeth Malone - KeyBanc

And then one last question, I'm sorry one more. On the assets under management, in the Asset Management segment, you indicated that decline in equities was kind offset by customer deposits. Do you have and that... do you have a calculation or a figure as to how much the equity decline, what the dollar amount equity decline was in those assets?

Greg Ness - President and Chief Operating Officer

Yes, so we did, we did see something on probably the order of 10% approximately.

Elizabeth Malone - KeyBanc

Okay. So, equity assets declined 10%. And... but overall that was offset somewhat by other?

Greg Ness - President and Chief Operating Officer

Quite right. New deposits are coming in, net new deposits are positive.

Elizabeth Malone - KeyBanc

Alright, thank you.

Operator

Your next question is from John Nadel of Sterne Agee. Your line is open.

John M. Nadel - Sterne Agee

Well, that was brutal. Hi, good morning everybody. How are you doing?

Greg Ness - President and Chief Operating Officer

Great. How are you John?

John M. Nadel - Sterne Agee

Good, good. So Greg everybody has been hitting you on this benefit ratio. I guess I just... I would ask Floyd, is this just a function of... you are going to take StanCorp's benefit ratio down to the level you had at insurance? And if that sustainable, then we've got some rethinking to do, right? But in all seriousness a question about the sales outlook, may be directed for Greg. Greg, you talked about may be fewer large cases coming to market and understand you guys had lost a couple and you guys talked about that last quarter.

But in light of some issues with AIG, and a few of the other things. I guess I'm sort of surprised that there is a fewer larger cases come in the market. Do you thing that's more of the function of all the large benefit managers or all the larger companies are dealing with there own separate issues that in the benefits program, is not necessarily rising to the top of the priority list? Is this just an issue where we sort to delay that whole process well companies are dealing with other issues?

Greg Ness - President and Chief Operating Officer

John, this is Greg. I appreciate your question about the benefit ratio in insurance. Thank you very much.

In terms of the sales outlook a fewer large cases, I think we probably would be speculating so what the reasons are. Clearly some companies are whole lot more concerned with their actual operations than bringing a case to market and might just say lets just mover forward and look where we are.

John M. Nadel - Sterne Agee

Yes.

Greg Ness - President and Chief Operating Officer

I think in some cases too what we've seen so from some competitors in terms of kind of irrational pricing practices and you can do that a couple of three different ways one, you can do it by a very rich plan design; two, you can do it by very low rates and three, you can do it by guaranteeing those rates for extended periods of time.

John M. Nadel - Sterne Agee

Yes.

Greg Ness - President and Chief Operating Officer

That doesn't really work very well it kind of violates a major tentative group insurance from my perspective and that we get to look back at our experience and then re-rate it after we've had some experience. And of course of along rate guarantee sometimes that's a five years is really one way optionally on behalf of the customer because we own it for five years, no matter what but the customer can walk anytime during those five years.

John M. Nadel - Sterne Agee

Yes.

Greg Ness - President and Chief Operating Officer

So we obviously don't describe to that theory but we suspected there may be some business that it's going to tied down because of that.

John M. Nadel - Sterne Agee

Okay. And you mentioned specifically Greg, firm pricing. Is that sort of a hidden way of saying that you think how other competitors are still behaving irrationally. And I know you guys have talked about some irrational behavior pretty openly without naming companies over the past few quarters, do you see any of that changing especially in light of insurers maybe taking a harder look at there own profitability levels in this environment.

Greg Ness - President and Chief Operating Officer

Well I hope so, John. I hope that exactly what happens, I think there are number of competitors that might be in this segment of the business where it is not core to their company as a whole, they may not manage it to the same extent that we do. You understand how we manage this business and rate detail and have the data to backup for the conclusion that we reach.

At the same time, I think we still see some competitors out there that have acted irrationally. One check on that as to look and see where the industry has grown say through mid-year and then look at the competitors and see... wait a minute the industry has grown in the 4% to 5% range why are there competitors that are moving at the 20 plus percent range.

John M. Nadel - Sterne Agee

Yes, understood.

Greg Ness - President and Chief Operating Officer

That should be a red flag in a big way I think.

John M. Nadel - Sterne Agee

Yes, always is. And maybe a decent way say going into... so excess capital levels are strong perhaps a slightly lower growth rate on the top line as we look forward given some of these pressures and that's not way you want outlook to look, but it does help you grow your excess capital at a slightly faster rate. Clearly in environment where you want a cushion given the uncertainty but are there some opportunities out there from M&A prospective?

And may be more for Eric, are there some things that you're seeing or hearing where some of these as Greg mentioned maybe less core businesses for others, it could plugged of?

Eric E. Parsons - Chairman and Chief Executive Officer

John, I think in theory that would make a lot of sense and I think we'll have to see how that plays out over the next few months or so. We certainly are aware that some of the companies who do have the relatively small blocks of business may well have reasons to be thinking about rationalizing their overall portfolio or something. But on the other hand they maybe perfectly happy with what they have to and so we'll just have to see how that plays out.

John M. Nadel - Sterne Agee

Okay. And then I guess lastly to go back to the benefit ratio. So if you stick in the 77.5 to 79.5 fourth quarter is got to come in somewhere around a 100. I mean, I know you don't want to get in a habit of updating some of things on a quarterly basis. But, and volatilities clearly been demonstrated over the past but, is there anything that you can see other than just sort of normal... a normal fluctuation that would cause this current trend well below low end of your range to completely reverse itself?

Eric E. Parsons - Chairman and Chief Executive Officer

John, I would. I don't like to here you talk about 100%.

John M. Nadel - Sterne Agee

No, I know, I know, but that's what your guidance implies. I don't expect it.

Eric E. Parsons - Chairman and Chief Executive Officer

Let's be very clear the guidance was set on a annual basis.

John M. Nadel - Sterne Agee

Understood.

Eric E. Parsons - Chairman and Chief Executive Officer

As mentioned, we clearly have enjoyed three quarters of the very good claims experience. Whether or not that claims experience will continue at that end. We'll find out in about another 90 days. The bottom line for us is everyday we work and trying to reduce that benefit ratio.

John M. Nadel - Sterne Agee

Okay.

Eric E. Parsons - Chairman and Chief Executive Officer

We'll do that... it's the underwriting decisions that we make, we do that for the claims decisions we make, we do that for our claims practices and trying to get people back to work as quickly as possible and very specifically on the industries in the sectors that we target. So I would suggest that the reduction in that benefit ratio is clearly not by accident but of course as you know we are not going to forecast a quarterly benefit ratio by any stretch of imagination.

John M. Nadel - Sterne Agee

I wasn't trying to back you into it.

Eric E. Parsons - Chairman and Chief Executive Officer

I appreciate it, thank you.

John M. Nadel - Sterne Agee

It just... to may be get out of this in a slightly different way. Is there a reason to believe that this business of yours which has been plus or minus a 100 basis points around the 15% ROE. Is there any reason to believe that can shift significantly higher?

Greg Ness - President and Chief Operating Officer

Well, I think ROE changes are all driven by... a color business perform generally driven by the benefits ratio, and particularly the benefit ratio, group business. So your ROE question is intimately related to that benefit ratio that you questions that you just asked.

John M. Nadel - Sterne Agee

I know I was trying it different way.

Eric E. Parsons - Chairman and Chief Executive Officer

Actually just to add than to what Greg said earlier. We did the math. It's actually not a 100% in the fourth quarter, its 89%. That's one, I don't know, why Two, its hard to predict any single quarter, but if experience, if you look at the sort of the way the way loss ratio has changed in the group business overtime, clearly there is a volatility quarter-to-quarter, but when you look at a trend like this that has been good for three quarters. You don't necessarily expect a trend that gives you whiplash [ph] and swing back to high levels in the next three quarters. You can't get it in one quarter. You could get a huge swing because a quarter could be anything. Based on could be, of course a wide range based on that short time period.

But so what, I mean Greg, has already described the good things that we are doing to drive the benefit ratio in that direction. I would not expect after three quarter of great loss ratio to be followed by three or four quarters of loss ratio that be 89%. So you will see some trending from one direction to the other, but not necessarily would. So you won't see the very sudden fluctuation but in terms about trend is what I am trying to get out.

John M. Nadel - Sterne Agee

Okay. All right thanks very much guys.

Eric E. Parsons - Chairman and Chief Executive Officer

Thanks, John.

Operator

The next question is from Mark Finkelstein of FPK. Your line is open.

Mark Finkelstein - Fox Pitt Kelton

Good morning in Oregon [ph].

Unidentified Company Representative

Good morning Mark.

Mark Finkelstein - Fox Pitt Kelton

Few questions I guess, just thinking about '09 a little bit. Are you making nay pricing changes above and beyond the kind of normal fine tuning that you've kind of historically done. On the one hand, you've favorability understand the kind of the normal variants around that, on the other hand in some of your classes of business, although yet, not the majority, you do have some sensitivity potentially to the economy, just curious what you are doing on the pricing side

Greg Ness - President and Chief Operating Officer

Mark, this is, Greg. As you would have imagined, we are constantly reviewing the pricing. We have a caviere that's spend an off lot of time and effort going back and examining our current pricing levels, where our margin are comparing back to the plan designs, the underwriting characteristic as well as the claims experience. We continually make pricing adjustments.

Mark Finkelstein - Fox Pitt Kelton

Okay, but so, but I guess in terms of the fundamental. I mean one of your competitors talked about abnormal rate increases in certain classes of business you are not kind of doing that same action as it right now?

Greg Ness - President and Chief Operating Officer

I'm not certain, exactly what you mean by abnormal rate increases, but clearly when we look at classes of business, we look at what the experience has been in those sectors and those plan designs, those geographies and so on, and make rating adjustments appropriately.

Mark Finkelstein - Fox Pitt Kelton

Okay.

Greg Ness - President and Chief Operating Officer

That might mean that there is no rating adjustments, that might there is positive rating adjustment and in some cases that may mean there is negative adjustment.

Mark Finkelstein - Fox Pitt Kelton

Okay, okay, fair enough. And just on the pipeline, you talked about both quotation activity and hit rates I believe in terms of where the competitors are pricing, I guess which is the bigger issue in your view right now in terms of thinking about your own pipeline and thinking about growth, is it just lack of lower activity in the market or is it kind of lower hit rates?

Greg Ness - President and Chief Operating Officer

No, I think we'll look at two things. We target our reps towards the industries that we are interested in writing because we believe they have favorable characteristics. The good news there is that we do see some increased activity in those types of industries in terms of our proposal activities. So I like that standpoint a lot. We're pointing our reps in the right place and they are out working with their producers to try to get proposals on various cases in those industry segments.

I think the issue in some respects comes back down to rational pricing issue and what companies, some companies may do in efforts to hit their sales goals for the end of the year, or to make sure that the top-line looks good. And you've heard us say a million times mark. We are not going to make the top-line look good at the expense the bottom-line. That's not the way we run this business that's not a long term orientation at all.

Mark Finkelstein - Fox Pitt Kelton

Okay. And then just I guess one question on commercial mortgage loans, have you made any changes or any adjustments in whether LTV's or any other underwriting standards recently or are you still kind of max out at 75% LTV, maybe a little bit low in California, have you made any fine tuning to that?

Eric E. Parsons - Chairman and Chief Executive Officer

Is that only fine tuning that goes on in the underwriting of all mortgages. We have seen an environment where I think our mortgage people would say because of the lowering of competition for mortgage loan, we've been able to actually get better underwriting and tighter underwriting standard than we've normally have gotten in the past. So we view, if anything, it's fine tuning. It's not any massive change, but all the fine tuning in the correct direction that makes these CDs more comfortable with those owned.

Mark Finkelstein - Fox Pitt Kelton

Okay, alright, thanks guys.

Unidentified Company Representative

Thanks, Mark.

Operator

Your next question is from Jukka Lipponen of KBW your line is open.

Jukka Lipponen - Keefe, Bruyette & Woods

Good morning. Couple of questions around growth. How is your retention and I know you don't provide those numbers, the specific numbers on a quarterly base, but any color on the retention excluding those large cases and how are looking at growth going into '09, and then 2010?

Greg Ness - President and Chief Operating Officer

Hey, good morning, Jukka. This is, Greg. You are correct in recalling that we did have a couple of large case terminations at mid year that negatively impact the retention numbers. Keep in mind that the most strong and effective data is January 1 or by July 1 followed by September 1. And so we looked very carefully those dates to see what kind of retention numbers we are seeing.

I think there is another point here. StanCorp has been very profitable and we don't hesitate for a second to look at a case and if it is not providing the return that needed to, to increase the rate.

To the extent of that works, we were very happy to keep to that customer, very happy to continue that relationship, to the extent that customer says 'Gosh I can't do that' we would be very happy to have that customer leave at the same time. That will only increase our profitability moving forward. And so you see in some selective pruning if you will of our book at business as we go through and look at our actual experience in our renewal increases and so on.

Retention numbers, I think will be more difficult because of a larger loss, the large cases this year, but I suspect that we will see some of that across the industry as a whole. It's also a function of very competitive pricing and in some cases very irrational pricing.

Jukka Lipponen - Keefe, Bruyette & Woods

And how about gross going into '09?

Greg Ness - President and Chief Operating Officer

Certainly, we are working on growth, but Jukka we are not going to grow at the expense of the profitability. And so what we'll do is we will continue our conservative and discipline stands that will right the right business at the right rates, we will accept that growth rate, we will not stretch to right business to grow the top-line and not be able to return the top-lien and bottom-line.

Jukka Lipponen - Keefe, Bruyette & Woods

And on our mortgage loan portfolio, how is your watch list of property spending?

Eric E. Parsons - Chairman and Chief Executive Officer

I would say no usual trends there. We constantly monitor those mortgages and we have processes that get into taking action as soon as we see any sort of movement towards delinquency. You can see our delinquency rate. It's still very, very small. So we continue our normal discipline process in the mortgage area.

Jukka Lipponen - Keefe, Bruyette & Woods

So no major increase in numbers of properties on the work list?

Eric E. Parsons - Chairman and Chief Executive Officer

No major increase that all. You're always talking about a handful of cases that affect that delinquency rate compared with the 1000s of mortgage loans that we do have.

Jukka Lipponen - Keefe, Bruyette & Woods

And last question. In terms of the retirement plan business, the general account assets have been falling for several quarters. So, can you give us some color, why that's happening?

Eric E. Parsons - Chairman and Chief Executive Officer

Alright. So...

Kim W. Ledbetter - Senior Vice President, Asset Management Group

All right you could... hi, this is Kim Ledbetter. Well, I have that number right in front of me, I think that actually we have seeing lately some reversible back trend in terms of moving back of the general accounts. So I think you will see that change, and I think it's really declined that much general account assets have grown in total, because of some of the highly individual annuity sales during the year.

Jukka Lipponen - Keefe, Bruyette & Woods

Okay. Thank you.

Unidentified Company Representative

Thank you.

Operator

Your next question comes from the Dustin Brumbaugh of Ragen Mackenzie. Your line is open.

Dustin Brumbaugh - Ragen Macjenzie

Good morning. I promise I won't to ask a question about the benefit ratio.

Unidentified Company Representative

Thank you, Dustin.

Dustin Brumbaugh - Ragen Macjenzie

Just wanted to see if you'd be willing to talk a little bit about premium growth in the context of unemployment, potentially going from 6 to 8%. Giving your... obviously the long experience you guys have at the standard and willing there will be puts in tags in terms of geography and some of the industries where you're bit more defensive?

Greg Ness - President and Chief Operating Officer

Good question, Dustin its Greg. One of the things that we do here is we look very carefully what our industry distribution of business is. And if I look at that data, we actually divided into two groups basically, those that had employment growth and those that have not had employment growth

If I look at our entire block of the LTD business, because that's really what we're talking about here is the LTD side, by looking at the entire block of LTD business, our groups have experienced about a 1.4% employment growth. At the same time international implement growth has been -0.4%. So that's down to the key of risk selection again.

Dustin Brumbaugh - Ragen Macjenzie

Working with the security you're talking about there, I am sorry.

Greg Ness - President and Chief Operating Officer

That's a June 30 of this year, compared to June 30 of last year. That's the most recent data that I have.

Dustin Brumbaugh - Ragen Macjenzie

Okay.

Greg Ness - President and Chief Operating Officer

The other point I want to make is that, in the industry groups where there has been very good growth about over 2% as a matter of fact, that represents of our 66% our LTD block. That only compensates about 37% of the U.S. work force, until you can see that we slant our underwriting and our targeting of cases based upon what we see and we are able to rotate that based upon what we see in the economy. So as it unfolds we may change some of those targets but we may continue with those depending upon how the economy progresses over the next few months.

Eric E. Parsons - Chairman and Chief Executive Officer

So just to add to Greg's statement as soon as proceed this growth question. It's an interesting external environment and it's an external environment that's affecting both the willingness of customers to move and it's an environment that could potentially have significant effects on the level of competition.

Now where that competition goes is interesting Greg has already talked about fitting up of competitors having this kind of business non-core to the overall business and we have seen that some of the lines at the end that could we considered call have come under the intense pressure. So where we moving into an economic [indiscernible] here where from our customer point of view there could be less growth or certainly some pressure on their level of hearing. So that takes you in one direction as far as growth goes.

And then as far as the rational competition goes, we have seen the competition come under significant pressure and if that leads to rationalization of behavior in the employee benefits based and that also provides opportunity for us which we will undertake, will take advantage of as we are seeing the context of a disciplined approach.

Dustin Brumbaugh - Ragen Macjenzie

Am I... is it unfairly characterizing what you are saying, that you think you may be able to end up period where unemployment goes from 6% currently to 8% that you maybe able to operate through that environment without much erosion in the premium base?

Eric E. Parsons - Chairman and Chief Executive Officer

As that will certainly be on to... absolutely try to do as a matter of fact if you look back at the 2001 recession and then track or profitability and pose that recession you will see that our profitability actually increased during that time period.

Dustin Brumbaugh - Ragen Macjenzie

Okay. Shifting gears, I just wanted to ask a question about the fixed maturity portfolio. It looks like you shifted, you are already underway compared to bond [indiscernible] in the financials but looks like you with the losses and then with some sales may be shifted even further away from financials. Just wondering if you have an updated mix as a percentage of the portfolio their?

Eric E. Parsons - Chairman and Chief Executive Officer

We don't have an updated mix but you are right. And we certainly, certainly have looked that the financials very carefully throughout the period. So we have taking impairments in financials and we have also sold some regional banks during this quarter.

Dustin Brumbaugh - Ragen Macjenzie

And related question, just wondering if you comment about how active you are in terms of the management at that portfolio right. Now, are there other areas where you are looking to potentially reduce your exposure either in the end industry or in the ratings?

Floyd F. Chadee - Senior Vice President and Chief Financial Officer

Well, we certainly monitor what's going on in this very unusual time. We pay very close attentions, differences between markets and book. We look at that by sector. I don't think we will point to any particular thing that we're looking at, as far as sector movements go. But we continue to monitor that very closely and look at sectors that come under pressure in a very difficult economic period.

Dustin Brumbaugh - Ragen Macjenzie

Okay. And then one final question, just there is been a lot of chatter and that's all it is at this point I guess around potential accounting changes. Wondering, what you're hearing there or if you anticipate that impacting you in any way, specifically around mark-to-market?

Floyd F. Chadee - Senior Vice President and Chief Financial Officer

There certainly has been an environment that has raised the level of controversy around share value and mark-to-market significantly, more so than the heated controversy that existed even before.

I think this economic environment, my point, there is greater uncertainty and where all of that is going to go and how it affects the assessments of the viability of companies and when you do get market that freeze as we've seen over the last July. So, I think the question of your accounting, the accounting environment and accounting treatment changing going forward is clearly relevant in this environment. But I think this environment cost even greater on certainty into, what direction that may take.

Dustin Brumbaugh - Ragen Macjenzie

Okay. Thank you very much.

Greg Ness - President and Chief Operating Officer

Thank you.

Operator

Mr. Hallin, at this time I show no further questions.

Jeffrey J. Hallin - Second Vice President of Investor Relations and Financial Planning

Thank you. And I'd like to turn the call back to Eric for some closing remarks.

Eric E. Parsons - Chairman and Chief Executive Officer

Thank you, Jeff. I'd like conclude today by saying we are pleased with the company's performance in these turbulent times. Our well developed expertise and employee benefits, disability insurance and mortgage loans has successfully guided us through previous recessions and we believe we are well prepared for potentially challenging times.

We remain strong and well capitalized. We like the sectors in which we operate. Our public and higher education business is particularly well suited to this economy. As we've said many times, we manage the company conservatively and our balance sheet is built to withstand events such as those we are seeing today. While we are not completely immune to the events around us, we have strong reserves, excess capital and ample liquidity. We continued to manage for a long-term growth and profitability as we always have.

With that, thank you all very much and have a great day.

Jeffrey J. Hallin - Second Vice President of Investor Relations and Financial Planning

We'd like to thank everyone once again for joining our call. There will be a replay of this call, starting this afternoon and running through October 31st. To listen to this call, you can dial 800-642-1687 and enter the conference ID 64979685. A replay of today's webcast is also available at www.stancorpfinancial.com/investors. Thank you.

Operator

Thank you for participating in today's teleconference. You may now disconnect. .

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