Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: Flash Update: 4Q15 and Full Year 2015 Earnings Results
Previous Edition: 3Q15 Earnings Update, Dec 29, 2015
Flash Update
On Feb 1, 2016,StanCorp Financial Group Inc. announced its fourth quarter and full year 2015 earnings results. Fourth-quarter 2015 net earningsof $1.02 per share missed the Zacks Consensus Estimate by 32%. Earnings also plunged 22.1% year over year.
Earnings increased on a less favorable claims experience in Employee Benefits and Individual Disabilityas well as increased commissions and bonuses, and higher operating expenses in Employee Benefits. However, higher premiums in Employee Benefits and Individual Disability mitigated the adverse effects to some extent.
Including after-tax net capital merger-related expenses of $0.05 per share and after-tax net capital losses of $0.08 per share, net earnings of StanCorp came in at $0.89 per share in the quarter, down .4% year over year.
Behind the Headlines
Total revenue in the quarter increased 5.9% year over year to $739.9 million. This improvement was backed by 6.9% increase in premiums and 3.1% rise in investment income. However, a 2.7% fall in administrative fee was a partial dampener.
Total benefits and expenses increased 10.6% year over year to $688.5 million as benefits to policyholders, operating expenses, commissions and bonuses, and premium taxes Increased.
StanCorp Financial’s AUM as of Dec 31, 2015 was a record $26.05 billion down 1.8% as of Dec 31, 2014.
Book value per share as of Dec 31, 2015 was $51.31, up 0.2% from $51.23 y/y.
Full-Year Highlights
StanCorp’s full-year earnings came in at $5.47 per share, up 9.2% year over year.
Total revenues improved 4.1% year over year to $2.9 billion.
Segment Update
Insurance Services: Pretax income declined 42.6% year over year to $41.3 million. A less favorable claims experience in Employee Benefits and Individual Disability as well as increased commissions and bonuses, and higher operating expenses in Employee Benefits led to the downside.
Employee Benefits premiums increased 7.2% year over year to $495.4 million buoyed by higher sales and retention of existing customers. Individual disability insurance premiums increased 4.4% year over year to $54.1 million.
Sales from Employee Benefits surged 18.3% year over year to $93.8 million owing to an increase in proposal activity.
Benefit ratio increased 200 basis points (bps) to 79.4% for Employee Benefits and 1450 bps to 74.5% for Individual Disability.
Asset Management business: Pretax income increased 27.8% to $23.9 million.
Assets under administration were $26.05 billion as of Dec 31, 2015, down 1.8% from $26.53 billion as of Dec 31, 2014. Divestment of the private client wealth management business, which had about $850 million in assets under administration, resulted in the decrease.
During the quarter, StanCorp Mortgage Investors actualized $353.5 million of commercial mortgage loans, higher than $256.8 million in the comparable quarter a year ago.
Other: Pretax loss of of $13.8 million, narrower than a loss of $14.5 million in the year-ago quarter.
Dividend and Share Repurchase Update
In the fourth quarter, the company paid an annual dividend of $1.40 per share or $59.4 million. This represents a 7.7% increase over the prior payout.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON SFG.
Executive Summary[Note: Only highlighted material has been changed.]
Portland, OR-based StanCorp Financial Group Inc. (SFG) is one of the largest providers of employee benefits products and services in the U.S. The company, together with its subsidiaries, serves customers with group and individual disability insurance, group life, accidental death and dismemberment (AD&D) and dental insurance, retirement plan products and services, individual annuities and investment advice. It operates primarily through two operating segments: Insurance Services and Asset Management.
Of the firms in the Digest group covering StanCorp Financial, about 80.0% had neutral outlooks, while 20.0% had a negative stance. None of the firms rated the stock positively. All the four firms covering the stock provided target prices ranging from $73.00 (36.1% downside from current price) to $115.00 (0.7% upside the current price).
Neutral or equivalent outlook – (4/5 firms or 80.0%)– The firms believe that continued pressure on premium growth is offset by improvement in the benefit ratio of the Employee Benefits business. They believe that with enhancement in StanCorp’s Employee Benefit business the rate of return will also improve. However, the company still has a long way to go before it can generate returns in low double digits.
According to the firms, in spite of volatile claims experience and the low interest rate environment, StanCorp’s efforts to increase price will lead to improved profitability.
Though employment growth has improved, new sales remain challenging. Additionally, the low interest rate environment will continue to weigh on the yields in the company’s investment portfolio.
The firms, envision weaker sales outlook due to the Obamacare uncertainty, but believe that StanCorp is well positioned to weather the Obamacare environment, given its conservation underwriting approach.
With benefit ratio stabilizing over time, the firms also believe that StanCorp will be able to generate sturdy capital, which can be deployed to enhance shareholder value via share repurchases.
The firms also believe that StanCorp is an attractive investment opportunity. Investors who intend to opt for a long-term holding and have the ability to absorb earnings volatility may give this stock some consideration.
StanCorp’s operating earnings have increased by a small percentage over the last five years and the firms do not expect any significant turnaround in 2015. This is because StanCorp will have to account for higher pension costs and the impact change for housing tax credits. Additionally, the company is unlikely to witness a repetition of the record 3Q14 group benefit claims experience.
Negative or equivalent outlook – (1/5 firms or 20.0%) - The firms noted that low single-digit price increase in Employee Benefit business and stiff competition impacted premiums and also weighed on new sales and renewals.
StanCorp estimates Employee Benefit premiums to remain under pressure, thereby exerting downward strain on employee benefit sales and persistency. Nevertheless, to mitigate elevated claims incidence and the low interest rate environment, StanCorp will continue to implement pricing actions for both new and renewed long-term disability business.
Dec 29, 2015
Overview [Note: Only highlighted material has been changed.]
StanCorp operates across the country, with a dominant position in the western part of the U.S. The company, which was de-mutualized in 1990, serves customers with group and individual disability insurance, group life, accidental death and dismemberment (AD&D) and dental insurance, retirement plan products and services, individual annuities and investment advice.
StanCorp’s main subsidiaries include Standard Insurance Company, The Standard Life Insurance Company of New York, StanCorp Mortgage Investors LLC, and StanCorp Investment Advisers Inc.
The company provides its service through two operating segments: Insurance Services and Asset Management.
The Insurance Services segmentsells disability, life, AD&D and dental insurance products to employer groups. This segment also sells disability insurance to individuals.The Asset Management segment offers full-service 401(k) plans, 457 plans, defined benefit plans, money purchase pension plans, profit sharing plans, 403(b) plans and non-qualified deferred compensation products and services through an affiliated broker-dealer. This segment also offers a full range of individual fixed annuity products, investment advisory and management services, financial planning services, commercial mortgage loan origination and servicing, group annuity contracts and retirement plan trust products.
Its Other category includes return on capital not allocated to the product segments, holding company expenses, operations of certain unallocated subsidiaries, interest on debt, unallocated expenses, net capital gains and losses related to the impairment or disposition of the company’s invested assets and adjustments made in consolidation.
Its website is
The firms identified the following key factors for evaluating the investment merits of StanCorp Financial:
Key Positive Arguments / Key Negative Arguments- StanCorp holds strong positions in the markets it serves.
- StanCorp’s investment portfolio continues to perform well with no considerable exposure to high-risk asset classes.
- StanCorp enjoys a strong capital position, which aids it to return value to its shareholders. Its capital level remains strong, with an estimated RBC ratio of 400% for insurance subsidiaries and about $500 million of available capital.
- StanCorp has been successful in reducing operating expenses.
- Delinquency deteriorated slightly in 2012 from 2011, but improved thereafter.
- StanCorp scores strongly with credit rating agencies.
- StanCorp’s Employee Benefit premium has been on a downtrend over the last few quarters.
- The low interest rate environment continues to put pressure on new investment rates and reserve discount rates.
- Differences between actual claims experience and underwriting and reserving assumptions may affect financial results.
- Being a life insurer, catastrophe losses from a disease pandemic can adversely affect results.
- StanCorp, being a holding company, largely depends on funds from its subsidiaries to make payments on debt securities, meet financial obligations as well as pay dividends.
Note: The company’s fiscal year coincides with the calendar year.
Dec 29, 2015
Long-Term Growth [Note: Only highlighted material has been changed.]
StanCorp’s growth remains restricted due to the persistent low interest rate environment leading to an increase in pricing in the highly price-sensitive group insurance marketplace.
Nevertheless, StanCorp remains focused on deriving long-term profits, relying on business diversification, disciplined product pricing, solid underwriting, effective claims management and high-quality customer service.
The firms expect the low interest rate environment to persist and challenge the entire industry, going forward. However, StanCorp plans to concentrate on implementing pricing actions and cost-reduction initiatives to combat the impact of the low interest rate environment on profitability.
The firms are optimistic about the company’s increased activity in the commercial real estate market and believe that its commitment toward originating and underwriting the high-quality commercial mortgage loans will yield significant returns.
Dec 29, 2015
Target Price/Valuation [Note: Only highlighted material has been changed.]
Rating DistributionPositive / 0.0%
Neutral / 80.0%↓
Negative / 20.0%↑
Avg. Target Price / $104.50↑
Digest High / $115.00↑
Digest Low / $73.00
No. of analysts with target price/Total / 4↓/5↓
Risks to target price include lower wage and employment levels, lower interest rates, unfavorable difference between actual and expected claims, competition, deteriorating credit quality and capital market conditions.
Recent Events[Note: Only highlighted material has been changed.]
On Oct 22, 2015, StanCorp reported 3Q15 earnings results. Operating net earnings of $1.44 per share missed the Zacks Consensus Estimate of $1.52. Earnings plunged 14.8% year over year (y-o-y) on less favorable claims experience in Employee Benefits and increased operating expenses.
Including after-tax net capital merger related expenses of $0.07 per share and after-tax net capital losses of $0.09 per share, net earnings of StanCorp came in at $1.28 per share in the quarter, down 21% y-o-y.
StanCorp’s total revenue in the quarter amounted to $724.7 million; up 4.6% y-o-y. Revenues missed the Zacks Consensus Estimate of $731 million.
Financial Update
As of Sep 30, 2015, StanCorp’s investment portfolio comprised approximately 56.2% fixed maturity securities, 39.2% commercial mortgage loans, 2.3% cash and cash equivalents, and 2.3% real estate and other invested assets. The overall weighted average credit rating of the fixed maturity securities portfolio assigned by Standard and Poor’s was “A-.”
As of Sep 30, 2015, cash and cash equivalents of StanCorp were $330.3 million, 31.5% higher than $251.1 million as of Dec 31, 2014. Long-term debt of the insurer was $504.8 million as of Sep 30, 2015, 0.2% higher from the 2014-end level.
Book value per share of the insurer as of Sep 30, 2015 was $53.66, up 1% from $53.11 as of Sep 30, 2014.
Dividend Update
The Board of Directors announced a cash dividend of $1.40 per share, which represents a 7.7% increase over the prior payout. The dividend was paid on Nov 30 to shareholders on record as of Nov 10, 2015.
Revenues [Note: Only highlighted material has been changed.]
StanCorp’s total revenue in 3Q15 amounted to $724.7 million, up 4.6% y-o-y. This improvement was backed by higher premiums (up 6.2% y-o-y) and investment income (up 0.7% y-o-y). However, a lower administrative fee (down 0.9% y-o-y) was a partial dampener. Revenues missed the Zacks Consensus Estimate of $731million.
Segment Details
Insurance Services
Employee benefits premiums increased 7.1% y-o-y to $468.2 million on higher Employee Benefits sales and favorable retention of existing customers. Individual disability insurance premiums increased 2.3% y-o-y to $51.5 million.
Sales from employee benefits surged 28% y-o-y to $67.6 million owing to an increase in proposal activity.
Asset Management
Assets under administration were $25.42 billion as of Sep 30, 2015, down 2.1% from $25.97 billion as of Sep 30, 2014. The decrease stemmed from the divestment of the private client wealth management business that had about $850 million in assets under administration.
During the quarter, StanCorp Mortgage Investors actualized $382.4 million of commercial mortgage loans, higher than $303.5 million in the comparable quarter a year ago.
Margins [Note: Only highlighted material has been changed.]
Total benefits and expenses increased 9% y-o-y to $637.5 million in 3Q15. The increase was primarily due to higher benefits to policyholders, operating expenses, commissions and bonuses, and premium taxes.
Segment Highlights
Insurance Services reported a pre-tax income of $77.4 million, down 17.3% y-o-y. The downside resulted from a less favorable claims experience along with increased commissions and bonuses in Employee Benefits, and higher operating expenses. However, higher premiums in Employee Benefits and more favorable claims experience in Individual Disability limited the downside.
The benefit ratio decreased 430 basis points (bps) to 77.5% for Employee Benefits and 880 bps to 59.0% for Individual Disability.
The Asset Management business reported a pre-tax income of $19 million, down 8.7% y-o-y.
The Other segment registered a pre-tax loss of $15.4 million, wider than a loss of $11.5 million incurred in the year-ago quarter.
Earnings per Share [Note: Only highlighted material has been changed.]
StanCorp reported 3Q15 operating net earnings of $1.44 per share, down 14.8% y-o-y. The decrease stemmed from less favorable claims experience in Employee Benefits and increased operating expenses. However, higher premiums in Employee Benefits and a more favorable claims experience in Individual Disability limited the downside. Results also missed the Zacks Consensus Estimate of $1.52 per share.
Including after-tax net capital merger-related expenses of $0.07 per share and after-tax net capital losses of $0.09 per share, net earnings of StanCorp came in at $1.28 per share in the quarter, down 21% y-o-y.
Research Analyst / Arunima SarkarCopy Editor
Content Ed. / Tanuka De
Lead Analyst / Tanuka De
QCA / Tanuka De
No. of brokers reported/Total brokers
Reason for Update / Flash