StanCorp Financial Group (SFG) reported second quarter 2012 earnings of 51 cents per share, lagging the Zacks Consensus Estimate by 5 cents. Results were also 13.6% lower than 59 cents earned in the prior-year quarter. Net income for the quarter declined by 14.4% to $22.5 million, from $26.3 million reported in second quarter 2011.
The quarter experienced higher benefit ratio in the Insurance Services segment, largely due to less favorable claims experience in the group long-term disability business. However, this was somewhat offset by more favorable claims experience in the individual disability business and a lower income tax rate.
Including after tax capital loss of $2.5 million or 6 cents a share, the company reported net earnings of $20 million or 45 cents per share, comparing favorably with $17.8 million or 40 cents per share in the year-ago quarter. The year-ago period included after-tax capital loss of $8.5 million or 19 cents a share.
Operational Performance
StanCorp’s total revenue in the second quarter of 2012 was $725.3 million, up 2.7% from $706 million in the year-ago quarter. The improvement primarily stemmed from higher premiums and lower capital losses. Revenue also lagged the Zacks Consensus Estimate of $737 million.
Total benefit and expense during the quarter increased 3.1% year over year to $702.7 million. The upside was buoyed by the increase in benefits to policyholders and higher premium taxes.
Segment Update
Insurance Services: Premiums from this business totaled $546.5 million in the second quarter of 2012, up 2.0% year over year. Higher premiums from group insurance largely triggered the overall premium increase.
Sales from the group insurance business in the quarter decreased 41% to $22.3 million, largely attributable to pricing competition.
Group insurance benefit ratio in the quarter was 88.5%, up 370 basis points year over year, while individual disability insurance benefit ratio was 60.8%, down 1370 basis points year over year.
Pretax income in the quarter totaled $23.3 million, down 37% from $36.9 million in the year-ago quarter.
Asset Management: Second-quarter 2012 pretax income declined 5.6% over the prior-year quarter to $15.2 million. The decrease was mainly attributable to lower administrative fee revenues due to a decline in retirement plan assets under administration.
Assets under administration were $21.07 billion as of June 30, 2012, reflecting a decrease of 4.4% from $22.04 billion as of June 30, 2011.
During the quarter, StanCorp Mortgage Investors originated $300.2 million of commercial mortgage loans, slightly lower than $302.7 million in the prior-year quarter.
StanCorp’s investment portfolio, as of March 31, 2012, consisted of approximately 56.4% fixed maturity securities, 41.2% commercial mortgage loans and 2.4% real estate. The overall weighted-average credit rating of the fixed maturity securities portfolio assigned by Standard & Poor’s was “A.”
Share Repurchases
During the quarter, StanCorp spent $10 million to buyback 279,700 shares. As of 30th June, StanCorp had approximately 2.7 million shares remaining under its repurchase authorization.
Balance Sheet
StanCorp exited the second quarter with cash and cash equivalents of $129.5 million, down from $138.4 million at 2011-end. Long-term debt was $301.2 million at quarter end, increasing marginally from $300.9 million at 2011-end.
Book value per share as of June 30, 2012 was $47.27, reflecting a 10.9% upside from $42.64 as of June 30, 2011.
Our Take
StanCorp’s results were weighed upon by high unemployment and low interest rates. However, management remains focused on adopting pricing action on new as well as renewal business.
The positives for StanCorp include premium growth, continued good investment performance, conservative underwriting practices, and focus on increasing shareholder value along with a strong capital position.
We retain our Underperform recommendation on StanCorp Financial. The quantitative Zacks #5 Rank (short-term Strong Sell rating) for the company indicates downward pressure on the stock over the near term.
MetLife Inc. (MET), which competes with StanCorp, is scheduled to release its second quarter earnings on August 1 after the bell. It currently holds a Zacks #3 Rank (short-term Hold rating) for indicating no clear directional pressure on the stock over the near term.
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