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StanCorp Financial Group, Inc. Reports First Quarter 2012 Earnings

StanCorp Financial Group, Inc. (NYSE: SFG) today reported net income for the first quarter of 2012 of $35.2 million, or $0.79 per diluted share, compared to net income for the first quarter of 2011 of $33.3 million, or $0.72 per diluted share. After-tax net capital losses were $0.1 million for the first quarter of 2012, compared to after-tax net capital losses of $1.5 million for the first quarter of 2011.

Net income excluding after-tax net capital losses increased to $0.79 per diluted share for the first quarter of 2012 from $0.75 per diluted share for the first quarter of 2011 (see discussion of non-GAAP financial measures below), primarily due to the effect of a 1.7 million share decrease in diluted weighted-average shares outstanding (see discussion of shares outstanding below) and a lower effective income tax rate as a result of the Company’s purchases of tax-advantaged investments.

Effective January 1, 2012, the Company adopted Accounting Standards Update (“ASU”) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, on a retrospective basis. In accordance with ASU 2010-26, the Company has adjusted its financial results for the periods prior to the first quarter of 2012. As a result of the adjustment, net income excluding after-tax net capital losses per diluted share decreased $0.01 for the first quarter of 2011.

“I am pleased with our results for the first quarter of 2012. We saw group insurance premium growth, a continued improvement in our long term disability claims experience, solid asset management earnings and a strong investment portfolio,” said Greg Ness, chairman, president and chief executive officer. “We remain focused on the fundamentals of our businesses and are encouraged by the progress through the first quarter of 2012.”

Business Segments

Insurance Services

The Insurance Services segment reported income before income taxes of $46.1 million for the first quarter of 2012, compared to $46.0 million for the first quarter of 2011.

Premiums for the Insurance Services segment increased 3.9% to $551.1 million for the first quarter of 2012, compared to $530.5 million for the first quarter of 2011. Group insurance premiums for the first quarter of 2012 were $506.9 million, a 3.8% increase compared to the first quarter of 2011. The increase in premiums for the first quarter of 2012 was primarily due to strong premium persistency and sales from 2011, and renewals in 2012. Premiums for individual disability insurance for the first quarter of 2012 were $44.2 million, compared to $42.1 million for the first quarter of 2011.

Sales for the group insurance businesses, reported as annualized new premiums, were $128.8 million and $160.3 million for the first quarters of 2012 and 2011, respectively. The decrease in group insurance sales was primarily due to pricing competition.

The discount rate used for newly established long term disability claim reserves was 4.75% for the first quarter of 2012, compared to 5.50% for the first quarter of 2011. The 75 basis point decrease in the discount rate resulted in a corresponding decrease in quarterly pre-tax income of $4.8 million. The lower discount rate for the first quarter of 2012 compared to the first quarter of 2011 was primarily the result of a continued low interest rate environment.

The benefit ratio for group insurance products, measured as benefits to policyholders and interest credited as a percentage of premiums, was 83.5% for the first quarter of 2012, compared to 84.2% for the first quarter of 2011. The decrease was primarily due to more favorable claims experience in the group long term disability insurance business, partially offset by the 75 basis point decrease in the discount rate used for newly established long term disability claim reserves for the first quarter of 2012. Claims experience can fluctuate widely from quarter to quarter and tends to be more stable when measured over a longer period of time.

The benefit ratio for individual disability insurance was 52.3% for the first quarter of 2012, compared to 57.2% for the first quarter of 2011. Due to the relatively small size of the individual disability insurance block of business, the benefit ratio for this business will generally fluctuate more than the benefit ratio for the group insurance business.

Asset Management

The Asset Management segment reported income before income taxes of $15.0 million for the first quarter of 2012, compared to $18.9 million for the first quarter of 2011. The decrease in income before income taxes was primarily due to lower bond call premiums for the first quarter of 2012. Bond call premiums added approximately $3 million of additional income before income taxes for the first quarter of 2011 compared to the first quarter of 2012.

Assets under administration for the Asset Management segment, which includes retirement plans, individual fixed annuities, private client wealth management and commercial mortgage loans managed for third-party investors, decreased 1.7% to $21.58 billion at March 31, 2012, compared to $21.96 billion at March 31, 2011. The decrease was primarily due to an elevated level of retirement plan terminations during 2011.

StanCorp Mortgage Investors originated $209.5 million and $196.3 million of commercial mortgage loans for the first quarters of 2012 and 2011, respectively.

Other

The Other category includes the 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 the disposition of the Company’s invested assets and adjustments made in consolidation. The Other category reported a loss before income taxes of $13.4 million for the first quarter of 2012, compared to a loss before income taxes of $15.5 million for the first quarter of 2011. Net capital losses for the first quarter of 2012 were $0.2 million, compared to net capital losses of $2.5 million for the first quarter of 2011.

Fixed Maturity Securities and Commercial Mortgage Loans

At March 31, 2012, the Company’s investment portfolio consisted of 56.6% fixed maturity securities, 41.1% commercial mortgage loans, and 2.3% real estate and other invested assets. The overall weighted-average credit rating of the fixed maturity securities portfolio was A (Standard & Poor’s) at March 31, 2012.

At March 31, 2012, commercial mortgage loans in the Company’s investment portfolio totaled $4.98 billion on more than 6,190 commercial mortgage loans. The average loan balance retained by the Company in the portfolio was approximately $0.8 million. Commercial mortgage loans more than 60 days delinquent were 0.33% and 0.42% of the portfolio balance at March 31, 2012 and 2011, respectively.

Capital and Book Value

The Company’s available capital increased $15 million to approximately $235 million at March 31, 2012 compared to December 31, 2011. Available capital includes capital at its insurance subsidiaries in excess of the Company’s target risk-based capital ratio (“RBC”) of 300% and cash and capital at the holding company and non-insurance subsidiaries. The Company reported available capital after subtracting an allocation for expected annual interest and dividends.

The Company’s book value per share grew 10.4% from $41.51 at March 31, 2011, to $45.82 at March 31, 2012. The Company’s book value per share excluding accumulated other comprehensive income or loss (“AOCI”) grew 6.0% from $38.17 at March 31, 2011, to $40.47 at March 31, 2012.

Shares Outstanding

The Company did not repurchase any shares during the first quarter of 2012. At March 31, 2012, the Company had 3.0 million shares remaining under its repurchase authorization, which expires December 31, 2012. Diluted weighted-average shares outstanding for the first quarters of 2012 and 2011 were 44,461,841 and 46,190,915, respectively.

Non-GAAP Financial Measures

Financial measures that exclude after-tax net capital gains and losses and AOCI are non-GAAP (Generally Accepted Accounting Principles in the United States) measures. To provide investors with a broader understanding of earnings, the Company provides net income per diluted share excluding after-tax net capital gains and losses, along with the GAAP measure of net income per diluted share, because capital gains and losses are not likely to occur in a stable pattern.

Return on average equity excluding after-tax net capital gains and losses from net income and AOCI from equity is furnished along with the GAAP measure of net income return on average equity because management believes providing both measures gives investors a broader understanding of return on average equity. Measuring return on average equity without AOCI excludes the effect of market value fluctuations of the Company’s fixed maturity securities associated with changes in interest rates and other market data. Management believes that measuring return on average equity without AOCI is important to investors because the turnover of the Company’s portfolio of fixed maturity securities may not be such that unrealized gains and losses reflected in AOCI are ultimately realized. Furthermore, management believes exclusion of AOCI provides investors with a better measure of return.

About StanCorp Financial Group, Inc.

StanCorp Financial Group, Inc., through its subsidiaries marketed as The Standard — Standard Insurance Company, The Standard Life Insurance Company of New York, Standard Retirement Services, StanCorp Mortgage Investors, StanCorp Investment Advisers, StanCorp Real Estate and StanCorp Equities — is a leading provider of financial products and services. StanCorp’s subsidiaries offer group and individual disability insurance, group life and accidental death and dismemberment insurance, group dental and group vision insurance, absence management services, retirement plans products and services, individual annuities and investment advice. For more information about StanCorp Financial Group, Inc., visit its investor website at www.stancorpfinancial.com.

Conference Call

StanCorp management will hold an investor and analyst conference call on April 24, 2012, at noon Eastern time (9:00 a.m. Pacific time) to review StanCorp’s first quarter results.

To listen to the live webcast of this conference call, visit www.stancorpfinancial.com; Windows Media PlayerTM will be required to listen to the webcast. A webcast replay will be available starting approximately two hours after the original broadcast. The replay will be available through June 15, 2012.

A telephone replay of the conference call will also be available approximately two hours after the conference call by dialing (877) 660-6853 or (201) 612-7415 and entering account number 286 and conference identification number 391143. The replay will be available through April 27, 2012.

Forward-Looking Information

Some of the statements contained in this earnings release, including those relating to the Company’s strategy, growth prospects and other statements that are predictive in nature, that depend on or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “seeks” and similar expressions, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements are not historical facts but instead represent only management’s expectations, estimates and projections regarding future events. Similarly, these statements are not guarantees of future performance and involve uncertainties that are difficult to predict, which may include, but are not limited to, the factors discussed below. As a provider of financial products and services, the Company’s results of operations may vary significantly in response to economic trends, interest rate changes, investment performance and claims experience. Caution should be used when extrapolating historical results or conditions to future periods.

The Company’s actual results and financial condition may differ, perhaps materially, from the anticipated results and financial condition in any such forward-looking statements. Because such statements are subject to risks and uncertainties, actual results in future periods may differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties or circumstances, readers are cautioned not to place undue reliance on such statements. The Company assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. See StanCorp's 2011 annual report on Form 10-K filed with the Securities and Exchange Commission for a description of the types of uncertainties and risks that may affect actual results.

The following factors could cause results to differ materially from management expectations as suggested by such forward-looking statements:

  • Growth of sales, premiums, annuity deposits, cash flows, assets under administration including performance of equity investments in the separate account, gross profits and profitability.
  • Availability of capital required to support business growth and the effective utilization of capital, including the ability to achieve financing through debt or equity.
  • Changes in liquidity needs and the liquidity of assets in its investment portfolio.
  • Ability to refinance or retire maturing debt.
  • Integration and performance of business acquired through reinsurance or acquisition.
  • Changes in financial strength and credit ratings.
  • Changes in the regulatory environment at the state or federal level including changes in income tax rates and regulations or changes in U.S. GAAP accounting principles, practices or policies.
  • Findings in litigation or other legal proceedings.
  • Intent and ability to hold investments consistent with its investment strategy.
  • Receipt of dividends from, or contributions to, its subsidiaries.
  • Adequacy of the diversification of risk by product offerings and customer industry, geography and size, including concentration of risk, especially inherent in group life products.
  • Adequacy of asset-liability management.
  • Events of terrorism, natural disasters or other catastrophic events, including losses from a disease pandemic.
  • Benefit ratios, including changes in claims incidence, severity and recovery.
  • Levels of persistency.
  • Adequacy of reserves established for future policy benefits.
  • The effect of changes in interest rates on reserves, policyholder funds, investment income and commercial mortgage loan prepayment fees.
  • Levels of employment and wage growth and the impact of rising benefit costs on employer budgets for employee benefits.
  • Competition from other insurers and financial services companies, including the ability to competitively price its products.
  • Ability of reinsurers to meet their obligations.
  • Availability, adequacy and pricing of reinsurance and catastrophe reinsurance coverage and potential charges incurred.
  • Achievement of anticipated levels of operating expenses.
  • Adequacy of diversification of risk within its fixed maturity securities portfolio by industries, issuers and maturities.
  • Adequacy of diversification of risk within its commercial mortgage loan portfolio by borrower type, property type and geographic region.
  • Credit quality of the holdings in its investment portfolios.
  • The condition of the economy and expectations for interest rate changes.
  • The effect of changing levels of commercial mortgage loan prepayment fees and participation levels on cash flows.
  • Experience in delinquency rates or loss experience in its commercial mortgage loan portfolio.
  • Adequacy of commercial mortgage loan loss allowance.
  • Concentration of commercial mortgage loan assets collateralized in certain states such as California.
  • Concentration of commercial mortgage loan assets by borrower.
  • Environmental liability exposure resulting from commercial mortgage loan and real estate investments.
   
StanCorp Financial Group, Inc.
Consolidated Statements of Income and Comprehensive Income
(Dollars in millions - except share data)
(Unaudited)
         
Three Months Ended
March 31,

 

2012

 

 

2011

Revenues:
Premiums:
Insurance Services $ 551.1 $ 530.5
Asset Management   2.2       3.3  
Total premiums   553.3       533.8  
Administrative fees:
Insurance Services 3.1 2.7
Asset Management 29.9 30.6
Other   (4.4 )     (3.9 )
Total administrative fees   28.6       29.4  
Net investment income:
Insurance Services 84.6 84.4
Asset Management 73.1 69.6
Other   2.0       3.0  
Total net investment income   159.7       157.0  
Net capital losses:

Total other-than-temporary impairment losses on fixed maturity securities — available-for-sale

(0.8 ) (0.9 )
All other net capital gains (losses)   0.6       (1.6 )
Total net capital losses   (0.2 )     (2.5 )

Total revenues

  741.4       717.7  
Benefits and expenses:
Benefits to policyholders 450.0 440.1
Interest credited 47.2 40.4
Operating expenses 123.9 118.3
Commissions and bonuses 55.4 58.8
Premium taxes 10.0 9.4
Interest expense 9.7 9.7
Net increase in deferred acquisition costs, value of business acquired and other intangible assets
  (2.5 )     (8.4 )
Total benefits and expenses   693.7       668.3  
 
Income (loss) before income taxes:
Insurance Services 46.1 46.0
Asset Management 15.0 18.9
Other   (13.4 )     (15.5 )
Total income before income taxes 47.7 49.4
Income taxes   12.5       16.1  
Net income   35.2       33.3  
 
Other comprehensive income (loss), net of tax:

Unrealized gains (losses) on securities — available-for-sale:

Net unrealized capital gains on securities — available-for-sale

1.3 (9.0 )

Reclassification adjustment for net capital gains included in net income

(0.8 ) (2.8 )
Employee benefit plans:

Prior service credit and net losses arising during the period, net

0.4 1.5

Reclassification adjustment for amortization to net pension cost, net

  1.6       0.8  
Total other comprehensive income (loss), net of tax   2.5       (9.5 )
Comprehensive income $ 37.7     $ 23.8  
 
Net income per common share:
Basic $ 0.79 $ 0.72
Diluted 0.79 0.72
 
Weighted-average common shares outstanding:
Basic 44,327,122 45,933,253
Diluted 44,461,841 46,190,915
 
   
StanCorp Financial Group, Inc.
Consolidated Balance Sheets
(Dollars in millions)
(Unaudited)
         
March 31, December 31,
2012   2011
Assets:
Investments:
Fixed maturity securities—available-for-sale (amortized cost of $6,304.2 and $6,209.9) $ 6,863.8 $ 6,769.5
Commercial mortgage loans, net 4,980.2 4,902.3
Real estate, net 101.5 92.7
Other invested assets   177.4     130.9
Total investments 12,122.9 11,895.4
Cash and cash equivalents 116.0 138.4
Premiums and other receivables 123.2 118.8
Accrued investment income 114.0 111.7
Amounts recoverable from reinsurers 953.7 949.3
Deferred acquisition costs, value of business acquired
and other intangible assets, net 349.1 344.9
Goodwill 36.0 36.0
Property and equipment, net 98.7 101.3
Other assets 102.1 113.9
Separate account assets   5,083.4     4,593.5
Total assets $ 19,099.1   $ 18,403.2
 
Liabilities and shareholders' equity:
Liabilities:
Future policy benefits and claims $ 5,714.5 $ 5,683.6
Other policyholder funds 5,122.5 5,078.1
Deferred tax liabilities, net 117.7 103.0
Short-term debt 251.3 251.2
Long-term debt 301.3 300.9
Other liabilities 474.9 402.5
Separate account liabilities   5,083.4     4,593.5
Total liabilities   17,065.6     16,412.8
 
Commitments and contingencies
 
Shareholders' equity:
Preferred stock, 100,000,000 shares authorized; none issued - -
Common stock, no par, 300,000,000 shares authorized;
44,377,419 and 44,268,859 shares issued at March 31,2012
and December 31, 2011, respectively 87.8 82.4
Accumulated other comprehensive income 237.6 235.1
Retained earnings   1,708.1     1,672.9
Total shareholders' equity   2,033.5     1,990.4
Total liabilities and shareholders' equity $ 19,099.1   $ 18,403.2
 
 
StanCorp Financial Group, Inc.
Statistical and Operating Data at or for the Periods Indicated
(Dollars in millions - except share data)
(Unaudited)
           
Three Months Ended
March 31,

 

2012

 

 

2011

Benefit ratio:
% of total revenues:
Group Insurance (including interest credited) 72.8 % 73.1 %
Individual Disability Insurance 40.1 43.6
Insurance Services segment (including interest credited) 69.9 70.5
% of total premiums:
Group Insurance (including interest credited) 83.5 % 84.2 %
Individual Disability Insurance 52.3 57.2
Insurance Services segment (including interest credited) 81.0 82.1
 
Reconciliation of non-GAAP financial measures:
Net income $ 35.2 $ 33.3
After-tax net capital losses   (0.1)     (1.5)  
Net income excluding after-tax net capital losses $ 35.3   $ 34.8  
 
Net capital losses $ (0.2) $ (2.5)
Tax benefit on net capital losses   (0.1)     (1.0)  
After-tax net capital losses $ (0.1)   $ (1.5)  
 
Diluted earnings per common share:
Net income $ 0.79 $ 0.72
After-tax net capital losses   -     (0.03)  
Net income excluding after-tax net capital losses $ 0.79   $ 0.75  
 
Shareholders' equity $ 2,033.5 $ 1,883.8
Accumulated other comprehensive income   237.6     151.4  
Shareholders' equity excluding accumulated other comprehensive income
$ 1,795.9   $ 1,732.4  
 
 
Net income return on average equity 7.0 % 7.1 %
Net income return on average equity (excluding accumulated other comprehensive income)
7.9 7.7
Net income return on average equity (excluding after-tax net capital losses and accumulated other comprehensive income)
 
8.0 8.0
 
Statutory data - insurance subsidiaries:
Net gain from operations before federal income taxes and realized capital gains (losses)
$ 42.1 $ 43.7
Net gain from operations after federal income taxes and before realized capital gains (losses)
36.8 26.6
 
March 31, December 31,
2012   2011
 
Capital and surplus $ 1,219.8 $ 1,193.1
Asset valuation reserve 111.7 107.2
 

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