StanCorp Financial Group (SFG) reported third-quarter 2010 earnings of $1.39 per share from continuing operations, beating the Zacks Consensus Estimate of $1.15 by 24 cents. Earnings also surpassed the year-ago result of $1.21. Net income from continuing operations for the quarter was $64.8 million, up 8.4% from $59.8 million reported in third-quarter 2009.
StanCorp incurred an after-tax net capital loss of $18.6 million or 40 cents per share in the quarter under review. Including the one-time loss, StanCorp reported a net income of $46.2 million or 99 cents per share compared with $59.9 million or $1.21 in the third quarter of 2009. Net income in the year-ago quarter included an after-tax operating expense reduction initiative of $2.1 million or 4 cents per share and after-tax net capital gains of $2.2 million or 4 cents per share.
A combination of favorable claims as well as increased premiums in the Insurance Services segment, coupled with improved earnings in the Asset Management segment and share buybacks aided the results, which exceeded expectations in the quarter under review.
StanCorp’s total revenue in the quarter was $685.0 million, down by 2.4% from $701.6 million in the year-ago period. Results also lagged the Zacks Consensus Estimate of $688 million. Increased premiums, administrative fees and investment income were more than offset by higher capital losses resulting in lower revenue in the quarter.
Total benefit and expense during the quarter increased 0.7% year-over-year to $615.4 million. The increase may primarily be attributable to an increase in benefits to policyholders and higher commissions and bonuses.
Segment Update
Insurance Services: Premiums from this business totaled $514.2 million in the second quarter of 2010, up 2.5% from $501.9 million in the prior-year quarter. Higher premiums from group insurance and individual disability insurance fueled the overall premium increase.
Sales from the group insurance business in the third quarter remained flat compared to $59.7 million in the prior year period.
Group insurance benefit ratio in the quarter was 75.5%, down 80 basis points year-over-year, while individual disability insurance benefit ratio was 58.1%, down 20 basis points year-over-year.
Pretax income in third-quarter 2010 totaled $94.3 million, higher than $84.3 million in third-quarter 2009. The improvement was mainly attributable to favorable claims experienced in the quarter.
Asset Management: Third-quarter 2010 pretax income increased by 36.4% to $15.0 million from $11.0 million in third-quarter 2009. The increase was mainly driven by higher administrative fees earned coupled with lower operating expenses.
Assets under administration were $21.12 billion as of September 30, 2010, down 3.7% from $21.94 billion as of September 30, 2009. Terminations of some large retirement plans muted the positive impact of improved equity market performance on assets under administration.
During the quarter, StanCorp Mortgage Investors originated $330.4 million of commercial mortgage loans, substantially higher than $98.7 million in the prior-year quarter due to increase in commercial real estate market activities.
StanCorp’s investment portfolio as of September 30, 2010 consisted of approximately 58% fixed maturity securities, 40% commercial mortgage loans and 2% real estate. The overall weighted-average credit rating of the fixed maturity securities portfolio assigned by Standard & Poor’s was “A.”
During third-quarter 2010, StanCorp spent $35.6 million for repurchasing 0.9 million shares at an average price of $38.11. At quarter end, StanCorp had approximately 2.4 million shares remaining under its repurchase authorization. The authorization will lapse on December 31, 2011.
Balance Sheet
Cash and cash equivalents at quarter-end totaled $141.4 million, up 30.6% from $108.3 million at the end of the fourth quarter of 2009. Long-term debt declined slightly to $552.3 million at the end of third-quarter 2010 from $553.2 million at the end of fourth-quarter 2009.
Book value per share as of September 30, 2009 was $43.49, up 18.7% from $36.63 as of September 30, 2009.
The positives for StanCorp include a better performing Asset Management segment and favorable claims experience along with positive recommendations from credit rating agencies, focus on increasing shareholder value and conservative underwriting practices.
However, based on a competitive environment, lowinterest rate environment and exposure to commercial mortgage loans, we maintain our “Underperform” recommendation on StanCorp. The quantitative Zacks #4 Rank (short-term Sell rating) for StanCorp indicates downward pressure on the stock over the near term.
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