StanCorp Financial Group Inc.’s (SFG) fourth-quarter 2014 operating net earnings of $1.42 per share outperformed the Zacks Consensus Estimate by 5.2%. Earnings declined 47% year over year due to lower premiums and a decline in net investment income. However, lower share count due to repurchased shares limited the downside.
Including after-tax net capital losses of 10 cent a share, net earnings of StanCorp came in at $1.32 per share in the fourth quarter, down 9.5% year over year.
Operational Update
StanCorp’s total revenue in the quarter amounted to $703 million, down 2.5% year over year. This was due to lower premiums (down 2.4% year over year) and lower net investment income (down 4.6% year over year) that offset higher administrative fees (5.6% increase year over year).
Total benefits and expenses of StanCorp came in at $622.9 million, creeping up 0.2% year over year. Higher operating expense and commission and bonus were responsible for the increase.
Full-Year Review
Operating income came in at $5.25 per share, surpassing the Zacks Consensus Estimate by 1.3% but declining 1.7% year over year.
Net income, including capital losses of 20 cents per share, was $5.05 per share, down 1.6% year over year.
Revenues were $2.7 billion, down about 7% year over year.
Segment Update
Insurance Services reported a pre-tax income of $69 million for the fourth quarter of 2014, down 18% year over year. The downside was due to soft performance at employee benefits.
Employee benefits premiums declined 3.5% year over year to $479 million due to lower sales. However, individual disability insurance premiums increased 6.8% year over year to $51.8 million.
Sales from employee benefits increased 14% year over year to $79.3 million in the quarter owing to an increase in proposal activity.
Employee benefits benefit ratio decreased 130 basis points to 77.4% while the same increased 250 basis points to 60.0% for individual disability.
The Asset Management business reported a pre-tax income of $18.7 million, down 4.1% year over year.
Assets under administration were $26.53 billion as of Dec 31, 2014, up 7.4% from $24.70 billion as of Dec 31, 2013. It largely reflected higher equity values and favorable cash flows for retirement plan assets under administration.
During the quarter, StanCorp Mortgage Investors actualized $256.8 million of commercial mortgage loans, higher than $251.2 million in the comparable year-ago quarter.
The Other segment registered a pre-tax loss of $14.4 million, wider than $11.0 million loss incurred in the year-ago quarter.
Financial Update
As of Dec 31, 2014, StanCorp’s investment portfolio comprised approximately 56.8% fixed maturity securities, 38.8% commercial mortgage loans, 1.8% cash and cash equivalents, and 2.6% real estate and other invested assets. The overall weighted-average credit rating of the fixed maturity securities portfolio assigned by Standard and Poor’s was “A-”.
As of Dec 31, 2014, cash and cash equivalents for StanCorp were $251.1 million, 47% lower than $379.3 million as of Dec 31, 2013. Long-term debt of StanCorp was $504.3 million as of Dec 31, 2014, lowering from $551.9 million as of 2013 end.
Book value per share of StanCorp as of Dec 31, 2014 was $48.90, up 6.9% from $45.37 as of Dec 31, 2013.
Dividend and Share Repurchase Update
In the quarter, StanCorp paid an annual dividend of $54.7 million or $1.30 per share, representing a year-over-year increase of 18.2% increase. This represents the fifteenth straight year of annual dividend increase.
In fourth-quarter 2014, StanCorp purchased 0.5 million shares for $27.9 million, taking the full-year tally to 2.4 million shares repurchased for $147 million. It has 2 million shares remaining under its authorization.
Guiding 2015
StanCorp expects 2015 operating income in line with the 2014 level.
Employee benefits premiums are estimated to be flat with 2014 with benefit ratio between 77% and 79%.
A low interest rate environment will continue to dampen investment results.
StanCorp estimates additional expense of $10.5 million or 16 cents per due to the adoption of a new mortality table for retirement plans.
Share buyback will be the same as in 2014.
While the effective income tax rate will range from 26% to 27%, adoption of the accounting guidance for affordable housing tax credit investments will lower net income by 30 cents per share.
Zacks Rank
StanCorp currently carries a Zacks Rank #2 (Hold). Investors interested in life insurers can also consider China Life Insurance Co. Ltd. (LFC), Lincoln National Corporation (LNC) and Protective Life Corporation (PL). While China Life sports a Zacks Rank #1 (Strong Buy), Lincoln and Protective Life share the Zacks Rank with StanCorp.
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