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StanCorp Financial Group, Inc. (NYSE:SFG)

Q2 FY08 Earnings Call

July 22, 2008, 12:00 PM ET

Executives

Jeffrey J. Hallin - Second VP IR and Financial Planning

Eric E. Parsons - Chairman, President and CEO

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

Floyd F. Chadee - Sr. VP and CFO

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

Analysts

Keith Walsh - Citigroup

Randy Binner - Friedman Billings Ramsey

Jukka Lipponen - KBW Asset Management

Eric Berg - Lehman Brothers

Mark Finkelstein - Fox-Pitt Kelton

Operator

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

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

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

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

Today's call will begin with some brief comments from Eric, 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 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 those 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 2007 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 second quarter earnings call. I am pleased to report another strong quarter for StanCorp Financial Group.

Second quarter net income excluding after-tax net capital gains and loses was $1.26 per diluted share, 31.3% increase over the second quarter of 2007. Both our Insurance Services Group and our Asset Management Group contributed positively to the results as did our long standing share repurchase program.

The Insurance Services Group continued to have very favorable claims experience, much better than our average over the past few years. As we have often mentioned, claims experience is inherently volatile when viewed on a quarterly basis. We are very pleased we've had two consecutive quarters of favorable claims experience. As you all know, we do not attempt to forecast our business on a quarterly basis, rather we will continue to look at results over a long period of time.

The Asset Management segment achieved record earnings during the quarter. We also achieved excellent individual annuity sales. And our mortgage loan originations continued to be strong and of high quality. Despite the headwinds caused by the current equity markets, net cash flows and our retirement plans business continue to be positive.

Our investment portfolio remains strong. Although we realized some capital losses during the second quarter, these losses primarily resulted from write downs on bond insurers Ambac, MBIA, and Radian holdings we've previously discussed in our 2007 year end conference call. Aside from this, there have been no material additions to our securities watch list. And our commercial loan portfolio, mortgage loan portfolio continues its long history of excellent performance.

As we look to the future, it seems clear that the economy will continue to present challenges. It is in times like this that the strong value of StanCorp's conservative approach to financial management. And our industry leading expertise and discipline in the pricing and underwriting of products become most visible. We will manage for long-term growth and profitability as we always have.

With that, I will first turn the call over to Greg for an overview of our Insurance Services segment. And then we will go to Floyd for the financial results. And of course, we'll leave plenty of time for your questions at the end.

Greg?

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

Thanks Eric. The Insurance Services segment had a strong second quarter with income before income taxes up 23.3%, compared to the second quarter of last year. These results were driven by premium growth and favorable claims experience in our group insurance business.

Premium growth for the Insurance Services segment for the second quarter of 2008 was 4.1%. However, premiums for the second quarter of 2007 included a single premium of $19.3 million related to our reserve buyout. Adjusted for the 2007 reserve buyout, premium growth for the second quarter of 2008 was 8.2%. Premium growth in the third and fourth quarters will be negatively affected by two large case termination as well as difficult comparisons to the second half of 2007 due to strong premium growth from jumbo size cases written last year.

The second quarter is typically a light sales quarter for group sales. Our group sales this quarter were $43 million compared to $58.3 million in the second quarter of 2007. Again adjusted for the 2007 reserve buyout, our sales growth for the second quarter of 2008 was up 10.3%. Our group insurance benefit ratio at 74.4% was favorable compared to the second quarter of 2007 and better than our annual expected target range of 77.5% to 79.5%. We see nothing systemic in the decrease in the benefit ratio for the last two quarters that leaves us to believe our future experience will differ significantly from what we've suggested in our annual guidance.

You may recall in the first half of 2006, we had two consecutive quarters of claims experience that were higher than our expectations. We said then that the results for what can be expected as a normal fluctuation within a very short timeframe. Although, experience over the past two quarters was more favorable than our annual expectation. We consider these results to be a normal fluctuation when measured over again a very short timeframe.

Despite the economic events of the quarter, the core business continues to perform well. We have not experienced a correlation between our claims experience and economic conditions. Our continued focus on writing profitable business in the appropriate industries, where risk profiles and growth prospects are favorable, helps us weather many economic scenarios.

Turning to our individual disability business, premiums were up 11% during the quarter, and claims experience was practically identical to the second quarter of last year. Although the claims experience was higher than usual for both periods, this is a relatively small block of business and the claims will fluctuate widely from quarter-to-quarter.

Looking ahead and given the uncertain economic conditions, we expect our premium growth to be up or little below the low end of the range we previously provided you in our 2008 guidance. In part, this is due to an impure large cases come to market, which can have a substantial impact on premium growth. We will continue to be selective, and we won't compromise the bottom line to make the top-line look good. Our focus remains on our core expertise in customer service, risk election, pricing discipline, and claims management all are delivering superior value to our customers in this very competitive environment.

With that, I'll turn the call over to Floyd. Floyd?

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

Thank you, Greg. As we announced yesterday, our earnings per diluted share excluding after-tax net capital gains and losses were $1.26 for the quarter, compared to $0.96 for the second quarter of last year. These results were driven primarily by very favorable experience in the insurance services segment, as well as good results in the Asset Management segment.

In the Insurance Services segment, income before income taxes for the second quarter was $89.3 million, compared to $72.4 million in the second quarter of last year. The primary contributing factors were the very favorable benefit ratio in a group insurance business as well as premium growth.

During the second quarter, we raised the discount rate used to establish new reserves by 25 basis points to 5.25%, compared to the 5% rate used in the first quarter of 2008. The average new money interest rate margin over the average discount rate for the previous 12-months was 41 basis points. Our overall portfolio margin at the end of the quarter was 43 basis points.

In the Asset Management segment pre-tax income of $12.6 million was slightly higher than the second quarter of 2007, primarily reflecting the impact of higher asset balances on revenues partially offset by expense levels related to integration and infrastructure work and the retirement plans business.

Individual annuity sales once again exhibited exceptional growth during the second quarter. At $232.9 million, sales were 311% higher than the second quarter of 2007, reflecting strong growth in our distribution channels and less competition from alternative investments. We expect sales of annuities for the remainder of the year to be more in line with the second half of 2007.

Moving to investments, our fixed maturity securities portfolio is well diversified and continues to perform well with the current portfolio yield of 5.54%. And an average portfolio rating of A, as measured by Standard & Poor's. The capital losses for the quarter primary reflected recognition of other than temporary impairments for holdings of bond insurers, Ambac, Radian, and MBIA. The market values of these holdings continue to change; and since quarter end, the values have increased by about 5.5%.

Our commercial mortgage loan portfolio yield was 6.36% for the quarter. In the second quarter, we originated $318 million of commercial mortgage loans. The current state of the mortgage industry has created an opportunity for us to originate high quality loans with widest spreads.

At $2.26 billion mortgage loan managed for third party investors were 40% higher at June 30th, 2008, compared to a year ago. These results reflect third party investors continued confidence in the high quality fixed rated commercial loans we originate on service. For the remainder of 2008, we expect originations to remain strong. We are very comfortable with our commercial mortgage loan portfolio. I'll remind you that these are first mortgages to creditworthy business people for amounts that are well below the value of the property.

We're pursuing small commercial mortgage loans for borrowers, who want to fix rate. And we rigorously underwrite every commercial mortgage loan we make. The average exposure per loan in the portfolio is under $1 million. Additionally, the average loan size is about 58% of the property value. And we have personal records on most of the loans. We haven't suffered any significant delinquencies or losses in this portfolio in decades. And we believe it's because we do a great job of underwriting these loans upfront. And we service these loans in-house to continuously monitor the payment activity.

While we continue to review our portfolio for impairments, we currently have no specific concerns. We have said before that in prior recessions we have seen delinquencies rise modestly, but nowhere near the industry rates. Even with the modest rise in delinquencies, we have not seen a significant amount of losses, because we have promptly secured the delinquencies.

Turning to capital; in the second quarter, we purchased 99,100 shares at a total cost of $5 million. At an average price of $50 - $52 per share. We expect purchases for the remainder of the year to be approximately $10 million per quarter. Our pretax statutory earnings for the quarter were $86.2 million. And the risk based capital at our insurance subsidies was 315%. Our capital position is growing at the pace we have expected.

For 2008 guidance, we expect that our long-term target for return on average equity of 14% to 15% will be met or exceeded. That our long-term target for earnings per diluted share growth of 12 to 15% will be achieved. And our premium growth will be at or little below the low end of previously stated 2008 range of 68%.

We are maintaining our group insurance benefit ratio guidance of 77.5% to 79.5%. However, actual experience over the past four years indicates that the benefit ratio for 2008 could be at the lower end of the range. Overall, the second quarter results represent a solid quarter. And indicated each of our businesses is operating well in the current economic environment.

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

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

Thank you, Heather. And we are ready to start the question-and-answer session of our call. So, we're ready to take the first question from our participants.

Question And Answer

Operator

Thank you. [Operator Instructions]. We will now take our first question from the line of Keith Walsh with Citigroup.

Keith Walsh - Citigroup

Nice quarter.

Unidentified Company Representative

Thanks, Keith. How are you doing today?

Keith Walsh - Citigroup

I'm good. Can you hear me okay? I am on a cell right now.

Unidentified Company Representative

We can get you, it sounds good.

Keith Walsh - Citigroup

Okay. First question I guess for Eric. Based on your earnings guidance that would imply second half or EPS more of 0% to 5% growth. I would like you to comment on that, and then I'll get a follow-up for Floyd.

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

Sure; Keith, fair question. I think the situation is simply here is that we've learned overtime that it does not make sense for us to try to give quarterly guidance and as the year starts to wind down into the second half; that's essentially what we'd be doing if we started to move those numbers around. So we will stay with our annual guidance. And as it plays out, if we do a little better, we'll celebrate.

Keith Walsh - Citigroup

Okay, great. And then for Floyd, I just want to get more of a context around... we've got in the industry now... right now declining payrolls and lower wages. Now how quickly does that flow through premiums on the income statements for StanCorp in the disability business?

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

Yes, I mean I think we definitely seeing an environment, where there's a certain amount of challenge to the top-line, and you can see we've tamped our guidance on the top-line a bit, it but it's I mean... the items that you talked about do translate into pressure on the top-line, but I think what drives it more is really the question of sales and persistency.

So we had some terminations in the first half of the year and then we're seeing a slowdown in the movement of large cases later in the year here. So those items that would probably affect the top-line faster than the slowdown in the growth in wages. Over period of year or two, I mean if you... if we go into very bad economic conditions we will see those are translating into further pressures on the top-line.

Keith Walsh - Citigroup

Okay. So that's not something that you're going to see in a quarter; it takes several quarters or even a year to work through?

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

I think that's correct, yes.

Keith Walsh - Citigroup

Okay, thank you.

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

What happens in a bad environment is that you see differences in cases moving and you also see differences in the competitive environment that could move much fast in terms of affecting your top-line.

Keith Walsh - Citigroup

Great, thanks.

Operator

Our next question comes from the line of Randy Binner with FBR Capital Markets.

Randy Binner - Friedman Billings Ramsey

Hi, everyone; thanks. Just a question on the DAC amortization in the insurance segment? This is probably best for Greg Ness. It looked like that was a little bit better than we had forecasted and where have been running at least in the last few sequential quarters. Is that... and I'm talking about the negative $16.8 million. Is that something that's more seasonable or is there a trend there that might go forward?

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

Yes, I mean there was nothing unusual in terms about number. They reflect the timing of expenses related to bonuses paid on the sale side. So, depending on how those numbers go, you get the DAC amortization going. So nothing really unusual there in terms of anything unusual for the quarter.

Randy Binner - Friedman Billings Ramsey

So, I mean so to clarify, I mean it's not... but it's not a level we want to run for. I mean is there are seasonal pattern to it? Because I mean I see last year in '07 the second quarter was definitely the lowest number and so would we assume that's the case again for '08?

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

There is some seasonalities in terms of timing, when we pay sales comp, our group [ph] sales comp. But it doesn't vary that significantly quarter-by-quarter. So I wouldn't want to hold you to sort of that... sort of certain seasonal pattern there.

Randy Binner - Friedman Billings Ramsey

Okay, fair enough. And then I have a question on commercial mortgages. I guess with the top-line potentially being softer vis-à-vis the guidance and maybe assuming a soft economic environment. You'll need a generator originally, less commercial mortgage to match against the liabilities that you generate. So I guess you had some comments in the top of the call, where your third-party business was a lot higher; I think you said 40% higher. I mean is that... I guess if the liability origination stays flatter goes down, but there is more commercial mortgage opportunities, because there has been a pull back by a lot of people in that market. I mean it's generating more fees there something you're more actively interested and in something that you would maybe you think about significantly ramping up?

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

We remain very excited by opportunities on the commercial mortgage side. In spite of what's going on in the general economy and in particular with respect to what you see in the mortgage industry. In totality, we remain very excited and infused by the opportunities for originations within our niche and the way we do business. So what we've seen is, there has been a fall in demand, but there is also been perhaps a greater fall in supply. So we have seen favorable conditions for us to originate mortgage loans. And we will take advantage of those opportunities going on to the rest of the year.

Randy Binner - Friedman Billings Ramsey

So, I mean could we assume that you'll just keep the origination level at least constant even if the liabilities you generate maybe start to decrease a little bit?

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

You're thinking in terms of what we would hold for--

Randy Binner - Friedman Billings Ramsey

I am just trying to figure out what the fee income, because you... I mean if your top line and your liability generation slows and you continue to... but you have the capacity especially where supply has been reduced as you said. I mean you could create a lot more fees from this. I am just trying to gauge how much of a fee generation opportunity is there. Is there kind of in the next year and a half?

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

Right, remember the fees spread out over the course of the loan, over the term of the loan. So, you don't see big bumps in the short-term. But these are very good investments for us. And the third party investors, who we provide originations for are very excited by the opportunities. So I think we will continue to drive this.

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

Randy, this is Eric. One more thought: I think what your thought pattern here is headed in the direction of... if top line growth starts to slow just a little, then what does that mean for our insurance company's requirement for mortgage loan. Is that correct?

Randy Binner - Friedman Billings Ramsey

Yes, 100%, yes.

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

Yes, and basically what happens there, keep in mind that the reserves... the loans are matched against reserves; the reserves are developed along with premium. Premium is not going to fall, but what we are talking about is the rate at which it will grow, it may grow a little less rapidly than we would like. But we are going to continue to see premium growing. And so the actual demand within the insurance companies is unlikely to change very much. If... and to the extent that it does, then we have the secondary outlet, and that's where the loans can go.

Randy Binner - Friedman Billings Ramsey

Okay, great; fair enough. And just one more question; Greg, you had mentioned some comments I think about jumbo contracts. And I didn't quite catch that, but I mean there... I may guess there was some lack of lumpiness in the sales numbers this quarter. So were your comments around... could you just repeat those comments, I am just trying to get a feel for how competitive it is for those larger cases?

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

Yes, Randy, what I was trying to do is to remind people that we had some large cases in the latter half of 2007, which means that the comps then moving forward for the latter half of '08 will be difficult. At the same time we think that premium growth will be impacted by determination of a couple of large cases that has occurred mid-year.

Randy Binner - Friedman Billings Ramsey

Perfect, that's great. Thank you so much.

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

No problem

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

You bet.

Operator

Our next question comes from the line of Jukka Lipponen with KBW Asset Management.

Jukka Lipponen - KBW Asset Management

My first question actually going back to Keith's question. With respect to what you're seeing within your existing book of business in terms of employment and wage growth, I think wages are still growing in general at a fairly decent rate; employment growth I guess is flat to maybe even declining. I mean is that sort of what you are seeing within your own book of business?

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

Jukka, this is Greg. You might recall that when we were in New York in May, we talked about our book of business. And we pulled some steps here just to get a sense of what was going on. If you look at employment growth from Q2 '07 through Q2 of '08 and then look at our book of business, two-thirds of our books of business in LTD grew at about 2% in that same timeframe. We think you are right that overall employment growth is probably flat to maybe very slightly negative.

Jukka Lipponen - KBW Asset Management

And what are you seeing in the wage side?

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

Haven't seen a whole lot of movement of the wage side yet; but as we see, inflation tend to peak a little bit. That may have some upward pressure on wages. And of course that's a good thing for us, so too early to make that call.

Jukka Lipponen - KBW Asset Management

And with respect to the benefit ratio, was that in the mortality in the life business or in the claims in the LTD business or can you give us a little more color on that?

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

UK was across the board; we have favorable experience across all the various product lines. One of the things that you note that I mentioned is that we don't see a correlation between the economic environment and our claims experience. During an economic recession if that's in fact where we are, you might tend to see more soft claims filed whether that's mental nervous claims or back or muscular, skeletal injuries, those kinds of things. So we monitor that very closely as you might guess. We look at those claims from second quarter of '07 through second quarter of '08, and we actually saw a decline in the percentage of those claims submitted to us.

Jukka Lipponen - KBW Asset Management

And if I heard you correctly, because it looks like maybe the LTD persistency was down a little bit and I think I heard you say that maybe there were some larger cases that terminated mid-year?

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

Yes.

Jukka Lipponen - KBW Asset Management

So the LTD persistency, it was lower this quarter.

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

Well, as you know, Jukka, we report persistency annually, and we'll do that at the end of the year. One of the... there is a lot of beauties of being a small case writer; there is also a couple of negatives. Sometimes small cases grow up to great size cases and they get acquired by somebody else. So when we lose a case like that, it's unfortunate, but that's impact exactly what happened here.

Jukka Lipponen - KBW Asset Management

Last question, in terms of the individual annuity sales that were very strong in the first half, why are you expecting such a drop off in the second half that we'd actually be at the level of what second half sales were in 2007?

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

Hi, Jukka, this is Kim Ledbetter. I think the reason for the second quarter sales and there is a lot of momentum from the first quarter and a number of sales that happened late in the second quarter, because they were 10.35ish [ph] changes and that kind of business showed up in the second quarter in terms of our sales results. And our plan is to manage that business carefully to so that we get that level of production in the second half year. This is more inline with what we saw in the second half of 2007. So that's our plan in terms of how we are going to manage that business.

Jukka Lipponen - KBW Asset Management

But if you... you talked about I think that of your expanded distribution. And if there is less competition from CDs and other competing products, I guess I'm still a little surprised that why would your production only be at the level of what it was in the second half of last year?

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

Well, I think you are right about... certainly, we do have a larger distribution network now and we certainly see less competition from investors like bank CDs. But we have the ability to set interest rates and manage that business so that we get the level of production that we want to see in the second half of the year.

Jukka Lipponen - KBW Asset Management

Very good, thank you.

Unidentified Company Representative

Thank you, Jukka.

Operator

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

Eric Berg - Lehman Brothers

Thanks very much. Can you remind me of your long-term... your target, long-term for rate of premium growth?

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

Eric, this is Eric Parsons. Our long-term stated growth rate has been 10% to 12% and we've talked about that really since the time of our demutualization, we've also talked though about the fact that there are years in which we will be able to exceed that and years in which we probably won't be able to attain it, and that of course is determined very much by the marketplace around us.

Eric Berg - Lehman Brothers

Two more; the... your reported long-term... your reported LTD sales were at least on a reported basis down in the March quarter and down in the June quarter even after approximately flat after adjusting for the second quarter of 2007 buyout. Is that consistent with your current sort of business plan? Is that an outcome? It was probably not an outcome that you wanted, but given the state of the world, is that what you wanted or is it disappointing to you consisted? How should we think of sort of these flat to declining sales in LTD, and why they're happening?

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

Eric, Greg Ness. I think a couple of comments I'd make there. One, top-line growth isn't where we'd like it to be, but we also recognize the market environment in which we are operating. Our job is to respond to that environment. As you know better than many there, top-line growth can add value, and there is top-line growth can destroy value. That's not what we are after. We are after business that is... can stand the [ph] books, that is priced right, and it will increase shareholder value for the long term. To the extent of that are competitors out there that are having a hard time making sales numbers or having their top line grow appropriately, what we see as longer rate guarantees, we see very aggressive pricing and so on. Those are games that we don't play, because they think they are very short-term oriented, and they do not increase value in the long haul.

So the LTD numbers that you see there, I would love to see those numbers higher. But I also that are reflection of where we are in the marketplace right now. And as you know, pricing discipline is very important to us.

Eric Berg - Lehman Brothers

Last question. Your group wise business by comparison, is... it looks like its pretty much at the same size right now as your disability business indeed is growing at a... I guess if you look at the year-over-year growth in premiums more than 10%. My question, where is this business coming from? Is it coming from mid-sized companies, from larger companies; and relatively, and this is one question: what would you estimate as the percentage of your customers, who have not had insurance before and are buying coverage for the first time as opposed to takeaway business? Thank you.

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

Eric, let me start with your last question. I don't have the numbers right in front of me. But I think it would be very fair to assume that the majority of customers that we deal with have had prior coverage.

Eric Berg - Lehman Brothers

Okay.

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

By probably a pretty significant number. In terms of the life business, we've seen some nice growth in the life business. We've gone through a number of life rating studies over the last couple of years. We have a very good life product out there; it's the one of the single most common benefits. And so employers are... that's high on their list. And it's a very inexpensive benefit for an employer to provide to an employee. And so we've seen good growth there; we've also had very good life claims experience as well.

Eric Berg - Lehman Brothers

Thank you very much.

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

Thank you, Eric.

Operator

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

Mark Finkelstein - Fox-Pitt Kelton

Hello.

Unidentified Company Representative

Hi Mark.

Mark Finkelstein - Fox-Pitt Kelton

A few questions; I got cut out of the call for part of it, so hopefully I am not going over the things you've talked about. But in terms of the lowered top-line expectations, I understand, I guess the two large cases. But I mean aside from that, is the change more driven by kind of the outlook in the pipeline or is it more driven by expectations on persistency kind of in the back half of the year?

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

Mark, Greg. I think that the couple of three things you've taken in your account. One you have very difficult comparisons from the second half of 2007 where we added some jumbo cases. And so that makes the bar very high there are just to be able to present good premium growth. Secondly, I think it's a reflection of what we see in the marketplace. While the pipeline is thoroughly active and we are seeing proposals to be very honest with you, I don't... I'd like the pipeline to be stronger than it is. But it also is a reflection of where we are in the market environment today.

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

I think Mark, in this environment, cases... medium sizes cases and large cases are not moving quite as much as we thought they would late in the year. So perhaps even though we... our expectations may be down, they may still exceed what the average for the industry, because we think sales could be down for the industry in this uncertain environment.

Mark Finkelstein - Fox-Pitt Kelton

Okay. And I guess just a comment or question on the commercial mortgage loan portfolio; I mean in the last three or four months, you have actually started hearing a lot more about store closings... start of excellence [ph] and things that are... I mean is your view that delinquencies will pick up, are you going to be kind of made home loans or is your view that you've positioned yourself to largely avoid a lot of kind of some of the retail oriented areas that ultimately could see a little bit more strength in the area?

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

Yes, Mark, this is Kim Ledbetter. Certainly we said I think a couple of quarters ago, that we expect to see delinquencies go up slightly. We've seen that in prior recessions. And... but remember delinquencies don't... at least for us, don't... have not equaled with losses. And so while we might expect to see some increase in delinquencies, we wouldn't expect to see any significant losses from those delinquencies. And certainly when we have a delinquency, we manage it very carefully and aggressively. And we did have one foreclosure this quarter and lost a very small amount on that sale. So anyway, it's something we expect to see, but don't expect to see a lot of it. And certainly much lower than what we would see expect the industry to have.

Unidentified Company Representative

We've been following the news on problems in the residential mortgage industry overflowing into the general economy and in particular putting pressure on the commercial side. But I think this is where we differ from the vast majority of the commercial mortgage industry. I mean the loans that we underwrite small loans, investor owned tenant occupied mostly, very vigorously underwritten. So even though we have the news in California for example of mall closings and pressures on malls, I think the quality of our book is very different from the stuff that you see generally in the mortgage industry. Our history base that out and you can see that even though we see those very small upticks that you would see in this quarter, our expectation of losses are very, very low.

Mark Finkelstein - Fox-Pitt Kelton

Okay, thank you.

Operator

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

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

Thanks, Heather. Before we conclude the call, I would like to turn it back over to Eric Parsons for some closing remarks.

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

Thank you, Jeff. I think it's clear that we are all operating on a challenging environment, in an environment where the results were little less predictable and where company strategies are tested. It's also, I believe the kind of environment, where... in which StanCorp stands apart. We've often said that we are focused on the long-term success of StanCorp Financial Group, and that we're impressed, we will protect bottom line over the top line, those fundamentals continue to be in place today.

We are in the business of accepting risks from others, and we'll see periods of favorable and unfavorable fluctuations from time-to-time. But over many decades, we've developed considerable expertise to manage what many considered to be challenging products; disability insurance and commercial mortgage loans among them.

We've chosen those businesses and stayed with them, because we believe they have long-term growth potential and we further believe that we can apply our expertise to create superior value for shareholders. While no single quarter will be immune from potential fluctuations we continued to have confidence in our long-term business plan, and we thank you for your confidence as well.

Thank you very much and have a great day.

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

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 31st. To listen to this call, you can dial 800-642-1687 and enter the conference ID number 53288913. A replay of today's webcast is also available at www.stancorpfinancial.com/investors. Thank you.

Operator

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

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Source: StanCorp Financial Group, Inc. Q2 2008 Earnings Call Transcript
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