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We are downgrading StanCorp Financial Group Inc. (SFG - Analyst Report) to ‘Underperform’ from ‘Neutral’, following the company’s announcement to post lower earnings in the second quarter. The company expects earnings to be $0.51 per share, hurt by lower favorable claims experience in the group long-term disability insurance business. The Zacks Consensus Estimate is currently pegged at $0.85.
StanCorp expects second quarter adjusted earnings to decline 13.5% year over year. The earnings will be hurt by less favorable claims experience in the group long-term disability insurance business. It also expects to deliver higher benefit ratio for its group insurance products. It is expected to be 88.5%, exceeding the guided range of 80% to 82% for 2012. The company also expects to incur after-tax net capital losses of $0.06 per share in the second quarter. Taking this into account, net income is expected to be $0.45 per share, representing a year-over-year improvement of 12.5%. Given the performance in the first half of 2012, it now expects to fall short of its full year guidance of $3.60–$3.90 per share.
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. A rating downgrade therefore, adversely affects the business, besides increasing cost of future debt issuances. Moody’s downgraded the financial strength and credit ratings for the company and its subsidiaries. However, recently another rating agency, Fitch Ratings, affirmed the long-term issuer default rating with a stable outlook.
Also, StanCorp’s Asset Management segment, after posting solid earnings over the past couple of quarters, witnessed a decline for the third consecutive quarter, mainly driven by lower bond call premium. Further, assets under administration in the retirement plans business showed a sequential decline. Low interest rate environment continues to weigh on the company’s long-term disability claim reserves in Group Insurance Business.
Counting on the positives, StanCorp, for the third consecutive time reported lower delinquency. This also marks 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 last-year quarter to $111.7 million in the first quarter of 2012.
The company also enjoys a strong capital position. The risk-based capital ratio at its insurance subsidiaries was 300% as of March 31. As of March 31, StanCorp had approximately 3.0 million shares remaining under its repurchase authorization. It stated that an amount of $20 million of the capital have been set aside for the purpose of dividend payment. The company also expects to buyback shares in the band of $40 million to $80 million in 2012.
The quantitative Zacks #5 Rank (short-term Hold rating) for the company indicates downward pressure on the stock over the near term. Metlife Inc. (MET - Analyst Report) and Unum Group (UNM - Analyst Report), which compete with Stancorp, both hold a quantitative Zacks #3 Rank (short-term Hold rating), indicating no clear directional pressure on the stock over the near term. Another peer, Principal Financial Group Inc. (PFG - Analyst Report), holds a quantitative Zacks #4 Rank (short-term Sell rating) indicating slight downward pressure on the stock over the near term.