We are downgrading the recommendation on StanCorp Financial Group Inc. (SFG) to Underperform from Neutral on the back of second quarter results.The quarter experienced higher level of claims incidence in the Insurance Services segment driving less favorable claims experience. The company's second quarter operating earnings are way behind the Zacks Consensus Estimate as well as year ago earnings.
StanCorp is facing a slowdown in 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 affected the second 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.
However, 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, favorable interest margins, and higher commitment fees from increased commercial mortgage loan originations have helped improve results in the segment.
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. In the second quarter, StanCorp repurchased approximately 0.9 million shares for $41.6 million. As on June 30, StanCorp had approximately 3.5 million shares remaining under its repurchase authorization. Furthermore, StanCorp has an excellent underwriting track record in its core employee benefits business.
The Zacks Consensus Estimate for third quarter 2011 is 81 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are $3.27 and $4.30 per share, respectively.
The quantitative Zacks #5 Rank (short-term Strong Sell rating) for the company indicates a downward 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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