StanCorp Financial Group, Inc. (NYSE: SFG) today reported net
income of $41.9 million, or $0.96 per diluted share for the second
quarter of 2014, compared to $57.7 million, or $1.30 per diluted
share for the second quarter of 2013. After-tax net capital losses
were $0.3 million for the second quarter of 2014, compared to $1.6
million for the second quarter of 2013.
Net income excluding after-tax net capital losses was $0.97 per
diluted share for the second quarter of 2014, compared to $1.34 per
diluted share for the second quarter of 2013 (see discussion of
non-GAAP financial measures below). Operating expenses for the
second quarter of 2013 reflected savings of $10.3 million or $0.15
per diluted share due to an amendment of the Company’s
postretirement medical plan that did not recur for the second
quarter of 2014. Excluding the operating expense savings for the
second quarter of 2013, the decrease in net income was primarily
due to less favorable claims experience in Employee Benefits and
Individual Disability for the second quarter of 2014, partially
offset by a lower effective income tax rate.
“Our second quarter results reflected less favorable claims
experience in Insurance Services,” said Greg Ness, chairman,
president and chief executive officer. “Despite the less favorable
claims experience this quarter, the benefit ratio for Employee
Benefits improved for the first six months of 2014 compared to the
same period of 2013. At the same time, we are pleased with our
record Asset Management earnings, our balance sheet strength and
capital management.”
Year-to-Date
Net income was $92.0 million, or $2.09 per diluted share for the
first six months of 2014, compared to $104.5 million, or $2.35 per
diluted share for the first six months of 2013. After-tax net
capital losses were $1.0 million for the first six months of 2014,
compared to $2.6 million for the first six months of 2013.
Net income excluding after-tax net capital losses for the first
six months of 2014 was $2.11 per diluted share, compared to $2.41
per diluted share for the first six months of 2013. The decrease
was primarily due to lower operating expenses for the first six
months of 2013, which reflected savings of $20.6 million or $0.30
per diluted share due to an amendment of the Company’s
postretirement medical plan that did not recur for the first six
months of 2014.
Business Segments
Insurance Services
Employee Benefits
Employee Benefits reported income before income taxes of $32.7
million for the second quarter of 2014, compared to $46.6 million
for the second quarter of 2013. The decrease was primarily due to
less favorable claims experience, lower net investment income and
lower premiums.
Employee Benefits premiums decreased 4.0% from $487.0 million
for the second quarter of 2013 to $467.3 million for the second
quarter of 2014. The decrease was primarily due to lower Employee
Benefits sales compared to prior periods.
Employee Benefits annualized new sales were $21.0 million for
the second quarter of 2014, compared to $25.2 million for the
second quarter of 2013. The decrease was primarily due to
competition in the large case market. The second quarter has
historically been the Company’s lightest sales quarter of the
year.
The benefit ratio for Employee Benefits, measured as benefits to
policyholders and interest credited as a percentage of premiums,
was 82.0% for the second quarter of 2014, compared to 80.4% for the
second quarter of 2013. The increase in the benefit ratio for the
second quarter of 2014 was primarily due to less favorable claims
experience for the Company’s long term disability business as a
result of a higher-than-normal number of large claims for the
second quarter of 2014. The benefit ratio can fluctuate widely from
quarter to quarter and has historically been higher in the first
half of the year.
The discount rate used for newly established, long term
disability claim reserves was 4.00% for the second quarter of 2014,
compared to 3.75% for the second quarter of 2013. A 25 basis point
increase or decrease in the discount rate currently results in a
corresponding increase or decrease in quarterly pre-tax income of
approximately $2 million.
The Company’s new money investment rate was 4.56% for the second
quarter of 2014, compared to 4.16% for the second quarter of 2013.
The 12-month reserve interest margin between the Company’s new
money rate and average reserve discount rate was 57 basis points
for the second quarter of 2014, compared to 53 basis points for the
second quarter of 2013.
Individual Disability
Individual Disability reported income before income taxes of
$7.0 million for the second quarter of 2014, compared to $14.8
million for the second quarter of 2013. The decrease was primarily
due to less favorable claims experience.
Individual Disability premiums were $48.9 million for the second
quarter of 2014, compared to $46.7 million for the second quarter
of 2013.
The benefit ratio for Individual Disability was 79.3% for the
second quarter of 2014, compared to 63.4% for the second quarter of
2013. Due to the relatively small size of the Individual Disability
business, the benefit ratio generally fluctuates more on a
quarterly basis and tends to be more stable when measured on an
annual basis.
Asset Management
Asset Management reported income before income taxes of $22.0
million for the second quarter of 2014, compared to $20.7 million
for the second quarter of 2013. The increase was primarily due to
higher administrative fees as a result of the increase in assets
under administration. Commercial mortgage loan prepayment fee
revenues and bond call premiums added $2.7 million of income before
income taxes for the second quarter of 2014 and $1.4 million for
the second quarter of 2013. Income before income taxes also
increased $0.7 million for the second quarter of 2014 and $1.6
million for the second quarter of 2013 as a result of the change in
fair values of the hedging assets and liabilities related to the
Company’s equity-indexed annuity product.
Assets under administration, which include assets related to
retirement plans, individual fixed annuities, private client wealth
management and commercial mortgage loans managed for third-party
investors, increased 14.0% to $26.03 billion at June 30, 2014 from
$22.83 billion at June 30, 2013, primarily reflecting higher equity
values and positive cash flows for retirement plan assets under
administration.
Commercial mortgage loan originations were $372.0 million for
the second quarter of 2014, compared to $364.1 million for the
second quarter of 2013.
Other
The Other category includes the return on capital not allocated
to the product segments, holding company expenses, operations of
certain unallocated subsidiaries, interest on debt, unallocated
expenses, net capital gains and losses primarily related to the
disposition or impairment of the Company’s invested assets and
adjustments made in consolidation.
The Other category reported a loss before income taxes of $10.4
million for the second quarter of 2014, compared to $3.6 million
for the second quarter of 2013. Net capital losses were $0.5
million for the second quarter of 2014, compared to $2.6 million
for the second quarter of 2013. The loss before income taxes
excluding net capital losses was $9.9 million for the second
quarter of 2014, compared to $1.0 million for the second quarter of
2013.
Operating expenses for the second quarter of 2013 reflected
savings of $10.3 million due to an amendment of the Company’s
postretirement medical plan that did not recur for the second
quarter of 2014.
Cash and Investments
At June 30, 2014, the Company’s total cash and investments
consisted of 55.3% fixed maturity securities, 40.4% commercial
mortgage loans, 2.5% other invested assets and real estate, and
1.8% cash and cash equivalents. The overall weighted-average credit
rating of the fixed maturity securities portfolio was A- (Standard
& Poor’s) at June 30, 2014.
At June 30, 2014, commercial mortgage loans in the Company’s
investment portfolio totaled $5.45 billion on approximately 6,500
commercial mortgage loans. The average loan balance retained by the
Company in the portfolio was $0.8 million. Commercial mortgage
loans more than 60 days delinquent were 0.26% of the portfolio
balance at June 30, 2014, compared to 0.23% at June 30, 2013.
Book Value
The Company’s book value per share increased 11.9% from $47.04
at June 30, 2013, to $52.66 at June 30, 2014. Accumulated other
comprehensive income (“AOCI”) increased $98.6 million from $127.3
million at June 30, 2013 to $225.9 million at June 30, 2014,
primarily due to an increase in net unrealized gains in the
Company’s fixed maturity securities portfolio related to lower
market interest rates. The Company’s book value per share excluding
AOCI increased 7.3% from $44.16 at June 30, 2013, to $47.40 at June
30, 2014 (see discussion of non-GAAP financial measures below).
Capital Management
For the first six months of 2014, the Company deployed
approximately $133 million of capital through the repurchase of
shares and debt.
Share Repurchases
For the second quarter of 2014, the Company repurchased 852,878
shares at a total cost of $51.3 million, which reflects a volume
weighted-average price per share of $60.13.
For the first six months of 2014, the Company repurchased
1,406,078 shares at a total cost of $85.9 million, which reflects a
volume weighted-average price per share of $61.11.
At June 30, 2014, the Company had 2.9 million shares remaining
under its share repurchase authorization. Diluted weighted-average
shares outstanding were 43,710,063 for the second quarter of 2014,
compared to 44,398,120 for the second quarter of 2013.
Debt Repurchase
In the first quarter of 2014, the Company repurchased $47.1
million of its 6.90% junior subordinated debentures (“Subordinated
Debt”), which matures on June 1, 2067 and is non-callable prior to
June 1, 2017. The Company had $252.9 million of Subordinated Debt
outstanding at June 30, 2014.
Available Capital
The Company’s available capital was approximately $500 million
at June 30, 2014 and March 31, 2014. The income from its insurance
subsidiaries and capital generated from real estate sales for the
second quarter of 2014 were offset by share repurchases and an
allocation for expected annual interest and shareholder dividends.
Available capital includes capital at its insurance subsidiaries in
excess of the Company’s target risk-based capital (“RBC”) ratio of
300% and cash and capital at the holding company and non-insurance
subsidiaries. The RBC ratio was approximately 400% at June 30,
2014.
Non-GAAP Financial Measures
Financial measures that exclude after-tax net capital gains and
losses and AOCI are non-GAAP (Generally Accepted Accounting
Principles in the United States) measures. To provide investors
with a broader understanding of earnings, the Company provides net
income per diluted share excluding after-tax net capital gains and
losses, along with the GAAP measure of net income per diluted
share, because capital gains and losses are not likely to occur in
a stable pattern.
Net income return on average equity excluding after-tax net
capital gains and losses from net income and AOCI from equity is
furnished along with the GAAP measure of net income return on
average equity because management believes providing both measures
gives investors a broader understanding of net income return on
average equity. Measuring net income return on average equity
without AOCI excludes the effect of market value fluctuations of
the Company’s fixed maturity securities associated with changes in
interest rates and other market data. Management believes that
measuring net income return on average equity without AOCI is
important to investors because the turnover of the Company’s
portfolio of fixed maturity securities may not be such that
unrealized gains and losses reflected in AOCI are ultimately
realized. Furthermore, management believes exclusion of AOCI
provides investors with a better measure of return.
About StanCorp Financial Group, Inc.
StanCorp Financial Group, Inc., through its subsidiaries
marketed as The Standard — Standard Insurance Company, The Standard
Life Insurance Company of New York, Standard Retirement Services,
StanCorp Mortgage Investors, StanCorp Investment Advisers, StanCorp
Real Estate and StanCorp Equities — is a leading provider of
financial products and services. StanCorp’s subsidiaries offer
group and individual disability insurance, group life and
accidental death and dismemberment insurance, group dental and
group vision insurance, absence management services, retirement
plans products and services, individual annuities, origination and
servicing of fixed-rate commercial mortgage loans, and investment
advice. For more information about StanCorp Financial Group, Inc.,
visit its investor relations website at
www.stancorpfinancial.com.
Conference Call
StanCorp management will hold an investor and analyst conference
call on July 24, 2014, at noon Eastern time (9:00 a.m. Pacific
time) to review StanCorp’s second quarter 2014 results.
To listen to the live webcast of this conference call, visit
www.stancorpfinancial.com. Windows Media PlayerTM will be required
to listen to the webcast. A webcast replay will be available
starting approximately two hours after the original broadcast. The
replay will be available through September 12, 2014.
A telephone replay of the conference call will also be available
approximately two hours after the conference call by dialing (877)
660-6853 or (201) 612-7415 and entering the conference
identification number 13584034. The telephone replay will be
available through August 1, 2014.
Forward-Looking Information
Some of the statements contained in this earnings release,
including estimates, projections, statements related to business
plans, strategies, objectives and expected operating results and
the assumptions upon which those statements are based, are
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act. Forward-looking statements also include,
without limitation, any statement that includes words such as
“expects,” “anticipates,” “intends,” “plans,” “believes,”
“estimates,” “seeks,” “will be,” “will continue,” “will likely
result” and similar expressions that are predictive in nature or
that depend on or refer to future events or conditions. The
Company’s forward-looking statements are not guarantees of future
performance and involve uncertainties that are difficult to
predict. They involve risks and uncertainties which may cause
actual results to differ materially from the forward-looking
statements. The risks and uncertainties are detailed in reports
filed by StanCorp with the Securities and Exchange Commission,
including Forms 10-Q and 10-K.
As a provider of financial products and services, the Company’s
actual results of operations may vary significantly in response to
economic trends, interest rates, investment performance, claims
experience, operating expenses and pricing. Given these
uncertainties or circumstances, investors are cautioned not to
place undue reliance on forward-looking statements as a predictor
of future results. The Company assumes no obligation to publicly
update or revise any forward-looking statements including annual
guidance, whether as a result of new information, future events or
otherwise.
The following factors could cause the Company’s results to
differ materially from management expectations suggested by
forward-looking statements:
- Growth of sales, premiums, annuity
deposits, cash flows, assets under administration including
performance of equity investments in the separate account, gross
profits and profitability.
- Availability of capital required to
support business growth and the effective use of capital, including
the ability to achieve financing through debt or equity.
- Changes in liquidity needs and the
liquidity of assets in its investment portfolios, including the
ability to pledge collateral as required.
- Performance of business acquired
through reinsurance or acquisition.
- Changes in financial strength and
credit ratings.
- Changes in the regulatory environment
at the state or federal level.
- Changes in accounting standards,
practices or policies.
- Findings in litigation or other legal
proceedings.
- Intent and ability to hold investments
consistent with its investment strategy.
- Receipt of dividends from, or
contributions to, its subsidiaries.
- Adequacy of the diversification of risk
by product offerings and customer industry, geography and size,
including concentration of risk, especially inherent in group life
products.
- Adequacy of asset-liability
management.
- Events of terrorism, natural disasters
or other catastrophic events, including losses from a disease
pandemic.
- Benefit ratios, including changes in
claims incidence, severity and recovery.
- Levels of customer persistency.
- Adequacy of reserves established for
future policy benefits.
- The effect of changes in interest rates
on reserves, policyholder funds, investment income, bond call
premiums and commercial mortgage loan prepayment fees.
- Levels of employment and wage growth
and the impact of rising benefit costs on employer budgets for
employee benefits.
- Competition from other insurers and
financial services companies, including the ability to
competitively price its products.
- Ability of reinsurers to meet their
obligations.
- Availability, adequacy and pricing of
reinsurance and catastrophe reinsurance coverage and potential
charges incurred.
- Achievement of anticipated levels of
operating expenses.
- Adequacy of diversification of risk
within its fixed maturity securities portfolio by industries,
issuers and maturities.
- Adequacy of diversification of risk
within its commercial mortgage loan portfolio by borrower, property
type and geographic region.
- Credit quality of the holdings in its
investment portfolios.
- The condition of the economy and
expectations for interest rate changes.
- The effect of changing levels of bond
call premiums, commercial mortgage loan prepayment fees and
commercial mortgage loan participation levels on cash flows.
- Experience in delinquency rates or loss
experience in its commercial mortgage loan portfolio.
- Adequacy of commercial mortgage loan
loss allowance.
- Concentration of commercial mortgage
loan assets collateralized in certain states such as
California.
- Environmental liability exposure
resulting from commercial mortgage loan and real estate
investments.
STANCORP FINANCIAL GROUP, INC. UNAUDITED
CONSOLIDATED STATEMENTS OF INCOME (Dollars in
millions-except per share data)
Three Months Ended
Six Months Ended June 30, June 30, 2014
2013 2014 2013
Revenues: Premiums: Insurance Services $ 516.2 $ 533.7 $ 1,023.7 $
1,066.9 Asset Management 3.0 1.4
5.6 4.4 Total premiums 519.2
535.1 1,029.3 1,071.3
Administrative fees: Insurance Services 4.3 3.5 8.5 7.0 Asset
Management 33.1 31.5 65.3 61.4 Other (4.8 ) (4.6 )
(9.6 ) (9.3 ) Total administrative fees 32.6
30.4 64.2 59.1 Net
investment income: Insurance Services 75.1 79.9 150.6 161.9 Asset
Management 72.2 70.7 141.7 144.0 Other 2.5 3.5
8.1 7.4 Total net investment
income 149.8 154.1 300.4
313.3 Net capital losses:
Total other-than-temporary impairment
losses on fixed maturity securities—available-for-sale
(0.1 ) (0.3 ) (0.1 )
(0.6
)
All other net capital losses (0.4 ) (2.3 )
(1.5 ) (3.6 ) Total net capital losses (0.5 )
(2.6 ) (1.6 ) (4.2 ) Total revenues
701.1 717.0 1,392.3
1,439.5 Benefits and expenses: Benefits to
policyholders 426.2 424.1 827.3 865.9 Interest credited 40.6 40.3
84.1 86.9 Operating expenses 115.3 104.4 228.4 209.5 Commissions
and bonuses 49.7 50.8 101.5 104.6 Premium taxes 8.1 9.1 17.2 18.6
Interest expense 7.9 8.6 16.3 17.1
Net decrease (increase) in deferred
acquisition costs, value of business acquired and other intangible
assets
2.0 1.2 0.8 (1.9 ) Total benefits and expenses 649.8
638.5 1,275.6 1,300.7
Income (loss) before income taxes: Insurance Services
39.7 61.4 96.4 110.2 Asset Management 22.0 20.7 38.4 37.9 Other
(10.4 ) (3.6 ) (18.1 ) (9.3 ) Total
income before income taxes 51.3 78.5 116.7 138.8 Income taxes
9.4 20.8 24.7 34.3
Net income $ 41.9 $ 57.7 $ 92.0
$ 104.5 Net income per common share: Basic $ 0.97 $
1.30 $ 2.11 $ 2.36 Diluted 0.96 1.30 2.09 2.35 Weighted-average
common shares outstanding: Basic 43,311,156 44,257,095 43,602,275
44,341,158 Diluted 43,710,063 44,398,120 44,027,747 44,445,155
STANCORP FINANCIAL GROUP, INC. UNAUDITED
CONSOLIDATED BALANCE SHEETS (Dollars in millions)
June 30,
December 31, 2014 2013
ASSETS
Investments: Fixed maturity securities—available-for-sale
(amortized cost of $7,016.4 and $6,811.9) $ 7,468.4 $ 7,120.5
Commercial mortgage loans, net 5,453.3 5,405.1 Real estate, net
49.2 65.7 Other invested assets 290.4 196.5 Total
investments 13,261.3 12,787.8 Cash and cash equivalents 237.7 379.3
Premiums and other receivables 122.0 118.2 Accrued investment
income 105.9 106.8 Amounts recoverable from reinsurers 986.1 988.1
Deferred acquisition costs, value of business acquired and other
intangible assets, net 368.0 371.3 Goodwill 36.0 36.0 Property and
equipment, net 82.2 84.7 Other assets 124.0 127.9 Separate account
assets 7,133.5 6,393.2 Total assets $ 22,456.7
$ 21,393.3
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Liabilities: Future policy benefits and claims $ 5,855.7 $
5,846.9 Other policyholder funds 6,204.6 6,051.6 Deferred tax
liabilities, net 119.1 64.7 Short-term debt 1.9 1.5 Long-term debt
504.3 551.9 Other liabilities 375.7 330.7 Separate account
liabilities 7,133.5 6,393.2 Total liabilities
20,194.8 19,240.5 Commitments and
contingencies Shareholders’ equity: Preferred stock,
100,000,000 shares authorized; none issued --- ---
Common stock, no par, 300,000,000 shares
authorized; 42,949,566 and 44,126,389 shares issued and outstanding
at June 30, 2014 and December 31, 2013, respectively
--- 68.0 Accumulated other comprehensive income 225.9 134.7
Retained earnings 2,036.0 1,950.1 Total
shareholders' equity 2,261.9 2,152.8 Total
liabilities and shareholders’ equity $ 22,456.7 $ 21,393.3
STANCORP FINANCIAL GROUP, INC. UNAUDITED
STATISTICAL AND OPERATING DATA AT OR FOR THE PERIODS
INDICATED (Dollars in millions-except per share data)
Three Months Ended Six Months Ended
June 30, June 30, 2014
2013 2014 2013 Benefit
ratio: % of total revenues: Employee Benefits (including
interest credited) 71.9 % 70.2 % 71.2 % 71.6 % Individual
Disability 62.6 49.6 52.6 48.9
% of total premiums: Employee
Benefits (including interest credited) 82.0 % 80.4 % 81.4 % 82.1 %
Individual Disability 79.3 63.4 66.8 62.6
Reconciliation
of non-GAAP financial measures: Net income $ 41.9 $ 57.7 $ 92.0
$ 104.5 After-tax net capital losses (0.3 ) (1.6 )
(1.0 ) (2.6 ) Net income excluding after-tax net
capital losses $ 42.2 $ 59.3 $ 93.0 $ 107.1
Net capital losses $ (0.5 ) $ (2.6 ) $ (1.6 ) $ (4.2
) Tax benefit on net capital losses (0.2 ) (1.0 )
(0.6 ) (1.6 ) After-tax net capital losses $ (0.3 ) $
(1.6 ) $ (1.0 ) $ (2.6 ) Net income per diluted common
share: Net income $ 0.96 $ 1.30 $ 2.09 $ 2.35 After-tax net capital
losses (0.01 ) (0.04 ) (0.02 ) (0.06 )
Net income excluding after-tax net capital losses $ 0.97 $
1.34 $ 2.11 $ 2.41 Shareholders' equity
$ 2,261.9 $ 2,077.0 Accumulated other comprehensive income
225.9 127.3
Shareholders' equity excluding accumulated
other comprehensive income
$ 2,036.0 $ 1,949.7 Net income return on average equity 8.3
% 9.8 %
Net income return on average equity
(excluding accumulated other comprehensive income)
9.1 11.0
Net income return on average equity
(excluding after-tax net capital losses and accumulated other
comprehensive income)
9.2 11.2
Statutory data - insurance subsidiaries:
Net gain from operations before federal
income taxes and realized capital gains (losses)
$
48.3
$ 66.4 $ 98.9 $ 95.3
Net gain from operations after federal
income taxes and before realized capital gains (losses)
40.4 42.3 81.3 66.7
June 30, December 31,
2014 2013 Capital and surplus $ 1,358.9 $
1,359.0 Asset valuation reserve 132.2 127.5
StanCorp Financial Group, Inc.Investor Relations and Financial
MediaJeff Hallin, 971-321-6127Vice President, Investor Relations
and Capital Marketsjeff.hallin@standard.comorGeneral MediaBob
Speltz, 971-321-3162Senior Director, Public
Affairsbob.speltz@standard.com
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