We are upgrading StanCorp Financial Group Inc. (SFG) to Neutral from Underperform based on its excellent underwriting track record, continued better performance at Asset Management segment as well as active share repurchases supported by a strong capital position.
StanCorp’s Asset Management segment is benefiting from an increase in administrative fees on increased cash flows. This coupled with lower operating expenses due to the successful implementation of cost reduction initiatives have helped improve results in the segment. Continued growth is expected, leading to increased contributions to the bottom line.
Also, StanCorp enjoys a strong capital position. The company has achieved double digit compounded annual growth rate in book value as well as dividend per share. StanCorp is returning value to shareholders by buying back shares.
Recently, the company’s board authorized another 3.0 million shares for its current share repurchase program. Furthermore, StanCorp has an excellent underwriting track record in its core employee benefits business.
On the flip side, StanCorp is facing a slowdown in the top-line growth, constrained by economic and competitive forces. Premiums remain pressured due to a group insurance market that continues to reflect a price-competitive sales environment and declines in wage growth and employment levels. This line of business has also witnessed an increase in claim incidence. An increased level of claims incidence in group long term disability business has affected the first quarter results.
The company’s exposure to commercial mortgages loan are higher than that of its peers. Over the last several quarters, delinquency rates in StanCorp’s commercial mortgage loan portfolio have risen. The company has also experienced a corresponding increase in foreclosure activity.
StanCorp has experienced softness in revenues in its retirement plans business over the past several quarters due to depressed equity markets and their impact on assets under administration.
StanCorp Financial reported its first-quarter 2011 earnings of $0.76 per share from continuing operations, in line with the Zacks Consensus Estimate. The quarter experienced higher level of claims incidence in group long term disability business resulting in soft performance.
Based on the first quarter results, StanCorp remains apprehensive of attaining a net income of $4.80-$5.10 per share.
The Zacks Consensus Estimate for second-quarter 2011 is $1.06 per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $4.22 per share and $5.19 per share.
The quantitative Zacks #4 Rank (short term Sell rating) on the stock indicates downward pressure on the shares 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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