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StanCorp Inc. (NYSE:SFG)

Q4 FY07 Earnings Call

January 31, 2008, 12:00 PM ET

Executives

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

Eric E. Parsons - Chairman, President, and CEO

J. Greg Ness - Sr. VP of Insurance Services Group

Kim W. Ledbetter - Sr. VP

Robert M. Erickson - Assistant VP and Controller

Analysts

Edward Spehar - Merrill Lynch

Keith Walsh - Citigroup

Jukka Lipponen - KBW

Eric Berg - Lehman Brothers

Mark Finkelstein - FPK

Operator

Ladies and gentlemen, thank you for holding. Welcome to the StanCorp Financial Group, Inc. Fourth Quarter 2007 Financial Review Conference Call. All lines have been placed on mute to prevent any background noise. Today's conference is being recorded. Today's conference call is being webcast live over the internet and is also being recorded. A question-and-answer session will follow today's presentation. [Operator Instructions].

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

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

Thank you, Tikkey and welcome to StanCorp's fourth quarter 2007 financial review conference call. Here today to discuss the company's fourth quarter results are Eric Parsons, Chairman, President, and Chief Executive Officer; Greg Ness, Senior Vice President, Insurance Services Group; Kim Ledbetter, Senior Vice President, Asset Management; and Rob Erickson, Assistant Vice President and Controller.

Today's call will begin with some brief comments from Eric, Greg, and Kim and then we will open it up for questions. Before we begin, I need to remind you that certain comments made during this conference call will include statements regarding growth plans and other anticipated developments for StanCorp's businesses and the intent, belief, and expectation of StanCorp's management regarding future performance.

Some of the statements made are not historical facts, but are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements are subject to risks and uncertainties, actual results may differ from those expressed or implied. Factors that could cause the actual results to differ materially from those expressed or implied have been disclosed as risk factors in the company's fourth quarter earnings release and the 2006 Form 10-K.

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

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Thank you, Jeff. And thanks to all of you who have joined us for our fourth quarter earnings call. I am happy to report another strong quarter for StanCorp Financial Group. Fourth quarter net income excluding after-tax net capital gains and losses was $1.23 per diluted share, a small improvement compared to an extremely strong fourth quarter in 2006. Measured on the same basis, our earnings for 2007 reached to $4.35 per diluted share, an increase of 17.6% over 2006. The results, for 2007 exceeded our expectations and demonstrated once again, the value of our long-term approach to the management of StanCorp. Earnings, sales, and persistency were strong in our core insurance services businesses. Annual earnings increased at our asset management group as well. And we continue to invest in improved processes and systems in that area with confidence that our investors will be well rewarded in future years.

In the fourth quarter, results of our insurance services segment were driven by premium growth and favorable claims experience, which generated income before income taxes of $89.8 million. Premiums for the insurance services segment increased 8.3% to $540.3 million for the fourth quarter of 2007. Sales were strong and persistency was excellent. Our people across the nation continued to provide the positively different service that sells new cases, retains current customers, and makes the difference to those who depend on us to fulfill our promises.

In the asset management segment, income before income taxes for the fourth quarter was $9.2 million. Revenues for asset management increased 14% primarily as a result of increased assets under administration. In the fourth quarter we also originated $423 million of commercial mortgage loans, a 71% increase compared to the fourth quarter of last year. Reduced compensation among lenders has created some excellent opportunities for us, and third party investors continue to have significant appetites for the high quality loans we generate.

During the quarter, we repurchased more than 836,000 shares of our common stock at a total cost of $42.9 million at a volume weighted average price of $51.27 per share. For the year, we repurchased over 4.8 million shares of stock, approximately 9% of the shares that were outstanding at the beginning of 2007 at a volume weighted average cost of $48.60. At December 31 , 2007 we had approximately 1.4 million shares remaining under our current share repurchase program which expires at the end of 2008. Risk-based capital in our insurance subsidiaries was 300% at December 31, 2007. We expect to maintain this level of capital at the insurance company level and we'll dividend any excess to the holding company. At the current growth rate we generate approximately $125 million to $150 million of excess capital per year. For 2007, earnings per share excluding after-tax net capital gains and losses increased 17.6% and our five year compound annual growth in earnings per share was 15.9%, exceeding our long term target range of 12% to 15%.

In addition, return on average equity excluding accumulated other comprehensive income was 15.8%. We have met or exceeded our return on equity objective every year since it was established, a record we expect to continue and total assets under administration in our asset management segment increased 17.6%. Consolidated premium growth was 7.4% for the year, a little below our long-term target range of 10% to 12%, but greater than what we believe the industry growth rate have been and better than our expectation.

For 2008, we expect we will continue to meet or exceed our long-term objective for return on average equity excluding after-tax net capital gains and losses from net income and accumulated other comprehensive income or loss from equity of 14% to 15%. We expect growth in net income per diluted share excluding after-tax net capital gains and losses to be in the range of 12% to 15%. In estimating this range we are taking in account expected premium growth in the range of 6% to 8%, a rate we expect will maintain our historical pattern of growing at least 1% to 2% more than what we estimate the industry growth rate will be, and we are maintaining our benefit ratio guidance of 77.5% to 79.5%. But we note that the actual experience for the last four years indicates the experience for 2008 could be towards the lower end of this range. Although 2008 will present us with a fresh set of challenges it will provide opportunities as well, and I believe that our strategy is right for both. If a recession occurs we believe we are well prepared. We like our mix of businesses. A significant portion of our premiums come from industries that have historically been resistant to many of the pressures that employers face in a recession. You will hear more from Greg, on that topic in just a moment.

Our balance sheet is the cornerstone of our financial strength and has provided us with the foundation for profitability through a wide range of economic cycles. Our bond portfolio was strong and you'll all no doubt see in the mortgage loan delinquency charge that we've provided in our investor presentations which shows that in prior recessions we have seen delinquencies rise modestly, but nowhere near the industry rates. Kim, will provide more on our investment portfolio shortly.

In terms of opportunities, we are well positioned to growth our core insurance businesses from a position of strength. We will continue to build our asset management businesses to provide greater earnings diversification overtime and we'll do both with the discipline and expertise that you come to expect from StanCorp.

In summary, I'm confident of our long-term prospects for both top and bottom line growth and expect 2008 will be another good year for StanCorp Financial Group. With that I will first turn the call over to, Greg, and then to Kim, for an overview of our business units. We'll leave plenty of time for your questions at the end. Greg?

J. Greg Ness - Senior Vice President of Insurance Services Group

Thanks, Eric, and good morning. I'm happy to report a very strong fourth quarter for the insurance services segment. Results for this quarter were excellent with strong sales, good premium growth, and favorable claims experience. Sales in our group business were $105.5 million in the fourth quarter, a 23% increase compared to the $85.8 million for the fourth quarter of 2006. This reflected double-digit growth in all of our key product lines.

Our results this quarter kept off an outstanding year in which sales grew 28.6% year-over-year and exceeded $400 million of annualized premium for the first time in our history. Fourth quarter sales included a good mix of business in all case sizes and products.

I'm especially pleased with the growth in the number of new cases sold. This fact underscores our efforts to continue to further broaden and diversify our block of business and thus our risk. These results are evidence of the exceptional efforts by our sales representatives in helping us to grow the business in a very competitive sales environment. We continue in our belief that avoiding the purely price sensitive customer while providing superior customer value at a fair price is key to producing the strongest long term earnings for our shareholders.

Premium growth in our Group business for the quarter was 8.4% compared to the fourth quarter of 2006 with strong growth across our key product lines. Premium persistency for the year continues to be excellent. Premium growth in our individual disability business was 7.5% quarter-over-quarter.

Persistency was outstanding in this line as well and we continue to have good diversification of new sales in terms of both occupation and geography. As you know, our premium growth is impacted both by new sales, as well as persistency and growth of the existing block of business.

For 2008, we expect our premiums to grow in the range of 6% to 8%, which we anticipate will likely be greater than the marketplace growth. The claims experienced in our group and individual businesses, although slightly less favorable than the excellent fourth quarter of 2006, was still very good. Despite normal quarterly fluctuations, the benefit ratio for the full year in our Group Insurance business was 77.4%, just below the bottom of our annual guidance range of 77.5% to 79.5%.

During the fourth quarter, we lowered the discount rate used to establish new reserves by 15 basis points, to 5.35%. Reviewing this rate each quarter, allows us to maintain the margins between our investment yields and our reserved discount rates. Our individual disability business continues to grow steadily with sales up 20% in the quarter and 11% for the full year. The benefit ratio can fluctuate widely for this small block of business, however on an annual basis it was well within our expectations.

Our operating expenses were up in the fourth quarter due to increased incentive compensation expenses as a result of higher earnings, as well as the final implementation of a large case that was effective at the end of the third quarter. The implementation expenses re-incurred include some new and enhanced capabilities that will benefit new and existing customers on a go forward basis. As we consider the possibilities of a recession we have included additional information with this quarter's release to demonstrate how we diversify our business against economic changes. If you look at slide number 3, you'll notice that 45% of our Group business premium comes from Life, AD&D, and Dental coverage's all relatively immune to economic changes.

On slide 4, you'll see that over half of our long-term disability premiums come from industries that are resistant to the effects a recession may have on employment. These industries include the public sector, education, healthcare, and the utilities. Compared to other industries during the last recession of 2001, most of these businesses showed either slight increases in employment or only fractional decreases. Our diversification is one of the reasons why we have not seen the same pattern of increased incidents rates during economic downturns, let's say social security has experienced.

Historically, social security incidence has increased during and following the recession. Our significant historical data would demonstrate no increase in incidence rates during the exact same timeframe.

I'd like to reiterate what we have said many times in prior earnings calls. We are continuing to maintain pricing discipline, and we are not chasing the market where it does not meet our profit targets. This business is all about getting the right rate on the right risk and providing real value and unwavering service to our customers. We continue to manage this business for the long-term and I believe that our results for both of the quarter and the year validate our strategy.

With that, I'll turn the call over Kim, Kim?

Kim W. Ledbetter - Senior Vice President

Thanks Greg and good morning. Our investment portfolio continued to perform well during the fourth quarter. And despite challenging equity markets, the asset management segments generated record revenues during the quarter. As Eric, mentioned, revenues were up 14% compared to the fourth quarter of 2006. Income before income taxes at $9.2 million was slightly lower than the same quarter last year. This was primarily due to equity market declines in the fourth quarter, higher FAS-133 liability accruals for our small block of indexed annuities, and some higher operating expenses associated with our recent acquisitions. During the integration of these acquisitions, we identified additional opportunities to consolidate systems and processes and decided to move forward and invest in additional changes that will benefit our clients and our business in the future.

Overall in 2007, we continued our trend of significant growth in the asset management segment. Over the last 12 months, total assets under administration increased by 17.6% to $22.7 billion, more than $3 billion higher than the year before resulting from new sales, continued growth in customer deposits, and acquisitions partially offset by equity market declines in the fourth quarter of 2007. We continue to grow organically and will seek opportunistic acquisitions to add asset management and advisory business, as we pursue our strategy to diversify the earnings base of StanCorp.

Turning to our investment portfolio, our fixed maturities securities portfolio, continues to perform well. With the current portfolio of yield of 5.57%, an average portfolio rating of A is measured by Standard & Poor's. We have no securities backed by residential or commercial mortgage loans.

The earnings presentation includes 2 slides, showing the diversity of our fixed maturity securities portfolio. You will note that municipal bonds make up less than 2% of our bond portfolio, which is about 1% of our total assets. Our strategy is to maintain a diversified portfolio of high quality securities to keep us well protected and if any industry experiences difficulties.

Now in a spirit of full disclosures some of you may have looked through our insurance company's statutory filings and noticed unscheduled the EBITDA holdings include bonds insurers and back MBIA and radiant. Our holdings totaled about $35 million. We have no current intention to sell these holdings, however if we were to sell these issues today, we would recognize an after tax capital loss of less then $6 million.

Now, on to our commercial mortgage loan portfolio. Our commercial mortgage loan portfolio yield was 6.36% for the quarter. Commercial mortgage loan pre-payment fees were $3 million for the quarter compared to $2.1 million for the fourth quarter of 2006. The quality of our commercial mortgage loans is excellent and our delinquency rates are very low. We have no direct exposure to sub-prime or all day mortgages and either our mortgage loan or Fixed Maturity Securities portfolios. As the slides in the earnings presentation show, we have good diversification by product type, by property type, and geography with deliberate concentrations in the higher growth areas from Texas to California. These areas have preformed very well for us for many years. The profile of our commercial mortgage loan portfolio is entirely different from the residential mortgages and it has been the subject to so much concern. Industry statistics from the American Council of Life Insurers, show that over half of the residential mortgages held by life insurers of loan-to-value ratios above 95%. We limit our loan-to-value ratios to no more than 75% of the origination. In 2007, our average loan-to-value ratio on new loans, was 69%. Over time, these loans continue to amortize further, lowering the overall loan-to-value ratios.

As shown on page 9 of the earnings presentation slides, the average loan-to-value ratio and our commercial mortgage loan portfolio is now 57%. The values of the commercial properties securing these loans would need to fall sharply before we would experience losses on foreclosure. We offer small commercial mortgage loans to borrowers who want fixed rate overtime and we rigorously underwrite every commercial mortgage loan we make. Over the past 20 years, we have had two recessions, during both of these recessions the delinquency record for our commercial mortgage loans has been exceptional. We have not suffered any significant delinquencies or losses on this portfolio in decades. During the quarter we originated $423 million of commercial mortgages, a 71% increase over the fourth quarter of last year.

Today, there are fewer lenders that will provide this product and the current market is one of the most rational underwriting markets in several years. So we're able to negotiate favorable returns for ourselves. We are also able to earn a wider spread on these investments than we do on our bonds. We continue to enjoy steady demand from third party investors for our mortgage loans. At $1.9 billion mortgage loans managed by third party investors were 35% higher at December 31, 2007 compared to a year ago.

For 2008, we expect to have strong originations and we have third party investors who have provided written commitments to purchase about two-third of these loans we expect to make.

With that I will turn the call over to, Jeff, for the question-and-answer portion of the call. Jeff?

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

Thanks you, Kim. Tikkey, we are ready to open up the call for questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. Your first question comes from the line Ed Spehar with Merrill Lynch.

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Hi Ed, how are you doing?

Edward Spehar - Merrill Lynch

Good, how are you?

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Great, thanks.

Edward Spehar - Merrill Lynch

I have a couple of questions on real estate. I guess, the first would be, do you have any numbers on what the LTV was of the portfolio going into the last downturn in the early 90s?

Kim W. Ledbetter - Senior Vice President

Hi, Ed. No, I don't think we have that number with us here today.

Edward Spehar - Merrill Lynch

Okay.

Kim W. Ledbetter - Senior Vice President

I wouldn't expect that would have changed very much overtime from what it is now, because we maintain the same underwriting standards and generally approached the underwriting of our loans the same way. So the portfolio was much smaller back then, but I don't expect it would been much different.

Edward Spehar - Merrill Lynch

Okay. Then just to maybe a little clarity on the lost commentary during the last recession, say, you said that there was no significant loss. Do you have any numbers on what kind of losses you have, let's say relative to the size of the portfolio in the early 90s on a basis points. I mean, I know its small, but I'm just wondering if you have those numbers.

Kim W. Ledbetter - Senior Vice President

We do have some information on that added, its been overtime averaged about three basis points for the last 20 years, so that's the number. It might have gone upto 20 basis points for one year during that period, but its been virtually nothing for the last 10 years or so. The losses that, that really make up that three basis points recurred in 1988 to 1998 so.

Edward Spehar - Merrill Lynch

Okay. And then I guess, in terms of the opportunity here to originate commercial mortgages. Is there something that's -- is this a significant enough opportunity where this could be some sort of outsized earnings contributor versus what it has been historically in terms of not just the portfolio yield, but what you're managing for others? What are the capacity constraints, I guess for you to do that in terms of managing mortgages for others.

Kim W. Ledbetter - Senior Vice President

Well a couple of comments on that. I don't think there is an outsized earning opportunities, those earnings emerge overtime as we service the mortgages overtime. So I don't think you will see any great blip there or big increase. We have over the last several years continued to grow our origination staff and our underwriting staff and have a capacity to continue to grow our originations at the rate you might have seen over the last several years, but it would be somewhat bigger in 2000, we expect to be somewhat larger in 2008, but I don't think you will see a doubling or anything like that.

Edward Spehar - Merrill Lynch

Okay, thank you.

Operator

Your next question comes from the line of Keith Walsh with Citigroup.

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Hi, Keith.

Keith Walsh - Citigroup

Couple of questions for, Greg, and one for, Eric. Just first half, Greg, with -- just trying to reconcile you guys always say its competitive environment out there, but I'm looking at the third straight quarter of very, very strong sales growth and it looks like premium growth is picking up as well, just trying to reconcile those comments? And then just on persistency, I wanted to kind of dwell into this a little bit more, it's look like in a long-term disability -- persistency is still very good, but it's down from the 90% in '05, it looks like its back in a more normalized range maybe you could talk about what's a normalize range on the LTD book and it looks like for group wide its actually increased maybe some of the dynamics there and then I have one for Eric?

J. Greg Ness - Senior Vice President of Insurance Services Group

Good morning, Keith, its, Greg. Let's talk about the competitive environment to start with. You are right, our sales people today will say that the environment is frankly as competitive as it has ever been and across a number of different sizes been. What we have done is being very selective about the targets that we choose, the cases that we want to go after in the industries, in the geography that we think will provide our profit returns. Having said that I think there are lot carriers out there this year that have had some difficulty growing their sales if we look at third quarter statistics which is our most recent data that we have available to us. We see pretty wide variation in sales growth across the top 10 or 15 carriers or so. Our numbers happen to be quite good. You know, we'll put on a fair amount of business in the second half of the year and we have got folks out there today that are continuing to target the right kinds of cases and get the right rates on them where they make sense to us.

Let's talk about persistency for a second, you have talked a little bit about the differences between life and LTD. I would say that those are very normal fluctuations, those are well within the range of what we would expect in that 87 to 88 range. Keep in mind that any large case can have a pretty significant impact potentially on those numbers, that's why we like to have the broad spread of risk and I am very pleased with the number of new cases we put on this year to help with those persistency numbers.

Keith Walsh - Citigroup

Okay and then just for Eric, I mean I thought it was interesting your press release, the commentary around the lost ratio, gravitating maybe towards the lower end of the range. When I just look back over your book its averaged over just a little over 78 or little over last several... 6 years lets say. What are you seeing differently, trends within your book that would lead you to make a comment like that in your press release? Thanks.

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Good question Keith, I think basically what you are seeing there is us trying to give you the best information we can. The range 77.5 to 79.5 is pretty range and pretty pre wide and I have great confidence in it on an annual basis. On a quarterly basis I think we all know that fluctuations can occur that might be inside or outside that band. I think we are just trying to be honest about acknowledging the fact that were about 4 years in a row now we've been pretty near the low-end of that range and wanted to give you the best guidance we can. We see the history, you see the history, I think we are just simply trying to acknowledge what we are all looking at.

Keith Walsh - Citigroup

Okay, thanks a lot guys and nice quarter.

Kim W. Ledbetter - Senior Vice President

Thank, appreciate it.

Operator

Your next question comes from the line Jukka Lipponen with KBW.

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Hi Jukka.

Jukka Lipponen - KBW

Good morning well I guess good afternoon. But in terms of the guidance can you give us sort of maybe a little bit of color how do you think about when you look at the benefit ratio range and it obviously a big swing factor in terms of earnings, that if we ended up being more towards the high-end instead of the low-end of the range which you then expect that still be within the 12% to 15% earnings growth range?

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Jukka, this is Eric, I think we have to acknowledge that the 12% to 15% is a pretty narrow range and if we ended up on an annual basis at the high end of the range, no we'd be outside of that range.

Jukka Lipponen - KBW

Okay, and can you also give us some update on your CFO search?

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Oh you bet, we are deep into that process, don't have an announcement for you today but I am hopeful though we will have very shortly.

Jukka Lipponen - KBW

And then can you just quickly sort of... buy back expectations any change from your previous commentary and how is the, what are you thinking in terms of the mortgage loan prepay income expectations for this year?

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Obviously there is mortgage loan prepay I think that we are seeing a pretty typical level and Kim unless you see something different I think you are probably looking at basically pretty much a steady state at this point and Jeff you want to talk about the share repurchases.

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

Hi Jukka, its Jeff. We have about 1.4 million shares left on the repurchase program and I would expect that to last us throughout 2008 and that's when it expires.

Jukka Lipponen - KBW

So you wouldn't then be necessarily buying at the same pace that you have in the last couple of quarters?

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

In the last couple of quarters we have been using the proceeds of our hybrid debt that we issued mid year last year and so it had relatively high pace of buy backs and I think expecting more normal levels from prior years would be what you should think about.

Jukka Lipponen - KBW

Okay, great. Thank you.

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Eric Berg with Lehman.

Kim W. Ledbetter - Senior Vice President

Hello Eric.

Eric Berg - Lehman Brothers

Hello Eric, thanks very much, good morning to your team. So my question too is related to sort of excess capital and buy back. I think Eric, in your prepared remarks you did give some numbers for the excess capital generated per quarter, do I have that in writing, will you be willing to just repeat them for me.

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Yeah, I think what we said is that we think we probably generate about a $125 million to $150 million per year in excess capital at our current growth rate.

Eric Berg - Lehman Brothers

Okay and what... how does StanCorp define excess capital? What does that mean in your words?

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Basically we capitalize the insurance companies at a rate that we know is going to satisfy not just regulators but ourselves primarily and rating agencies and others. I think we said that we are going to hold 300% RBC at the insurance companies and dividend excesses from there.

Eric Berg - Lehman Brothers

And so when we think about the amount of stock that, well the excess capital should we assume that it is not only excess but at the holding company and fully available therefore to buy back your stock?

Eric E. Parsons - Chairman, President, and Chief Executive Officer

I want to make sure I understand your question. I mean the capital we... we managed the capital on a consolidated basis. Obviously we are going to maintain the appropriate level in the insurance companies at any given time but we have a fair bit of dividends capacity if for some reason we should ever need it. The excess capital is simply what we have available for a number of potential users including share buy backs but also potential including some small acquisitions or something like that.

Eric Berg - Lehman Brothers

Let me rephrase the question because it wasn't as clear as it needs to be. Since you are calling it excess capital, meaning capital above what you need to support the growth of the business or the growth that has taken place and in excess of what you believe the rating agencies require, since you are calling it excess I am going to presume that it is if you want... if you chose to use it to buy-back stock you could and I am going to presume that its at the holding company that is to say available to buy back stock if you wanted to, am I thinking about this correctly, that's all I am asking you?

Eric E. Parsons - Chairman, President, and Chief Executive Officer

You are not far off, we have about $90 million of capital in the holding company today. I consider that excess although during the course of the year, we'll manage that to make sure that we can make our interest payments so we can make sure that we can pay our dividends and that we'll use excess for... and if we have any purchases out there we'll be retaining capital for that and then there will still be excess I expect, which will go to the share repurchase bucket. And that will be continually replenished from earnings from the insurance operations.

Eric Berg - Lehman Brothers

Okay.

Eric E. Parsons - Chairman, President, and Chief Executive Officer

So again --

Eric Berg - Lehman Brothers

Yes, that definitely does get at it and then my follow-up question is whether I am interpreting correctly your answer to an earlier question relating to the benefit ratio. I think its apparent to everyone that... I mean this was raised earlier, that your earnings are very much dependent on very much sensitive to that benefit ratio. So by saying that your guidance for 2008 is... you seem to be saying that your guidance for 2008 is dependent on being at the low end, did I... was that what you were answering I guess Jukka's question before, is that basically what you were saying that you need to get that low end of the guidance for the benefit ratio target, you need to be at the low end of that range in order to hit your target?

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Eric, I would say it a little differently. We have some room in the benefit ratio and can still hit our targets.

Eric Berg - Lehman Brothers

Okay.

Eric E. Parsons - Chairman, President, and Chief Executive Officer

What I was trying to say I think to Jukka is simply that we acknowledge that the benefit ratio for the last several years has been at the low-end. We don't see anything today that causes us to think that experience next year is going to be greatly different from experience last year or the year before. That said, we are in the business of taking risk from others and that's why the benefit ratio is as wide as it is. That make sense.

Eric Berg - Lehman Brothers

Yes, yes, you are very clear, you are very clear. Thank you very much.

Eric E. Parsons - Chairman, President, and Chief Executive Officer

You bet. Thank you, Eric.

Operator

Your next question comes from the line of Mark Finkelstein with FPK.

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Hi, Mark.

Mark Finkelstein - FPK

Yes, follow-up on Eric's question just real quick. In terms of thinking about the loss ratio guidance for 2008, I am just curious if kind of the IBNR levels and whether or not we're kind of in a position kind of like what we were back in '04 and '05 where in that number there is some forecasted take downs, is that at all factoring into that kind of comment that loss ratios could be at the lower end of your targeted range?

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Mark that is great question, but no we are not anticipating additional reductions in the IBNR.

Mark Finkelstein - FPK

Okay, and just going back to, I think a commentary in your opening remarks, you've mentioned no increase in incidence in the last recession and what I am curious about is does that comment apply to the non-education municipality public healthcare books kind of into the broader... if I were to take those out of the book would that comment still apply that you didn't see an increase in incentive levels following or even in a recession.

J. Greg Ness - Senior Vice President of Insurance Services Group

Mark, this is Greg. We actually break it out by industry, we are not going to obviously talk about exactly what our experience is by industry. But I want to remind you of a couple of three things relative to those industries. If you look at those there are some industries that are clearly more prone to unemployment pressures in a recession environment. That might be construction or real estate or manufacturing those kinds of industries. We don't happen to have a lot of business in those groups. So it's very possible that you could see a potential increase in claims, but let me remind you, number one you have to be employed and covered at the time of the disability. Number two, you have to be the disabled under the terms of the contract. We have probably 700 of the single best claims analysts in the country today that examine those claims as swiftly as possible and we pay every single legitimate claim as quickly as we can. But those that don't fit the bill we don't pay.

Mark Finkelstein - FPK

Okay. And just Greg real quick, is there anything you can talk about in terms of the Q1 '08 group pipeline just knowing how important that is in terms of kind of total production for 2008.

J. Greg Ness - Senior Vice President of Insurance Services Group

I would say Mark at this stage I am not just pleased with what I see at all. We seem to be on-track for the targets we have and of course our guidance that you just receive in corporate what we see in terms of known renewals and so on.

Mark Finkelstein - FPK

Okay, great. Thank you, guys.

J. Greg Ness - Senior Vice President of Insurance Services Group

You're welcome.

Operator

[Operator Instructions]. Your next question comes from the line of Jukka Lipponen with KBW.

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Hi, Jukka.

Jukka Lipponen - KBW

Just couple of follow-ups, in terms of the operating expense in the insurance business, how should we think about how much will those expenses grow relative to the premium growth in '08?

J. Greg Ness - Senior Vice President of Insurance Services Group

Jukka this is Greg. As we've mentioned earlier, there is a little bit of increase in that expense ratio for the two main reasons, one is the accruals we need to do for the incentive compensation based on the earnings. But secondly, we incurred some additional expense with the final implementation of large case that came online at the very end of the third quarter of last year. My expectation for 2008 is that I'd like to see those expenses trend downward.

Jukka Lipponen - KBW

In absolute dollars?

J. Greg Ness - Senior Vice President of Insurance Services Group

No, not in absolute dollars. Remember there is two parts to that equation. We can grow the top line and reduce expenses that's the double win or we can reduce the absolute dollars and so win there as well. But I would expect that the absolute dollars will be greater than '07 but the expense ratio overall will be lower based on premium growth.

Jukka Lipponen - KBW

And the other question was in terms of your tax rate going forward, what's kind of reasonable expectation there?

Eric E. Parsons - Chairman, President, and Chief Executive Officer

Rob, do you want to take that one?

Robert M. Erickson - Assistant Vice President and Controller

Yes, I would look at a little less than our historical levels but little more than what we saw for year-to-date effective rate for 2007.

Jukka Lipponen - KBW

Okay, great. Thank you.

Eric E. Parsons - Chairman, President, and Chief Executive Officer

You bet, thanks.

Operator

[Operator Instructions]. Mr. Hallin at this time I show there are no further questions.

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

Thank you, Tikkey. I would like to thank everyone once again for joining our call. There will be a replay of this call starting this afternoon and running through February 8th. To listen to this call, you can dial 800-642-1687 and enter the conference ID number 28808983. A replay of today's webcast will also be available at www.stancorpfinancial.com/investors. Thanks you.

Operator

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

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Source: StanCorp Financial Group, Inc. Q4 2007 Earnings Call Transcript
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