MET MetLife Inc

StanCorp Financial Group (SFG) reported third-quarter 2011 earnings of 96 cents per share from continuing operations, striding ahead of the Zacks Consensus Estimate of 66 cents. However results were 31% below $1.39 earned in the prior-year quarter. Net income from continuing operations for the quarter was $42.7 million, dropping 34% from $64.8 million reported in third-quarter 2010.

StanCorp benefited from an after-tax net capital gain of $4.8 million or 11 cents per share in the quarter under review. Including the one-time gain, StanCorp reported a net income of $47.5 million or $1.07 per share compared with $46.2 million or 99 cents in the third quarter of 2010. The prior-year quarter included after-tax capital losses of $18.6 million or 40 cents per share.

The quarter experienced higher benefit ratio in the Insurance Services segment, primarily due to higher claims incidence in its group long-term disability insurance business.

Operational Performance

StanCorp’s total revenue in the third quarter 2011 was $723.3 million, up 5.6% from $685 million in the year-ago period. A combination of increased premiums, administrative fees and investment income led to the overall climb. Revenue was almost in line with the Zacks Consensus estimate.

Total benefit and expense during the quarter increased 6.7% year over year to $656.6 million. The increase may primarily be attributable to the increase in benefits to policyholders, higher operating expenses, higher commissions and bonuses and higher premium taxes.

Segment Update

Insurance Services: Premiums from this business totaled $538.3 million in the third quarter of 2011, up 4.7% year over year. Higher premiums from group insurance and individual disability insurance fueled the overall premium increase.

Sales from the group insurance business in the third quarter increased 6.7% to $63.7 million from $59.7 million in the year-ago period.

Group insurance benefit ratio in the quarter was 80.7%, up 520 basis points year over year, while individual disability insurance benefit ratio was 66.3%, up 820 basis points year over year.

Pretax income in third-quarter 2011 totaled $65.6 million, down 30.4% year over year. The decrease was mainly attributable to lower favorable claims in the group long-term disability insurance business.

Asset Management: Third-quarter 2011 pretax income declined 17.3% to $12.4 million from $15.0 million in third-quarter 2010. The decrease was mainly driven by lower administrative fee revenues due to the decline in assets under administration, coupled with impact of lower interest rates on the hedges used for the company’s equity-indexed annuity product.

Assets under administration were $20.17 billion as of September 30, 2011, a decrease of 4.6% from $21.13 billion as of September 30, 2010.

During the quarter, StanCorp Mortgage Investors originated $217.7 million of commercial mortgage loans, substantially lower than $330.4 million in the prior-year quarter.

StanCorp’s investment portfolio, as of September 30, 2011, consisted of approximately 57% fixed maturity securities, 41% commercial mortgage loans and 2% real estate. The overall weighted-average credit rating of the fixed maturity securities portfolio assigned by Standard & Poor’s was “A”.

Share Repurchases

During third-quarter 2011, StanCorp spent $9.7 million for repurchasing 0.4 million shares at an average price of $27.16. As of September 30, StanCorp had approximately 3.1 million shares remaining under its repurchase authorization.

Balance Sheet

StanCorp ended the quarter with cash and cash equivalents of $172.2 million, up 13.3% from 2010 end. Long-term debt was $300.8 million at quarter end compared with $551.9 million at 2010 end, reflecting a decline of 45.5%.

Book value per share as of September 30, 2011 was $45.97, up 5.7% from $43.49 as of September 30, 2010.

Our Take

The positives for StanCorp include a better performing Asset Management segment, premium growth, continued good investment performance, conservative underwriting practices, positive recommendations from credit rating agencies, focus on increasing shareholder value and a strong capital position.

However, the company continues to expect the group disability insurance claims incidence to remain high.

We retain our Underperform recommendation on StanCorp Financial. The quantitative Zacks #5 Rank (short-term Strong Sell rating) for StanCorp indicates downward pressure on the stock over the near term.

Headquartered in Portland, Oregon, StanCorp Financial Group is one of the largest providers of employee benefits products and services in the U.S. The company operates across the country, with a dominant position in western U.S. It competes with Unum Group (UNM), MetLife, Inc. (MET) and Principal Financial Group Inc. (PFG).

 
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