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WIKI ANALYSIS
StanCorp Financial Group is a holding company with subsidiaries in insurance and asset management. Its insurance subsidiary offers group and individual disability insurance, and group life, accidental death, and dental insurance. The asset management subsidiary offers retirement, pension, profit-sharing, and benefit plans, amongst others.
Business Overview
StanCorp Financial Group, Inc. (SFG) is one of the largest providers of employee benefits products and services in the U.S., operating across the country, with a dominant position in the western part of the U.S. The Oregon-based company, which demutualized in 1990, serves approximately 8.1 million customers nationwide as of December 31, 2006 with group and individual disability insurance, group life, AD&D and dental insurance, retirement plans product 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.
Effective January 1, 2006, the company has realigned its business into two operating segments Insurance Services and Asset Management.
The Insurance Services segment (90.2% of SFG's FY06 total revenues) comprises the Individual Insurance segment and the Employee Benefits segment.
The Asset Management segment (9.5%) combines asset management and accumulation businesses, (previously reported under the segments Individual Insurance and Retirement Plans). For FY06 the company had $19.0 billion in assets under administration ($11.0 billion stemming from the acquisition of Invesmart).
StanCorp’s operations primarily belong to one of two groups: insurance services and asset management. Its insurance services provides products such as group and individual disability and life insurance, and group dental insurance. The asset management section provides services such as 401(k) retirement plans, defined benefit plans, profit sharing plans, investment management, financial planning, commercial mortgage loans, and fixed annuities. For the year ending 2007, 88.5% of total revenue came from insurance services while 11.2% came from asset management services.
Insurance Services
StanCorp’s insurance services provides coverage for about 8.1 million employees. Group insurance products products are sold by company sales representatives, although they are aided by third-party brokers and consultants. StanCorp compensates its sales representatives through incentive compensation programs. StanCorp maintains 41 field offices throughout the United States that offer sales support, customer services, and limited underwriting capabilities.
Group long-term disability insurance
Group long-term disability accounted for 41% of its insurance premiums for 2007. Its payout to policyholders is influenced by other disability payments that the policyholder might receive, such as Social Security disability pay. 50% of its disability claims are closed within 24 months, although severe disabilities may push payments well into the policyholder’s retirement age. StanCorp usually offers rate guarantees ranging from one to three years, after which it may re-price and re-underwrite its policies.
Group life and accidental insurance
Group life and accidental insurance accounted for 38% of its insurance premiums for 2007. The policies offer coverage for a specified period of time. Life insurance is also offered to employees’ families. Therefore profitability depends on signing up and retaining employees’ families while they are affiliated with the company. Because of this, economic downturns can have a multiplied effect on its profits should a group policyholder decide to lay off employees.
Other products
Group short-term disability insurance accounted for 11% of its insurance premiums for 2007. Policyholders are subjected to a delay (ranging from one to 30 days), and may not claim benefits for more than 26 weeks. The amount paid out is influenced by other disability compensation packages the company may already offer, such as sick leave.
Individual disability insurance accounted for 7% of its insurance premiums for 2007. These products include disability coverage and overhead expense coverage, amongst others. Individual disability insurance products are sold nationally by company-employed sales agents through insurance brokers to physicians, lawyers, executives, and small businesses. StanCorp motivates its third-party brokers by providing a percentage of the premiums earned as an incentive, as well as bonuses based on sales volume and persistency.
Asset Management
StanCorp’s asset management services fall under 401(k) plans, defined benefit and profit sharing plans, investment management, financial planning services, commercial mortgage loans, and individual fixed annuities.
StanCorp works with several mutual funds to invest the money it receives from people in its 4019k0, defined benefit, and other government plans. StanCorp evaluates the mutual funds it partners with for performance, expense ratios, risk, consistency, diversification, and management.
Its annuities products are sold through general agents as well as brokers and other financial institutions. Compensation to its sales team is usually a percentage of the premiums, but they may receive additional bonuses for generating a certain amount of volume and maintaining a certain level of consistency.
StanCorp also originates and underwrites commercial mortgage loans. The loans typically range between $250,000 and $1 million. StanCorp has been able to generate 36% than it did a year earlier because the credit crisis of 2007 has reduced the number of loan originators (StanCorp’s competitors), yet demand has remained strong.
Investments
Like most insurance companies, StanCorp invests a certain percentage of its premiums. Its profitability is dependent on its investments since investment returns are used to keep its policy rates competitive. While StanCorp’s portfolio has performed considerably well, 40% of it is invested in commercial real estate loans underwritten by StanCorp itself, which increases its credit risk exposure considerably compared to its competitors. Furthermore, 37% of these commercial loans originated in California, which adds geographical exposure risk.
Trends and Forces
- Geographical concentration may hurt StanCorp. Its group life insurance products make it susceptible to any large-scale accident or attack such as natural disasters or terrorism. Large-scale losses may also occur from pandemics, such as diseases or the avian flu. All these scenarios may weaken StanCorp’s financial positions and operating cash flows. Such a scenario would also affect the reinsurance market, which would limit StanCorp’s ability to mitigate its exposure and liabilities.
- Volatile interest rates will affect the annuities which StanCorp issues. During a time of increasing interest rates, many policyholders may withdraw their annuities hoping to invest them in other products with higher returns. This may lead to a net cash outflow and may force StanCorp to sell assets. During a time of decreasing interest rates, the annuities will seem more attractive and more will be held to maturity. This, in combination with a lower return on investments, might make it difficult for StanCorp to meet its minimum required payments to annuity holders.
- StanCorp is heavily exposed to the mortgage industry. A significant portion of its portfolio is composed of commercial mortgage loans, which have been declining rapidly during the mortgage crisis of 2007. Since these loans are relatively illiquid, it is difficult for StanCorp to seek alternative investments. An inability to meet certain liquidity requirements, cash balances, and overexposure to the mortgage market might lead to a downgrade of StanCorp’s financial ratings, which will affect its ability to borrow and will decrease public confidence in the company’s products.
- As a holding company, it is dependent on its subsidiaries for cash transfers to pay dividends and interest on debt. State regulation on insurance companies limit the amount that they can pay out in dividends, which affect cash flows from StanCorp’s insurance subsidiaries.
- Overexposure to the western United States may hurt StanCorp’s financial positions. Many of its mortgages are located in California, making it extremely susceptible to California’s economic fluctuations. Currently, California’s real-estate market has experienced the biggest downturn in the United States. Furthermore, wildfires, earthquakes, and floods, all common in California, may hurt cash flows to StanCorp, which in turn will decrease its returns on investments and harm its financial stability.
References
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