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We are upgrading our recommendation on StanCorp Financial Group Inc. (SFG - Analyst Report) to Neutral from Underperform, as we expect the company to continue to deliver solid underwriting results and lower delinquency.

The company is schedule to release its third quarter results on October 22 and we expect it to deliver earnings of 69 cents per share, improving sequentially, though falling short of the year-ago earnings.

Performance of StanCorp continues to be robust. Its second quarter marks the third consecutive time of reporting lower delinquency. It also marked the lowest 60 day delinquency rate since the first quarter of 2009. The company also reported strong growth in Group insurance premiums. However, intense price competition weighed heavily on the company’s group insurance sale. It is also expanding its product portfolio by launching new products and re-launching some of them to diversify its areas of revenue generation.

StanCorp enjoys a strong capital position. By virtue of its solid capital position, the company remains focused on enhancing shareholders’ value. StanCorp spent $10 million in share repurchases in the second quarter. The company stated that if group insurance benefit ratio continues to trend upward, then there are remote chances of share buyback activity in the second half of 2012.

However, as StanCorp expected, the second quarter of 2012 experienced higher benefit ratio in the Insurance Services segment, largely due to less favorable claims experience in the group long-term disability business. Benefit ratio exceeded the guided range of 80% to 82% for 2012. Also, the company now expects full-year benefit ratio to exceed its guided range, given the performance in the first half of the year and the persistently low interest rate environment.

Moreover, StanCorp’s Asset Management segment, after posting solid earnings over the past couple of quarters, witnessed a decline for the fourth consecutive quarter.

Stancorp currently carries a Zacks #3 Rank translating into a short-term Hold rating. MetLife, Inc. (MET - Analyst Report), Principal Financial Group Inc. (PFG - Analyst Report) and Unum Group (UNM - Analyst Report), which compete with Stancorp, share the same rank.

 

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