StanCorp Financial Group (NYSE: SFG) 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.
SFG's insurance subsidiary underwrites group and individual disability insurance and annuity products, group life and AD&D insurance, and provides group dental and vision insurance, absence management services and retirement plan products. This segment earns revenues by charging premiums on insurance policies it writes.
SFG's asset management segment earns revenues based on a small percentage of the Assets Under Management (AUM) that it holds. As a result, in order to increase profitability, SFG needs to attract more assets to manage, as well as increase the value of the assets it already manages.
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 serves approximately 8.1 million customers nationwide 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.
In 2009, SFG earned a total of $2.77 billion in total revenues. This was a slight increase from its 2008 total revenues of $2.67 billion. As a result, this had a positive impact on SFG's net income. Between 2008 and 2009, SFG's net income increased from $163 million in 2008 to $209 million in 2009.
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.
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 401k, 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.
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.
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.
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.
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.
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.