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StanCorp Financial Group, Inc. (NYSE:SFG)

Investor Meeting Call

May 22, 2012 09:00 ET

Executives

Jeff Hallin – Assistant Vice President, Investor Relations

Greg Ness – Chairman, President and Chief Executive Officer

Dan McMillan – Vice President, Insurance Services Group

Jim Harbolt – Vice President, Insurance Services Group

Scott Hibbs – Vice President, Asset Management Group

Floyd Chadee – Senior Vice President and Chief Financial Officer

Analysts

Ryan Krueger – Dowling

Randy Binner – FBR Capital Markets

Chris Giovanni – Goldman Sachs

Tom Gallagher – Credit Suisse

Eric Berg – RBC Capital Markets

Mark Finkelstein – Evercore

Steven Schwartz – Raymond James

Stewart Johnson – Brookville Fund Managers

Kelly Flynn – Goldman Sachs

Jeff Hallin – Assistant Vice President, Investor Relations

Hi, good morning everyone. I’m Jeff Hallin, Assistant Vice President, Investor Relations and I want to thank everyone for attending today both here and on the web. So, this year this meeting is being webcast over the Internet and we will have microphones available for our question-and-answer period at the end.

Today, representing StanCorp with presentations will be Greg Ness, Chairman, President and Chief Executive Officer; Floyd Chadee, Senior Vice President and Chief Financial Officer; Jim Harbolt, Vice President, Insurances Services Group; Dan McMillan, Vice President, Insurance Services Group; and Scott Hibbs, Vice President, Asset Management. Also representing StanCorp in the room today, we have Rob Erickson, our Vice President and Controller and Jane Keister, Manager of Shareholder Services.

Before I turn it over to Greg, I need to remind you that certain comments made during this meeting will include statements regarding our 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 statements are forward-looking, they are subject to risks and uncertainties and 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 our first quarter earnings release and first quarter Form 10-Q.

With that, I’d like to turn the call – or the meeting over to Greg. Thank you.

Greg Ness – Chairman, President and Chief Executive Officer

Thanks, Jeff. Thank you very much. Good morning everyone. Thank you all for being here with us today. I understand this is a big week for lots of you with lots of meetings going on. So, we are going to move through this rapidly, because we want to frankly get to the end where you can ask questions of whatever you’ve seen here and we can give you the information that you need. So, let’s move beyond our forward-looking statement.

And move into this first chart. This is kind of what we hear when we are talking to analysts and buy side folks and investors, there is kind of a range of concerns or issues or areas of questions that come up and you can see those depicted on this particular chart. We are going to try to take a number of these on today and try to get you some information about them to the extent that you don’t have what you need please be sure and ask questions as we move on.

So, today, what we’d really like to cover is quick recap on our first quarter claims and highlights there. So, you can just get a sense of where we ended up at the end of first quarter. We are going to spend some time today breaking down our claims activity in more detail. So, you really get an understanding of what it is that we are seeing in terms of incidence, in terms of long-term visibility. No, that’s a big driver of our results and so we want to share with you information about that.

Going to talk a little bit about what we see in the sales environment, it changes about daily, but we are going to give you some instance or some insight rather into what we are seeing in terms of pricing. That's a very important factor. Now, that we have seen a number of other competitors talk about incidence issues in their blocks of business. They have talked about gosh we are going to raise prices, so we are going to talk a little bit about what we see there. As you know, we began raising prices last year. I am very pleased that we are on the front end of this curve and moving through it and we are going to show you kind of our pricing curve if you will, you’ll see that we have really already priced about 30% of the block of business and by this time next year we'll be well over three quarters. So, you get a sense of where we are on that. And actually I think Jim and Dan will actually share with you some actual examples of some pricing increases, give you a good sense of how we look at it and what the average price increases are that have been moving through.

Let me give you a quick update on Asset Management, so you can see what’s going on, on that side of the house, remember that's the 401(k), the annuities, the mortgage company and so on. So, Scott will give us an update there. And then I am going to ask Floyd to talk a lot about capital interest rate management and so on. And I show you exactly how we set our discount rate. My perception is that we are very, very transparent in the way we do that. Based upon an average of portfolio yields and new money rates, Floyd will actually step you through that process to make sure that everybody understands and then we’ll talk of course about capital.

So, let's talk about the first quarter that we concluded here end of March. We viewed the quarter as an inline quarter if you will. The results were certainly in line with what our expectations were in terms of what we would see. Historically, Q1, Q2 generally are higher quarters in terms of claims results. We like what we saw there. We did see an improvement in LTD claims incidence in Q1. We think that’s a very good sign moving forward. These are things that don’t change very rapidly, so what we look for changes on a relatively small scale, but we did see a change there that we like a lot. At the same time, group insurance premiums continued to grow. That’s a very healthy sign too. That means that we are either writing new business, retaining current business or the current business that you have is growing, which would be a very good sign if we begin to see some organic growth.

We saw very good results from our Asset Management Group as a matter of fact that we are probably record results in that first quarter. Scott will touch on that what he talks a little bit. And our investment portfolio continues to perform very well. As you know, we have a significant portfolio of commercial mortgage loans, which has behaved exceedingly well through duration of this economic scenario that we’ve all been through continues to perform very, very well. And frankly, it’s a differentiator from a lot of companies against whom we compete.

Finally, we grew our book value per share and have a very good strong capital position at the end of first quarter. Floyd again will touch more on that as we move forward. So, some of you have been coming to this meeting a number of different times, others relatively new. But in some respects, this is the same story you’ve heard from a conservative company that’s been around for more than 100 years. It’s just the same story in a little bit of a different time. We are very, very careful about the businesses that we choose to compete in. We try not to be everything to everyone because we think that’s a recipe for doing a halfway job on a whole lot of thing.

So, what we do is we choose very carefully the businesses that we are in and we become experts at those particular businesses and then we just stick to our netting in that particular space. We look for profitable long-term businesses. We don’t run this company on a quarter-to-quarter basis. This is really very much a long-term business. We have people out that are making a sale today that we won’t see a liability on for 5, 10, 15, or 20 years. If that’s the model of your business, you have to take a long-term perspective when you operate it. You cannot operate it on a 90-day basis as what I would submit to you. We avoid high-risk businesses. You don’t see us in variable annuities. You don’t see us with minimum guarantees that are causing all kinds of problems. You certainly don’t see us in a long-term care business or something like that. Those are businesses that we don’t think have a very good long-term profile and clearly it’s been very difficult for those businesses to be profitable in this environment.

Very conservative reserving practices at our company, StanCorp continues to never have had a material reserve change. My sense is that when you see those material reserve changes, that’s in essence of passive admission that there were some business that was under-priced, which you acquired business and did not appropriately reserve for that business moving forward. That has not happened at StanCorp. You also know that we are very disciplined in terms of our approach to interest rate management, how we manage our investments and then of course how we use those interest earnings to us, discount or reserves moving forward and Floyd will talk about that in detail.

The last couple of three items here, high-quality investment portfolio, little different in terms of our investment mix than many other companies that you might cover. So, we will talk about that a little bit. It’s an elegantly simple story as Floyd likes to say. It’s really corporate bonds and commercial mortgages and the beauty of it is that we originate all those commercial mortgage loans ourselves and we service those as well. And then a very strong balance sheet with very low debt and you will see some charts later on from Floyd that demonstrate with a new GAAP rule changes, how did StanCorp actually came out compared to some of the other folks.

So, when we look at our business from a long-term standpoint, one of the things we like to look at is book value per share, because while this looks through obviously at your earnings, we also give some insight into how those investments are performing and how they have performed through this. You can see a very nice track record of 10%, compound annual growth over the period, and that’s really driven by not only operations, but a very solid investment portfolio and we can talk more about that later as well.

When you have that kind of compound annual growth rates, you are able to return dollars to shareholders. And this is a chart depicting those shareholder dividends at $0.75, $0.80, $0.86, and $0.89. StanCorp has paid a dividend every single year as a public company and has increased that dividend every year as a public company. And you can see the blue charts there – the blue bars rather depict the actual repurchase activity and other form of returning value to shareholders.

So, the takeaways that I’d like you to think about as you listen to the conversations this morning, we absolutely are committed to this business. This is what we do for living. We can’t do enter your boat or your car or any of those kind of things, but we can sure ensure your income. We think that our pricing methodologies are extremely sound and we’ll be able to demonstrate that to you and we absolutely operate this on a long-term basis. I like what we are seeing in terms of our pricing actions thus far, things are moving through the pipeline about as we would have expected, you will see greater detail about that in just a few minutes. The fact is that one of the beauties of this group insurance business is if you have the ability to re-price the business continually and that’s the process that’s underway and frankly that’s the process that began last year and I am happy that, that began last year and then we are already a good portion of the way through that.

At the same time that lots of other folks are having all kinds of other difficulty. We have continued to invest in our services and capabilities, because we know that this market will change and that employers will begin to add employees again ultimately we’ll grow. We need to have new services and capabilities that attract and retain those kinds of customers for the long-haul, so we have been able to continue to do that.

The interest rates clearly a challenge for this industry as a whole for all of us frankly. We have continued to monitor that and believe we are taking very appropriate steps to manage those interest rates that we see in the environment today. And you will see how we do that – when you look at our discount reserve rate and Floyd will go into great deal of detail about how we do that. Really a very conservative approach to capital management for our company in a time like this, where you see greater volatility and uncertainty, you tend to see us hold on the capital. There were years, where we would come here and we talked about excess capital and you would all say none, see there is no such thing as excess capital. You can’t have too much. And so we watch our capital position quite carefully and manage that very carefully depending upon what we perceive the potential risk to be, what we see in terms of our claims activity, what we see in terms of the economic and interest rate environments as well. So, we’ll talk more in great detail about that as we go today.

So, that’s really kind of the outline for today. With that, what I’d like to do is to turn it over to Dan and have him give you a first look at insurance services. Dan?

Dan McMillan – Vice President, Insurance Services Group

Thank you, Greg. I want to emphasize something that Greg mentioned in his remarks, so that is – this is an expertise business. The businesses we compete in and I hope you leave with this general theme today, answer a lot of specific questions during Q&A, but if you don’t leave with this is an expertise business you are probably missing something.

When it comes to how we do asset liability matching with our investment portfolio, claims management, risk acceptance really how we do distribution. We manage that how we look at blocks, how we do pricing, the nimbleness that’s required in this business, and the expertise runs really deep. And it allows companies and times like these to operate and move as they should to react to the – and anticipate the economic uncertainty that we are all involved in now. So, expertise is really critical for us. We recruit that way. We look at talent that way and it’s something that we manage every day.

Couple of key things that we are going to talk about for the insurance business, the insurance services business. LTD incidence was a key theme first quarter of last year, but we’ll provide an update related to the first quarter results of this year. We are continuing to receive some correlation between the employment environment and our claims experience. We’ll talk about that in some detail. Jim will go through some of the pricing actions, timing, the drivers of those pricing actions, how we’re looking at that in the marketplace, and what we’re seeing so far. And we would be remised, if we didn’t tell you that we’re continuing to invest in this business. We’re not hunkered down weathering the storm of the current environment. It’s something that we are investing in everyday and we have capabilities and innovations that we are spending money on, because we know as the economy improves this business will continue to flourish.

Couple of context slides here for you, we are a top 10 player in the markets that we serve in disability and life particularly, you can see the breakout of premium in the right hand side of this slide with almost an even breakout between life and LTD. Individual disability and short-term visibility on the bottom there, those are the premium amounts. As a provider of those core products, we surround them with really kind of suite of services, capabilities that really supports the growth of those products, and the retention of those insurance products in the middle that you see there.

I think it was last year this meeting we showed you a video presentation of the workplace possibilities program, a fairly innovative look at helping employees return to work. We didn’t see anybody in the business do a quite a way we did. We have a unique and arrangement with Health Advocate and we provide services there to employers and nobody else can provide because of our arrangement with Health Advocate. We are continuing to see our Absence Management business and grow and harden, which is not something you get into lightly Absence Management is very tricky. It’s noisy and it requires a lot of specification both on the technical side as well as on the service and the claims side.

We are a company that manages disability claims in conjunction with Absence Management, which is fairly unique as well and it’s something that we are continuing to gain expertise in everyday. These three donuts, if you will, outline premium across a couple of different dimensions by industry on the left there by region on the right, customer size on the bottom, and our premiums were spread at and diversified spread of risk. If you take the United States and you cut it into vertical slices, a third, a third, a third, that would be our west, central, and east as we look at it. We then cut the East horizontally, and that makes up the Southeast and Northeast that you see there on that slides. We have – you’re thinking of us as a Western company and we have a spread across the U.S. in terms of premiums for our group insurance business.

Benefit ratio is the primary driver of our business. The bottom of the slide has our guidance for the year. Claim incidence in the first quarters of the year generally seasonally as little higher. We will talk about more about incidence here in a moment, but the increase in the benefit ratio really driven by the increase in LTD incidence with something that we saw as an impact of the economy, I know we talked about this one before, but it’s something I'll go into some detail here.

Benefit ratio as a reminder something that fluctuates quarter-to-quarter and should be really looked at on an annual basis or even a wider basis in terms of trending and that type of behavior. This slides one you’ve seen before which the green line provides a quarterly tracking of the benefit ratio, overlaid in the dark blue line, which is the annual benefit ratio with our guidance in the middle there. 80% to 82% benefit ratios what we – our guidance was April 2012, new CLS trending across that range.

Next slide provides a really a picture of incidence over the last three years, last two years with the first quarter of 2012 in the orange bar there on the left. You can see the not only the seasonality of incidence generally trends higher in the first couple quarters and the last two. We can also see compared to 2010, the green bars represents 2011, the dramatic increase we saw in LTD incidence and the first quarter of 2012 for LTD saw an improvement better than the first quarter of last year or the second quarter of the last year.

So, when we said gradual steady improvement in LTD incidence, that's what we meant on the call a few weeks ago. Incidence improved across various industry sectors. So, the broad-based increase in incidence we saw at the end of the last year has started to decline across those sectors like I was talking somebody earlier like the only sector from the far right there, that we didn't see an improvement at finance and insurance, which basically would be this room.

So, anything you all can do to help us we would appreciate it, but we did see an improvement across a lot of the industries that we are in, which is a good size, gradual steady improvement in that sector – that measurement. For the first time, a number of quarters ago, we reported a correlation between the employment levels of our customers and incidence in the LTD space. Something we hadn't seen in prior recessionary periods, but the breadth and depth of the current economic conditions have driven out a correlation here.

You can see in the blue bars moderate growth and a stagnant growth at an employer level across a lower incidence compared to the extreme, now it does breakdown at the extremes. You can see in the far left here that dramatic growth which we typically you don’t see that kind of growth in any sectors that's really attributed to M&A activity, which creates all kinds of noise from a claims experience sometime as well. So, I wouldn’t attribute a lot to the far left side, but you will see there is some loose correlation in the middle there, where you have moderately growing companies have lower incidence.

Premium growth was a – had some very positive signs in the first quarter. We have reported 3.8% premium growth in the first quarter compared to flat guidance. We had a fair amount of health from experienced rate of refunds, which is the bottom of the equation on this sheet, but we also had positive growth outside of experience rate of refunds to the tune of about 2%. This slide really is laid out to demonstrate their premium growth is more than sales. It's more than retaining the customers that you have, terminations there in the red bar.

We also have pricing actions that are contributing in the premium growth. We have organic growth which then is broken down into three categories in the right there, unemployment, wage growth, and life growth. We've seen some salary growth. Our benefit plans and premiums are often associated with age and salaries, so their age created rates often. And so as salaries increase and employee's age, those premiums go up. We are not seeing organic growth from an employment standpoint improve to the group we like it to, although did improve in the first quarter compared to the first quarter of last year into the fourth quarter of last year.

All those add up to provide the equation for premium growth. ERRs are typically, at the end run across several years’ span. They are typically negative contribution. In the first quarter, it was a positive contribution.

I am going to hand it over to Jim here to talk about the blue bars in this slide, which is really a historical look at sales growth, but the green line that superimposed across the front of those bars is a persistency number. You can see we ended 2011 with a very strong persistency. We were pleased with the persistency of customers we saw in the first quarter of this year. And in an environment where you are raising prices, that's a very positive sign from a customer service standpoint or retention standpoint.

So, with that, I'll hand over to Jim to go through the rest of it.

Jim Harbolt – Vice President, Insurance Services Group

Good morning. I am going to first talk about sales and then we are going to talk a little bit about as a refresher our pricing methodology, and report out on the progress of our pricing increases that we announced here last year. And then at the end there is a couple of examples of some cases that provide some further insight into some sales activity and sort of the competitive balance and the pricing increases.

This is a slide that we showed last year and the blue bars are our historical look back on our sales activity on an annual basis. A couple of highlights to remember. 2007 was a big sales year for us. It was really driven by about three or four things. And one of those was that was – one of those is we saw a particularly strong year in what we would call open enrollments, that's sort of pre-recession, where employees are making their own choices to buy up more coverage. We saw that pretty strong that year.

We also saw three sales that year that were particularly large. And large group life case, we also sold for the California Teachers Association. Those cases have all gone through renewals and they have performed rather well for us as we look back over the three or four years, but that's the big year in 2007. We’ve talked a lot in late 2008 and most of 2009. 2009 was a significant investment year for us in new services and capabilities. Those are things that Dan was just mentioned about particularly our absence management platform.

Last year, we showed a video around workplace possibilities, which helps people get back to work. It's a big investment year for us and then we saw the commensurate uptick in sales in 2010 and 2011, particularly around the private sector. Private sector employment is often looking for ways to interact with us more efficiently and for value-added services. So, that gets us through the 2011 sales. As a chronology reminder, it was late in probably about November of 2010 we announced a low single-digit price increase for interest rates at that time. We’ve talked about that on the January 11 earnings call. And then here last year in May of 2011, we announced a larger single-digit price increase for our LTV block in response to the uptick in incidence that we saw. And so those are different chronology events to remember. This is the first quarter sales that we just got done talking about in the April call.

Couple of key takeaways for us. For the first quarter sales, we are down about $30 million in sales. Most of that was in life insurance. We talked about that about that on the earnings call. We had happened to see some larger cases year-over-year in the LTD space, but the important thing is to remember here what we saw was sales decreases really across the board. The LTD sales declined just a little bit, but it was sort of masked by couple of larger sales that we hadn't seen the prior year. Prior year, we had actually seen a couple of larger life sales that did not repeat.

I want to point your eyes to the right side of the screen, which is where there is a lot of talk right now about price competition that's going on and some suggestion that pricing is firming. We do hear some of that. I don't know that we see it as much as we hear it, but where we have seen a bunch of that is a convergence and what we referred to is the middle market is the 500 at sort of 2,500 lives and that's where we saw our biggest decline in sales.

We have heard over the last few years about some of competitors who focus in the real small case wanting to move up market. We heard some larger competitors saying they want to kind of move down market and that slide shows you, where we have seen some convergence right there in the mid-market space for us. We find that to be extremely competitive. It's also a space, where we are out there probably first with some price increases. So, we are pushing through price increases in the new sales arena as well as on renewals and you see that convergence sort of coming to bear.

This slide tells about the same thing. I'd point your eyes to the green sections on each pie chart there. The left pie chart there. The left pie chart shows our in-force business as of the end of the year. our mix of business if you will by size of customer segment and then the right pie chart I’ll point your eyes to the green bar, where we have 15% of our sales. That’s the convergence I was just talking about, where the mid-market seems to be almost hyper-competitive, particularly for a company that’s out there early pushing through price increases. You can see those reflected in the sales in the right pie size.

I just want to remind folks this is just a little bit of a refresher slide, something that we have talked about in the past about what we look for when we talk about our pricing. Certainly, our response to your claims experience pricing encompasses that, demographic changes return for shareholders and interest rates. And those are the things that we’ve been talking about for quite some time I spoke at the AFA conference and said from the stage there if we saw interest rates continue with that level that we were seeing at the end of the year that we would then have to respond with another single-digit pricing increase that approximates what we did in November of 2010. We saw some movement in the quarter in the 10 year and that seems to quickly evaporated on the 10-year treasury and we are back down in the space, where we were at the yearend if not even a little bit lower. And so we’ve begun implementation of a low single-digit pricing increase really triggered by the interest rates that we are seeing today.

This is a slide I think there has been a lot of conversation about out there. We haven’t shown this slide before. I am going to leave it up there for a minute. There is a couple of tit-bits to really mention. If you took your camera out and took a snapshot which is what we did last summer this is what we would see in our LTD block as far as renewals going forward. The bars across the bottom represent three years. So, if you were to think about a two to three year renewal cycle, two to three year price guarantee, the bars across the bottom with the percentage increases total 100% and that’s a snapshot that we took from last summer about the time that we announced the pricing increases in May of last year. And this shows you at what pace the LTD block renews. It’s important to note that our snapshot was taken last summer prior to our ‘11 sales. So, if you go to the first quarter 2014 bar, you might ask – why is it that up at about 23% or so because of the sales that we just finished in the first quarter this year because the snapshot was taken last summer, but it shows you sort of a cadence and a progression through for the rate increases.

One of the questions I’ve had a few times that would come up is the concept that well, when do you start working on your renewal increases say for that January 1, 2013 quarter. The answer to that would be on larger cases is now. One of the things that goes on typically is the larger cases the more our lead time you need to have to announce the price increase, which typically the smaller the case you could be working down on 30, 60, 90 days for larger cases you might be a little bit bigger. So, bigger cases will be working on those right now to work through on price increases.

And you can see from that slide that as Greg mentioned this time - at this time next year will be through about three quarters of our book of business from the time that we announced the high single digit price increase a year ago. Going to leave this slide up for a little while and let folks eyes kind of get adjusted it’s a busy slide. It answers the question of, are you getting the right rate on the rate cases, the ones that needed and how is your business sort of renewing and how persistency responding to it. This is about persistency. If you look at the left access it’s what we would refer to as persistency based on premium. So, it’s how much of the book is renewing and at what rate? But excuse me in the right access it has to do with the percentage increase in change.

So, for example, if you take a look at the left data point – the green left data point. What you have is for chunk of our business that’s performing well below our profit targets, what you have is a price increase that approximates about 18%. And you have about 70% of that business renewing and this is for first quarter renewals. And if you go to the far right side, you will see a price increase or rating change that approximates to zero for chunk of our businesses that exceeding our ROE target, and that’s based on a three-year measure. And you will see that the persistency for that business where the rating increases approximates about zero, you will see that our persistency is about 90%. And then you have the middle chunk, which is about approaching around a little over 80% for persistency and a pricing increase is approximating about 4%.

The big takeaway here for renewals is that you’re seeing the business that we like and want to keep and encompasses an uptick in incidence of maybe a particular group hasn’t seen that uptick, we’re able to persist that business and keep it around and keep very strong customer relationship and appreciate keeping that customer and they see value in that relationship continues. On the left side what you see is either underperforming business leaving or underperforming business getting to the right rate.

Let me talk about two cases in particular that give some insight to the renewal process. This is a long-term customer in fact they’ve been with us for about 10 years. And we just lost them and we are not happy about losing them. But when we want keep them we want to keep them at the long-term rate. And this is a customer that was about $6 million, it’s the school district 31,000 employees. We have group life, AD&D LTD and we lost both the life AD&D and as well as the disability.

The big takeaway here is that with this group as you see incidence in the green line starting to decline and improve a little bit, you can see the inverse relationship to ROE starts to improve. We went out with a renewal offer in package and you are talking about a school district there that was under some particular budget paying, went very much to a price focus. We put out what we thought was exactly the fair offer and somebody came in at 20% below us. So, I’ve said a few times that we’ve heard competitors talking about price firming, but we don’t see it in all cases from all competitors. And in fact in this particular incidence, the group life went one place at 20% below what we put on the table and the group LTD went another place at 20% below what we put on the table.

This is a renewal for our case it’s been underperforming for us and we successfully kept this case, we’re proud about it. It’s a customer that we’ve had a very close working relationship with, very tight working relationship with the broker. I would tell you that this has lots of regular contact. This is not show up once a year with the surprise rate increase. This is a manufacturing group with about $8 million and you can see the uptick in incidence for this particular customer.

One of the things I want to talk about with this customer Dan just a minute ago showed we’ve seen an uptick in incidence for companies where we saw some really dramatic growth or adds to headcount. This is one of those and they did it through M&A. It gone around the country and they bought some additional businesses and they’ve had a pretty good increase for headcount, but yet it didn’t hang with the correlation that we saw about a year ago and have been seeing where the loss of jobs ties to little bit higher uptick in incidence. This is actually a company that’s growing quite a bit and they saw an uptick in incidence and we’ve gone out with a significant rate increase and we just renewed them on January 1, 2012.

But again one of the keys and we have talked about this in Portland last week. We invest a lot in our account managers and I don’t just mean our sales reps, we have 25 officers with local service people in them and all of those account managers were in Portland, Oregon last week for almost a full week of training. We spend a lot of time with them. Greg speaks to them, I speak to them, Dan is in front of them, we spend a lot of time training them to get out in front and communicate our messages. We think that their success and being in constant contact with customers really played out with some strong persistency that we saw last year in the middle of pricing increases that we kicked off at midyear.

Just a couple of the highlights that Dan mentioned and I’ll repeat them quickly so we can turn the mic over to Scott and then be happy to address some more questions at the end of our presentation today. Claims incidence remains elevated from historical levels although, we’ve seen some improvement there. We continue to see that correlation with the unemployment and the job growth to particular employers with incidence rates. We’re pushing through our price increases that we announced last year. We think that they are going rather well. We are pleased with what we are seeing so far with the cases we are keeping and frankly we have seen some cases go the other way. And it's fundamental to our position of protecting the bottom line over the top line.

And last even in these difficult times, we continued to invest robustly with things that we continue to see that play out well. We still have human resource benefits departments looking for value. If somebody is just a pure price player, it might be a case that we are not going to be able to keep or sell and we'll just look for them to come back.

And with that, I'll turn it over to Scott.

Scott Hibbs – Vice President, Asset Management Group

Thank you, Jim. Good morning everybody. I am going to shift gears a little bit on here for just 5, 10 minutes or so and talk a little bit about our Asset Management businesses. I want to kind of focus in three key areas, one, the increasing contribution that these businesses are making to SFG and its bottom line. Secondly, the investments that we are continuing to make in the businesses including new product and service offerings. And then third, I'll give you a quick update on our commercial mortgage loan business, which continues to be a significant investment advantage for us.

Since we don't talk about these businesses as much I'll just take this slide and kind of quickly talk through the overview of the three lines, the retirement plans business, which is our 401(k), 403(b) defined benefit administration business. That's the biggest chunk of our assets under administration. Our individual annuities business primarily fixed rate product, some equity index annuity product, no variable product.

Our Private Wealth Management businesses that's the newest of our asset management lines, about $1 billion in private client money, and then our commercial mortgage loan business. What you see on this slide the top green piece those are the assets that we service for our investors, that's about $2 billion and you add that to the $5 billion or so that's on our balance sheet for our portfolio.

We have seen steady growth in these businesses, not spectacular, but steady. You can see the bottom chunk there, our net investment income growth, that's the growth in our spread products. We like the steady nature of the growth here and certainly what is a volatile time, we like the fact that we are growing these businesses in what is certainly a tough economic climate. And I think it's really reflective of the way we do business in all of our lines, significant increase in bottom-line contribution from these businesses over the last few years. This certainly starts with the last slide I showed you, which is the good steady top-line growth, but there is also lot of good solid cost control going on in these businesses. We like the cost position at each of the lines today. There is certainly always room for more efficiency in any of our businesses, but I think the biggest upside here is to grow off a really solid base in all of these lines. I will – little footnote down at the bottom there, you can see in 2011, there was about $5 million worth of bond call premium in those numbers and that's certainly a number we don't expect to recur in 2012.

So, talk a little bit now about the retirement plans business. This has really been a turnaround story for us in the last couple of years. This is now a significant profit contributor for us. We are investing significantly in technology and product and service for this line. In January, we launched what we call our flexible product offering. This is really targeted at our primary distribution channel, which is registered investment advisors, so rather than taking our fully bundled administration product to that market, advisors – our advisors can now have flexibility in the services they offer versus what we offer. So, we give you a couple examples there. Enrollment services, they could do it or we could do it, planned consulting, the actual investment monitoring. So, our base administration was some flexibility.

We added at the same time a new (36 team) fiduciary – administrative fiduciary offering. So, that allows us to take on responsibility for some of the administration that the notices and communications required by planned sponsors for their participants. We are able to do that because of the technology investments we made in the business over the last year, nice complements also to our investment fiduciary services and very well received. We have had a significant number of sales of this service so far this year.

We are also leveraging more our key institutional partners in this marketplace. I think we have gotten spread a little bit in terms of where we went in the channel and so we’re really focusing our resources on some key institutional relationship that we think can have add some leverage and upside to the business. We've increased the target market. We've talked for the last few years about how we’re very focused in the 1 million to 10 million marketplace, we have stepped that out $1 million to $20 million and in some cases up to 50 million.

We can do that because of the investments we've made in the service platform for this business over the last couple of years much stronger, much more robust allowing us to serve bigger clients. We’re increasing our sales of stable asset funds, that’s really critical component of the profitability of our retirement plans business, that’s a product that’s always been available on the group annuity platform. Last year we set it up for our NAV platforms and this year we’ve began to sell it on an investment only basis. So, 80%-85% of all of our new sales now include the stable asset fund and we’ve seen some good initial sales of the investment only product so far in 2012.

Last point on retirement plans will make, we are also making technology investments in the front end, the client touch in our websites, both for advisors and for plan sponsors and participants. So and that rolled out in March of this year. So, all in all, lot of good stuff going on in this business. We like to trend in the business and are optimistic for its growth in the future. The annuities line, good growth in this business. Over the last two or three years, we sell a very straightforward consumer-friendly products in the marketplace.

As I mentioned its primarily fixed rate products, we do have some index product, no variable product in the mix very disciplined pricing discipline underwriting like to do in all of our products here. Select distribution partners many of which have been with us now for over a decade what we call our national marketing organization. They work both through the individual agent channel as well as the bank and brokerage channels. We invest a lot in them they come back for to us both for good products, good crediting rates and also for consistent reliable service.

New products in the annuity space, I would probably a better term will be product modifications, strong MVA provisions, lower commissions, lower minimum crediting rates, all designed to keep our crediting rate as high as we can in a very low interest rate environment. So, I will say as you all obviously have seen we have sales have slowed, and sales have slowed in the last six months or so. You saw that in our first quarter sales numbers. We expect that, that could continue for a while and we are okay with that. We are in this business for the long-term. We’ll sell at the right price.

Mortgage business, let me give you a quick update there, obvious – there is something many of you know our long-term expertise in this space, this is all small fixed rate commercial mortgage loans. I won’t read you all the statistics there, but I’ll say very well diversified, very conservatively underwritten over a long period of time that’s what how you get a 0.33 delinquency rate and superior long-term performance in the business. Spreads remained strong, obviously we all know what base treasury rates are, so yields are low, but our spreads remained very strong in this business. We’re still in this 300 plus range over comparable treasuries.

Common question we often get asked is what's our perspective, what's the marketplace look like. We continue to see slow improvement in the commercial real estate marketplace in this small end where we operate where we saw whether it’s vacancies or rents, market values, property values, transaction activity. We are seeing slow improvement and that’s our expectation and that will continue as we move forward.

Also continue to see slow improvement in our forward-looking indicators of loan quality. So, we look at 30-day delinquencies, demand letters, request for forbearance, those have all been slowly declining. So, the conditions, while they are not going to improve, we don’t think quickly in this market, they are certainly trending in the right direction. So, I’ll wrap this up by saying our forward look is we would like more of what you saw here. Our focus is continued disciplined growth in all of these lines of business, recognizing that there are things like 175 10-year treasuries that can slow the businesses down in the short-term, but we are investing for the long-term and we like the long-term growth prospect.

Now, I’ll turn it over to Floyd.

Floyd Chadee – Senior Vice President and Chief Financial Officer

Thanks, Scott. So, Greg has given you an overview of the business. Jim and Dan have walked you through the details of our largest business, which is the employee benefits business in our Insurance Services Group. And Scott has reminded you of the value we see the – the great value we see in our asset management business. My intent is to walk you through some balance sheet issues to focus on the strength of our balance sheet, and most of it would be reminding you of the strength of our balance sheet, because it’s an area of great stability for us.

Some new information, I’ll display some new information, which again just reinforces an age-old story about the strength of our balance sheet. So, my intent is to go through these items here. To remind you that we have a conservative investment portfolio so that’s on the asset side of our balance sheet and then on the other side of our balance sheet with respect to how we do liabilities that we have a very disciplined and transparent approach to interest rate management. The interest rates are going to the calculation of our reserves formulate in its approach as I’ll show you in a bit. It’s – and sort of unique within the industry, very transparent in its communication to investors.

We have a solid balance sheet overall and our financial strength ratings is solid. We also have a long history of returning capital to shareholders and I will touch on the – on our sort of our capital products going forward.

So, with that, this slide is a slide that investors have seen for a very long time, which is on the left hand side, the left hand bar shows our investment portfolio and it’s flipped essentially between very conservative bonds at about 60% and commission mortgages at about 40% and for the longest time for many, many years, we have a question surrounding that commercial mortgage portfolio, surely that can’t be conservative. I think the experience we have seen to that commercial mortgage portfolio as Scott has just described, within the last few years of the worst financial crisis for a long time, the very resilient experience that we have seen within that commercial mortgage portfolio shows that within our commercial mortgage portfolio, not only do we justify the returns that we guess there, arguably undertaking greater risk, but if you actually look at it, if you actually look at the experience and you compare our complete performance of our commercial mortgage portfolio versus our bond portfolio, any other bond portfolio, you would actually – might actually draw the conclusion that not only are we getting a better reward, we are also doing it at lower risk, because of the height of the financial crisis.

When our commercial mortgage portfolio had the highest delinquency rate in the order of 40 something basis points, we were – we actually amongst the rest of the industry experienced capital losses on AAA bonds within our bond portfolio. So, again very conservative investment portfolio, you can see the comparison with our peer group instead of commercial mortgages they have invested a lot in very exotic instruments that have not geared very well through the last financial crisis.

The next slide shows our interest rate management just to remind you that we do it in a very disciplined approach, we look at our 12 months new money yield and we set our 12 months discount rate as a function of that keeping the margins, keeping the margin between the two. You can see when interest rates are high, there is a higher margin and when interest rates are low, the margins go down as you would expect because that margin is essentially there to deal with reinvestment risk.

The next slide is an attempt to illustrate how it is we set the new money discount rates and we talked a lot about this and our approach is so disciplined and so formulate and different from the rest of the industry that sometimes it’s we need to reinforce the message of how we actually said it. So, if we look at this slide you can see that we are in the – if we were in the first quarter of 2012 and we were trying to decide what should we set the discount rates for the claims that were coming in the first quarter of 2012.

So what we do is we look at the new money rate that we’ve experienced in the first quarter of 2012 and for the previous three quarters. So, we take a rolling average of the new money rate that’s the first line there, the first row we take the average new money rates for four quarters including the quarter that we’re in. And then we set then on the next lines we set a discount rate for the first quarter such that if you take that average discount rate for that quarter plus the remaining three quarters and we subtract it from the average new money rate that we got on the first row, you end up with the margin that we would like for our reserves.

And then the next quarter we roll that forward taking a different fourth quarter rolling average. So, you can see, it’s a very disciplined approach, very formulated and we do it every quarter on that rolling basis. To remind you a 25 basis points increase in that quarterly discount rate results in an impact on our pretax income of $1.6 million, as you can imagine in this – with this recent environment where treasury is going down as low – 10 year treasury is going down as low as 170 basis points not only we, but the rest of the industry will face some challenges and how to respond to that.

Jim has already talked to you about our pricing response on the group insurance side to the prospect of low interface going forward. So, we will continue to monitor that and respond it appropriately. The next slide shows is a reminder of the strength of our balance sheet and what we’ve done here is we’ve showed a chart that gives you take the DAC, the deferred acquisition cost and other intangible assets on your balance sheet as a percentage of shareholders’ equity. And you can see StanCorp on the far left hand side 21.4% has its deferred acquisition cost and other intangible assets as a much lower percentage than any other company within our peer group.

So, you can see the closest company with 24.6% with StanCorp is lowest in terms of DAC and intangible assets as a percentage of shareholder equity. This illustrates one aspect – one way you can think of the conservatism in our balance sheet, but even going beyond this because this slide doesn’t really even get the conservatism within our reserves. So, some of the companies there that you see with low deferred acquisition costs and other intangible assets as a percentage of shareholder equity have actually taking massive reserve changes on their liability sides which StanCorp has never done. So, not only do we have low DAC and other intangible assets, but we’ve also never taken any massive reserve corrections.

The next slide is the historical slide that shows as a result – as a reaction to ASU 2010-26 that is the change in GAAP accounting for deferred acquisition costs, many companies had to do accumulative adjustment to book value the accounts for this. And we tend to think that the amount of that adjustment is a reflection of how conservative or how aggressive you were previously with respect to your deferred acquisition cost accounting. So, you can see StanCorp 1% of our GAAP book value of our cumulative adjustments much lower than any of our peer group.

Now, this partially reflects the fact that we in the group business as a group business you would expect to have a lower impact. But even when compared with companies that are substantially in the group business you can see that we had a lower percentage, again reflecting that even before the introduction of this ASU 2010-26 that we were conservative with respect to the way we accounted for deferred acquisition costs.

The next slide shows our capital levels just a reminder of our target RBC ratio is 300%. We are often asked by investors well, would you consider that being higher. Some of your peers talk about percentages that are much higher than that. And we remind them that there are many in the industry who raised those ratios substantially as a reaction to the demonstrated risk in their products during the financial crisis. So, if you are in the variable annuity business you probably should be holding something in the order of 500%. For the business that we are in, which is essentially group insurance and even in our Asset Management side, no variable annuity we think the 300% is appropriate for us. And you can see our ratings high-quality ratings with a stable outlook on all lines.

For capital generation, the table here shows the capital generation in 2011 and just to walk you through that, you can see we began the year with available capital of $235 million. We ended the year in 2011 with available capital of $220 million. We did generate about $74 million from our statutory entities or insurance businesses and we had net capital generation from our non-statutory entities on the order of $72 million, that $72 million is a little bit higher than normal, is actually substantially higher than normal. About $60 million of that number slightly north of $60 million of that would have come from real estate sales in 2011. As a reminder, we do not count the real estate on our balance sheet as part of our available capital. Then we did share repurchases maybe in the first-half of the year of over $90 million. We paid our shareholder dividends of about $39 million, interest expense on our debt of our $38 million, and other items accounting – amounting to about $6 million getting to the $220 million.

So, that’s capital generation in 2011. And to remind you, how do we think of capital going forward, our primary use for capital or preferred use for capital would be in the organic growth of our business. As you would imagine, we want to be careful with that in an economy that’s challenged. We want always want to make sure we get the right pricing. So, we will not as we think of preserving the bottom line and not sacrificing it for the top line. We don’t necessarily have all the opportunities that one would see to use up all capital organically. So, we look for other possibilities for the deployment of capital and there haven’t been any great M&A activities within our space for long time. So, those would be our preferred paths and then in the absence of that, we return capital to shareholders.

What would determine the amount of our share repurchases that we do? We pay attention to two things. We pay attention to the external economy, which continues to be volatile. We recently had the longest streak of consecutive days of down days on the S&P 500. So, even while we all thought that things were settling down, the equity markets continue to demonstrate that there is nervousness and volatility in the external environment. That nervousness translates generally into risk in the financial world, but also it affects the economy. We know that translates into the impact it has on our benefit ratio within our group insurance line. So, we pay attention to the external economy and what's going on there. We pay attention to our pricing efforts and the rate in our employee benefits business and the rate of statutory capital generation there as that pricing impacts that reach. And that will determine how we think about capital going forward.

The low interest rate environment, the low interest rate environment we began the year as the most within the financial services sector thinking of the interest rate environment as being challenged going forward with many within our industry talking about well, how would we react to this low interest rate environment going forward, whether through pricing, whether through different and how would investors react to that, whether through different expectations of ROE return in an interest rate environment that is very low going forward. We all thought at the beginning of the year the interest rate environment would be challenged and at our earnings call, we talked about well if interest rates remain at this low level. We would expect some reduction in our discount rate going forward. What we have seen since then is not only of interest rates remained low, but they have actually gone down going to a 170 basis points on the 10 year treasury a week ago. So, clearly, it’s going to – the interest rate will continue to be a challenge going forward. And Jim and Dan have already talked to you about within our group insurance business, where we have the flexibility to price on an annual basis, we will continue to take into consideration, interest rates as a cost factor within our overall pricing for the business and we react appropriately to that.

So, with that, I’ll wrap up here reminding you of the takeaways that Greg introduced you at the beginning of our presentation here. We are confident of our ability to manage our business. We are confident in our underwriting and pricing methodologies and we are committed to doing the right thing with respect to managing our employee benefits business. We are pleased with the pricing actions so far as we have implemented them. Why are we doing that? We continue to invest in products and service capabilities within that business. As we did even at the height of the financial crisis while our competitors were falling apart on their balance sheet, we did it then and we continued to do it now. We continued to monitor interest rates very, very carefully in this new world for all of us and our discipline – we’ll continue the disciplined approach with respect to how we set the reserves in that low interest rate environment and we will take the pricing action necessary to manage our business in that low interest rate environment. To remind you, we’ve continued to be a conservative company and we will continue to manage our balance sheet conservatively and manage capital conservatively.

With that, I’ll turn it back to Greg.

Greg Ness – Chairman, President and Chief Executive Officer

Alright, what we like to do now is to give you an opportunity to ask any questions. If these gentlemen would join me up here, I’d appreciate that. We are webcasting this to appeal hang on just for a second if you have a question until we get a microphone in front of you. And then if you just state your name and go with your question. Ryan, let’s start with you right here.

Question-and-Answer Session

Ryan Krueger – Dowling

Thanks. Ryan Krueger with Dowling. Floyd, I didn’t see the previous $40 million to $80 million share repurchase guidance listed in the slide is that still a relevant target for the year?

Floyd Chadee

Yes, when we started in the year, we talked about the $40 million to $80 million. In the first quarter, we did not repurchase any shares. I would say as we look forward and we look at this very volatile external economy, and as we take our pricing action on the group insurance side, you probably would see a small life geared towards the low end of that business to high end?

Ryan Krueger – Dowling

Okay, thanks. And then on the discount rates, I think on the portfolio, it’s up to maybe I think it’s 67 basis points now, which is well above your 30 to 40 basis point target and you also mentioned that we tend to hold a lower margin and low interest rate environment. So, at what point would you expect to start selling discount rates on new business that would take the portfolio yield lower?

Floyd Chadee

Yeah, so just a quick – we talk about a margin on our portfolio and we talk our margin on new money. So, remember that, that formula that I showed you on that page is really how we set the new money discount rate, that is for claims coming in now. The actual margin that you are talking about, which is in the 60 something basis points is about new money rate. The portfolio margin which is sort of average overall – all are reserved over a very long period of time is actually more in the order of 40 something basis points. So, the question that you are asking is really that with this – in this low interest rates environment, does that margin in new money rate not seen too high. The reason is this high is because we were still using some opportunistically some low interest housing tax credits that were giving us some very high margin, very high yield on those products that we got in sort of dislocated market. So, we held a higher margin on those investments. I think going forward you will probably see us being very careful about that margin going forward. With the treasury it is lower than 170 basis points I think it will be appropriate to come down from that 40 basis points that we monitored very closely.

Ryan Krueger – Dowling

Thank you.

Unidentified Company Speaker

Randy?

Randy Binner – FBR Capital Markets

Thank you. Randy Binner from FBR Capital Markets. I guess I have a follow-up there a little bit and I guess it’s for Floyd, but your commentary was more cautious on the rate in economic environment. So, does that leads to the low end of guidance because of caution on buybacks or because of interest rate pressure on the business, trying to kind of – can you be weak on both of those and still had 360 at the low end of the guidance?

Unidentified Company Speaker

Still hit?

Randy Binner – FBR Capital Markets

Still hit the low end of guidance which I think is 360?

Unidentified Company Speaker

The EPS, yes. So, I mean I think we are certainly not changing guidance on anything in the middle of the year here, we’ve seen one quarter. I think overall the tone of that, not just from us, but really overall. If you think an assessment of the economy at this point in the year versus where we might have been at the beginning of the year, sure, I think it will be a little more conservative. We’ve seen interest rates come down substantially. We’ve seen the equity margins, a long street of down days I think which nobody would have expected when we’re talking about the recovery. So, we are certainly not changing guidance at this point. But I would say as we look at the – you see reflected in sort of our guidance around – for statements about more likely to hit the low end of our share repurchases on the high-end. I think appropriately what you have seen as a more quarters doing in this clearly challenge environment.

Randy Binner – FBR Capital Markets

Okay. And then I guess just thinking about the income statement on the asset management side. I don’t think you give ROEs for that segment, but if you do either communicating with ROEs or with margins – pretax margins. The margins kind of trended lower there in the first quarter and I think it was a function of kind of lower fees and higher interest credited so tighter spreads. If rates stay this low, would you think that you can get better margins that you saw in the first quarter or they stay kind of low as they were in the first quarter?

Unidentified Company Speaker

To start your question, we don’t give ROEs by a line of business relative to margin, I think it be careful that periods that you’re comparing so, when you look back to the first quarter of last year that’s when we had a big chunk of those bond call premiums. So, when I look at the margin on an apple-to-apple basis, I think we are in the 13% to 14% range. I think we can continue to see some improvement over the long-term in those margins, that is our goal. Will low interest rates put some pressure on us? Yes, there is no question we will see some pressure on spreads in this kind of rate environment, but long-term, I think they is room for margin expansion and top-line growth.

Randy Binner – FBR Capital Markets

Long-term being in 2013, more than 2012?

Unidentified Company Speaker

I don’t think I get the predicted timeframe on that. So, I wish that I could.

Randy Binner – FBR Capital Markets

Thank you.

Unidentified Company Speaker

Thanks, Randy.

Chris Giovanni – Goldman Sachs

Chris Giovanni of Goldman Sachs. I guess first in terms of the ROE target to a year either under returning or over returning, what is the ROE target that you alluded to in that side?

Unidentified Company Speaker

I don’t think we’re going to give a specific number than what I will tell you is that we are pricing right now both in terms of consistent with the guidance that we are giving, and then also that we released to be in here, but also for long-term target. I’m a little careful here because as you could imagine, there has been a lot of competition out there right now and I am a little careful about what I want to release around fighting with folks a little bit on the street and trying to sell business.

Chris Giovanni – Goldman Sachs

Okay. And then when you’re exceeding those ROE target, you show as your percent rate change so, you weren’t taking any rate improvement there in that book of business for the low rate environment?

Unidentified Company Speaker

I would tell you on the business it approximates zero and what we said all long is that when we’ve done our rate increases, we haven’t gone any change manually. But we’ve given some approximations across the whole board. When businesses perform at above ROE targets, no, we are not going in the right now and taken lead action on those cases.

Unidentified Company Speaker

Chris, the right way to think about that is the rates that Jim talked about there we are really specifically driven by incidence issue.

Chris Giovanni – Goldman Sachs

Okay.

Unidentified Company Speaker

Alright, so to the extent that you don’t see incidence issues in some small block of the business, you don’t need rate there. However, you also alluded to the fact that it’s going to begin to take greater rate for interest rates, I mean, extended low environment that would apply across the board.

Chris Giovanni – Goldman Sachs

Okay. And then just two more quick ones if I may the January 1, 2013 renewals that are coming off, should we be thinking about essentially three iterations of rate increases sort of two for low rates going back to what you initially did in November, and then what you talked about today plus the increase that you did mid last year around the increase in incidence.

Unidentified Company Speaker

I think certainly you can think about two iterations as of May last – last year’s May increase and then the one we have now that we just announced our interest rates, some of that November 2010 increase may have flown through depend on the length , the rate guarantees. But some maybe seeing three and some may have already seen that happen.

Chris Giovanni – Goldman Sachs

Okay. And then lastly, the book of business you’re putting on today what are you assuming in terms of forward curve kind of interest rates as well as economic recovery. I think last year you talked about making some assumptions that rates improved the economy, improves is that still the assumptions on new book of business?

Unidentified Company Speaker

Well we've patently demonstrated our inability to predict interest rates along with rest of the world and so, we are certainly not going to do that. The issue for us is pricing on a long-term basis. If you think there is sustain low interest rate environment which is in fact what we do at that’s where you see a low single-digit rate increase moving through on all new business starting whenever you started. So, that's moving forward that will continue on. The issue for our businesses that we were going to match the asset in the liability every single quarter based upon Floyd's comments that if anytime the liabilities we take on what we see in the interest rate environment we’re going to set the discount rate and that in fact, locks in the pricing on the book of business right there. The only thing that will change within is a subsequent rate increase based upon incidence or other factors. So, we think we are priced correctly given this low interest rate environment and frankly we are not anticipating a big increase in interest rates at all, at all.

Chris Giovanni – Goldman Sachs

Okay, thank you.

Tom Gallagher – Credit Suisse

Hi, Tom Gallagher, Credit Suisse. I would say more company seem to be attracted to your business model right now just given the lack of tail risk, so lot of concerns about sustained low interest rates and it seems like that's one of the issues here in terms of why competition has remained fairly intense in the business even though, I think it described as somewhat of a hardened market. So, I guess my question is how do you balance that dynamics and consuming that not going to go away for a while competition more remain intense versus what I think would be a very attractive private market value bid to look at one of your smaller competitors in the industry, got I think it was a 70% premium through an M&A transaction. So, you consider that dynamic and what I think would be a very healthy private market value bid versus staying in depending going to of course anyway, can you comment it all how do you think about that from a shareholder value standpoint?

Unidentified Company Speaker

We – I appreciate the question. I think you are right, this business is different and lot about the business in terms of tail risk and so on. We happen to things there is off lot of website in this business. If there is a lot of embedded value in our business if you will and that will see that emerges as time goes on if the economy changes as we move back into a more normalized interest rate environment. But we also think that we are able to manage through this low interest rate environment because the strength of our foundation of the capital balance sheet issues that we've got today. Do you have an interest in selling on a private market value basis, I think that the way we look at the company now is that we are enter for a long haul we think we can greater value continue to run ourselves that's up we are on right now.

Tom Gallagher – Credit Suisse

Got it. And the other question I had was I guess I would have guess just based on the change in your incidence rate over the years that was largely driven by a shift towards higher points incidence in the public sector given that I think historically you probably had very low incidence rates there. But when I look at the slide that you put up and you showed the last three years, it doesn't look like it’s even changed that much. If you go back 10 years or even 5 years ago, has there been a noticeable shift in that part of your business?

Unidentified Company Speaker

It's a good question because I think what you are hitting on is something that we haven't seen in prior kind of recessionary periods of time and it's different this time. So, Dan you want to talk about?

Dan McMillan

Yeah, I think the first time we talked about our large increases in the first quarter of last year, so in 2011. And the phenomenon that we saw that Greg alluded to was a broad-based increase. That was across all sectors in large part, there may have been some lighter level higher than the others. The improvement that we are seeing now, I mean I think we have one slide in there other than finance and insurance is also a broad-based in terms of its improvement. So, to say it would be more of attributable to the public or education sector, I don't think would be accurate.

Tom Gallagher – Credit Suisse

So, but if you looked at incidence rates, your public sector business, let’s say, 5 to 10 years ago, how does that compare today relative to where it was 5 or 10 years ago?

Dan McMillan

5 would probably a little different than 10, but they were generally there elevated, so today they are higher than either 5 or 10 years ago, I think 10 years ago they were little higher than they were five years ago. So, there is a general kind of dip that goes like this that is about a 10-year window and I would say in the ‘07, ‘08, ‘09 period was the bottom of that dip and you see the benefit ratio attracted in that same kind of trend, 10 years out, it was a little higher. So, it’s something that does change over time, but the incidence what we are seeing right now, are higher than both of those periods.

Tom Gallagher – Credit Suisse

Got it. I guess my – what I was trying to get it is, order of magnitude is that really been the driver in terms of the elevated claims incidence just that mix shift that you are seeing or is that not been the case?

Unidentified Company Speaker

The mix has been the driver…

Unidentified Company Speaker

It has not been the sole driver. It clearly has contributed as the other thing you have to look at – when you look those incidence charts where they showed to the incidence over a three-year period for public and higher ed in manufacturing and financing insurance and so on. The other thing you need to go back to then let’s think about okay so how much premium do we get from each one of those sectors. And you get about 50% of your premium today from that public and higher ed sectors. So, well, it might be a small change it can have a larger impact, because there was greater premium some sort of risk in that particular sector, but to attribute all of our incidence to public and higher ed would be absolutely incorrect, because as you see across that chart it’s virtually across every single sector.

Unidentified Company Speaker

Right.

Tom Gallagher – Credit Suisse

Okay.

Unidentified Company Speaker

Let’s go to Kelly in the back.

Kelly Flynn – Goldman Sachs

Thanks. Kelly Flynn with Goldman Sachs. Just kind of touches on what we are – Tom was just asking as I look at page 15 between public and education and healthcare is about talking about 60% of premiums and we all know that, but these three areas historically have been characterized by a lot of stability and certainly they are changing and they are going to continue to change in ways that we can’t necessarily predict. So, I am curious if we look out in light of your rate increases and somewhat losing some customers on purpose gaining no one’s, what that mix might be expected to look like three to five years?

Unidentified Company Speaker

It’s a very good question. I think you are right that we see changes in public and education, but I think we probably would also agree that neither public nor education is going to go away. We are still going to educate kids. We are still going to pave roads and run cities and so on. What you probably see though as time goes on and I’ll ask Jim to respond to this in just a second is a change in that mix of new business coming on. And when they talk about their products and services and capabilities being added, they are specifically targeted toward more private sector employers. And so you will see that mix begin to change as more and more new business comes on. You want to fill in the detail.

Unidentified Company Speaker

The investments that we made in late ‘08 and in 2009 in particular have been sort of labor savings if you will for human resource departments. That resonates quickly in the private sector. It resonates a little slower in the public sector. We can literally through our ability to catch data feeds to the outsourcing if you will or leave administration that’s certainly a conservation most private employers will have, very few public employers want to talk about outsourcing leave administration. And we have seen our shift over the last couple of years even with some private sector interest in those services and capabilities less on the public we’re seeing a little bit of the shift, where we were a little bit over 50% on public and education now we are a little bit under, that could reasonably continue or as you suggested changes could be coming in the public side, where maybe some of those outsourcing things could be attractive or be worthy of some conservation. Public is starting to get under enough budget pressure that they are looking at core functions. We typically look at – we provide value to sort of ancillary thing, so it’s a little hard to see how that will play out over the next couple of years, but I think we’ll see more and more conversations about it.

Unidentified Company Speaker

I would just add one other thing to my own tech tests, in these slides, we often – it’s easy to generalize about public and education. We saw employment start to comeback in education this first quarter this year. Some we hadn’t seen for the last two years, but those sectors are, there is quite a bit of difference regionally and so local government is now saying state government, higher ed is not the same as lower ed K-12 and there is some differences in there and we obviously don’t have all of that business. We have some concentration for expertise purposes, but it isn’t – there are lot of differences and we are selective about who we do business with so.

Kelly Flynn – Goldman Sachs

Thanks.

Unidentified Analyst

Hi (Rich) from Kennedy Capital. Can you guys just talk about the stock and setbacks, so I guess I would have expected now the buyback would actually have increased a little bit. What – if you have 220 in excess capital, why would you trend towards the lower end of your guidance. What are you using the capital for or what's the conservativeness or so how much real estate do you have on the books for sale potentially?

Unidentified Company Speaker

So, in terms of the real estate on the books, I think you’d see about $100 million of real estate on the balance sheet. If you take out minority interest in that, it’s probably about $70 million, probably about half of it we’ll consider, we’ll probably actively consider selling. So, that’s the order of magnitude to that. In terms of we do have – we do have a very good position with respect to capital right now, I think the conservatism that you see relates all to the external economy and the way that external economy sets our sense of risk generally, but also in the wage effects of our benefit ratio as we work through that pricing, and also to think of the rate of capital generation on as we go forward. So, it's balancing all those things. It's not formulaic in the sense that if we get see this number we buy this much capital is really balance if you need that sense of risk. In before the financial crisis started going back into the 2006 period, we probably would have talked about well, about $100 million is what we would have wanted to hold in terms of excess capital, about 5% of GAAP equity. Since then, we have held higher numbers and we continue to hold higher numbers. So, I think all you're seeing is that judgment – that risk judgment in terms of external economy, how it affects the overall industry, and how it affects us in particular through the benefit ratio.

Unidentified Analyst

Okay, good.

Unidentified Company Speaker

Eric?

Eric Berg – RBC Capital Markets

Thank you. Eric Berg from RBC Capital Markets. Just one question, would you think Floyd that within a given industry your incidence, which is I understand that has nothing to do with how much you are charging, it’s just the number of claims per thousand. Would you think that within an industry like any industry want, disability industry-wide incidence would be the same? To put my question differently, would you think that your incidence at any point in time for any customer group would be better than or worse than your competitors?

Unidentified Company Speaker

Well, I think – well, first of all, you got to be careful about being too granular, because incidence itself is a low frequency, high severity event. So, if you drill down with too much granularity, then you lose all sense of what you are measuring, because then randomly it just takes over. If you think of sort of the statistical mix, we have talked about all business being more public in education versus many in the industry. We know that public and education was hit lower in the financial crisis – later in the financial crisis than the – than construction, for example, which lost all the jobs almost immediately and then started to come back. So, we think the timing could be very different. So, in fact early in the financial crisis, we saw some of our peers already talking about high levels of incidence which we saw later.

Unidentified Company Speaker

Eric, I would add to that the comparison is a little tricky as well, because incidence is approved claims. And so, it's not every claim that comes in the door and companies, when I mentioned expertise in beginning – claims expertise is area that we have particular investment in. How you manage those incoming claims, how you help people back to work will have an impact on that as well? I don’t want to scare anybody in the room here, but Jim and I both early in our carriers actually managed long-term disability claims. So, this is not the theoretical exercise for us, worked with claimants directly, and we believe that our claim shop, which I am currently responsible for is about the best in the business, so…

Eric Berg – RBC Capital Markets

Would you think I heard what you said about the difficulty statistically that can arise from getting too detail, still I'd like to note and I heard what you said about paid versus submitted incidence. If you were to look at submitted incidence just the number of letters coming in the door from people who are saying I'm disabled within a given industry, take any industry you want, manufacture it. Do you think that your submitted incidence within a large industry like manufacturing would be similar to competitors?

Unidentified Company Speaker

I think the other key variable there and there are bunch of variables here, but the other key variable there is say we took manufacturing, high-tech manufacturing versus maybe automotive manufacturing. Plan design plays a big part. And so if you have a 180-day waiting period for an LTD claim or an LTD plan versus a 90-day waiting period, incidence there submitted claims is going to be dramatically different. So, there is subsections, as Floyd alluded to earlier, that are dramatically different just based on plan design.

Unidentified Company Speaker

Eric, your point is well taken, but you think that industry as a whole should do it, but there are so many other variables that come into play that I just don't think you can extrapolate across the whole industry. Good question though.

Unidentified Company Speaker

Alright, let’s come up here, Mark?

Mark Finkelstein – Evercore

Mark Finkelstein, Evercore. Actually going back to slide 27 where you gave kind of the diagram of kind of very low ROE kind of just below targets and then above targets, I’m curious about of the business that still has yet to renew, what percentage falls into that left kind of well below ROE targets bucket?

Unidentified Company Speaker

I don’t think we’ll be talking about that right now that one thing to be careful with this slide, we are hesitant to put this slide up is that those blue chunks on that page are not representative of one-third premium, one-third premium, one-third premium. So, we specifically did not put that in there without same reason I am not going to go there.

Mark Finkelstein – Evercore

Okay. That I try. And then on the pricing that you got kind of 33% of the way through the re-pricing of the business that renewed what percentage of your pricing objective have you been able to achieve?

Unidentified Company Speaker

What I’ll say is that I think it’s tracking about where we wanted it to be, when we take a look at we break out some chunks of our business. And we see say our regional account business and we see that we’ll see maybe a chunk of that did I give any price increases and then some of that business might approximate a 20% increase and we put that altogether we can say that we are on track to hit our higher single-digit price increases on our LTD book. And so I feel pretty good in the aggregate, when we look at the aggregate that we are getting right where we want to be, but some of that businesses got some pretty healthy price increases, you saw some 18s. We have seen some stuff on price increases that the first digit is a two. And so then we’ve got some other stuff where it really didn’t warrant a price increase for higher incidence. So, the way we look as the aggregate and I’d just say that we are hitting our targets of a high single-digit price increase.

Mark Finkelstein – Evercore

Okay. And then maybe just finally the pricing incorporates some incidence, but not fully for incidence, where we are at today in terms of you see there is an expectation of incidence does subside somewhat, I mean, not a realistic outcome, but I am just curious if incidence were to stay where it was how much more would your pricing increases need to be to accommodate that?

Unidentified Company Speaker

I think when we showed some slides a year ago and what we have talked about where we announced the pricing increases that we would see, we are looking for maybe about a third of improvement and incidence would come from sort of economic and two-thirds would be we would cover for in a pricing increase. And I would say that right now we are sort of tracking on that. And in fact I think the incidence improvements are we see it’s pretty favorable so far.

Mark Finkelstein – Evercore

Thank you.

Unidentified Company Speaker

The good news is we are starting to see some change in that incidence number, but it will take some period of time for it to work through. You are right from the standpoint of so what percentage are in the high ROE or the low ROE category, this is a snapshot just for Q1. And what we are really trying to demonstrate to you is the magnitude of the changes, but there can be in essence 0% or very near zero changes to plus 18 and in between depending upon where it is. If somebody rejects a 18% or 20% rate increase, I am probably okay with that, because they weren’t meeting our ROE targets to start with. So, to the extent that brand X wants to pick them up at 20% below my 18% increase, I’m good with that.

Mark Finkelstein – Evercore

Okay.

Unidentified Company Speaker

Steven?

Steven Schwartz – Raymond James

Steven Schwartz, Raymond James. I’ve got a few, I apologize, if you could on page 19 the breakout of just kind of question, I guess where is health in that?

Unidentified Company Speaker

I don’t think we displayed all the various industry sectors here, this was just a…

Steven Schwartz – Raymond James

Okay.

Unidentified Company Speaker

Good example.

Steven Schwartz – Raymond James

Would health have had basically matched this?

Unidentified Company Speaker

Yes.

Steven Schwartz – Raymond James

Okay.

Unidentified Company Speaker

We saw some improvement there.

Steven Schwartz – Raymond James

And then Greg, you’ve been back and forth on voluntary – on the voluntary business kind of didn’t buy the story kind of edge – seem like you are edging there, any update on your thoughts on the voluntary market?

Greg Ness

We are in the voluntary market today. We sell products everyday that on a voluntary basis, where our employees decide what they are going to buy or how much and so on. You will continue to see us do that and if anything else we’ll just forge even more into that voluntary space.

Steven Schwartz – Raymond James

Okay. And then if I may continue. Scott, just want to see if you are paying attention. July 1st, fee disclosure comes in 401(k)?

Scott Hibbs

Here you go.

Steven Schwartz – Raymond James

Any thoughts on that?

Scott Hibbs

Number one, we are ready. Number two, I don’t think it’s a significant deal for us as it maybe for others, because that we've been very transparent on fees for a long time. We don't have a proprietary product in the lineup. So, I know there is a lot of talk about what does that mean for competition etcetera. I am not overly concerned about it. We’re ready, we’ve got statements ready to go starting with planned sponsors and then for participants so…

Steven Schwartz – Raymond James

Okay. And then one more, I think you mentioned on the – I think you mentioned on the conference call about social security and delays in decision, I was wondering if there was any update on that?

Jim Harbolt

I think some of that – maybe some of our competitors mentioned social security in their calls as well. We didn't see any significant changes in approval rates or timing in the current period. It’s something that we want to talk back to expertise. The ability to manage the claim in the relationship to other income they are eligible for whether it's on the retirement side in the public sector or in social security side in the private sector. It’s something we have seen that real consistent in the current period.

Steven Schwartz – Raymond James

Okay, thanks Jim.

Jim Harbolt

Others questions?

Stewart Johnson – Brookville Fund Managers

Stewart Johnson, Brookville Fund Managers. Floyd, I have a theoretical question for you. You showed a slide that compared StanCorp's stake levels as a percentage of shareholders’ equity to some of your peers. And I understand you are trying to make a case that you might be more conservative than others with higher levels, but isn’t it the case that DAC enters the balance sheet through product mix and even pace of sales or company with the higher sales growth rate would have a higher level of DAC, can you speak to that?

Floyd Chadee

Yeah, absolutely, absolutely. So, it would – those variables were affected, certainly the product mix would be significant depending on your pace, keep your sales in the pattern of sales over the last few years, it would affect it so. They are the variables. So, it isn't a complete story, but it is illustrative of sort of the overall things you would see with respect to our balance sheet. If you look at that measure knowing that it's not a precise measure, but you look at other measures too sort of the runoff for reserves, you would also see the same kinds of patterns, you also see – we haven't taken the changes, so not meant to be definitive, but illustrative.

Stewart Johnson – Brookville Fund Managers

Thanks. And then I have one other question for Jim, I am going to try and commit Mark's question in a different way, but if we were to fast forward to next year first quarter, three quarters of your business is re-priced, if you look at that from the slide number 27 of the business that is underpriced, do you like to have a higher ROE given that the price increases go through what percentage of your business is going to still be in that left hand pile?

Jim Harbolt

I think I need to stay away from that and it's also a little bit asking me to really pull out some crystal ball activity in the time when we are seeing some continued improvement in incidence. And so I am not sure I am really able to predict that. What I will tell you with confidence is that when we get to that point in time, if we don't see all the improvement in incidence that we expect, we are going to react again at that time and we’ll do – we'll pull the trigger again on another price increasing.

Stewart Johnson – Brookville Fund Managers

Under 15% be reasonable?

Jim Harbolt

Under 15%..

Stewart Johnson – Brookville Fund Managers

Of your business being that you wish kind of higher ROE?

Jim Harbolt

Well, I should hope – I mean, I think that's we are going to be mitigating through with the pricing increases and we are going to be reacting to that. I think that we would see those price increases flow through by them. I think we'd be in a – we feel pretty good about this, but would be in the right at the first quarter next year.

Stewart Johnson – Brookville Fund Managers

Thanks.

Unidentified Company Speaker

Okay, Jim let’s go back here.

Unidentified Analyst

Sorry, (Rich) from Kennedy again. So, you guys talked about that you didn’t think now is the time to sell the business, which I respect, but could you give us your vision over the next five years the runway you think and what you can do to this business that makes it worth a lot more when we meet with you five years from now?

Unidentified Company Speaker

Yeah, let me start and well I’d feel free to try them in. We think that given where we are in this economic cycle and where this company is or the strength of the foundation of its balance sheet is and the potential for our business, there is an awful lot of increase value to be had here. We think that when we return to a more normal market environment, we don't really need great growth necessarily for this company to really excel. All we really need is for the headwinds to turndown some. We were still seeing a negative growth or a loss of employees in our existing book of business. That is the employers that we insure today continue to shrink their workforces. If we could just get that to stop and hold it level and then if they even just start to add a few employees, we would see significant changes in this business moving forward. And so that gives us a whole lot of possibility, you saw Scott business is performing exceeding well in this low interest rate environment. As interest rates increased and equity markets increased, that business becomes far more valuable since it's based on those equities, which also based upon the interest in the spread that you can get in this spread businesses and so on.

So the combination of the two really says that there is an off a lot of upside as we move forward even if we are bumping a long kind of the bottom here and I expect that's what we are going to do, we are going to bump along a bit, we'll have some that are up, some that are down and so on, but still we are in upward trend so, that’s what gives us a great hope moving forward.

Floyd Chadee

Okay, so add into more color to what Greg said, I mean, right now the financial services industry and the insurance industry itself working against sort of the challenges of the environment the employment picture, the interest rate picture, I think you’ve heard us tell the story about how we are managing the business properly within that environment. There is a question of when incidence might subside and when – what is the pattern of incidence going forward. We think of incidence as a function not of the level of employment, but the rate at which unemployment is increasing and that once at rate keep this up, incidence is going to come down, and when it comes down and if it returns to pre-crisis levels and then you will start seeing immediate improvement in your bottom-line.

If you actually would start seeing the economy improve, then you have people going back to claims – coming off claims very rapidly. So, even see a lift in your earnings then. So, that’s the function of our business in terms of the external environment. But in the mix of all of that, I mean, we’ve been managing this business at the very disciplined. You’ve heard Jim and Dan talk about the investments and they continue to make through the financial crisis and beyond in terms of products and services. We think not only we’re managing for sort of the difficult economy, but we also with the kind of activity positioning ourselves strategically within a very attractive industry.

Unidentified Analyst

May be what I miss this – I’m sorry, may be what I miss there is a vision of growth, there is a well announce at the time because the headwinds, but is there is a vision of where you want to take the business excluding the headwinds are sort of I was looking for?

Floyd Chadee

I think you are absolutely going to see this business grow. We think there is an off lot of potential on the group insurance side to grow. You saw the chart they put up there showed a single-digit market share in every single one of our products today. So, we think there is an off a lot of opportunity for growth as time goes up. We also think that this interest rate environment in the economic conditions continue, we will also see other people start to help from the market with their pricing that can only help us. I think that’s a very positive thing. We frankly might see some people to finally say nowhere. We are really not expert to this business. We really don't know exactly what we’re doing here maybe it’s time to move out of this business.

We think this is a company has a huge amount of pontifical moving forward as I kind of called embedded value like to be careful because and we get into accounting and all those kinds of things, but we think that when you look at where we are in terms of the LTD cycle, where this guess are in terms of the pricing increases, where we are in terms of the economy, where we are in terms of the products and services they have put in place and are ready to rock and roll that if we could just see the loss of jobs slowdown. We’d see huge improvement and then it just actually moves up in exponential manner. If we start to see a growth in the economy start to return as we saw in the past. I mean, previously we saw in our organic growth, we see three plus 4% growth per year just from the organic growth segment that’s negative today. But we could just bring that back to zero that would make a huge difference. I’ll just get back to Chris, I guess.

Chris Giovanni – Goldman Sachs

Thanks, Floyd. Chris Giovanni, Goldman Sachs. On page 15, you split out the customer size and roughly half of which under 2,500 devices and then other half is over 2,500. Is there a similarities or differences between incidence on may be the smaller case versus the larger case and then sort of transferring that to loss experience?

Floyd Chadee

Good question, Dan you want to take that?

Dan McMillan

We did not see dramatic difference in customer size for incidence and so, we think about those industries – industry segments that we held in the one bar chart that cuts across all size customers as well. So, when you look at incidence to think about as broad-based, increasing spiking for us in the first couple of quarters last year and now slowly improving back down and hopefully to historical levels.

Chris Giovanni – Goldman Sachs

Okay. So, you are not targeting in terms of new sales, any particular case sizes because of incidence level?

Dan McMillan

Correct. There is no specific high correlation between incidence and case size.

Chris Giovanni – Goldman Sachs

Okay, great. Thanks.

Dan McMillan

Good.

Tom Gallagher – Credit Suisse

Thanks. Tom Gallagher of Credit Suisse. I just want to ask you an accounting question, the – I would agree Floyd with your comment earlier that a lot of your assumptions I think are more conservative than most peers. Is that a competitive disadvantage right now for you from a pricing standpoint? That’s question number one. Have you tried the size what the differentials might be in terms of what competitors are using from a discount rate standpoint versus what you are using today both for GAAP and stat? And the reason I asked the stat question, which is kind of the final piece of my question is I think the fact that you don’t as far as I know use any captive reinsurance type structures, where some peers do would also create more initial pressure for you especially in the current environment. So, would you consider any of those types of structures going forward?

Floyd Chadee

Okay, so, let’s see, is it will be – we are more conservative, that’s been demonstrated to a long history of just looking at say schedule agent to start or the fact that we’ve never taken a reserve – to take the reserve increase. Is it a competitive disadvantage from a pricing perspective? One could argue, in the area of commercial mortgages that we were at a competitive disadvantage when the others were expanding their commercial mortgages much faster than we will. Did it turnout to be a competitive disadvantage? It didn’t, because when the crisis hit as Warren Buffett says, when the tide was out, we were better off than the others. So, in the midst of how you manage a group insurance business, for example, how you hold reserve is just one aspect of sort of your discipline in managing that business. It’s also consistent with how you price, how you said interest rates and all of that.

We think it’s a disciplined management, the total disciplined management that matters. Will we ever gain competitive advantage in the hot market? Probably, will we want that? Probably, because we think, we don’t chase for the market, right. So, have we been able to size the difference in conservatism, not preciously, we haven’t gone after that sometimes it’s hard to tease it out, you get a sense of the magnitude when others take unusual reserve changes. And it’s massive in those circumstances. I’m sorry I missed that.

Oh yes, the question of capital management or the captive reinsurance arrangements that you talked about really gets into different mechanisms for capital management. We think those are all tools out there and you have seen us use some of it in terms of reinsurance last year on our group life side. So, we will continue to look at those and that’s part of sort of capital management story as opposed to sort of the discipline we use in terms of managing the actual businesses.

Unidentified Company Speaker

Tom, if I was in our Manhattan sales office today and I will be in the Chicago tomorrow in our sales office, right now, I am walking to announce what you mean from a competitive standpoint, it’s price and we are not talking about 8%, it’s like the story up here, we are 20% off on an LTD case and give me four year rate guarantees on LTD like everybody else to ask. That’s what I am here from our folks, the price and four year rate guarantees.

Unidentified Company Speaker

Okay. Just go to Randy.

Randy Binner – FBR Capital Markets

Just submit for an update on Healthcare Reform, I guess that hasn’t come up and that’s kind of moving forward and has been a bigger focus for all this in the past, but as we closer I’ll be interested in update on how that’s affecting your business, I guess most specifically how it’s affecting your brokers, their distribution, how they are going to adjust to it with probably lower revenues as well as if you think there is going to be an impact on demand for your product and just the overall impact there?

Unidentified Company Speaker

Good question, Randy. Jim, you want to take that?

Jim Harbolt

Couple of things to think about that we see, certainly there is disruption in the marketplace and attention by brokers and consultants right now. With employers, they are starting to focus a little bit on the January 1, 2014 decisions. The consultants out there working on consulting assignments seem to be rather happy. They seem to be all pretty busy right now, working on health insurance. So that’s taken a segment of the market away a little bit from being interested in group life and group disability. There is a focus on healthcare and changes that are looming.

Our brokers are spending a lot of time on that business right now as well focusing on health insurance. So, the chatter we sort of hear in the industry right now is geez are going to be – some of our competitors reported declining sales in late ‘09 and then in 2010, because of the focus on the healthcare changes then and some are predicting that, that could happen a little bit now. We are hearing that a little bit from our brokers as well. So, there is a lot of attention going on to healthcare. I have heard some people speculate that under the healthcare changes that are looming that brokers revenue was going to go down. There is going to be more broker consolidation. I think that those things seem to be – everybody seems to be buying in on that deal.

Randy Binner – FBR Capital Markets

Assuming there is going to be broker consolidation, because that seems inevitable, how do you plan for them to react to that, because you could lose what if you lost a major kind of mid-market distributor? I mean, do you chase where that broker went or how do you think about planning for that or just take it as it goes?

Jim Harbolt

We think we are planned for it now. We have well-established relationships with a wide array of brokers. What I would tell you there has been broker consolidation now for numbers of years. It’s not like it’s new. And so we have navigated that pretty well. I think with the relationships that we invest. When we do talk to brokers, the number one thing that they are really nervous about when they are losing revenue from health insurance right now is they don’t want to lose a customer. They understand losing revenue on health insurance. They don’t want to lose a customer and that’s what we speak to and that’s what we deliver and we say working through those intermediaries, you can trust us with your clients and we are going to make you look good and that’s worked for us.

Randy Binner – FBR Capital Markets

Good.

Kelly Flynn – Goldman Sachs

Kelly from Goldman Sachs. Getting back to the issue of a lot of competition in your middle market business, is it reasonable to think of it as partially at least a function of the flush times for the HMOs recently, are there – are they the HMOs that are competitors of yours obviously good times in their core business, low utilization deploying that capital into the middle market, is that a reasonable explanation?

Unidentified Company Speaker

Obviously, they are the ones that have to answer that. I don’t know for sure what it is. I think it's an interesting theory to think about. We don’t see those large healthcare providers as very expert at this business. We see them come in, get burned, and go out. As an example, I think probably telling a tale out of school when you see the competitor come in and take a case for 20% below our offer, that was a healthcare company. We think they don’t accurately assess the risk and understand the long-term liability and nature of the claims and so on. And so your theory might have some credibility to it. As Jim said, I think we see a little bit of people that used to go after large cases kind of coming down a little bit. And so maybe that’s the case. You want to add anything Jim?

Jim Harbolt

No, I think some folks have been very public with some strategies, some larger case riders saying we want to come down and then both in private and then there are some mutual companies who have said gee, we have been in this, the lower end of the market, we want to move up. And I don’t hear as much about the HMO space.

Kelly Flynn – Goldman Sachs

Thanks.

Unidentified Company Speaker

Alright, any final question? Alright, well hearing none we’ll say thank you very much for spending your time with us. We are very appreciative of that. I know you’ve got lots of options for your time. Thank you very much for your attention to StanCorp and have a good week. Thank you all.

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