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We have upgraded StanCorp Financial Group Inc. (SFG - Analyst Report) to Outperform from Neutral based on the approval of a dividend hike along with a new share repurchase program and its third-quarter outperformance.

Based on StanCorp's strong capital position, the board authorized a dividend hike as well as a share repurchase program. Recently, the board approved a new 3 million share buyback program. Additionally, it approved a 4.5% hike in dividend. The current dividend yield of StanCorp stands at 2.52%, much above the industry average of 1.60% as well as some of its nearest competitors MetLife Inc. (MET - Analyst Report) (2.25%) and Unum Group (UNM - Analyst Report) (2.50%).

The company’s third-quarter earnings outperformed the Zacks Consensus Estimate on the back of favorable claims in the group insurance business, a decline in operating expenses and increased net investment income in the Asset Management segment.

After several quarters of higher benefit ratio, StanCorp managed to post lower benefit ratio in the third quarter. It improved 100 basis points year over year and 800 basis points sequentially on the back of better-than-expected claim recoveries, lower incidence rates in group long-term disability business, and improvement in severity.

StanCorp’s Asset Management segment, after posting an earnings decline in four consecutive quarters, witnessed a substantial improvement in the third quarter of 2012. Higher net investment income from the commercial mortgage loan pre-payment fee revenues and bond call premiums aided the upside. However, the company expects the interest rate environment to remain depressed over the next few years.

Also, delinquency continues to remain low. Third quarter marks the lowest 60 day delinquency rate since the first quarter of 2009 and fifth consecutive quarter of lower delinquency.

However, after reporting strong growth in Group insurance premiums in the past quarters, the company witnessed a decline in premium in the third quarter. The decline largely stemmed from a low single-digit price increase in the group insurance business and stiff competition, which also weighed on new sales and renewals. StanCorp expects headwinds from the lack of employment and wage growth in the group insurance business to persist in the upcoming quarters and pressurize premium growth

StanCorp carries a Zacks #1 rank translating into a short term ‘Strong Buy’ rating. Its peer MetLife carries a Zacks #5 Rank (Strong Sell), while Unum Group carries a Zacks #4 Rank (Sell).

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