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StanCorp Financial Group, Inc. (NYSE:SFG)

Q3 2012 Earnings Call

October 23, 2012 12:00 pm ET

Executives

Jeff Hallin - AVP, IR

Greg Ness - Chairman, President & CEO

Floyd Chadee - SVP & CFO

Jim Harbolt - VP, Insurance Services Group

Dan McMillan - VP, Insurance Services Group

Scott Hibbs - VP, Asset Management Group

Rob Erickson - VP & Controller

Analysts

Randy Binner - FBR

Ryan Krueger - Dowling & Partners

Mark Finkelstein - Evercore Partners

John Nadel - Sterne Agee

Suneet Kamath - UBS

Steven Schwartz - Raymond James & Associates

Tom Gallagher - Credit Suisse

Chris Giovanni - Goldman Sachs

Bill Dezellem - Titan Capital Management

Operator

Ladies and gentlemen, thank you for holding. Welcome to the StanCorp Financial Group Incorporated Third 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

Thank you, [Raya], and welcome everyone to StanCorp's third quarter 2012 financial review conference call. Here today to discuss the company's third 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; 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 conference call will include certain statements regarding to growth plans and other anticipated developments for StanCorp's businesses, and the intent, belief, and expectation of StanCorp's management regarding future performance.

Some of the statements made are not historical facts, but are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Because these statements are forward-looking statements and 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 third quarter earnings release and the 2011 Form 10-K as modified by the current report on Form 8-K dated July 18th, 2012.

With that, I would like to turn the call over to Greg. Greg?

Greg Ness

Thank you, Jeff, and thanks to all of you who have joined us for our third quarter earnings call today. We are pleased to report operating earnings per share of $1.05 this quarter. This quarter's results were driven by a group insurance benefit ratio that was lower than each of the first two quarters of this year, and strong earnings in our Asset Management segment.

As you read in the release, the group insurance benefit ratio was 79.7% for the third quarter of 2012, which was a 100 basis point improvement, compared to 80.7% for the third quarter of last year, and sequentially better by over 800 basis points.

A comparatively lower benefit ratio was primarily due to better than expected claim recoveries and lower incidence rates within our group long-term disability business. Sequentially, we also saw some improvement in severity. While we continue to see improvement in claims incidence, the levels remain high when compared to historical averages.

We are addressing the impact of higher incidence with a pricing increases that we announced in mid 2011, and we're nearly half way through repricing our business. Along with the pricing actions, we continued to dedicate resources in claims management further enhancing our expertise and working with claimants to get them back to work. I believe we have the best claims management team in the business.

Our history shows that trends in our benefit ratio cannot be measured in 90-day increments, and our results will fluctuate widely from quarter-to-quarter. Certainly, the last few quarters are an excellent example. We continue to be a strong and disciplined company focusing on our expertise, integrity, commitment, and exceptional customer service.

Partially offsetting the improvement in claims, recoveries, and incidence quarter-over-quarter was the effect of a lower interest rate environment. Despite the flat treasury market, we continue to see yields on investments declining. Lower yields affect of our net investment income and the related discount rate we use for our long-term disability reserves. This is an industrywide challenge. Floyd will speak to our interest rates in just a moment.

During the third quarter, group insurance premiums decreased 2%, compared to the third quarter of last year, reflecting the effect of the pricing actions we are taking to address the continued elevated group, long-term disability claims incidence, and the low interest rate environment on both new and renewal business. The market remains competitive and our pricing increases have put pressure on both new sales and renewals.

Our focus will continue to be on providing products and services that our customers want at the right price. We are committed to writing and retaining profitable business. Over time, this will naturally bring the benefit ratio back to more historical levels.

Lack of employment and wage growth within our group insurance business continues to be a significant headwind to growing premiums, and we don't see this changing soon. Employment levels among our existing customers decreased about 1.6% from the third quarter of last year, continuing the trend we saw throughout 2010 and 2011. This economy is not yet growing on a broad-based and sustainable basis.

For our Individual Disability Insurance business, the benefit ratio was 75.7% for the third quarter of 2012, compared to 66.3% for the third quarter of last year. As you know, this benefit ratio can be more volatile for this smaller block of business.

Our Asset Management Group delivered solid third quarter results. The results included higher net investment income from commercial mortgage loan prepayment fees, and bond call premiums that added approximately $2.5 million of income this quarter that we would not expect to continue in the normal run rate. Overall, we like the steady contribution we've seen from our Asset Management businesses.

StanCorp's long history of success is predicated on our financial discipline, our dedication to customer service, our strong balance sheet, and capital position, all of which were evidenced this quarter. We continue to grow book value per share and make decisions that lead to long-term shareholder value.

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

Floyd Chadee

Thank you, Greg. I will focus first on interest rates. Given current market and economic condition, this topic has been appropriately attracting a great deal of tension within the insurance industry. I will also comment on our investment portfolio performance, our balance sheet strength, and finally, our capital position.

As you know, the insurance industry is faced with a challenging interest rate environment. We expect that the continued low yield on U.S. Treasuries, together with additional spread compression, will continue to place pressure on interest rates leading to potentially lower discount rates, and therefore, higher claim reserves across the industry.

Our discount rate used for newly established long-term disability claim reserves remained at 4% for the third quarter of 2012. This represents a 100 basis point decrease from the 5% discount rate used for the third quarter of last year. The lower discount rate used for this quarter resulted in a corresponding decrease in quarterly pre-tax income of $7.2 million and an increase in the group insurance benefit ratio of approximately 150 basis points.

Our new money investment rate for the third quarter of 2012 decreased to 4.46%, compared to 4.73% for the second quarter, and 5.64% for the third quarter of last year. This lower new money rate reflects low investment yields on both our bond acquisitions and our commercial mortgage loan originations.

As always, we continue to closely monitor the interest rate margin in our reserves. The 12-month reserve interest margin between our new money rate and our average reserve discount rate was 57 basis points for the third quarter, down from 62 basis points for the second quarter. Our overall portfolio margin was 41 basis points for the third quarter, compared to 44 basis points for the second quarter.

We expect that the low interest rates environment will remain a challenge for the entire industry over the next couple of years as treasury rates remain low and spreads tighten.

To offset the effects of the lower interest rate environment and profitability, we announced last quarter a low single-digit price increase in our group insurance business. We will continue to monitor interest rates closely and we will take additional pricing action to address the low returns as appropriate.

Moving on to our investments, despite the low interest rates environment, we're pleased with the overall performance of our investment portfolio. But like many of our peers, we do not have significant exposure to high risk asset classes. Our fixed maturity security portfolio has an average credit quality rating of A and we have a strong commercial mortgage loan portfolio with a long track record of originating and servicing high quality commercial mortgage loans.

During the third quarter we originated $347 million of loans. In addition, our 60-day mortgage delinquency rate dropped to 30 basis points, which represents the fifth consecutive quarterly decrease in the 60-day delinquency for the portfolio and the lowest delinquency since early 2009.

StanCorp's balance sheet continues to be a fundamental strength. During the third quarter, we grew book value per share excluding AOCI by 2.5% to $41.98 and we grew GAAP value per share 3.8% to $49.08 compared to June 30, 2012. Year-over-year book value excluding AOCI is up 5.8% and GAAP book value is up 7.8%.

In addition, we successfully refinanced our senior notes during the quarter and lowered our annual interest cost. We issued $250 million of 5% 10-year senior notes in August and repaid the $250 million of 6.875% 10-year senior notes at the end of September.

Finally, I would like to discuss our capital structure. At September 30, 2012, our available capital was approximately $330 million, an increase of $120 million from June 30, 2012. The risk based capital at our insurance subsidiaries was 364% at September 30, 2012. The increase in available capital was primarily due to the reduction in required capital coming from additional group life reinsurance together with improved capital generation from our insurance subsidiaries. This was partially offset by our normal quarterly for debt service and shareholder dividends. The additional group life reinsurance released approximately to $100 million of net capital.

We did not repurchase shares during the third quarter. As we mentioned in our second quarter earnings call, we did not expect to repurchase shares in the second half of 2012 due to the elevated group insurance benefit ratio we experienced in the first half of 2012 and to the continuing uncertainty in the economy. During the third quarter, we saw significant improvement in our group insurance benefit ratio and in our capital generation from the insurance subsidiaries.

The significant improvement for this quarter needs to be balanced against the fact that on a year-to-date basis our benefit ratio remains elevated. We will continue to evaluate share repurchases based on the direction of equity markets and the consistency in our level of capital generation.

There is no question that we, together with the rest of industry, are navigating a difficult period of low employment level, elevated claims incidence, prolonged low interest rates and general economic uncertainty.

As Greg mentioned earlier, we're pleased with the improvement in the group insurance benefit ratio this quarter, with the progress we're making in our pricing actions and the with the stable earnings within the asset management segment. We will continue to adhere to our due diligence and conservative underwriting and investment practices that have always served us well.

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

Jeff Hallin

Thank you, Floyd. Raya, we're now ready to take the question from our participants.

Question-and-Answer Session

Operator

(Operator Instructions). We will now take our first question from Randy Binner with FBR. Please proceed with your question.

Randy Binner - FBR

Greg, I kind of wanted to follow up on your commentary around the employment environment because this probably gets to question a lot of investors have and that’s kind of if these better loss trends are sustainable, and if you outline that there are still headwinds in some of your kind of key areas that you insure? But I guess I wanted to kind of dig down on that a little bit. I mean, if we think about the west coast and California in particular, we think about the public sector out there. I mean, has there been an improvement in those areas? Is it showing some signs of bottoming out and is it -- is that potentially a cause of lower incidence? It just feels like it’s a little early to see this much better result just by virtue of pricing and kind of resources being allocated to the claims team?

Greg Ness

Okay, Randy, good question. We track that very closely. As you know, we have symmetrics around that. I'll ask Dan to give you a download on it. Dan?

Dan McMillan

Hello Randy. And you're right. It's difficult to make attribution from an employment standpoint. One of the things we saw in the quarter is a shrinkage head count as Greg mentioned in the block of negative 1.6%. And I would say relative to prior measures that we've reported there is a bit of mixed bag. We still saw some degradation in the public market but higher dictation was actually positive. And so in the quarter we see that that move around. It hasn't gotten worse but when we reported entire quarters and we're seeing a little bit of improvement in some of those larger segments.

Randy Binner - FBR

Okay. And so that's higher ad, is there any kind of layer you can add for California. I mean is that seeming like it's better. May be I guess the question is, is this rate a leading indicator for us to try and look at, is thinking about public sector and thinking about California?

Greg Ness

Yeah I think its one -- one indicator and again there are several in that mix. California in specific is a typical economic environment. But really our insured block is not necessarily a representative of the larger state of California. And we have business in California that's doing very well.

Operator

Thank you. Our next question comes from the line of Ryan Krueger with Dowling & Partners. Please proceed with your question.

Ryan Krueger - Dowling & Partners

I was hoping to get a little bit more detail on the underlying claims and benefit ratio. This quarter you had mentioned very favorable recovery rates as well as some improved incidence year-over-year. Could you just break down a bit may be attribute roughly how much each of those contributed to the insurance?

Greg Ness

Sure, we can do that Ryan down.

Floyd Chadee

Ryan, a couple of comments around the drivers of benefit ratio. Greg mentioned earlier three elements, claim recoveries, some improved incidence, some improved severity. And really that's the, I won't make specific attribution to each of those but that is the order in terms of influence with recoveries being the top one. As you know, we evaluate claim recoveries I think very closely, normally trends, patterns, outcomes, et cetera and helping the claims management is an area of expertise for us it's one to which we provide a great deal of service to employees who are especially going through a very hard time, and we can help that employee return to part time and full time work if a win-win for the employee and the employer. And at the same time there are claims and claimants that discover in returns towards providing any assistance from us at all. What I can tell you from benefit ratio standpoint, we know that fluctuates every 90 days, these matrix around recoveries also fluctuate greater within any given 90 day period.

Ryan Krueger - Dowling & Partners

Okay. And then, I mean it has been I had assumed especially that benefit ratio is very volatile quarterly. Just do you think year-to-date is that I think it's currently now about 84%? Do you think that's kind of appropriate level to look at and think about as we had kind of a baseline for improvement going forward as you run through the price increases?

Greg Ness

Yeah the direction we provided obviously, we're not going to do, we've a quarterly benefit ratio guidance. But the direction we provided last quarter still holds true in terms of the range and the year-to-date as you noted is 84%, which is in that -- within that range.

Operator

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

Mark Finkelstein - Evercore Partners

A few things. One is, may be just a kind of follow-up a little bit on Ryan's questions. I guess on incidence, how would you compare the incidence this quarter versus the incidence that you saw in the first and the second quarters?

Greg Ness

Dan?

Dan McMillan

You know Mark it's an area that we have seen some gradual improvement in, really since the big uptick we saw in the first quarter 2011. We obviously, like to see that improve more quickly, but we're seeing that come down overtime and it's some we're going to watch very closely.

Mark Finkelstein - Evercore Partners

Okay. And I guess just on claim recovery. I struggled to think of how exactly this took place is there anything through this I mean it can be more volatile. Would you attribute the experience that you saw this quarter, it's just good luck or is there anything structural in terms of better trend that you think have some sustainability to them in that element?

Greg Ness

The comments I made earlier mark around our systems. We think we help people return to work better than anybody in the industry, it's an expertise area, and way more level of specialty there the most people realize. At the same time, you have a certain number of claims every quarter that return and get better without any help from us at all. And so well, we look at the recoveries throughout the year and we're pleased with the pattern there, but any given quarter it can jump around.

Mark Finkelstein - Evercore Partners

Okay. Just on sales. If you look at the year-over-year sale change particularly in LTD and group life, first, second, and third quarters, the year-over-year change has actually gotten worse. And I guess, I would have thought that it might improve a little bit, as some competitors had put through rate increases. And so, I'm trying to kind of think through this. And how would you characterize the environment? I mean, again your year-over-year sales are going down, others are putting in pricing increases, what -- how should we interpret this?

Greg Ness

Hang on just a second, Mark, and we'll have Jim address the sales side. Jim?

Jim Harbolt

Mark thanks for your question. When you take a look at our group life sales year-over-year its important to remember that we saw stronger group life sales in 2011 and they just haven't repeated in '12, mostly around large case. In the first half of the year, last year we saw a significant large case life sales and those haven't repeated. So that's a fair bit of what's gong on there. When I look at the sales environment out there right now, one of the things that we're seeing is that there is some price firming going on but we still see outlier quotes and we see some evidence of significant discounting still on, on any given case.

Operator

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

John Nadel - Sterne Agee

A couple of quick questions. I didn't hear you mention group life mortality, wondering if that played any role in the benefit ratio this quarter either versus the first half or even on a year-over-year basis?

Greg Ness

Okay, John, we'll get to that. Dan?

Dan McMillan

Yeah, we -- I -- and when we look at the life results and it's good to mention because sometimes we're talking about benefit ratio, all we talk about is LTE, but that our life block is roughly half the size of our disability block or about equal in terms of premium overall. In the quarter, the results were inline with our expectations for life not dramatically better or dramatically worse from what we're expecting.

John Nadel - Sterne Agee

And how would that compare for instance versus the life mortality result, let's say in the first half of the year versus your expectations, were they better, worse, same?

Dan McMillan

I would call them pretty much in line similar to this quarter.

John Nadel - Sterne Agee

Floyd quick question. So far I've been paying very close attention to the spread compression, that's been going on out there and I empathize, with the challenge could generate any real good new money yields. I'm wondering, that's 4.46% average new money yields in the quarter, I'm wondering what that might have looked like that by the time you got to the end of the quarter?

Floyd Chadee

Yeah, well certainly, I think if you were to look at the overall trend during the quarter, there is no question that there was spread compression throughout the quarter. So, I would concur with you that the rate at the end of the quarter probably, didn't look as good for the entire industry as it would probably do during the sort of average for the quarter.

John Nadel - Sterne Agee

Any sense for about how much by the end of the quarter, below that average?

Floyd Chadee

Yeah. I mean it bounces around. Now you have to remember that that with us we have a mixture of mortgages and bonds. So, when you talk about spreads, you're talking about 40% of our investment sort of within the mix that we operate. I mean, if you look at the spreads we had during the quarter, they're down versus last year -- for the quarter last year about 60 -- 40 basis points and 20 -- 24 basis points versus the previous quarter. So definitely the trend being down this is would be on a bond. Now our mortgages are still continuing to be in excess of 300 basis points, but clearly still a downward pressure on all assets.

John Nadel - Sterne Agee

Just to go back to claim recoveries for a moment, is there a way to think about claim recoveries? I know a 90-day, very difficult, but is there a way to think about claim recoveries versus your own expectations and maybe similar to the way to think about group life mortality versus your own expectations? I assume that claim recoveries were a positive delta in the quarter versus your expectations, but I'm still trying to figure out just how much.

Greg Ness

Dan?

Dan McMillan

Yeah, it’s a little difficult to keep. I wouldn’t characterize recoveries as being a little better than expectations in the quarter. And I would say that that recoveries have been a little better over the last 90, 100 days, 120 days even from a recovery standpoint, so little good in the quarter.

John Nadel - Sterne Agee

And then, finally, just to go back to the sort of the issue of overall competitiveness, I certainly appreciate the idea that there's some outlier quotes from time to time in discounting on certain cases. How -- in cases that you -- well, I guess you want to win every case you quote on, but I'm sort of -- I'd be interested in how much of a delta there is between the quotes you're providing, which I assume are sort of your best indication of a good price and a good return for you, versus the quotes that are selling, that are closing the sales?

Greg Ness

All right, Jim, give John --

John Nadel - Sterne Agee

I don’t know if I phrased that very well.

Greg Ness

I think we got the gist of it.

Jim Harbolt

I think I can get there for you, John. We want to win every case that we quote but we absolutely want to win it the right away, and our prices and our sales results I think are pretty well tied right there right now.

It's not unusual for us to see quoting on a case, a handful of carriers in similar sort of rate range kind of close, but then you'll see somebody who might drop in at 20% lower than a handful of companies. And it’s a little hard to predict who that might be or where. It tends to bounce around a little bit but that you might see somebody 20%, 25% lower.

John Nadel - Sterne Agee

Jesus, still today?

Jim Harbolt

Yeah.

John Nadel - Sterne Agee

My God.

Jim Harbolt

I won't say on every case and every geography but that’s something that we're dealing with.

John Nadel - Sterne Agee

Okay.

Greg Ness

John, one of things you're seeing clearly from our sales results is that we are exercising very good discipline in terms of the prices both on a renewal basis and a new sales basis. We are after our price and we're getting our price, and we believe that we're taking sufficient price.

John Nadel - Sterne Agee

Listen, I appreciate that focus. Can you help sort of understand on renewal business, cases that you lost versus cases you renewed what sort of differential in pricing there might have been? Is there a way to think about that as broadly?

Greg Ness

Jim, maybe a little perspective?

Jim Harbolt

John, I don’t think we're going to give you a specific number that you're looking for, but you're right. When we renew our block of business we've been pleased with how it's been going so far, but there's three components to think about. We want to get the right rate on every case. We also have another set of customers where the cases will be running fine and we're okay with the rates that we have. And then a significant improvement in the block is also seeing cases that are underperforming leave the block, and we've had some of that. And in general, I could tell you that cases that leave have been not meeting our price expectations.

Operator

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

Suneet Kamath - UBS

I wanted to just come back to recoveries one more time because it seems to me that that was the basis of price in the reported results and certainly relative to the guidance that you gave last quarter. So, I guess my question is, was there anything that you did differently in the quarter just sort of -- to get the results that we're seeing versus perhaps what you did in the past? Or is this, I guess, it gets back to Mark Nicholson's question, is this sort of a blip that we should feel so much reluctant to build into modeling going forward? Thanks.

Greg Ness

Dan?

Dan McMillan

Overall, I would again characterize it as a better than expected in the quarter. We didn’t -- to answer your question directly, didn’t do something dramatic in the quarter to influences recoveries. It's something that we work on quarter in and quarter out, year in year out as a part of a -- in helping management -- claims management group that has a lot of expertise in helping people get back to work. So, in the quarter that again that can jump around, it jumped up in this quarter. And I think that’s probably the best color we can provide there.

Suneet Kamath - UBS

Okay. And then, anything in terms of how widespread the recoveries were be it by geography or by customer segment, anything along those lines?

Dan McMillan

Nothing specific in terms of a trend in any of those high level demographics you just mentioned. We look at that and if we sought pockets that really drove it we've drawn those out, we didn’t see that.

Suneet Kamath - UBS

Okay, understood, and then a quick follow-up for Floyd on capital. I think in terms of this life reinsurance transaction that you did, I think the number in terms of capital freed is higher than what I think you did on the first tranche $100 million this time versus $70 million. And I think the way you characterize, call it, opportunity cost last quarter was that it was relatively small, I think the original transaction was probably $1 million pretax, and I'm guessing this is somewhat in that vicinity. So, I guess I'm wondering given kind of where your stock price is, kind of the available capital that you have, the ability to do these types of transactions that free up capital, what's the reluctance if there is any to do more of these and use some of the capital that you're freeing up to buy back your stock, which I'm arguing or I'm guessing you would argue is that a pretty attractive valuation. So why not do more of that I guess is the question?

Floyd Chadee

In terms of why we would not more, I mean when you work with a reinsurer, the reinsurer does expect you retain some of the risk. So I think in terms of balancing the risk we keep and the risk we pass on to the reinsurer we're probably aware we would want to be right now and where our reinsurer probably the reinsurance industry probably want to us to be. So that's a suspect of the question of why we wouldn't do more with respect to the group life.

In terms of how we would utilize that capital, I think when we think of doing share repurchases we do want to see that there are a consistent level of capital generation from our business, as opposed to doing balance sheet transactions to go after the share repurchases. Because I think as we continue in an environment of rate uncertainty we don't want to deplete our balance sheet in that direction. But when we see consistent levels of capital generation from our operations we will reevaluate our share repurchases.

Suneet Kamath - UBS

Understood. So what happens to this $100 million of capital I guess? How are you going to redeploy that if you're?

Floyd Chadee

Well as of the moment we certainly always think of capital in the way we've consistently with our past, I mean we would like to reinvest it in the business, we would like to take advantage of strategic opportunities, and if we start seeing the consistent level of capital generation from operations we certainly return to shareholders. So that hasn't changed.

Operator

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

Steven Schwartz - Raymond James & Associates

Couple of follow-ups, same topic. Dan may be this was a throwaway line, but did you suggest, you suggested that the employment in your groups was down year-over-year. But did you suggest that it was flat with the second quarter?

Dan McMillan

I don't actually I think I mentioned anything relevant to the second quarter. We didn't see any dramatic improvement in head count, showing future growth quarter-over-quarter.

Steven Schwartz - Raymond James & Associates

Okay. Was there any, was there a decrease or was it basically flat?

Dan McMillan

It was very close to flat.

Steven Schwartz - Raymond James & Associates

Isn't that really important, isn't this delta in general for the benefit ratio and group DI, isn't that much more to do with the changing trajectory sequentially as opposed to year-over-year, if things stop declining, you're not getting big increases in reserves. Am I understanding that right?

Greg Ness

Well we mentioned the fact that we saw some correlation or some trends where our employers that were shrinking dramatically or shrinking more than 5%, for example, in headcount we saw higher incidence level. And employers that were adding heads or were staying flat we saw incidence levels. And we talked about that, have talked about this. Historically, I think in an environment where you have employment levels that are not shrinking or staying really stagnant or even going up, you could make that general attribution. When you would see it and how is not really some I can comment on specifically.

Suneet Kamath - UBS

Okay. And then one more, with regards to social security, anything there in the quarter, any casualty or anything like that that might be affecting the benefit ratio?

Greg Ness

Dan?

Dan McMillan

Nothing notable, no.

Operator

Thank you. Our next question comes from the line of Tom Gallagher with Credit Suisse. Please proceed with your question.

Tom Gallagher - Credit Suisse

Just wanted to follow-up on one comment you made kind of just referencing reserve adequacy and the impact of low yields. Can you comment a bit about what's the sensitivity is if you think about your book in aggregate, when would things become an issue when you have to think about adequacy of reserves on your entire book? As I've thought about it just given the match on the claims side that, in the most part, should not be an issue, but is there -- are there any plausible scenarios under which rates continue to grind lower where we should be thinking about reserve adequacy?

Greg Ness

So Tom, the way we do it is one. We adjust our discount rate every quarter to reflect the actual interest rate environment that we face in that quarter. So, you will see with us continuous every quarter an adjustment it's also so -- and in addition to that, we also do a very asset liability management. So, as far as the old claims go, we're very tight on the asset liability management there. So, what you would see with us that is that our discount reflects the ongoing in the overall interest rate environment on a more or less continuous basis. So, what is happening with our block is that you're not developing that reserve risk where you would see some sudden change, some need for suddenly increasing our reserves.

Now, I think this practice is not consistent with -- necessarily consistent with the rest of the industry. And if you see the entities within the insurance industry that are not doing this continuous adjustment, then I think they're building towards a cliff where they will have to take that kind of adjustment.

Tom Gallagher - Credit Suisse

And Floyd, if you -- yeah, that’s my understanding as well if I think about the way you operate versus others. But if you think about your spread in aggregate between portfolio yield and discount rate, can you comment on how that’s been trending and how much margin you really need on the booking aggregate as you think about the spread that you'd be comfortable with?

Floyd Chadee

Yeah, so because we've been doing these constant adjustments and because we do a very tight asset liability management, our portfolio margin has been very stable for a long time. Over the last couple of years, every quarter in the -- very close 40 basis points so reflecting that tight management.

We don’t see -- again, we don’t see a need to take overall -- adjustment in our overall portfolio. In fact, as we see, these low and lower interest environment, we think there's room for actually taking the margin down because most of the margin is there to take advantage -- to provide for reinvestment risk. And as you can imagine, at these lower rates there's low and lower reinvestment risk.

Tom Gallagher - Credit Suisse

And so, Floyd, how would that happen mechanically if you did take the margin down? Would that mean on new claim incurrals you wouldn’t have to keep lowering the new claim discount rates? For -- in other words, I'll just use a hypothetical example. You've continued to take that down and thus maintain the 40 basis points on the whole book, but if you're going to make a decision to take a little bit less cushion there, would you be able to, as your new money yield to let's say, 4%, would you be able to maintain a 4% discount rate and sacrifice a little bit of a lower margin on the book? Is that sort of the way to think about it?

Floyd Chadee

Yeah, I think you should -- I mean, right now our new money margin is on average for the last 12 months about 57 basis points but the actual quarter itself we had a quarterly new money rate of 4.46 and a discount rate of 4 for the quarter, so about 46 basis points. I mean, I can see there's a reasonable argument for taking down that 57 basis points down somewhat as you look at the -- how you set the discount rates for new claims coming in each quarter. So, that’s how it would happen mechanically.

Tom Gallagher - Credit Suisse

And then, lastly, I know its -- you commented on how competitive the environment is, but if I think about in aggregate the combination of lower sales and I presume pressure on persistency. Are we looking at a plausible scenario where you began to see more substantial revenue shrinkage? I mean, I guess, you're seeing a very small amount right now but, and I'm not asking you to give guidance, more just directionally relative to what we've seen historically are we -- is the environment such that in order to get rate you're going to see material revenue declines in order for the benefit of improving margins. If you can just at least give some color on that? Thanks.

Greg Ness

We can do that. Jim, will you take that please?

Jim Harbolt

Tom, I think it's important to remember that both in 2010 and 2011 we had record high persistency. We will release our persistency number in January for 2012. And I think that with our pricing discipline you could expect a little pressure on the persistency number, and I think Greg has already told John on his question that our pricing discipline will probably continue to put some pressure on our sales pipeline.

Tom Gallagher - Credit Suisse

Any thoughts around what the combination of lower sales plus weaker persistency might do? We still directionally are we talking about maybe a couple of points or I mean, is it possible to see something like double-digit revenue decline? I just want to get a sense for how substantial something like that might play out?

Jim Harbolt

I think your first comment on the question is right that we're not going to give guidance on that.

Operator

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

Chris Giovanni - Goldman Sachs

First question just in terms of the benefit ratio in recognizing it can definitely be lumpy quarter to quarter, but if we look back pretty much in every quarter as a public company your 4Q benefit ratio has never been, call it, more than 200 basis points above the third quarter level, and in many instances its flatter, even down. So, I just -- with that as a background, why should we be thinking about sort of the range in the first half of the year that 83.5 to 88.5 as sort of the base case expectations for 4Q?

Greg Ness

Floyd?

Floyd Chadee

So Chris, the one thing I'd caution is clearly we are in an environment of a greater uncertainty and greater volatility. So, I would caution you to use historical seasonality patterns. And certainly I think the difference between the benefit ratio in the second quarter of this and what we saw in the third quarter was probably greater than you would have anticipated, given a look at our seasonality. So, again, I would caution looking at our seasonality patterns in this environment of uncertainty.

Chris Giovanni - Goldman Sachs

Okay, but I guess even in looking at past, I mean, this an 83 to 88 in 4Q I think would be a record kind of 4Q level. I mean, is that still inline kind of with what your point is that look we're in a new pattern here, or is there something else we should be considering for 4Q?

Floyd Chadee

No, I mean, nothing more that what we've talked to you about already in terms of incidence has been up, we saw a change in severity, you've seen a improvement in recoveries here and as we continue to work with our claimants to get back people to work I think, in an environment with great economic uncertainty, I think you should just expect greater volatility.

Chris Giovanni - Goldman Sachs

Okay. And then, may be just one follow-up, as well for you Floyd just on capital management. I guess, the 84% benefit ratio we've seen year-to-date is not that much different than what we saw last year, it is around 83 or so, I mean certainly more volatility this year, but point-to-point it's not much different. And I guess, where you stood last year you had repurchased, I think $90 million or so stock to this point. And you started I guess, 2011 with capital $100 million below where you currently are and a share price stood certainly lower than those level. So, I mean, what do we need to see -- I mean, you mentioned sort of more consistency within the operating results. Is that really -- in terms of what kind of gets you back in the market, repurchasing stock?

Floyd Chadee

Yeah, I think that is absolutely what it is, the consistency in the rate of capital generation. Remember the beginning of the year when we gave guidance, we've anticipated being sort of better than last year and somewhat in the 80% to 82% range and we had also anticipated that that would be -- that would correlate with the level of capital generation. It would make us comfortable being in the market for this year. As of the end of the second quarter we had not seen a benefit ratio in that range and therefore, we didn't repurchase, we weren't really in the market actively down as a result.

Chris Giovanni - Goldman Sachs

Okay. And then, since the authorization expires at the end of this year, if you see more favorable trends in 4Q, is there the potential you could look to buyback some stock this quarter?

Floyd Chadee

The possibility is always again, it's -- it would have to depend on that consistent level of capital generation.

Operator

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

Bill Dezellem - Titan Capital Management

I would like to continue down the employment trends question, if I could. You had mentioned that versus the third quarter employment at your customers was down 1.6% and roughly flat sequentially. Would you please fill in the rest of the gaps for us in terms of the Q3, Q4, Q4 to Q1, 1 to 2 and help us understand the trending that has been taking place offline?

Greg Ness

Sure Bill. We can provide some real detailed information there for you. Jeff has agreed to take it offline with you and have the discussion privately.

Bill Dezellem - Titan Capital Management

And then, I will look forward to that Jeff. And one other question is that, if we go back a year or so ago, I think you even reiterated it here today that you did see a correlation between claims incidents and the employment trends at individual customers. Are you still seeing that today or has that correlation started to blur?

Jim Harbolt

You know, Bill, well I jumped around a little bit quarter-to-quarter, we have continued to see that same trend that we identified earlier.

Operator

Thank you. Our next question comes from the line of Ryan Krueger with Dowling & Partners. Please proceed with your question.

Ryan Krueger - Dowling & Partners

I sill have a follow-up. Last year in the fourth quarter, I believe you had a $40 million true-up in terms of capital at the insurance subs for a lower discount rate on the pension plan. You can give me where interest rates stand today, is that something we should take a note again this year?

Floyd Chadee

So, with our pension plan over the long-term you do have the potential for changes and in that liability. So and that is something we always look at in the fourth quarter. At this point, we're not prepared to give guidance around that. But I think that is something the all pension plans look at on a yearly basis.

Operator

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

John Nadel - Sterne Agee

Just couple of quick follow-ups. Floyd, was there anything unusual in the level of capitalized costs in the quarter?

Floyd Chadee

Nothing that isn't just directly correlated with the business, so you'll see depending on the sales of the business and the DART capitalization that's just related to sales in different parts of the business but other than that nothing unusual.

John Nadel - Sterne Agee

Okay. Thanks. And then, thinking about the mortgage prepays and the bond calls prepayments I think, in total that was about 7 a little over $7 million, contribution to the quarter. Can you give us some help on -- how much -- what was the dollar amount like the principal amount that you need to think about reinvesting and what kind of risk there is to the given the drops in new money yields?

Floyd Chadee

Yeah. I mean, I don't have the principal amounts on those but the actual amount you're right was about $7.5 million largely, most of it's tied to mortgage prepayments about one out of that seven being tied to bonds. The number that you -- in this as you would imagine, in this environment of low interest rate, you do get an ongoing sort of pattern of prepayments but it tends to be small in most quarters, more in the range of $1 million to $2 million, so this quarter was unusual.

John Nadel - Sterne Agee

Okay. And then, the last quick follow-up for you is, is there anything that we should adjust that you would suggest that we should adjust in our modeling to reflect any loss level of earnings that are now going to your reinsurance counterparty or just the cost that you obtain for this reinsurance transaction?

Floyd Chadee

Yeah. I mean the numbers are similar to what we would have told you before. So when we did the original deal, the cost, the net cost on our GAAP income statement would be about a $1 million. So, you can think about doubling that, a little more than double and that's really the cost of this reinsurance transaction.

John Nadel - Sterne Agee

Okay. So, we don't see actual reduction in premiums or anything along those lines, it's just an added operating expense, I guess?

Floyd Chadee

Yeah, that's correct. That's the GAAP treatment.

Operator

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

Mark Finkelstein - Evercore Partners

Two quick follow-ups. Just going a little bit back to Tom Gallagher's question, I appreciate you don't want to give kind of detailed persistency numbers till year end. But it is just getting late in the year, you've given some color on the numbers; I have to appreciate that not a lot cases are the same. But I guess I would ask the question this why, if you look at the persistency in '11 and '10 for that matter is kind of 88.7, 88.8 so kind of trending in that 88.5 to 89 range. If you go back to 2008/'09 it was in that 83, 84 range. Would you be surprised if you finished 2011 and the persistency number was below that level that you saw in 2008 and 2009?

Greg Ness

Lets see. Jim you want to take that.

Jim Harbolt

I think we would be surprised if that number went below that.

Mark Finkelstein - Evercore Partners

Okay.

Jim Harbolt

Mark it might be worthwhile just to remind folks too, that when we take a look at the revenue growth, we're talking about sales, persistency, and organic growth. And when we talk about organic growth, we're talking about employment levels as well as wages as well as agent of the blocks. So there is lot of factors going through there. I can also tell you that our price increases contributed to premiums, as well.

Mark Finkelstein - Evercore Partners

Right, okay. And then just finally Floyd, and I apologize if you already addressed this, are we done with these surplus relief treaties on the block or is there more capacity and is this going to be an ongoing notwithstanding reserve build on future claims but just on what -- where we are today, have you exhausted all the capacity?

Floyd Chadee

Well, in terms of I mean we've always said that the balance sheet is very conservative. So we have a very strong balance sheet and we will proceed with caution in terms of looking at that balance sheet. We have not pushed our balance sheet generally as aggressively as the rest of the industry as other entities within the industry have done. This has been a good decision; because we have not seen the need to reverse sort of due high reserve increases on our balance sheet. So, we continue to look at our balance sheets and while there is nothing on the horizon that I can, I would talk about now and we continue to look at our balance sheet.

Operator

Thank you. Our last question today is a follow-up from Suneet Kamath of UBS. Please proceed with your question.

Suneet Kamath - UBS

Thanks so much for the follow-up. Just on the recoveries again, sorry to try to beat a dead horse here, but can you just give us a sense of sort of how those recoveries came in over the course of 3Q, it was more front end or back end loaded or pretty much even across the quarter. And then relatedly, can you give us a peak in terms of what you're seeing in 4Q already I know it's early days, but any sense of whether or not the trend that you saw in 3Q are persisting into 4Q would be helpful? Thanks.

Greg Ness

Dan?

Dan McMillan

Suneet, I can appreciate the question. Unfortunately I can't provide a whole lot of color there. The intraquarter trend would be more reliable, I think than the quarterly number. And obviously we're not going to push into fourth quarter and provide any picture there yet so. It's one that we monitor closely and it's going to -- it's something that we would jump around and we'll predict as going to jump around next quarter too.

Jeff Hallin

Okay I would like to turn the call over to Greg for some closing remarks.

Greg Ness

Thanks, Jeff. As we conclude this call, I would like to leave you with a couple of thoughts. First, we are very pleased with our results for this quarter. Secondly, we are making good progress with the pricing actions that we're taking to address the continued elevated group long-term disability claims incidents and the low interest rate environment.

Like others in the industry, we will face the headwinds of continued low interest rates and the sluggish economy. Our results would demonstrate the value of our expertise in underwriting discipline. However, we expect our earnings will continue to be somewhat uneven when measured on a quarterly basis. We remain confident in both our ability and our resolve to generate superior long-term results for shareholders. Thanks for listening to our third quarter earnings call. Have a great afternoon.

Jeff Hallin

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 October 26th. To listen to this call, you can dial 877-660-6853 and enter the conference identification number400487. A replay of today's webcast will also be available at www.stancorpfinancial.com. Thank you.

Operator

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

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