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StanCorp Financial Group, Inc. (NYSE:SFG)

Q2 2012 Earnings Conference Call

July 24, 2012 12:00 ET

Executives

Jeff Hallin – Assistant Vice President, Investor Relations

Greg Ness – Chairman, President and Chief Executive Officer

Floyd Chadee – Senior Vice President and Chief Financial Officer

Jim Harbolt – Vice President, Insurance Services Group

Scott Hibbs – Vice President, Asset Management Group

Dan McMillan – Vice President, Insurance Services Group

Mark Fisher – Vice President and Managing Director, StanCorp Mortgage Investors

Rob Erickson – Vice President and Controller

Analysts

Ryan Krueger – Dowling & Partners

Randy Binner – FBR

Steven Schwartz – Raymond James

Mark Finkelstein – Evercore Partners

Suneet Kamath – UBS

Ron Bobman – Capital Returns

Bill Dezellem – Titan Capital Management

Chris Giovanni – Goldman Sachs

John Nadel – Sterne Agee

Operator

Ladies and gentlemen, thank you for holding. Welcome to StanCorp Financial Group’s Second Quarter 2012 Financial Review Conference Call. All lines have been placed on mute to prevent any background noise. Today’s conference call is being webcast live over the Internet and is also being recorded. A question-and-answer session will follow today’s presentation. (Operator Instructions)

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

Jeff Hallin – Assistant Vice President, Investor Relations

Thank you, (Louis) and welcome to StanCorp’s second quarter 2012 financial review conference call. Here today to discuss the company’s second quarter results are Greg Ness, Chairman, President and Chief Executive Officer; Floyd Chadee, Senior Vice President and Chief Financial Officer; Jim Harbolt, Vice President, Insurance Services Group; Dan McMillan, Vice President, Insurance Services Group; Scott Hibbs, Vice President, Asset Management Group; Mark Fisher, Vice President and Managing Director of StanCorp Mortgage Investors; and Rob Erickson, Vice President and Controller. Today’s call will begin with some brief comments from Greg and Floyd, and then we will open it up for questions.

Before we begin, I need to remind you that certain comments made during this 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 actual results to differ materially from those expressed or implied have been disclosed as risk factors in the company’s second quarter earnings release and the first quarter Form 10-Q.

With that, I’ll turn the call over to Greg. Greg?

Greg Ness – Chairman, President and Chief Executive Officer

Thanks, Jeff and thanks to all of you who have joined us for our second quarter earnings call this morning. With the increase in the group insurance benefit ratio, second quarter results did not meet my expectations. As you read in the release, the group insurance benefit ratio was 88.5% for the second quarter of 2012, which was above our previously announced full year 2012 guidance range of 80% to 82%. This elevated benefit ratio was primarily due to higher-than-expected long-term disability claims experience, which can be explained by three key drivers of the results.

First, we saw greater claims severity in the quarter, meaning the average value of each claim increased. While there was not a singular driver of this increase in severity, we saw concentrations in pockets of our manufacturing and services segments like claims incidence, severity is something that can fluctuate from quarter-to-quarter, but merits our close attention going forward. In addition to increased severity, we also saw continued elevated claims incidence during the quarter.

Finally, the last key component increasing the benefit ratio was the 125 basis point decrease in the discount rate compared to the second quarter of 2011. Had the discount rate remained at 5.25%, the benefit ratio would have been 86.7% instead of 88.5%. Based on our results for the first six months of the year and the continued low interest rate environment with no change inside, we now expect our annual benefit ratio to exceed our previously stated guidance range for the year.

During the second quarter, group insurance premiums increased 2% compared to the second quarter of last year, aided by the additional premium we received from customers who participate in experience rated refund arrangements. Excluding these ERRs, premiums were down slightly year-over-year. Despite lower sales, the stable premiums reflect that the price increases are being accepted on the vast majority of our renewal business.

Organic growth within our group insurance business continues to be a significant challenge to growing premiums, as this measure really depends on employment and wage growth. Employment levels among our existing customers were down about 1.5% from the second quarter of last year, continuing the trend we saw throughout 2010 and 2011. It’s clear this economy is not yet growing on a broad-based sustainable basis. We are committed to writing and retaining profitable business and are taking the necessary actions to drive the benefit ratio back to an acceptable range. While it may take some time and we’re only about one-third of the way through our re-pricing, we’re actively and aggressively taking pricing actions on new and renewed business to address the unfavorable claims experience and now an additional rate increase to reflect this continued low interest rate environment.

We are confident in our underwriting and pricing practices. Our pricing reflects our long-term expectations of claims experience, demographic changes, return objectives as well as interest rates. We will continue to closely monitor claims trends and interest rate and are prepared to take additional pricing action as necessary and appropriate. In addition to the pricing actions, we have dedicated more claim management resources to effectively manage the continued high level of claims. I’m confident that we have the best claims administration shop in this business.

We continue to focus on paying claims promptly, and assisting claimants in their efforts to return to work as soon as possible. While we take action to counter the financial impact of increased claims, our operations remain strong, and our commitment to high quality customer service is unwavering. If anything we have certainly been able to demonstrate the great value of our products to our customers.

Going into the second half of the year, we expect continued pressure on sales and persistency due to price increases, but remain confident in our ability to deliver strong value to our customers. Our task is to get the right rate on the right risk. Our focus on writing and retaining profitable business has never been stronger. As I’ve said many before, we’ll sacrifice the top line or the bottom line. The less favorable claims results in our group insurance business were partially offset by a lower individual disability benefit ratio. The benefit ratio for our individual disability insurance business was 60.8% for the second quarter of 2012 compared to 74.5% for the second quarter of last year. The benefit ratio can be more volatile for this smaller block of business.

We’re pleased with results in individual disability and we have not seen the same increase in claims as we have in our group disability business. Following last week's preannouncement, Standard & Poor's and Moody's both affirmed the ratings of StanCorp and our insurance subsidiaries with a negative outlook. Our ratings continued to be high-quality investment grade, and well positioned within the insurance industry. Despite the economic pressures on our group long-term disability business, our financial discipline continues to be key and is demonstrated by our strong balance sheet and capital position. We continued to grow book value per share. Our investment portfolio has performed very well and our capital level remained strong. As StanCorp has done in the past, we’ll manage through this cycle.

We know what to do and we are executing on our plan. Focus and expertise matter, we are in this business for the long-term. We remain confident in our ability and result to work through the current issues and deliver superior value to our customers and our shareholders.

With that, I’ll turn the call over to Floyd for a further discussion of interest rates, investments and capital, and of course, we’ll leave plenty of time for your questions at the end. Floyd?

Floyd Chadee – Senior Vice President and Chief Financial Officer

Thank you, Greg. I would like to begin by revisiting our 2012 annual guidance, and then follow with a discussion of our long-term disability discount rate or investment portfolio, and finally our balance sheet and our capital position. As mentioned in our earnings release, we expect that the 2012 annual benefit ratio in the group insurance business will exceed the guidance range of 80% to 82% that we provided at the beginning of this year.

As a result, we expect that our 2012 earnings per share and our return on average equity will come in below our 2012 annual guidance range. We also expect that the lower earnings will result in a lower effective income tax rate for 2012 than our guidance range of 26% to 27%. As one would expect, the low interest rates environment continues to put downward pressure on reserve discount rates and investment yields.

In January, we estimated that if low interest rates persisted at the levels we were seeing at that time then the discount rate would be low at 25 basis points to 50 basis points during 2012. Since January, the 10-year treasury has dropped more than 30 basis points. And now, it sits as an all time low with little indication of a near-term recovery.

As a result of this low interest rates environment, we lowered our disability reserve discount rate in the second quarter of 2012 by 75 basis points to 4%. This represents a 125 basis point decrease from the 5.25% discount rate used in the second quarter of 2011. The effect of this 125 basis point decrease in the discount rate is a decrease in quarterly pre-tax income of approximately $9 million and an increase in the group insurance benefit ratio of approximately 180 basis points when compared to the second quarter of 2011. We continue to be disciplined with our management of the interest rate margin in our reserves.

During the second quarter of 2012, the new money investment rate decreased to 4.73% compared to 5.5% for the first quarter of 2012. This decrease in the current quarter’s new money rate reflects the overall decline in interest rates together with a decline in the opportunities for high yielding stocks advantage investments. The 12-month reserve interest margin between our new money rate and our average reverse discount rate was 62 basis points for the second quarter of 2012 compared to 67 basis points for the first quarter of 2012.

Our overall portfolio margin was 44 basis points. We maintain a high-quality investment portfolio with no significant exposure to high-risk asset classes. Our fixed maturity security investments remained strong with an average credit quality at a rating of A and we continue to originate high-quality commercial mortgage loans at attractive spreads. Our 60-day mortgage loan delinquency rates dropped for the fourth consecutive quarter to 31 basis points. This represents the lowest 60-day delinquency rate since the first quarter of 2009.

Now, moving on to share repurchases. In the second quarter, we repurchased approximately 280,000 shares of our common stock at a total cost of $10 million and a volume weighted average price of $35.68. We evaluate our share repurchases opportunistically based on equity markets and our capital levels. As we mentioned in our earnings release, if the group insurance benefit ratio continues to be elevated, we do not expect to repurchase shares in the second half of 2012.

Finally, turning to the strength of our balance sheet and our capital position, while challenges persist in the overall economy, StanCorp has continued to maintain a capital position. At June 30, 2012, our available capital was approximately $210 million, a decrease of $25 million from March 31, 2012. Please note that there was a date error in the news release it said that this $25 million represented the decrease from December 31, 2011. The risk-based capital ratio at our insurance subsidiaries was in excess of 330% at June 30, 2012. We have $250 million of senior unsecured notes maturing on October 1 of this year. We expect to refinance this maturity in the future. The actual timing of this refinancing will be opportunistic, be depending on market conditions.

During the second quarter of 2012, we secured a new four-year $250 million line of credit. In addition, we expect that during the third quarter of 2012, we will place additional reinsurance in our group life business that would be similar to the action we took at the end of 2011. This previous action had increased capital by approximately $70 million.

Despite the increase in our benefit ratio during the second quarter of 2012, we remain confident in our long-term underwriting and pricing methodologies. We are aggressively taking pricing action to address our claims experience and the continued low interest rate environment. In addition, as claim volumes have increased in our long-term disability business area, we are actively adding resources. We are the same conservative company that we have been for over 100 years. And we remain committed to generating long-term shareholder value.

With that, I’ll now turn the call back to Jeff to begin the question and answer portion.

Jeff Hallin – Assistant Vice President, Investor Relations

Thank you, Floyd. (Louis), we’re now ready to take the first question from our participants.

Question-and-Answer-Session

Operator

Thank you. Once again today’s question-and-answer session will be conducted electronically. (Operator Instruction) Our first question comes from Ryan Krueger of Dowling & Partners. Please proceed with your question.

Greg Ness

Good morning, Ryan.

Ryan Krueger – Dowling & Partners

Good morning, guys.

Greg Ness

Good morning.

Ryan Krueger – Dowling & Partners

Could you please give some additional color on the group disability incidence, maybe in terms of how compared to the year ago quarter as well as the first quarter of this year?

Greg Ness

Absolutely, we can do that. Dan, will you take that please?

Dan McMillan

You bet. Good morning, Ryan, Dan McMillian. We saw an incidence level and LTD claims similar to second quarter of last year and a little bit up from the prior few quarters of this year, but really in line with second quarter of last year for claims incidence, that being really the – one of the three things that drove in the increase the benefit ratio.

Ryan Krueger – Dowling & Partners

Okay. And then in terms of the severity, did your analysis suggest that this was it all economically related, and I guess if not, do you see anything in the severity of this quarter that would suggest – that it may continue going forward?

Dan McMillian

We did not see anything that would indicate it was economically related. It is something that fluctuates quarter-to-quarter quite a bit we would expect that to fluctuate. We’ve seen similar increases in severity in the past at this level, but they have not been combined with and you can see a high incidence level as well as a 125 basis point drop in the discount rate at the same time.

Ryan Krueger – Dowling & Partners

Okay. And then just lastly, Greg, you talked about taking additional rate actions for the low interest rate environment, could you quantify that?

Greg Ness

Yes. I’ll ask Jim to talk about that. We mentioned that on our last call. Jim wanted to bring us up-to-date there.

Jim Harbolt

Ryan, at our Investor Day, we announced that we’d be taking a low-single-digit price increase to reflect the current low interest rate. We feel comfortable about the rate actions that we’ve taken there and where rates are at right now. If we saw a significant decline in interest rates in the future, we won’t hesitate to move on that again.

Ryan Krueger – Dowling & Partners

Okay, great. Thanks.

Greg Ness

Thanks, Ryan.

Operator

Our next question comes from line of Randy Binner with FBR. Please proceed with your question.

Greg Ness

Good morning, Randy.

Randy Binner – FBR

Good morning. Thank you. I guess the first one is just on kind of capital generation I’m trying to understand what the benefit ratio at this level, kind of how you would view statutory capital generation?

Greg Ness

Floyd?

Floyd Chadee

So, if you think of the role forward this quarter, Randy, we started off the quarter with about $235 million, put aside about $10 million for dividend accrual, about $10 million for interests on the debt. We did another $10 million of share repurchases. So that gets you 30 down, we’re actually 25 down. So the next generation of capital at this benefit ratio was in the $5 million to $6 million range. So, you can think of the statutory earnings as being offset by the increase in risk-based capital driven by sort of normal business movements, the group life insurance that you sell, the increase in mortgage loans on your books and stuff like that. So, you can see at this benefit ratio level, a modest increase in capital generation.

Randy Binner – FBR

Okay. That’s great. And then another detail one, so the tax rate clearly was lower and it makes sense it would be below the initial guide, but it was quite a bit lower than we had planned for. So is there – is there kind of a ballpark you can give us on what – you had planned for the year, assuming kind of a more normal benefit ratio? Is it – is it still in the 20 as you know, is it in the 24 or 22, anything would be helpful there?

Floyd Chadee

Yeah. So, I think – I think, the best way to think of it, Randy is that the tax rate will be a function of our overall earnings. And you can think – you can see that the biggest thing that drives our earnings is the benefit ratio. So, when we gave you guidance, and we said the benefit ratio would be in the 80% to 82% range that was consistent with an expected tax rate in the 26%, 27%. Now, on a year-to-date basis, we have a benefit ratio that is approximately 86%, so and with that higher benefit ratio, you have year-to-date tax rate in the order of about 21.5%. So, you can interpolate that and get a feeling for the function – the tax rate as a function of the benefit ratio, which is a biggest move.

Randy Binner – FBR

Okay. Just one other detail I want, on net investment income, was there anything unusual, which is lower than forecasted, was there – I mean on either side, were there – did you get prepays that came in or were there any bonds that did you have accelerated turnover of bonds or anything unusual that drove things lower?

Floyd Chadee

Nothing unusual this quarter, Randy, just the normal movement in the business.

Randy Binner – FBR

Okay, thank you.

Greg Ness

Thanks Randy.

Operator

Our next question comes from the line of Steven Schwartz with Raymond James. Please proceed with your question.

Greg Ness

Good morning Steven.

Steven Schwartz – Raymond James

Hey, good morning. A couple, can we go back and revisit the incidence versus severity, we know, just trying to get a sense of how we look versus the first quarter. We know that vis-à-vis the first quarter, the change in the discount rate probably was about 1.1% of the increase in the benefit ratio, how would we breakout the remainder?

Greg Ness

The remainder of the change in the discount rate?

Steven Schwartz – Raymond James

No, no, no. It’s going from 83.5% in the first quarter to the 88.5%, about 110 basis points is going to be due to the change in the discount rate, which gives us another 4 points something like that?

Floyd Chadee

Right. I think that the key there Steven is the other two drivers that Greg mentioned in his prepared remarks and in order they were severity of long-term visibility claims, which is really just a function of really age, benefit amount, and your expected benefit period that really drives severity, and then incidence following severity was remained high.

Steven Schwartz – Raymond James

Okay. I guess my question is, let’s break that in half? How much of the increase was due to severity? How much of the increase would you say was due to incidence, if you could say?

Greg Ness

So, I think as Dan mentioned in his remarks earlier Steven, the incidence level remains high that we did see some tapering off of the incidence as it fluctuates from quarter-to-quarter, but the big increase that we saw this quarter was that thing that Dan mentioned, which is the severity that fluctuates here, so most of it, most of it is there.

Steven Schwartz – Raymond James

Okay, great. And then again a more general question, what’s up with social security? I guess, just leave it out there as that?

Greg Ness

Okay, yeah. I think we all read the newspapers, and we’ve like everybody else in our industry we are watching the development of Social Security Administration very closely. For our business specifically, we’d not see a deterioration in approvals for Social Security disability for LTD claimants that showed any material or notice over impact on our results.

Steven Schwartz – Raymond James

Okay, alright. Thank you, guys.

Greg Ness

Thanks, Steven.

Operator

Our next question comes from the line of John Nadel with Sterne Agee. Please proceed with your question.

Greg Ness

Hey, John.

John Nadel – Sterne Agee

Hey, good morning. So, tough quarter, but you’re battling through with price increases. I guess, what I would like to sort of understand is there was a comment in the opening remarks, and I don’t recall if it was yours, Greg or Floyd’s, but that you are about one-third of the way through your pricing adjustments on the book of business. Can you give us a sense on that one-third, what kind of retention you’ve seen, particularly if you sort of broke down the renewal business into those pieces, where you really needed rate because of the behavior of the block versus those where it was behaving more in line, so probably less rate sensitive?

Greg Ness

Okay. Jim, you want to take a shot of that?

Jim Harbolt

Hi, John. We said consistently that we are not going to dive into lots of details about the pricing increases. I can give – share a couple of things with you when we look at the price increases that we announced a little over a year ago. In the aggregate, we were targeting a high single-digit rate increase that would be implemented over a period of years. You’re right we’re a little over a third of the way through now. When we get into the first quarter of next year, we’ll be getting close to 75%. When you think about rate increases in a rate increase pricing strategy, there is really about three parts there. And one is, not every customer is going to get a rate increase. We are looking at some of those customers that are performing well, but then we have another segment where you’re going to implement rate increases and some of those are double-digit, and some are well beyond 20%.

The third part of that then is you’re also going to see some underperforming groups that are going to not want to move to that right higher rate. And all three of those components – after those customers leave, all three of those components add up to a renewal strategy and a healthier block of business for us. We monitor the rate increases that we are implementing. We also monitor the unfavorable returns of the groups that are leaving us. And right now, we feel pretty good about how our strategies are rolling out.

John Nadel – Sterne Agee

And then I guess a follow up around – just thinking about your overall book of business looks based on sector, quite different from many of the other names that we are familiar with. And in particular, I’m thinking more about the public sector portion. Are you having a more difficult time achieving targeted rate increases in state and local type government situations, where clearly their budgetary pressures are significantly higher today than they were one or two or three years ago?

Jim Harbolt

John, I don’t think I would say that. I would say that when we go out and work on books of renewal that different groups find themselves in different places. And there are certainly some people that are price-only shoppers and those are difficult renewals for us when we are moving them to the right higher rate. At the same time, I think we’ve had some pretty good success with active and early account management and when we are out there demonstrating results for underperforming groups early and working with our brokers and consultants, we have seen some good success in renewing groups at the right higher rates. And I wouldn’t make the distinction between the public/private.

John Nadel – Sterne Agee

Okay. And then one last quick one, just a quick one for Floyd, so the new money rate at 4.73% in the second quarter, where does that stand today, because the conversations I’ve had with many of your peers, it sounds like the new money rate currently is probably very – much closer to 4% than to 5%, which it seems you are closer to the 5% in the second quarter, but I wonder if that’s just something that’s falling steadily throughout the quarter?

Floyd Chadee

It was certainly, I mean even today we can see continued pressure on the 10-year treasuries. So, I mean where we end of this quarter is going to be an average for the quarter, but one of the things you got to be careful about in comparison across the companies is the mix of assets coming on the books. Remember, we do have that mortgage portfolio, which plays a significant role in our new money rates.

John Nadel – Sterne Agee

No, I understand. I’m just trying to understand if it was 4.73 on average, more recently is that something that’s more in the low 4s and then what kind of pressure, if we are down at that level, what kind of incremental pressure from here, do you think we might have to expect on the discount rate?

Floyd Chadee

Yeah. So, I would say the drop that you saw from the first to the second quarter, reflected not just the changing interest rate environment, but also the low income housing tapering off. So, as we move forward here, you would see – you would see our discount rate move probably more in line with overall interest rates.

John Nadel – Sterne Agee

Okay.

Floyd Chadee

Now, as our people in our actuarial and corporate actuarial and in our bond investment area you like to see, they don’t see any upward pressure on rates.

John Nadel – Sterne Agee

Okay, okay. I’ll get back in the queue. Thank you.

Greg Ness

Thanks, John.

Floyd Chadee

Very good, thanks.

Operator

Our next question comes from the line of Mark Finkelstein with Evercore Partners. Please proceed with your question.

Greg Ness

Hey, Mark.

Mark Finkelstein – Evercore Partners

Hey, good morning. I want to ask John’s question maybe slightly differently, which is – your sales numbers were pretty low and you characterized that to, what sounded like rate pressures generally? And I guess I’m curious, why shouldn’t we see a bigger hit to persistency on the in force block, if there is clearly still competition in the market that’s causing you to have much, much more pronounced sales pressures. I mean, why shouldn’t that translate more meaningfully into the in-force?

Greg Ness

Okay. Jim, you want to take that?

Jim Harbolt

Mark, the way I think I would look at that would be that in-force customers, we’ve had a longstanding relationship, have had a chance to experience the value and the services of the products and the things that we bring to the table. And they see that value, and I think it resonates easier with them, as opposed to just talking with the new customer, where you are trying to make a new sale. I think experiencing it is works very well for us.

Floyd Chadee

The other thing – this is Floyd, Mark. The other thing to take into the consideration Mark is when you do put rate increases around the in-force block, you do see some cases leave, but on the cases that you keep, remember you’re getting a higher rate, and to the extent we’re going out with higher rates that also works in the opposite direction.

Mark Finkelstein – Evercore Partners

Okay. On severity, just curious if the increase was all related to new claiming curls or there was any adjustment to existing claims on the book?

Greg Ness

Great question, Mark. Dan, you want to take that?

Dan McMillan

Yeah, Mark. Our comments are really focused on new claim severity, not to the existing book. So, it’s a good clarifying question.

Mark Finkelstein – Evercore Partners

Okay. And then finally, just on the group life reinsurance transaction, I think you said you are going to kind of free up $70 million of capital, what’s the earnings impact of that?

Floyd Chadee

Well, immediately there is no earnings impact. It’s – what it does is it just reduces the required capital, so to the extent you don’t deploy that it doesn’t change anything on a GAAP basis.

Mark Finkelstein – Evercore Partners

Right, but shouldn’t there be some kind of a financing for using somebody else’s balance sheet to offload $70 million of…

Floyd Chadee

Absolutely. So, it’s actually – so the GAAP impact, what you would see on a GAAP income statement is purely the financing fee and the financing fee we have is about $1 million that we saw earlier. So, it’s going to be on that same order of magnitude again.

Mark Finkelstein – Evercore Partners

Annually?

Floyd Chadee

Yes.

Mark Finkelstein – Evercore Partners

Okay, alright. Thank you.

Greg Ness

Thank you, Mark.

Operator

Our next question comes from the line of Suneet Kamath of UBS. Please proceed with your question.

Suneet Kamath – UBS

Hi, there, thanks. Two questions, I guess. The first is on the benefit ratio, my question is, yeah, how much visibility do you have on the statistic as you move through the quarter and the reason I ask is if I go to last quarter’s conference call I think in the Q&A, there was a question about guidance and are your reaffirming guidance, and I think the answer was yes. And then clearly in the second quarter, you bought back $10 million of stock at a price that’s well above where your stock is trading now, so presumably you felt pretty good about the quarter at least at the time when you decided to do those buybacks and now you are eliminating the buybacks at least if the benefit ratio stays elevated. So, I guess I’m just wondering how much visibility do you have on this and if there is any read that you have in terms of what we are seeing in the third quarter?

Greg Ness

Alright, Dan let’s take that and maybe some looking forward.

Dan McMillan

Yeah, I’ll comment on the benefit ratio and then let Floyd maybe take on some of the buyback strategy, but if you look at the benefit ratio, we’d make a couple of comments. First, we wouldn’t expect the current quarters’ benefit ratio to continue for the remainder of the year, for the next six months. At the same time, we do expect the low interest rate that Floyd referred to in his prepared remarks that environment to continue and we are seeing a pretty slow and uneven improvement in the decline of claim incidence levels. And you know that we don’t try to predict the benefit ratio on a quarterly basis, because the inherent volatility of that measure. Having said that, we would expect the benefit ratio to be within the range of the first two quarters this year, the remaining portion of the year.

Suneet Kamath – UBS

So, when you talk about on intra-quarter basis the fluctuations that you see, some of the questions related to the visibility of intra-quarter?

Dan McMillan

Sure. Thank you. The fluctuations we see intra-quarter can really range on a month-to-month basis. For example with any one month during the quarter, you can see even more dramatic fluctuations in the month than we would see on a quarterly basis and we know that a lot of the claim dynamics as well as the benefit ratio itself fluctuates fairly greatly on a quarterly basis, and within the months we see that fluctuation swing even to a greater degree.

Suneet Kamath – UBS

Okay. So, just to clarify, you had said that you expect in the balance of the year, the benefit ratio to be in the range of what we’ve seen so far this year, so I guess that’s the 83.5 to 88 now?

Dan McMillan

Correct.

Suneet Kamath – UBS

Okay. And then I guess a longer term question maybe for Greg, if I think back to StanCorp think about ROE historically, it’s been probably one of the strongest in the industry kind of mid-teens, and obviously we’re in a difficult environment and returns have compressed pretty much across the board, but as you think about the price increases that you’re building in right now, let’s say we kind of get through those. If we kind of remain in this interest rate environment, what kind of ROE do you think ROE lift you could get – do you think you could get from where we are today, which is sort of I guess what’s 7% 8% something like that again assuming rates are kind of where they but you get the full effect of your price increases?

Greg Ness

I think it's a really good question. I think what we're probably seeing across the industry is a little bit of a recalibration here as we think obviously our historical ROE is in the say 14%, 15% range. Don't make sense in this particular economic environment where we’ve got a 10-year treasury that’s less than 1.5%. So, one way to think about it would be to look historically and say previously, we had ROEs at 14%, 15%, but we probably had a 10-year treasury that was easily north of 5%, 5.5% somewhere in there. It might be illustrative moving forward as you think about less than a 1.5% 10-year treasury and what kind of risk premium you really want on top of that for this nature of this business. I don't think that this business in this current economic environment is a 14% ROE business by any stretch of imagination.

Suneet Kamath – UBS

Got it. So, we can just simply take that spread and tack it on to 10-year and kind of get in the ballpark of what you think is achievable with your price increases?

Greg Ness

I think that’s one way that you might want to look at it. Obviously there are a lot of factors that come into play there, but that probably gets you in a ballpark.

Suneet Kamath – UBS

Understood. Thank you.

Greg Ness

Alright, Suneet.

Operator

Our next question comes from the line of Ron Bobman of Capital Returns. Please proceed with your question.

Ron Bobman – Capital Returns

Hi gentlemen. When you report on a day when no one else reports you should get a lot of interesting question.

Greg Ness

We’re happy to do it.

Ron Bobman – Capital Returns

Yeah, I think Finkelstein came back from his vacation as a result. I have a simple question. You made a point in your prepared remarks about increasing claims staff, hiring some more claims people if I heard you correctly. And I was wondering in effect why the incident level albeit higher this quarter is effectively sort of matching what it was in the like quarter a year ago. Is there an element to that hiring that I’m either overemphasizing and focusing on it or I’m not just appreciating? Thanks.

Greg Ness

Ron, let us better explain that because we can certainly do that. Dan you want to take that?

Dan McMillan

Ron, I wouldn’t take the comments to mean that we have instituted some big program or initiative as a result of this quarter’s results. Monitoring and really leveraging claim analytics to take actions to manage the volume of claims that we’ve been receiving which are higher has required more resources and that’s just a cause and effect kind of equation there. But the reality is we watch that very closely and add resources in areas that are needed to manage these claims and provide great service. And so the expertise around positioning consultants, nurse case managers, occasional consultants all play into that mix and that’s something that we monitor and add, and watch very closely.

Ron Bobman – Capital Returns

Did you have before you started this last quarter did you have a like number of professionals and staff and claims that you did a year ago roughly?

Greg Ness

May be slightly higher, but yes similar number – similar.

Ron Bobman – Capital Returns

Okay. Thank you very much.

Operator

Our next question comes from the line Bill Dezellem of Titan Capital Management. Please with your question.

Greg Ness

Hey good morning Bill.

Bill Dezellem – Titan Capital Management

Good morning. Thank you. A couple of questions here. First of all, I may have missed this in your opening remarks, but relative to the new pricing actions that you were taking, do you anticipated the implementation timeframe will be any different than the first set of pricing actions?

Greg Ness

Jim?

Jim Harbolt

Bill, the announcement we made a little over a year ago about how long it would take us to put forth the pricing increases. We’re on track with that and expect to continue to be so.

Greg Ness

But Bill, the way to think about it is we’re a little over third of the way through now and we expect to be somewhere at the three quarter mark after 1st of the year.

Bill Dezellem – Titan Capital Management

And that’s relative to the first round of pricing.

Greg Ness

That is correct.

Bill Dezellem – Titan Capital Management

So, I guess the question that that brings up is why wouldn’t this second round be a bit faster because some of the pricing actions that you would be taking relative to round one between now and the first of 2013 that you would actually just layer on top of that both around one and round two and do it all at once?

Greg Ness

Well, you’re thinking about it correctly, that’s exactly what we’re doing.

Bill Dezellem – Titan Capital Management

Alright, thank you. That’s helpful. And then secondarily, totally a new topic here, your individual annuity sales appear to jump up a bit in the second quarter of this year, but they also seem to jump up a bit in the second quarter of last year. So, not sure if there is some seasonality going on here. But I am hoping you discuss just the dynamics of the increase in sales. Please?

Greg Ness

We can do that, well. Scott, would you take that?

Scott Hibbs

Yeah, sure Bill. There is – in the end history trend that generally in second, third quarter sales are somewhat higher and our sales tend to follow that. That being said our total sales year-to-date relative to a year ago were down about 25% and that’s a function of the rate environment and something that we would expect to continue.

Bill Dezellem – Titan Capital Management

Thank you. Appreciate all your help.

Greg Ness

Thanks Bill.

Operator

Our next question comes from the line of Chris Giovanni with Goldman Sachs. Please proceed with your question.

Greg Ness

Chris?

Chris Giovanni – Goldman Sachs

Just, I guess first question back on sort of the rate increases, I think Jim noted, you guys are sticking with the high single-digit increases that you pointed to at investor day in May. But since then obviously the 10 years back down another 35 basis points in terms of the yield. So, I guess should we assume that kind of magnitude of rate change doesn’t require the need to take additional rate as you push through the remaining two-thirds of the book.

Greg Ness

No, Chris, that’s probably not appropriate, Jim, let’s make sure we understand that two different actions you get going on.

Jim Harbolt

So Chris a year ago, at the Investor Day was when we announced a rate increase in the high single digits for the new higher incidents that we are seeing and here about two months ago, month and half ago we announced, a low single-digit price increase for the new low interest rates and so that’s the second one here is more of an interest rate focus. It’s similar to the low single-digit price increase that we announced in late 2010 for decline in interest rates.

Chris Giovanni – Goldman Sachs

Okay. And then I guess for Floyd in terms of capital management, you noted the two big drivers for your buybacks are you evaluating your equity markets in your capital position and you seem pretty comfortable with your capital position. I noted you will get some additional capital relief from the reinsurance transaction later this year. So, I guess I’m little confused why you guys wouldn’t look to be more aggressive on the deployment side given the pullback in the stock and the belief that the re-pricing should ultimately improve your loss experience going forward.

Floyd Chadee

Yes, I would say Chris just in this environment, its being more cautious. We have had a high benefits on our ratio this quarter and we looked to monitor that and act as a function of that.

Chris Giovanni – Goldman Sachs

Okay. And then lastly just on the dividend, I guess, historically your payout ratio has been in and around 15%. Last year, it was higher because of the pressures and this year if you maintain the dividend it looks like it will be higher, is there any, should we be thinking about a payout ratio at all, or should we just be thinking, I know you guys are going to maintain sort of the dividend growth that we have kind of seen over the history as a public company?

Floyd Chadee

I think the latter, we have tend to think of the dividend as sort of our commitment long term to shareholders, so you would see that steady growth all the time.

Chris Giovanni – Goldman Sachs

Okay. So, we got up to something, while north of 30 or so we shouldn’t be scared.

Floyd Chadee

Yeah, I would say, I would say consistent with past practice in terms of the growth of the dividend.

Chris Giovanni – Goldman Sachs

Okay. Alright, thanks so much.

Greg Ness

Thanks, Chris.

Operator

Our final question of the day comes from John Nadel of Sterne Agee. Please proceed with your question.

John Nadel – Sterne Agee

Thanks for letting me back in a couple of more quick follow-ups. How did claims severity compare in the second quarter of 2012 to the second quarter of 2011?

Greg Ness

Dan?

Dan McMillan

John, it was up compared to the second of 2011. But again that is something that fluctuates quarter-to-quarter.

John Nadel – Sterne Agee

Would you have characterize the claims severity in 2Q of a year ago as in line or favorable or unfavorable, I’m trying to understand was – I’m trying to – I guess I’m trying to sort of guess the order of magnitudes here.

Dan McMillan

Right and I would – when you compare the two, I would consider the second quarter of last year is slightly favorable.

John Nadel – Sterne Agee

Slightly favorable?

Dan McMillan

Favorable, yes.

John Nadel – Sterne Agee

Okay, that’s helpful. Then I recognized that some of these factors can vary pretty widely on I guess both the quarterly basis and maybe even a little bit longer term than that, but can you give us a sense for about how much above your historical averages claims incidence is running and claim severity is running? I mean, are we talking about one standard deviation, four standard deviations, can you give us some sense?

Dan McMillan

We can give you some sense relative to the path performed that we touched on that a little bit and that there incidence remains elevated about historical norms pre-recession, and we are watching that closely expected to come down, but the overall severity in incidence fluctuate quarter-to-quarter and the real message, I think around the benefit ratio this quarter is that those two fluctuated in the wrong direction and when you combine that with the discount rate that dropped 125 basis points quarter-to-quarter, you have the whole picture there.

John Nadel – Sterne Agee

Okay. And then one last one, so previously, I think in – I don’t know if it was last quarter, but in the last couple of quarters, you’d mentioned that re-pricing of the book of business was leaving some room for economic recovery to be helpful to the benefit ratio over time. Now, I think we fast forward now a couple of quarters including second quarter and more recent economic data continues to be disappointing. How much longer do you – or I guess or is your – is your more recent additional pricing actions, is that now – trying to take and say we’re not going to assume economic recovery into our – as part of the improvement any longer, we’re going to take price to cover that as well or are you just covering lower rates?

Greg Ness

Okay. John, I’ll ask Jim to take that question. Obviously, you’re recalling previously when we mentioned the price increases that we took – we take about two-thirds of the way there and we expect the economy to help us for about the remaining third.

John Nadel – Sterne Agee

Thank you.

Greg Ness

That obviously has not materialized. So, Jim?

Jim Harbolt

You’re right, John, that’s not materialized in the way that we had expected and we’re continuing to see the new claim numbers elevated. So, you would expect for the balance of the year, we’re reflecting that in our underwriting as we assess individual groups case by case.

John Nadel – Sterne Agee

Okay. So, that’s a change though to be clear, right?

Jim Harbolt

To be clear, that is correct.

Jeff Hallin

Yeah.

John Nadel – Sterne Agee

Okay. Thank you very much.

Jeff Hallin

Alright, I’d like to turn the call over to Greg for some closing remarks.

Greg Ness – Chairman, President and Chief Executive Officer

Thanks Jeff. Thanks all of you for your questions this morning, and for participating in our call. I would like to share just a few thoughts with you, as we close today. Like others in the industry, we are retooling to get through these difficult economic times. We have the expertise and we’re focused on the right things to get our profitability on track, pricing, underwriting discipline, retention of profitable business, and expense management.

It’s going to take a little time, but I’m confident in our underwriting methodologies and the aggressive pricing actions we’re taking on both new and renewal business to address the unfavorable claims experience and the continued, low interest rate environment. Despite the unfavorable results in our group long-term visibility business this quarter, there are number of positive results that I want to mention. We continue to see strong earnings from our asset management, as well as our individual disability businesses. We continue to benefit from good expense management across our enterprise.

Our balance sheet and capital levels remained strong. And we’re continuing to grow book value per share. In times like these, our expertise and discipline, coupled with our financial strength, provide a solid foundation to manage through this environment. We know what to do, and we’re executing on our plan. Thanks for listening to our second quarter earnings call. I’ll look forward to providing you with an update in our third quarter results in October. Have a great day.

Jeff Hallin – Assistant Vice President, Investor Relations

Thank you, Greg. I’d like to thank everyone once again for joining our call. There will be a replay of this call starting this afternoon and running through July 27. To listen to this call, you can dial 877-660-6853 and enter the account number 286 and conference ID number 396260. A replay of today’s webcast will also be available at www.stancorpfinancial.com. Thank you. Louis?

Operator

Thank you for participating in today’s telephone conference. You may now disconnect your lines and have a great day.

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