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StanCorp's Bottom Line Lags

Zacks Equity Research

StanCorp Financial Group (NYSE:SFG - News) reported second-quarter 2011 earnings of 61 cents per share from continuing operations, way behind the Zacks Consensus Estimate of $1.02 as well $1.04 earned in the prior-year quarter. Net income from continuing operations for the quarter was $27.3 million, dipping 45% from $49.2 million reported in second-quarter 2010.

StanCorp incurred an after-tax net capital loss of $8.5 million or 19 cents per share in the quarter under review. Including the one-time loss, StanCorp reported a net income of $18.8 million or 42 cents per share compared with $41.1 million or 87 cents in the second quarter of 2010. The prior year quarter included after-tax capital losses of $8.1 million or 17 cents per share.

The quarter experienced higher level of claims incidence in the Insurance Services segment driving less favorable claims experience.

Operational Performance

StanCorp’s total revenue in the second quarter 2011 was $706 million, up 2% from $691 million in the year-ago period. A combination of increased premiums, administrative fees and investment income led to the overall climb.

Total benefit and expense during the quarter increased 8% year-over-year to $680 million. The increase may primarily be attributable to an increase in benefits to policyholders, higher operating expenses and higher commissions and bonuses.

Segment Update

Insurance Services: Premiums from this business totaled $535.6 million in the second quarter of 2011, up 2.3% year over year. Higher premiums from group insurance and individual disability insurance fueled the overall premium increase.

Sales from the group insurance business in the second quarter increased 12% to $37.7 million from $42.6 million in the year ago period.

Group insurance benefit ratio in the quarter was 84.8 %, up 490 basis points year-over-year, while individual disability insurance benefit ratio was 74.5%, up 840 basis points year-over-year.

Pretax income in second-quarter 2011 totaled $37.7 million, down 45% year over year. The decrease was mainly attributable to lower favorable claims that group and individual insurance businesses experienced in the quarter.

Asset Management: Second-quarter 2011 pretax income improved by 26% to $16.6 million from $13.2 million in second-quarter 2010. The increase was mainly driven by higher spread margin from higher annuity and retirement plan assets under administration, higher net commitment fees from increased commercial mortgage loan originations coupled with lower operating expenses.

Assets under administration were $22.04 billion as of June 30, 2011, an increase of 10% from $19.99 billion as of June 30, 2010.

During the quarter, StanCorp Mortgage Investors originated $302.7 million of commercial mortgage loans, substantially higher than $200.7 million in the prior-year quarter due to an increase in commercial real estate market activities.

StanCorp’s investment portfolio, as of June 30, 2011, consisted of approximately 56.7% fixed maturity securities, 41.2% commercial mortgage loans and 2.1% real estate. The overall weighted-average credit rating of the fixed maturity securities portfolio assigned by Standard & Poor’s was “A”.

Share Repurchases

During second-quarter 2011, StanCorp spent $41.6 million for repurchasing 0.9 million shares at an average price of $43.23. As on June 30, StanCorp had approximately 3.5 million shares remaining under its repurchase authorization.

Balance Sheet

StanCorp ended the quarter with cash and cash equivalents of $111 million, down 27% from 2010 end. Long-term debt declined slightly to $551.4 million at quarter end from $551.9 million at 2010 end.

Book value per share as of June 30, 2011 was $43.07, up 5.8% from $40.72 as of June 30, 2010.

Our Take

The positives for StanCorp include a better performing Asset Management segment, premium growth, continued good investment performance, conservative underwriting practices, positive recommendations from credit rating agencies, focus on increasing shareholder value and a strong capital position.

We retain our Neutral recommendation on StanCorp Financial. 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 (NYSE:UNM - News), MetLife, Inc. (NYSE:MET - News) and Principal Financial Group Inc. (NYSE:PFG - News).

STANCORP FINL GROUP INC (SFG): Read the Full Research Report

METLIFE INC (MET): Read the Full Research Report

PRINCIPAL FINANCIAL GROUP IN (PFG): Read the Full Research Report

UNUM GROUP (UNM): Read the Full Research Report

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