September 29, 2017 / 6:37 PM / 3 months ago

Fitch Affirms StanCorp's Ratings; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, September 29 (Fitch) Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings of Standard Insurance Company and Standard Life Insurance Company of New York (collectively, The Standard), at 'A' (Strong) and the Issuer Default Rating (IDR) of StanCorp Financial Group, Inc. (SFG) at 'A-'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS The ratings consider SFG's status as a wholly owned subsidiary of Meiji Yasuda Life Insurance Company (MYL). MYL's IFS rating (A/Outlook Stable) is capped by Japan's Long-Term Local-Currency IDR (A/Outlook Stable) and is one notch below its unconstrained IFS rating of 'A+'. Fitch classifies SFG as a 'Very Important' subsidiary within the MYL enterprise and as such, following its acquisition by MYL in 2016, Fitch upgraded SFG's IDR one notch, reflecting its parent's unconstrained rating and considering its enhanced financial and capital resources. Fitch views SFG's standalone profile as in line with an 'A' IFS rating. The standalone view reflects SFG's strong competitive position in the group life and disability market, solid operating performance, very strong capitalization and concentrated investment portfolio. The ratings also consider the intense competitive landscape and challenging macroeconomic conditions, including persistently low interest rates and somewhat soft wage growth. The Stable Outlook reflects Fitch's view that, while SFG faces economic headwinds, including the prolonged low interest rate environment, its credit profile will continue to support the current rating. Despite soft wage growth, premium growth reflects solid persistency, rate actions and strong sales. Fitch views SFG's business profile as strong due to the low-risk nature of its products and its long operating track record and expertise in the group insurance market. Over recent periods, its earnings diversification has improved through the growth in its asset management segment. SFG's ratings are supported by its very strong capitalization. The Standard's RBC ratio was an estimated 386% as of 1H17. The ratio has declined over recent periods driven by growth in required capital, but remains strong on a risk-adjusted basis. The company's Prism capital model score was 'Very Strong' in 2016, which exceeds the current rating level. Fitch considers SFG's use of financial leverage to be moderate. The financial leverage ratio was 9% as of 1H17, reflecting purchase GAAP accounting and the resulting write-up of equity to MYL's purchase price. The company recently announced plans to redeem $253 million outstanding subordinated debentures, which Fitch expects to be funded with cash at the holding company or its revolving credit facility. Fitch views SFG's investment portfolio as strong. The company's risky asset ratio of 57% as of year-end 2016 was well below the life industry average, driven by its minimal exposure to alternative assets and equities. The ratio has increased over recent periods primarily due to the uptick in its asset leverage. The company targets an asset allocation of 60% in fixed maturities and 40% commercial mortgage loans. As of 1H17, commercial mortgage loans comprised 42% of its cash and invested assets, nearly four times the industry average. While Fitch considers SFG's commercial mortgage loan concentration and its increased liquidity risk relative to publicly traded bonds a credit concern, this is partially mitigated by management's expertise and experience and the portfolio's strong quality. Additionally, Fitch views a higher commercial mortgage allocation as complementary to SFG's long-duration and stable liability structure. The company enforces tight underwriting standards and its fairly diversified portfolio continues to perform well. Fitch considers SFG's earnings to be strong. Results were very stable over the three-year period ending in 2015. SFG's pre-tax operating income declined 12% in 2016 to $284 million driven by an uptick in its employee benefits and individual disability benefit ratios as a result of less favorable claims experience. Statutory profitability declined in 1H17 from the prior-year period due to an increase in the employee benefits segment's benefit ratio, and elevated operating expenses, commissions and bonuses RATING SENSITIVITIES The Standard's IFS rating could be upgraded one notch above MYL's IFS rating if its standalone credit profile improved to 'A+'. As a 'Very Important' subsidiary of MYL, The Standard's IFS rating could also be upgraded in conjunction with an upgrade of the parent. In the event of a one-notch downgrade of the parent's IFS rating or SFG's standalone credit profile to 'A-', The Standard could maintain its current 'A' IFS rating per Fitch's criteria. SFG's holding company ratings are notched based on MYL's unconstrained IFS rating of 'A+', implying a two-notch upgrade of MYL's IFS rating would be needed to upgrade SFG's holding company ratings. In the event of a one-notch downgrade of MYL's ratings, Fitch could affirm SFG's holding company ratings. However, if MYL's ratings were downgraded by more than one notch based on its own credit quality, or deterioration in Japan's sovereign rating, SFG's holding company ratings would also likely be lowered in conjunction with its parent. Fitch has affirmed the following with a Stable Outlook StanCorp Financial Corp. --IDR at 'A-'; --$250 million 5.000% senior notes due Aug. 15, 2022 at 'BBB+'; --60-year $253 million junior subordinated debt due June 1, 2067 at 'BBB-'. Standard Insurance Company --IFS at 'A'. Standard Life Insurance Co. of New York --IFS at 'A'. Contact: Primary Analyst Jamie R. Tucker, CPA Associate Director +1-212-612-7856 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Dafina M. Dunmore, CFA Director +1-312-368-3136 Committee Chairperson Keith M. Buckley, CFA Managing Director +1-312-368-3211 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. 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