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StanCorp Financial Group Inc. (SFG - Analyst Report) reported second quarter 2013 operating net earnings of $1.34 per share, which exceeded the Zacks Consensus Estimate of $1.01 by 33%. Results were way ahead of 51 cents earned in the prior-year quarter.

The improvement came on the back of a decline in operating expenses, more favorable claims experience in the group long-term disability insurance business, and higher earnings in the company’s Asset Management segment.

Including after-tax net capital losses of 4 cents a share, net earnings of StanCorp were $1.30 per share in the second quarter, up from 45 cents per share in the year-ago quarter.

Operational Update

StanCorp’s total revenue in the second quarter of 2013 was $717.0 million, down 1.1% year over year from $725.3 million in the year-ago quarter. The decline in results came from waning premiums (down 2.4% year over year). Results were below the Zacks Consensus Estimate of $724 million.

Total benefits and expenses of StanCorp stood at $638.5 million in the second quarter, down 9.1% year over year. A decline in benefits to policyholders (down 10.9%), operating expense (down 10.5%), commissions and bonuses (down 1%), premium taxes (down 4.2%) and interest expense (down 12.2%) compared to the prior-year quarter aided the improvement.

Net investment income of StanCorp for the quarter was $154.1 million, up 1.8% year over year.

Segment Update

The Insurance Services business reported pretax income of $16.4 million for the second quarter of 2013, more than double than the year-ago level.  The surge was driven by more favorable claims experience in the group long-term disability insurance business and lower operating expenses. However, lower group insurance premiums and a lower discount rate used for newly established long-term disability claim reserves limited the upside.

Premiums for the segment in the second quarter were $533.7 million, down 2.3% from $546.5 million in the prior-year quarter. Group insurance premiums declined 3.5% year over year to $487.0 million in the second quarter and induced the overall premium decline.

The decline in group insurance premiums was affected by higher experience rated refunds (ERR) and lower group insurance sales. However, individual disability insurance premiums increased 11.7% year over year to $46.7 million during the reported quarter.

Sales from the group insurance business declined 13% year over year to $25.2 million in the reported quarter due to pricing competition.

Group Insurance benefit ratio was 80.4% compared with 88.5% in the year-ago quarter. Individual disability benefit ratio was 63.4% in the second quarter of 2013 compared with 60.8% in the prior-year period.

The Asset Management business reported pre-tax income of $20.7 million, up 36.2% year over year from $15.2 million in the prior-year quarter. The improvement came on the back of higher administrative fee revenues and spread margin stemming from increase in assets under administration, and lower operating expenses.

Assets under administration were $22.83 billion as of Jun 30, 2013, up 8.3% from $21.1 billion as of Jun 30, 2012. It largely reflected higher equity values for retirement plan assets under administration.

During the quarter, StanCorp Mortgage Investors originated $364.1 million of commercial mortgage loans, higher than $300.2 million in the prior-year quarter.

The Other segment pre-tax loss was $3.6 million in the reported quarter compared with $15.9 million in the second quarter of 2012.

Financial Update

As of Jun 30, 2013, StanCorp’s investment portfolio comprised approximately 55.2% fixed maturity securities, 42.5% commercial mortgage loans, and 2.3% real estate and other invested assets. The overall weighted-average credit rating of the fixed maturity securities portfolio assigned by Standard and Poor’s was “A-.”

As of Jun 30, 2013, cash and cash equivalents for StanCorp were $199.7 million, up 24.3% from $160.7 million as of Dec 31, 2012. Long-term debt of StanCorp was $551.4 million as of Jun 30, 2013, flat with 2012-end level.

Book value per share of StanCorp as on Mar 31, 2013 was $44.16, up 7.8% year over year from $40.97 at Jun 30, 2012.

Share Repurchase Update

In the second quarter, StanCorp purchased 0.38 million shares for $16.9 million and is left with 2.4 million shares under its authorization, scheduled to expire on Dec 31, 2014.

Zacks Rank

StanCorp currently carries a Zacks Rank #1 (Strong Buy). Among others in the industry, American Equity Investment Life Holding Co. (AEL - Snapshot Report) with a Zacks Rank #1 (Strong Buy), and Health Insurance Innovations, Inc. (HIIQ - Snapshot Report) and Universal American Corp (UAM - Snapshot Report) with Zacks Rank #2 (Buy) are expected to report second quarter 2013 results shortly.

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