StanCorp Financial Group Inc., Q1 2009 Earnings Call Transcript

Apr.22.09 | About: StanCorp Financial (SFG)

StanCorp Financial Group Inc. (NYSE:SFG)

Q1 2009 Earnings Call

April 22, 2009 12:00 pm ET

Executives

Eric E. Parsons - Chairman, Chief Executive Officer

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

Scott A. Hibbs - Vice President, Asset Management Group

Robert M. Erickson - Vice President and Controller

Mark Fisher - Vice President and Managing Director, StanCorp Mortgage Investors.

Jim Harbolt - Vice President, Insurance Services Group

Dan McMillan - Vice President, Insurance Services Group

Jeffrey J. Hallin - Assistant Vice President of Investor Relations

Analysts

Edward Spehar - Bank of America

Elizabeth Malone - Wunderlich Securities

Randy Binner - FBR Capital Markets

Mark Finkelstein - Fox-Pitt Kelton

Eric Berg - Barclays Capital

William J. Dezellem - Tieton Capital Management

Dustin Brumbaugh – Ragen Mackenzi

John Nadel – Sterne, Agee & Leach

John Evans – [Wells Capital]

Operator

Welcome to the StanCorp Financial Group Inc. first quarter 2009 financial review conference call. (Operator Instructions). At this time, I would like to turn the call over to Mr. Jeffrey Hallin, StanCorp's Assistant Vice President of Investor Relations for opening remarks and introductions.

Jeffrey J. Hallin

Welcome to StanCorp’s first quarter 2009 financial review conference call. Here today to discuss the company's first quarter results are Eric Parsons, Chairman and Chief Executive Officer; Dr. Floyd Chadee, Senior Vice President and Chief Financial Officer; Scott Hibbs, Vice President, Asset Management Group; Rob Erickson, Vice President and Controller; and Mark Fisher, Vice President and Managing Director of StanCorp Mortgage Investors.

I’d like to note that Greg Ness, President and Chief Operating Officer is home with a flu this morning and not able to join us on the call today. Jim Harbolt and Dan McMillan both Vice Presidents in the Insurance Services Group will be backing Greg up on the Q&A.

Today’s call will begin with some brief comments from Eric and Floyd, and then we will 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 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 the actual results to differ materially from those expressed or implied have been disclosed as risk factors in the company’s first quarter earnings release and 2008 Form 10-K.

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

Eric E. Parsons

Thanks to all of you who have joined us for our first quarter earnings call. While the current economic climate continues to offer a number of challenges, StanCorp Financial Group is performing well, turning in yet another solid quarter of earnings.

Earnings from operations which exclude after tax net capital gains and losses and one-time costs associated with our efforts to reduce long-term operating expenses were $1.13 per share in the first quarter of 2009 compared to $1.08 in the first quarter of 2008. The increase was primarily due to continued favorable claims activity in the insurance services segment, partially offset by reduced earnings in the asset management segment which was impacted once again by declining equity values.

In the first quarter, the state of the overall economy continued to dominate the headlines. While we recognize that the current economy presents a unique set of business conditions, we are very pleased with our results and believe they reflect a consistent application of our long-term business model and investment practices.

In our insurance services segment, revenue growth has been a challenge but we continue to produce solid profits. Premiums for the insurance services segment for the first quarter of 2009 were up slightly from the first quarter of last year. The increase in premiums was largely due to the termination of a re-insurance agreement resulting in a premium payment of approximately $18 million within the individual disability business in the first quarter of the year. Offsetting the effects of the re-insurance termination was a slight year-over-year decrease in premiums in our group insurance business largely due to the difficult economic and competitive landscape combined with our disciplined underwriting approach.

Group insurance premiums decreased just under 2% from the first quarter of last year. In line with our expectations, the effects of slower economic conditions on wages and job growth presented short-term top-line growth challenge. Our bottom-line continues to be profitable because we are especially selective on the types of cases that we write and retain. In addition, our premiums remain well diversified for economic pressures with a large percentage of premiums earned in sectors that are still growing or experiencing relatively fewer job losses when compared to the overall market. These sectors include health, education, and public services.

We are seeing some tough competition in our smallest case market and we have some sense that smaller employers may be experiencing greater economic pressures than their larger counterparts. This manifests itself in pressures on persistency and requests to quote only the lowest cost options. We are getting more looks at larger cases as employers seek to find competitive prices with high quality carriers.

I’m pleased with the proposal activity that our sales representatives are generating, and while our sales for the first quarter of 2009 were lower than the first quarter of 2008, we continue to see strong quote activity. It is clear that customers continue to seek financially strong and stable carriers that provide excellent value.

Based on our high quality underwriting and pricing discipline and excellent claims administration, our claims experience in our group insurance business was very favorable with the benefit ratio of 75.8%. We are closely monitoring claims activity for any discernable trends related to the overall economy. We’ve seen no adverse effect on our claims incidence due to the economy. Claims incidence for the first quarter actually decreased compared to the first quarter of last year. We are not seeing any trends within certain claim types that feature more subject components that are believed by some to be more prominent during the recession.

Our investment portfolio continues to perform very well relative to peers. We took action in the fourth quarter of last year to solidify our bond portfolio by identifying holdings vulnerable to the current economic conditions and reducing such holdings in the portfolio. While the first quarter contains some additional capital losses related to the bond portfolio, realized and unrealized losses were less than in the previous quarter and continued to be very manageable given the strength of our balance sheet. Our unrealized loss position continues to be one of the industry’s lowest when measured as a percentage of either investments or equity.

Delinquencies and foreclosures in our mortgage loan portfolio were once again very small in the first quarter, served as continuing evidence of the longstanding expertise we enjoy in the commercial mortgage loan business.

In a moment, Floyd will provide more detail and will walk you through how our commercial mortgages are different from others. I’ll simply say that 1-1/2 into this recession, our mortgage loan portfolio has proven to be an important asset for StanCorp and our confidence in its ability to outperform other asset classes is as strong as ever.

During 2009, we are taking some important actions to ensure that the resources at StanCorp are best aligned to support our business goals. These actions will streamline our operations for better customer service, improve our operating efficiency to reduce costs, and enable us to take advantage of growth opportunities as they arise. As previously announced, these actions will be taken in a series of steps throughout the year to ensure that the changes will not affect the way we provide customer service. In total, one-time pre-tax costs in 2009 will be between $15 and $20 million leading to a savings of at least $25 million annually beginning in the second half of this year. We recognized the first $8.4 million in one-time costs in the first quarter putting us right on track to hit these important targets.

I would like to emphasize that the reduction in staff is in our operating areas, not in sales or service offices. We will continue to make sure we have the right number of sales representatives in our field offices in order to meet our growth objectives. While these actions are appropriate, that doesn’t make them any less difficult. I would like to thank our employees for their continued service and support and we all work through this transition. Customer service remains one of our key priorities and our people are keenly focused on providing value and extraordinary service to each of our customers.

StanCorp will continue to be presented with new challenges as we navigate through and ultimately out of the current recession, but we will rely on the same disciplined business and investment philosophies that allowed us to remain flexible and prosper through previous economic downturns. Our financial strength is the foundation upon which we can build future success. The core strength of StanCorp is our expertise in the businesses in which we compete. Our long-term commitment to our customers, shareholders, and employees will not waiver regardless of outside economic factors.

With that, I’ll turn the call over to Floyd for discussion of asset management and a deeper look into our financials. We have plenty of time free for questions at the end.

Dr. Floyd Chadee

In the asset management segment, pre-tax income of $4.5 million was lower than the first quarter of 2008, primarily reflecting the impact of declining equity markets and revenues for the retirement business together with a decline in mortgage originations based on current market conditions. Despite strong positive net cash flows in our retirement plans business, the declining equity markets more than offset the deposit growth in assets under administration.

As Eric mentioned, once the equity markets recover, we look for retirement plans business to benefit greatly through the increased assets under administration and additional asset based administration combined with the retirement plan system integration that we completed in the fourth quarter of 2008 and other actions currently underway. To improve the operating efficiencies of the business, our retirement plan business is well positioned for future growth.

Sales of individual annuities were $104.5 million in the first quarter, a very manageable level of annuity business for us. We primarily sell fixed rate annuities. We do not have any variable annuity exposure.

At StanCorp, our capital position remains strong. At March 31, 2009, we had approximately $160 million of available capital. This consists of capital in excess of our insurance subsidiaries target RBC ratio of 300% of the company action level as well as cash and securities available to the holding company. This number assumes an estimated quarterly accrual for an annual dividend and interest payments. In the past, we had not assumed such an accrual when giving out our excess capital number.

We are pleased that our solid capital position has been reflected in stable credit and financial strength ratings and we expect to see continued growth in this important measure of financial strength.

Risk based capital at our insurance subsidiaries was 323%. This is subsequent to the $25 million dividend that was made from the insurance subsidiaries to the holding company in the first quarter. It is important to note that our RBC estimates do not include any of the adjustments that have been recently permitted by some states in order to increase the capitalist insurance entities. For example, if we were to admit additional deferred tax assets which have been permitted in some states, the result would add approximately $50 million in admitted assets of the insurance companies and increase our RBC ratio to 335%, adding approximately 30% to excess capital.

Our liquidity remains strong. We have no debt maturing until 2012, and currently have no outstanding borrowing against our multi-year $200 million line of credit. Our book value remains very strong, and our intangible assets as a percentage of equity are much lower than that of our peers. In spite of the capital losses during the first quarter, our book value per share increased by $0.68 from year end.

For our fixed maturing securities portfolio, credit quality remains high. On average, the portfolio credit rating is A. Approximately 70% of the portfolio is rated A or higher and less than 5% of the portfolio is below investment grade. The portfolio remains broadly diversified across industries similar to a Merrill credit index but with an under-weighed position in finance.

We continue to stress that our investments have no exposure to the equity markets. Furthermore, our investment portfolio contains no CDOs, CMBS, or Alt-A risk, and no hybrid securities.

Net unrealized losses in the bond portfolio at March 31, 2009, were $124 million compared to $122 million at December 31, 2008. Total realized capital losses for the quarter was $17 million after tax. Approximately $9 million of the losses were due to bond sales related to holdings in financial institutions, particularly insurance companies. Only about $2 million resulted from the other than temporary bond impairments.

In the first quarter, we did not make any changes in our other than temporary impairment process related to the FASB’s adoption of adjusted mark to market fair value rules. Based on our analysis, these rules would not have had a material effect on the valuation of our securities if they had been adopted in the first quarter.

As Eric mentioned earlier, our mortgage loans continue to perform extremely well. We have included some slides on our website to provide some additional detail on this performance. I will now refer to these slides.

Beginning on slide #2, our commercial mortgage loans are prudent investments with a long track record of superior performance with very low losses and low delinquency rates. We continue to see excellent results in these investments with the delinquency rate remaining extremely low at 23 basis points. When losses do occur, they remain very contained.

On slide #3 we show that our delinquency rates have always been lower than those in commercial loans underwritten by banks or for CMBS. Although we would expect to see some increase in our delinquencies in this unusual economy we have no reason to anticipate that these delinquency rates would come anywhere near the bank or CMBS delinquency rates.

On slide #4 we show some detail on the delinquencies and foreclosures during the quarter. Out of a total of 5400 loans in our mortgage portfolio there were 9 loans with a combined value of $9.6 million that were more than 6 days delinquent at the end of the quarter. Additionally, there was one foreclosure of $1.2 million resulting in a loss of less than $200,000. None of the loans were concentrated in any specific vintage, property type, or state reflecting the consistency of our underwriting discipline over time and across geographies.

One of the reasons underlying our success is that the valuations we use in underwriting are based on conservative capitalization rates. On slide #5 we show that over the past 5 years, the capitalization rates used by our underwriters were at least 100 basis points higher than the average capitalization rates reported to the ACLI. The capitalization rates used in the valuation of a mortgage loan has a significant effect on the LTV and hence on the risk assessment of that loan.

At March 31, 2009, the average LTV of our total portfolio was 58%. Had we used average industry CAP rate, this average LTV on our loan would have been approximately 10% points lower. Through StanCorp Mortgage Investors we’re experts in underwriting, originating, and servicing these loans. Selecting and underwriting these loans ourselves ensures that we understand each individual risk. The vast majority of our borrowers are making scheduled loan payments on time with no notable issues. However, when issues do arise, our strong inhouse servicing staff combined with our team of local services ensures that we can immediately address delinquencies and property level issues.

As we have said before these loans are conservatively underwritten loans on smaller, mostly multi-tenant commercial property in good locations. The portfolio is well diversified across property type, geography, borrower, and tenant, and is relatively free of the brand names that have filed bankruptcy and announced store closings.

To summarize, StanCorp’s financial position is solid. It is backed up by stable operational cash flows, a strong risk-based capital position, and a balance sheet supported by a conservative investment portfolio. It is this financial strength that ensures that we will continue to meet the demands of our stakeholders.

With that, I’ll now turn the call back to Jeff to begin the Q&A portion.

Jeffrey J. Hallin

Abigail, we’re now ready to take questions from our participants.

Question-and-Answer Session

Operator

(Operator Instructions). We will now take our first question from Edward Spehar - Bank of America.

Edward Spehar - Bank of America

I have three questions; the first is, the description that you’ve given of the business and the results this quarter I think suggest that you don’t feel that the environment is having nearly as much of an impact on your business as it is for some of the other companies we covered. So, I guess I am just curious, could you remind us again why you are no longer providing any guidance on earnings, and then I have two quick followups.

Eric E. Parsons

Ed, I’ll start and I’ll turn it over to Floyd. I think it would be probably incorrect to say that we’re not feeling the effect of the economy; certainly we are, but I think you’re right, I don’t think we’re feeling it to the same degree that maybe some of our competitors are. There probably are a number of reasons for that; I think that we’ve chosen to be in businesses that work reasonably well during many cycles of the economy. I think we have paid attention through previous learning experiences on how to diversify our business so that we don’t feel the effects. We pride ourselves on quality underwriting, both in the insurance side and the investment side; I think that makes a big big difference for us, and so while we certainly are aware of the economy and then feel it for example of the top line very much in the insurance services group and even more in the asset management side, I would say that we think we’ve done a pretty good job of diversifying ourselves away from the really difficult part. With regard to guidance, I’ll turn that one over to Floyd.

Dr. Floyd Chadee

I think it’s quite correct to say that we’re not feeling the way our competitors are feeling it and it does reflect what we’ve talked about in previous calls which is the conservative way the business is underwritten. So, if we go through the list of the ways that we are feeling it, our top line in the insurance services group is somewhat muted in this environment as we would have expected, not reflecting the normal growth that we’ve seen in previous years, but perhaps reflecting the continued discipline that we would continue with during this difficult time. In our asset management group, we have been affected by the equity markets, and then if you look on the other side of the balance sheet, you see on our bond portfolio we have taken realized losses on the order of $50 million for the previous two quarters, but you can see some tapering off there reflecting both the long-term conservative management of that portfolio, but also some of the cleaning out that we did during the economic last year. Then, on the mortgage side you can see very consistent with what we’ve been seeing. We continue to perform very well there reflecting that very conservative underwriting of those loans. So, in terms of guidance we’re not really looking to change our expectations from the beginning of this year. We gave some indication of guidance in terms of relatively flat top line and expectation of ROEs for the year being in the range of 14% to 15%. I would say the first quarter we’ve been tracking very well in terms of our expectations for the year.

Edward Spehar - Bank of America

Just a couple of quick followup; first, could you discuss your appetite for new commercial mortgage loans and the normal asset allocation decision on that asset class; any changes in how you think about the appropriateness of the mortgage portfolio, and then I guess the other question is given some of the things that are occurring among the competitors, could you talk about any early indications of pricing actions that you’re seeing from competitors that might be encouraging in terms of how we should think about the business going forward?

Dr. Floyd Chadee

In terms of the bond mortgage split in our investment portfolio, we’ve always thought in one way the 60-40 split. We haven’t changed from that and while we will fluctuate around the 60-40 split that’s really our target and we intend to stay within those boundaries. Now having said that if you observe mortgage originations over the last say eight quarters you would notice an in and out of the market; we remain very disciplined in the way we underwrite those mortgage loans to the extent we observe the market that is excessively hot we tend to shy away from that market and where we discover good opportunities we tend to increase originations. So, in 2007 when the CMBS market was very hot and in 2006, then you would see mortgage originations actually decreased from the previous years, but in 2008 when in fact when the CMBS market was dying, you would see actually all mortgage originations increased now. If you compare mortgage originations this first quarter with that in the first quarter of 2008 you can see in the first quarter of 2008 we were taking advantage of the competitors pulling out of the market. What we’ve seen recently in the mortgage market is; one, given the state of the economy there is just less overall activity, and given our discipline in terms of underwriting those loans, we’re seeing that the best quality borrowers are pulling away from the market. So, we are, in maintaining that discipline, you’d see originations have appropriately come down when compared with the first quarter of 2008. Having said that, it is very interesting to note that the spread that we’re getting on those new originations are very good, on those high-quality borrowers. So, we’ve seen very good spreads in the order of 400 basis points this quarter and we think in this tough market, it’s probably a good expectation that the market will remain with those kinds of spreads. I am going to ask Jim Harbolt to comment on your question regarding pricing.

Jim Harbolt

Pricing competency remains tough, but we are remaining committed to value proposition and competing on value and not just on price. We continue to look for the right cases at the right rates and look for select opportunities; we think they are out there. It appears thus that customers are looking more and more for financial and stable carriers and we think we’re the right pick there and we’ll continue to compete in that space.

Operator

We will take our next question from Elizabeth Malone - Wunderlich Securities.

Elizabeth Malone - Wunderlich Securities

Could you just talk a little bit more about what you’re seeing in terms of economic impact on some of your markets? You mentioned that the smaller businesses maybe struggling a little more. Is that change; a lot of companies that I work with market to the small business owner and they have said consistently that that’s been one of the more resilient sectors of the market in this economy. So, is that different from what you’ve seen say a year ago?

Eric E. Parsons

I’ll make a quick comment and then I’ll ask Jim to expand a little bit, but I would say that we probably have been in a period now for a year or so where we’ve seen some stress in the smaller scale markets. We certainly are seeing new business opportunities coming from that area and expect that that will continue, but I think that’s also where we’re seeing some stress, some indication of interest in the lower price offerings. Jim, additional thoughts?

Jim Harbolt

It appears that it does in the small case market that some small employers are having to make choices about how extensive their benefit offerings are to all their employers. Large employers are going out to bid and asking about price and reduce costs where some small employers might be actually asking the question which benefits to even offer in this economic time.

Elizabeth Malone - Wunderlich Securities

You say that’s comparable to what you saw last year or you think it’s getting worse?

Jim Harbolt

I would say that it seems to be something that’s developing and moving as the economy keeps shifting. In some sectors it seems to be getting worse.

Elizabeth Malone - Wunderlich Securities

On the sales number; the new sales was down I think around 20%. Could you say how much of that is because you’re not writing it because the pricing competition has put you off to the side or because the demand has come down; what would be the breakdown between those two factors?

Eric E. Parsons

I would say that probably the difference between the first quarter this year and the first quarter a year ago was ironically given the conversation we just had two or three larger cases. We actually have seen a pretty good level of activity across the board, but you look at an awful lot of small cases and you close a certain percentage of them, you look at a much smaller number of the larger cases and a couple of hits or a couple of misses there can make the difference of $10 million or $20 million in sales premium. I would say that’s more likely where you’d look this quarter.

Elizabeth Malone - Wunderlich Securities

I have two more questions; one is that there has been speculation about Lincoln selling the Jefferson-Pilot group business; potentially they raise capital and I was wondering if you have thoughts on that.

Eric E. Parsons

We enjoy speculating too. I am not sure what to say beyond that; obviously we don’t have any information that they wouldn’t have.

Elizabeth Malone - Wunderlich Securities

Is that the kind of acquisition you’d be interested in?

Eric E. Parsons

We certainly watch with great interest any activity in our competitive space.

Elizabeth Malone - Wunderlich Securities

On the asset management side, that’s where you have made some tuck-in accretive acquisitions in the recent past. Do you think this market condition increases the opportunity for you to gain some market share through acquisitions?

Scott A. Hibbs

I think our answer is oriented pretty similar to what Eric just said. We’re very interested in any opportunity like that. That being said, our real focus right now is making sure that we’re operating as efficiently as we can with the business that we have and the actions that we’re taking to consolidate our administration and get ourselves well positioned is our primary focus. So we feel real good about where the business is going to be going forward and if acquisition opportunities came along, we’d take a look.

Elizabeth Malone - Wunderlich Securities

On the expense cost that you excluded from results in the first quarter, I understand there’s going to be more of that throughout the rest of the year. Should we also assume that you’re going to exclude that expense from future quarters where those expenses arise?

Dr. Floyd Chadee

We certainly intend to provide a great deal of transparency in terms of those expenses in order to provide you with a strong indication of how we actually are performing on an operating level with respect to our business. So in the first quarter we expect as we said around $15 million to $20 million for the year in terms of those one-time costs, and as you can see in the first quarter a significant chunk was incurred in the first quarter here. So, our expectation is to show those expenses separately.

Operator

We will take our next question from Randy Binner - FBR Capital Markets.

Randy Binner - FBR Capital Markets

Just a quick question; I guess another way of following up on the comments that some smaller employers are under pressure, and this is related to the commercial mortgages, but obviously that asset class is holding up well, the non performer restructured loan mix there is about 25 basis points on the total portfolio which is much lower than what banks and thrifts are seeing in California, and so it’s a very good results, but the unemployment level is high in California, you are seeing some pressure with the employers, and so I am wondering if you can provide color on what the pipeline is looking like there and if there is any sort of update you can give on the debt coverage ratios that you provided with the annual investor day?

Dr. Floyd Chadee

Yes, we go through a process of updating our LTVs on a continuous basis. We look at debt coverage ratio and we look at the change in LTVs; so just to give you some indication, last year we didn’t see much of a change in terms of the impact on valuations based on changing net operating incomes from these properties, and we are in the process now of going through that with a wave of information that’s been sent at year end and which we have been going through in the first quarter and we’ll continue to go through in the second quarter to update those valuations. To give you some indication of where the valuations are changing, we know that there will be pressure on NOIs as tenants look to get lower rents on those properties that are widespread in the market. We have not seen NOIs come down significantly on the LTVs that we have been working on. In fact, on average if you look at a sample, it’s probably on the order of 1% so far. Now, that’s not to say that we don’t expect in this economy that there will be further pressure on NOIs which would put pressure on LTVs and debt coverage ratios, but nothing significant so far.

Randy Binner - FBR Capital Markets

Is it possible to quantify about how much roll-through we can expect there? When we see the next investor day presentation with new debt coverage ratios and LTVs, about how much of the book would be reappraised for both those items?

Mark Fisher

The investor day in the middle of May, probably 25% and I would just add to Floyd’s comments that we do expect office to underperform the other property types in this recession and that’s been true in the past, but keep in mind that the office portfolio has a weighted average DCR of 171. So we are going to see a few issues there and you can see it on the slide in our delinquencies. Office is over-represented, but I don’t think it’s going to turn out to be a big issue for us.

Randy Binner - FBR Capital Markets

Any thoughts on why retail is under-represented; it’s seemingly a bigger loss bucket for a lot of the banks and thrifts on the west coast that my firm follows, and so it’s interesting; you haven’t seen it with retail, just curious if there are any thoughts you have there.

Mark Fisher

Our retail portfolio is convenience and food oriented and in a lot of cases those categories are doing very well. Obviously CAP rates are going to be up, but we’ve not seen a big decline in net operating income in that category, and I think that speaks to the fact that we’ve always focused on retail. It is oversized in our portfolio and we’ve made a real effort over the past years to develop a reputation in the marketplace. So, that’s where the quality borrowers want to go to get their financing. So, I think retail will prove to be well under-represented in our delinquency rate going forward.

Dr. Floyd Chadee

Randy, I’ll just add to what Mark is saying there. It’s interesting you’re making the comparisons with what else you’re seeing in the market. We view that as very very important. Hence, one of our slides comparing our delinquencies with the CMBS market or the loans and banks; one might go so far as to say not even the same asset class because of the way we’ve underwritten those loans, the kinds of properties we’ve done, we don’t expect the performance in our mortgage portfolio to in any way mirror what’s been going on in those large banks. For example, we’ve seen some large banks recently announce results and some of those bad results tightly tied to the performance on the commercial mortgage loan portfolio, in one case setting up significant reserves for maturities, very large maturities that are coming due, and then in the other case just general underperformance. We don’t have such problems. Our maturities for example in the next two years are just on the order of $50 million or so. We think that the way our mortgage loans have been underwritten and the way they’ve been structured and the kind of borrowers that we have and the kind of properties we go after would lead to results that completely contrast what you’re seeing in the bank underwritten loans or the CMBS market.

Operator

We will take our next question from Mark Finkelstein - Fox-Pitt Kelton.

Mark Finkelstein - Fox-Pitt Kelton

Just a couple of quick questions; I am trying to understand a little bit about the asset management segment, the first question I have is are you making money or losing money in retirement plans right now?

Dr. Floyd Chadee

The fee base on asset values would have come down significantly in retirement plans over the last year or so. So, if you look at the contributions from those different segments within the asset management group, clearly the contributions have changed. We haven’t given out earnings by particular segments within the asset management group and I wouldn’t want to start doing that in an ad hoc manner, but clearly the retirement plans business where the fees are tied tightly to the asset is under pressure. Now having said that there are things that we’re doing with respect to that business which Eric alluded to and Scott earlier too in terms of the expense reductions that we’re doing in that business that would expect the prospects of the retirement plan business to be significantly improving over time and particularly so if or when the equity markets improve.

Mark Finkelstein - Fox-Pitt Kelton

Fixed annuity sales I guess dropped from $400 million in the fourth quarter down to $100 million in the first quarter; is that more market or is that anything that you specifically did in terms of adjusting your crediting rates?

Scott A. Hibbs

That first quarter result obviously is below the fourth quarter. We like others saw a big surge in demand in the fourth quarter for fixed annuity. Part of what you’re seeing in the first quarter is above our historical run rate; is some carryover effect from that. We’re looking at 2009 being watchful of our capital and I think you should expect to see us at or below the first quarter as a quarterly run rate going forward for this year.

Mark Finkelstein - Fox-Pitt Kelton

Finally, you indicated that you sold out of some financials; I guess you mentioned some insurance companies, about $9 million in the quarter; are you done with the culling of the portfolio or is there more to go in terms of bond sales?

Dr. Floyd Chadee

We’ve been on track in terms of cleaning all the portfolio, did a lot of work last year. In fact a lot of work in the last quarter of last year heavily focused on issues with potential liquidity problems in the market in an economy where the availability of credit could be a significant barrier for a long period of time. So, in the fourth quarter the sales and the impairments were across the board as we mentioned focused on financial characteristics and liquidity characteristics. What we took in the first quarter was more concentrated, a significant portion coming from insurance companies and one casino. Insurance companies were largely variably annuity writers and we think when we assess that we looked at the prospects for those companies and you can tell they’re under significant pressure and significant exposure to where the equity markets go generally in terms of the liabilities and the capital relates to variable annuities. So, those capital losses in the first quarter were heavily concentrated on variable annuity writers. We have done a lot of cleaning out, that was probably one of the most opaque areas or portfolios as of this quarter. We have done a lot of cleaning out. I think a lot going forward depends on where the overall economy goes, but as you can see all capital losses have come down significantly versus the previous two quarters.

Operator

We will take our next question from Eric Berg - Barclays Capital.

Eric Berg - Barclays Capital

Question for Floyd, just a small matter of curiosity although maybe your answer will reveal that there’s more to it than I am thinking; is there any reason why you use the term ‘available capital’ as opposed to the term that’s used widely in the industry ‘excess capital?’

Dr. Floyd Chadee

No particular reason.

Jeffrey J. Hallin

I have talked to investors and the term ‘excess capital’ has a lot of meaning and we don’t want to think that it’s just available to spend on anything. We just want to use it as a measurement above the benchmark.

Eric E. Parsons

In this economic environment with a lot of stress ‘excess’ has many different meanings and if say you have excess capital then should you just be buying back shares or going after acquisitions like crazy and we think a lot of investors would like the company to reflect the financial strength in these very uncertain times. Hence you get into terminologies, use with perspective; the excess and available.

Eric Berg - Barclays Capital

My second and final question relates to your mortgage origination. When on page 6 of your supplement you’re reporting out your commercial mortgage loans originated, that is not only for third parties, but also for the house account so to speak as well right; for the general account, what’s shown on the bottom of page 6?

Dr. Floyd Chadee

Yes.

Eric Berg - Barclays Capital

So, my question is are those two coincident meaning that when you’re making loans for third parties, are you also making loans for the standard; do those two go hand in hand?

Dr. Floyd Chadee

Absolutely. All third party investors have an expectation that we will be sharing in the risk; so we always participate our portion of the loan.

Eric Berg - Barclays Capital

Just to clarify, this will be one followup; when you are making third party loans, the loans on behalf of third parties, they are participating with you in loans rather than your making loans as an agent for them in which they are the sole investor?

Dr. Floyd Chadee

That’s correct, yes.

Operator

We will take our next question from William J. Dezellem - Tieton Capital Management.

William J. Dezellem - Tieton Capital Management

Relative to the comments early in the call that the quoting activity for large employers or your invitation to make quotes has increases. Would you please carry that thought process forward and discuss how you’re win rate has been and if and when you would anticipate there to be a noticeable benefit to revenues to those of us on the outside?

Eric E. Parsons

Bill, I’ll start and simply say that we wanted to note for all of our investors the fact that we see changes pretty much every quarter in the nature of the business we’re looking at. That’s not at all unusual. We’re obviously pleased to see some of the larger employers out and active in the market. When you’re looking at it at the quote stage, it’s pretty hard to predict what kind of closed ratio you’re going to have and what the impact is going to be down the road, and in fact in the past we’ve noted that when you see increases or decreases on a quarterly basis in sales, it’s usually because of one or two larger sales that did close or didn’t close, and so I’d say that pattern is likely to continue, pretty hard to predict at this point what the outcome is going to be other than we like the level of activity. Jim, do you have a further comment on that?

Jim Harbolt

Bill, I would add that although we can’t predict when the economy is going to turn and get stronger where we think sales activity will just sort of bump up by demand. I can tell you that we are taking actions and continuing to make substantial investments in our services and capabilities. I think customers will find those things very attractive, and we will be providing excellent value to those folks when the economy does turn.

Dr. Floyd Chadee

And just add to Jim’s statement that the focus on closing ratio is always an interesting one within our industry. The notion that you can quote a closing ratio and then if you ramp up your activity, then your closing ratio is more less stable, and therefore you expect better results. That’s not the way we think it works. We work with a lot of discipline, and we may actually ramp up activity, and the closing ratios could go in the opposite direction because we don’t necessarily like what we see, so having said that, if you look at the activity in the market. If you remember about a year ago, we were telling you that we were seeing fewer large cases coming to market. As the economy went bad, and we think that shopping around was not top of mind for management of many large companies. That has now changed. We are seeing a lot more activity in the market, so with that there is an ebb and flow given the uncertainty in the overall economy and given that we’ll approach these opportunities with discipline, I think you’d see closing ratios reflect that change in pattern.

William J. Dezellem - Tieton Capital Management

And as a followup, is it your sense that the larger employers have an increased interest in Standard recently as a result of your financial strength or is it a function o the service that you provide and that they have heard about and are just not getting what they are looking for from their existing provider?

Jim Harbolt

We are certainly seeing more requests for proposals and more inquiries about financial strength and stabilities of the carrier.

Operator

Your next question comes from the line of Dustin Brumbaugh with Ragen Mackenzi.

Dustin Brumbaugh – Ragen Mackenzi

On the topline, just wanted to focus a little bit on the portion of your book that does tend to be a bit more defensive in downturns. We’re seeing quite a bit of pressure on state and local budgets and also on the healthcare front too, I’m wondering if you would be willing to talk about what you’re seeing expecting from your book in this cycle and how it might differ from past ones on the wage and job growth front?

Jim Harbolt

Dustin, we continue monitor various sectors of the economy, and we look at job growth and job loss, and we certainly break those out by quartile, and we think that some of the more resilient areas of the economy match up well with areas that we’ve historically competed very strongly.

Dr. Floyd Chadee

If you look at the pressures that are being faced by different sectors of the economy, I would say we’ve seen recently news about healthcare, and healthcare providers are also coming under pressure and local governments coming under pressure too. However, we still think that those sectors will perform relatively better than many other sectors, so even though there is overall pressure in the economy.

Dustin Brumbaugh – Ragen Mackenzi

Do you think that the when you look back at past cycles, the differential between, when you talked about, I agree that it probably will hold up relatively better, but can make any kind of quantification of whether that is going to be different than past cycles? Does that makes sense what I’m asking?

Dr. Floyd Chadee

I think it’s definitely a function of the differential performance in terms of employment growth within those sectors. At this point, we have no reason to believe that that differential will be significantly different from what we have seen in the past, but it is an unusual time, and we’ll wait for that to play out.

Dustin Brumbaugh – Ragen Mackenzi

Just noticed a little bit of a shift down in the ratings buckets on the bond portfolio and wondering if there is anything notable there in terms of downgrades in the portfolio?

Dr. Floyd Chadee

Well, you do get some downgrades, but I think any movement there is slight. We don’t think of that shift down as being material, but clearly you are getting downgrades in today’s economy.

Dustin Brumbaugh – Ragen Mackenzi

On slide 4, your commercial mortgage presentation, you give the breakout by the losses, and I’m just wondering over what period those losses are?

Jim Harbolt

Are you looking Dustin at the foreclosure line at the bottom?

Dustin Brumbaugh – Ragen Mackenzi

I’m looking at the pie chart on the right.

Jim Harbolt

Those don’t necessarily add up to losses. That’s the geographic breakout of the loans that are currently in the delinquency rate, that are currently 60 days or more delinquent.

Dustin Brumbaugh – Ragen Mackenzi

So, those are the delinquencies by state?

Jim Harbolt

That’s correct. At March 31.

Operator

Your next question comes from the line of John Nadel with Sterne, Agee & Leach.

John Nadel – Sterne, Agee & Leach

The premiums on the individual disability line that were recaptured from the reinsurance program, can you just explain why that occurred and how should we think about that?

Dr. Floyd Chadee

This is individual disability, and basically you had a situation where $80 million, we had ceded our risk to a reinsurer and then we took that risk back, so when we took that risk back, you would have a bump on the premium line of $80 million, and on the date of the transaction, you have an equivalent amount on the increase in reserve line, so there is no immediate earnings impact, but it’s really taking back the risk that we had previously ceded out to that reinsurer.

John Nadel – Sterne, Agee & Leach

Does that mean premiums remain elevated at that new run rate level?

Dr. Floyd Chadee

What you would see there is a one time impact, a significant one-time impact, $80 million and there would be a much small amount in the future on a run rate basis.

John Nadel – Sterne, Agee & Leach

I’m thinking about the commissions line on the insurance services segment. Despite the fact that sales were down, especially in fixed annuity line sequentially, maybe flattish on the group insurance side, commissions were up. Can you give us a sense for what happened there?

Dr. Floyd Chadee

If we take them separately, if you look at the insurance services group, if you look at the ratio of commissions and bonuses to the premium line and you look at the ratio as it moved either from the first quarter of last year or the fourth quarter of last year. So, remember in the first quarter of this year, you would have to make an adjustment on the topline for that reinsurance recapture that we just talked about. So, if you took that out and then you did the ratio of commissions and bonus to the premium line, you’d see in the first quarter of last year, it was about 8.7%, and it’s virtually identical with that in the first quarter of this year. In the fourth quarter of last year, it was slightly different, and you get two impacts which cause that seasonality. One of it is the impact of experience rated refunds on your topline which causes some distortion in that commissions to premium ratio, and the second one is there is the annual payments made to brokers that you accrue for during the year, but there is a tuning up during the first quarter that could cause some seasonality distortion, so when we look at that ratio, it’s almost identical with last year first quarter but up from the fourth quarter, slightly because of seasonality.

John Nadel – Sterne, Agee & Leach

You guys mentioned in the press release $160 million of available capital. Can you just tell us where does that capital fit? How much of that is at the holding company, how much of that is at the life sub?

Dr. Floyd Chadee

Approximately $50 million of that at the holding company and the rest in the subs.

John Nadel – Sterne, Agee & Leach

Just going back to this whole idea of quoting activity and RFPs and the percentages of wins, how should we think about that? Is quoting activity up, is it flat, is it down versus the year ago period since there’s clearly some seasonality in that?

Dr. Floyd Chadee

Clearly, there is seasonality, that’s one. Many large cases have a seasonality patch and that tends to bring them closer to the beginning of the year, but also we have seen changes because of the economic climate. I go back to some time in the middle of last year, we saw significant drop off of quoting activity in the larger key segment. We’ve seen a pick up in that more recently, so a lot more activity. You would expect if there is a significant change in the quoting activity, the close ratios should go down because the denominator has just gone up, and you wouldn’t necessarily want all that business.

John Nadel – Sterne, Agee & Leach

Can you just remind us from StanCorp’s perspective what the large case is when you talk about that increase in quoting activity at the large case?

Jim Harbolt

John, this would be over 2500 lives.

Operator

Your next question comes from the line of John Evans with [Wells Capital].

John Evans – Wells Capital

Can you just talk a little bit about longer term your thought process relative to your capital structure, and since there seems to be more perceived risk out there in the insurance companies in general, etc., do you think you have to have more equity as opposed to debt, etc.? Can you help us think about that?

Jim Harbolt

We think you are absolutely right in pointing out that there is more perceived risk in the insurance sector, but what we would like to stress is that the actual discovery of risk is not in the kind of businesses that we are in. We have been largely focused on variable annuity writers where the extent of the increase in liability and in the extent of increase in capital requirements for those kinds of businesses and kind of economic downturn we have, those factors have changed the perception of risk and the assessment of risk with respect those writers. We would say that in our asset management business for example, we don’t have variable annuities, we have products that are a lot more stable. Also on our insurance services side, we’re not exposed to that kind of escalation of risk that variable annuity writers have seen, so we think that the questions that you are raising are relevant for the insurance industry in terms of how you focus on the variable annuity writers but not necessarily for companies like us that are in quite stable businesses. We don’t see that it necessarily points to any significant drastic change in our capital structure. We think the 300% RBC that we hold for example is quite appropriate target for the kinds of businesses that we are in.

John Evans – Wells Capital

A lot of people think their stock is cheap, etc., but when I look at your capital structure, it looks like on the debt side, if you can get equity line returns if you repurchase them, and so you have excess capital to a degree. Maybe not in the places that you want it to be, but can you help us think about potentially how you could increase shareholder value over time with your excess capital?

Jim Harbolt

We have two kinds of debt, we have the hybrid debt and we have the regular debt. The hybrid debt does come with some restrictions in terms of being able to repurchase that, so this is an interesting time when companies have available capital, what to do with it, and we have certainly looked at that question under a microscope over the last few quarters. I’m sure many companies have. There are many assets that are cheap today relative to historical values. It is not clear that in this environment of uncertainty that we should be using all available capital to buy back ether stock or to reduce the debt levels, given the general uncertainty in the economy and the need for shareholders to actually look at your company and understand that you have financial strength in this uncertain time.

John Evans – Wells Capital

Wouldn’t it seem to make sense if you can buy debt back at equity returns because they are trading at such small things on the dollar, and I assume you think you are going to pay them back one of these days, so why doesn’t that benefit the shareholders in a big way because the EVA of the company goes up?

Jim Harbolt

What you do with your available capital, there are many possible actions that one can take with your available capital, and what you are pointing is one direction that certainly would increase shareholder value assuming that one doesn’t need the available capital or investors don’t look at it and think that you maybe should have more available capital in this uncertain time. There are also other questions, should you be buying back your own stock, should you be buying the stock of others, should be buying other companies, should be looking at investing in growth otherwise, so I think there are many assets that are cheap, and you can look at most of them and say buying those assets according to some calculation would improve shareholder value. I think there is a question of, one, choice of what you do with that available capital, and two, how much do you need to have on your books during the period of uncertainty in this economy.

John Evans – Wells Capital

Do you need to see your securities be priced maybe more fairly before you go out and make an acquisition because that seems like that just is going to be diluted or is there something I’m missing there?

Jim Harbolt

There are many things that would drive you towards an acquisition. Certainly in this environment, we certainly don’t think our shares are priced properly, but in this environment where everybody’s stock has gone down, there is a question of relative value, that’s one, but then one also has to see proper opportunities for acquisitions before you pursue that line too, so there are many considerations in that, not just the question of where your stock is trading at that point.

Operator

We’ll take a followup question from John Nadel.

John Nadel – Sterne, Agee & Leach

My last question for you guys was just to get a sense for what was the driver behind the 25-basis point reduction in the discount rate on new claims reserves? Was that more interest rate driven or what was because yields on new money were coming down?

Dr. Floyd Chadee

It’s entirely driven by the yields on new money. We have a formula where we look at the new assets that we pick up in the quarter, and we relate those to the new claims. We do an averaging over 12 months. We retain a certain spread on that, that new money basis spread over 12 months, and we also look at the margin in our overall portfolio, between the overall yield on the portfolio and the average discount rate on the entire block of claims. The methodology that we’ve used has been just entirely consistent over long periods of time, so when you see those movements, they reflect entirely the new money yields that we’re seeing for the quarter.

John Nadel – Sterne, Agee & Leach

What was the new money yield in the first quarter, and what was it in the fourth quarter?

Dr. Floyd Chadee

The new money yield for the first quarter was 5.67%. In the fourth quarter of 2008, it was 6.55%. Now the 6.55 was very unusual.

Operator

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

Jeffrey J. Hallin

I’d like to thank everyone once again for joining on our call. There will be a replay of this call starting this afternoon and running through May 1st. To listen to this call, you can dial 800-642-1687 and enter the conference ID number 91168518. A replay of today’s web cast is also available at www.stancorpfinancial.com.

Operator

Thank you for participating in today’s telephone conference. You may now disconnect.

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