StanCorp Financial Group (SFG) reported first-quarter 2011 earnings of 76 cents per share from continuing operations, in line with the Zacks Consensus Estimate. Earnings also fell behind the year-ago result of $1.13. Net income from continuing operations for the quarter was $35.2 million, down 35% from $54.1 million reported in first-quarter 2010.
StanCorp incurred an after-tax net capital loss of $1.5 million or 3 cents per share in the quarter under review. Including the one-time loss, StanCorp reported a net income of $33.7 million or 73 cents per share compared with $49.7 million or $1.04 in the first quarter of 2010. The prior year quarter included after-tax capital losses of $4.4 million or 9 cents per share.
The quarter experienced higher level of claims incidence in group long term disability business resulting in soft performance.
Operational Performance
StanCorp’s total revenue in the first quarter 2011 was $717.7 million, up 8% from $678.7 million in the year-ago period. Results surpassed the Zacks Consensus Estimate of $711 million. A combination of increased premiums, administrative fees and investment income led to the overall climb.
Total benefit and expense during the quarter increased 11% year-over-year to $667 million. The increase may primarily be attributable to an increase in benefits to policyholders, higher operating expenses and higher commissions and bonuses.
Segment Update
Insurance Services: Premiums from this business totaled $530.5 million in the first quarter of 2011, up 4.8% 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 first quarter increased 5% to $160.3 million from $155.2 million in the year ago period.
Group insurance benefit ratio in the quarter was 84.2%, up 810 basis points year-over-year, while individual disability insurance benefit ratio was 57.2%, down 400 basis points year-over-year.
Pretax income in first-quarter 2011 totaled $46.5 million, down 41% year over year. The decrease was mainly attributable to lower favorable claims that group long term disability insurance business experienced in the quarter.
Asset Management: First-quarter 2011 pretax income decreased by 56% to $19.1 million from $12.2 million in first-quarter 2010. The increase was mainly driven by higher bond call premiums coupled with continued operating expense management.
Assets under administration were $21.96 billion as of March 31, 2011, a trifle higher than the year ago period.
During the quarter, StanCorp Mortgage Investors originated $196.3 million of commercial mortgage loans, substantially higher than $140.6 million in the prior-year quarter due to increase in commercial real estate market activities.
StanCorp’s investment portfolio, as of March 31, 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 first-quarter 2011, StanCorp spent $38.7 million for repurchasing 0.9 million shares at an average price of $45.45. As on March 31, StanCorp had approximately 1.5 million shares remaining under its repurchase authorization. The authorization will lapse on December 31, 2011.
Balance Sheet
StanCorp ended the quarter with cash and cash equivalents of $86.5 million, down 43% from 2009 end. Long-term debt declined slightly to $551.6 million at quarter end from $551.9 million at 2010 end.
Book value per share as of March 31, 2011 was $41.90, up 10% from $38.10 as of March 31, 2010.
Looking Into 2011
Based on the first quarter results, StanCorp remains apprehensive of attaining net income of $4.80-$5.10 per share.
Our Take
The positives for StanCorp include a better performing Asset Management segment, premium growth, sales strength, continued good investment performance, positive recommendations from credit rating agencies, focus on increasing shareholder value and conservative underwriting practices.
However, the company is exposed to a competitive environment, low interest rate environment and commercial mortgage loans. The quantitative Zacks #3 Rank (short-term Hold rating) for StanCorp indicates no clear directional 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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