We are downgrading StanCorp Financial Group Inc. (SFG) to ‘Underperform’ from ‘Neutral’ as we expect delinquencies on commercial mortgage loans to remain modestly high in the foreseeable future.
Moreover, we suspect organic growth will remain restricted in the near term, given the sluggish economic environment and challenging labor market conditions.
StanCorp’s exposure to commercial mortgage loans are higher than that of its peers and account for approximately 40% of the investment portfolio. Over the last several quarters, delinquency rates in StanCorp’s commercial mortgage loan portfolio have risen. Given the current economic challenges across its footprint, we believe delinquencies will remain elevated in the near future, which might result in additional realized losses.
Also, 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 as customers navigate a challenging economy.
This line of business has also witnessed an increase in claim incidence. We believe that the stressed economic conditions will continue and therefore top-line growth of the company will remain restricted in the foreseeable future.
However, counting on the positives, StanCorp has an excellent underwriting track record in its core employee benefits business. The company also scores strongly with rating agencies, reflecting its healthy business fundamentals.
The Asset Management segment is benefiting from an increase in administrative fees on increased cash flows led by a recovery in the equity market, as well as lower operating expenses due to the successful implementation of cost reduction initiatives.
During the fourth quarter conference call, Stancorp announced that it expects 2011 premium growth to remain flat with the 2010 level. The company also expects that the annual benefit ratio for the group insurance business will be consistent with the last five years. Stancorp expects share repurchases to remain consistent with 2010 activity.
Taking these factors into consideration, Stancorp guided operating income to a range of $4.80 to $5.10 per share and return on equity in a range of 12% to 13%.
The Zacks Consensus Estimate for first-quarter 2011 is $1.19 per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $5.01 per share and $5.50 per share.
The quantitative Zacks #4 Rank (short-term Sell rating) for StanCorp indicates 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).
METLIFE INC (MET): Free Stock Analysis Report
PRINCIPAL FINL (PFG): Free Stock Analysis Report
STANCORP FNL CP (SFG): Free Stock Analysis Report
UNUM GROUP (UNM): Free Stock Analysis Report
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