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StanCorp Financial Group ( SFG - Analyst Report ) reported fourth-quarter 2011 earnings of 87 cents per share from continuing operations, striding ahead of the Zacks Consensus Estimate of 79 cents per share. However, results were 24% below $1.14 per share earned in the prior-year quarter. Net income from continuing operations for the quarter was $38.6 million, slipping 27% from $53 million reported in fourth-quarter 2010.
StanCorp benefited from an after-tax net capital gain of $0.7 million or 2 cents per share in the quarter under review. Including the one-time gain, StanCorp reported net income of $39.3 million or 89 cents per share against $52 million or $1.12 per share in the fourth quarter of 2010. The prior-year quarter included after-tax capital losses of $1 million or 2 cents per share.
Moreover, the reported quarter experienced higher benefit ratio in the Insurance Services segment, primarily due to higher claims incidence in its group long-term disability insurance business.
Full year 2011 operating earning came in at $3.19 per share, 8 cents per share above the Zacks Consensus Estimate but 32% down from $4.70 per share earned in 2010. Operating earnings declined 39% over the prior year to $143.8 million in 2011.
Including capital loss of $4.5 million or 10 cents per share, the company reported net income of $139.3 million or $3.09 per share, compared with $189 million or $4.02 a share.
StanCorp’s total revenue in the fourth quarter of 2011 was $727.7 million, up 2.5% from $710.2 million in the year-ago quarter. The improvement primarily stemmed from higher premiums. Revenue surpassed the Zacks Consensus Estimate of $711 million.
Full year revenue was $2.9 billion, up 4% year over year and was almost in line with the Zacks Consensus Estimate.
Total benefit and expense during the quarter increased 6.5% year over year to $675.3 million. The upside was buoyed by the increase in benefits to policyholders, higher operating expenses, higher commissions and bonuses and higher premium taxes. Full year total benefit and expense escalated 7.9% over 2010 to $2.7 billion.
Insurance Services: Premiums from this business totaled $540.9 million in the fourth quarter of 2011, up 5.6% 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 fourth quarter increased 2.2% to $74.7 million from $73.1 million in the year-ago period.
Group insurance benefit ratio in the quarter was 82.8%, up 540 basis points year over year, while individual disability insurance benefit ratio was 70.9%, down 1100 basis points year over year.
Pretax income in third-quarter 2011 totaled $53.7 million, down 25.6% year over year. The decrease resulted primarily from lower favorable claims in the group long-term disability insurance business.
Asset Management: Fourth-quarter 2011 pretax income declined 11.6% to $14.5 million from $16.4 million in fourth-quarter 2010. The decrease was mainly driven by lower administrative fee revenues due to the decline in assets under administration, somewhat offset by lower operating expense.
Assets under administration were $20.43 billion as of December 31, 2011, showing a decrease of 6.6% from $21.89 billion as of December 31, 2010.
During the quarter under review, StanCorp Mortgage Investors originated $237 million of commercial mortgage loans, higher than $215.8 million in the prior-year quarter. For full year 2011, StanCorp Mortgage Investors originated $1.01 billion of commercial mortgage loans, compared with $887.5 million in 2010.
StanCorp’s investment portfolio, as of December 31, 2011, consisted of approximately 56.9% fixed maturity securities, 41.2% commercial mortgage loans and 1.9% real estate. The overall weighted-average credit rating of the fixed maturity securities portfolio assigned by Standard & Poor’s was “A”.
Dividend and Share Repurchases
During the quarter under review, StanCorp paid an annual dividend of 89 cents per share.
During fourth-quarter 2011, StanCorp spent $0.3 million for repurchasing 0.1 million shares at an average price of $31.97. For full year 2011, StanCorp spent $90.3 million for repurchasing 2.2 million shares at an average price of $41.41.
As of December 31, StanCorp had approximately 3.0 million shares remaining under its repurchase authorization.
StanCorp ended 2011 with cash and cash equivalents of $138.4 million, down 8.9% from 2010 end. Long-term debt was $300.9 million at quarter end compared with $551.9 million at 2010 end, reflecting a substantial decline of 45.5%.
Book value per share as of December 31, 2011 was $45.42, reflecting a 9.7% upside from $41.42 as of December 31, 2010.
Looking Ahead in 2012
StanCorp expects operating earnings in the band of $3.60 to $3.90 per share.
The company also expects to deliver return on average equity and accumulated other comprehensive income (AOCI) from equity, in the range of 9-10%.
The guidance includes annual benefit ratio for the group insurance business in the 80-82% range and share repurchases between $40 million and $80 million.
The company also expects that adoption of ASU 2010-26 will increase pre-tax expenses by $3 million to $4 million annually with a cumulative effect adjustment to retained earnings of approximately $20 million to $25 million in the first year.
The effective income tax rate is expected to be 26% to 27%.
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.
The company also expects the group disability insurance benefit ratio to improve given the pricing actions taken at the long-term disability business.
We retain our Neutral recommendation on StanCorp Financial. The quantitative Zacks #3 Rank (short-term Hold rating) for StanCorp indicates no clear directional 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 - Analyst Report ) , MetLife, Inc. ( MET - Analyst Report ) and Principal Financial Group Inc. ( PFG - Analyst Report ) .
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