StanCorp Financial Group Inc.’s (SFG) fourth quarter earnings lagged the Zacks Consensus Estimate as well as the year-ago results as higher premiums in the Insurance Services segment, improved earnings in the Asset Management segment and positive favorable impact of share buyback were more than offset by lower favorable claims in the Insurance Services segment. We thus remain Neutral on StanCorp.
StanCorp’s Asset Management segment is benefiting from an increase in administrative fees on increased cash flows led by a recovery in the equity market. This coupled with lower operating expenses due to the successful implementation of cost reduction initiatives has helped improve results in the segment.
StanCorp has an excellent underwriting track record in its core employee benefits business. Given its pricing policies and underwriting efforts, the company has not exhibited the need to add substantially to its prior-period reserves.
Additionally, cost containment initiatives augur well though they themselves result in some upfront costs. One-time pre-tax cost of approximately $20 million was incurred in fiscal 2009. This would, however, lead to a savings run rate of approximately $25 million annually in the following years.
StanCorp also scores strongly with rating agencies reflecting its healthy business fundamentals. The company enjoys a strong capital position and continues to enhance its shareholders value.
The company has exhibited a 14% compounded annual growth in book value per share since 1999. It has also achieved around 15% compounded annual growth in dividend per share since 2003. Also, Stancorp continues to buy back shares. It repurchased 2.0 million shares in 2010 with 2.3 million shares remaining under its repurchase program.
On the flip side, StanCorp is facing a slowdown in top-line growth. 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.
The company’s exposure to commercial mortgages loan is higher than that of its peers and accounts for approximately 40% of the investment portfolio. Over the last several quarters, delinquency rates in StanCorp’s commercial mortgage loan portfolio have risen.
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.
Taking into consideration these factors, 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%.
Over the last 7 days, none of the analyst covering the stock have revised their estimates for the first quarter of 2011. However, over the last 30 days period, 1 out of 11 analysts covering the stock raised the estimate while 2 analysts lowered the same. Over the last 7 days period as well as 30 days period, none of the analysts covering the stock have revised the estimates for 2011 and 2012.
The Zacks Consensus Estimate for first-quarter 2011 is $1.19 per share. For full year 2011 and 2012, the Zacks Consensus Estimates are, respectively, $4.98 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
Zacks Investment Research
