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StanCorp Financial Group Inc. (SFG - Analyst Report) continues to report lower delinquency and excellent underwriting track record in its core employee benefits business. Besides being well poised in its capital position, the company's benefit ratio is also on a decreasing trend.
However, soft results at its Asset Management segment, increasing operating expenses and rating downgrades keep us on the sidelines. Thus we retain our Neutral recommendation on the company.
The company’s performance continues to be solid. For the third consecutive quarter it reported lower delinquency rates, as well as marking the lowest 60 day delinquency rate since the first quarter of 2009.
StanCorp has an excellent underwriting track record in its core employee benefits business. Given its pricing policies and underwriting efforts, the company’s reserves improved by 4.2% over the prior-year quarter to $111.7 million in the first quarter of 2012.
StanCorp enjoys a strong capital position. At quarter end, available capital was approximately $235 million, increasing 6.8% from the end of the last quarter. The company also had approximately 3.0 million shares remaining under its repurchase authorization.
It stated that an amount of $20 million of the capital has been set aside for the purpose of dividend payment. The company also expects to buyback share in the band of $40 million to $80 million in 2012.
StanCorp’s benefit ratio is on a decreasing trend year over year primarily due to initiatives undertaken by management to improve the pricing of the long-term disability business, supported by a better macro environment. This segment is expected to decrease in the long term primarily to reflect the growth in business.
On the flip side, StanCorp’s Asset Management segment, after posting solid earnings over the past couple of quarters, witnessed a decline for the third consecutive quarter. The decrease was mainly driven by lower bond call premium during the first quarter of 2012.
StanCorp witnessed annualized increase in operating expenses over the last couple of quarters. First quarter operating expense increased 4.7% year over year. Also, adoption of new accounting guidance related to deferred acquisition costs resulted in an increase in pre-tax expense by $0.7 million. Further, net income excluding after-tax net capital losses per share was lowered by $0.01 while book value decreased by $0.40 per share.
To add to its woes, recently Moody’s downgraded the financial strength and credit ratings for the company and its subsidiaries. It lowered the ratings on senior debt to Baa2 from Baa1. This rating downgrade comes on the back of the increase in claims incidence in group long term disability business.
The quantitative Zacks #3 Rank (short term Hold rating) for StanCorp indicates no clear directional pressure on the stock over the near term. The company competes with MetLife Inc. (MET - Analyst Report), Principal Financial Group Inc. (PFG - Analyst Report) and Unum Group (UNM - Analyst Report).