StanCorp Financial Group, Inc. Reports Second Quarter 2008 Earnings
PORTLAND, Ore., July 21 /EMWNews/ -- StanCorp Financial Group, Inc. (NYSE: SFG) today reported net income for the second quarter of 2008 of $0.98 per diluted share, compared to $0.97 per diluted share for the second quarter of 2007. Net income for the same periods was $48.4 million and $52.1 million, respectively. After-tax net capital losses were $14.0 million for the second quarter of 2008, compared to after-tax net capital gains of $0.4 million for the second quarter of 2007. After-tax net capital losses for the second quarter of 2008 primarily related to impairment write-downs of previously disclosed debt security holdings of bond insurers Ambac, Radian and MBIA. Net income excluding after-tax net capital gains and losses increased 31.3% to $1.26 per diluted share for the second quarter of 2008, compared to $0.96 per diluted share for the second quarter of 2007 (see discussion of non-GAAP financial measures below). The increase reflected comparatively favorable claims experience for the group insurance businesses. In addition, diluted weighted-average shares were 49.4 million in the second quarter of 2008 compared to 53.7 million for the second quarter of 2007. "We are pleased to see sustained strength in our Insurance Services and Asset Management segments," said Eric E. Parsons, chairman, president and chief executive officer. "While asset impairments are never welcome, it was prudent to recognize the reduced market value of holdings related to three bond insurers. We had no material additions to our watchlist and our mortgage loan portfolio continues to perform well. In an uncertain economic environment, we continue to maintain our commitment to long-term financial success." Operating expenses were $115.8 million for the second quarter of 2008, compared to $105.7 million for the second quarter of 2007. The increase in operating expenses was primarily driven by business growth in the Insurance Services segment as evidenced by premium growth, as well as technology infrastructure costs related to the integration of acquired businesses in the Asset Management segment. Year-to-Date Net income for the first six months of 2008 was $2.00 per diluted share, compared to net income of $1.86 per diluted share for the first six months of 2007. Net income for these same periods was $98.7 million and $100.4 million, respectively. After-tax net capital losses for the first six months of 2008 were $16.8 million, compared to after-tax net capital gains of $1.0 million for the first six months of 2007. Net income excluding after-tax net capital gains and losses for the first six months of 2008 was $2.34 per diluted share, compared to $1.85 per diluted share for the first six months of 2007. The increase was primarily due to premium growth and comparatively favorable claims experience in the group insurance businesses. Premium growth for the Insurance Services segment between the comparative periods was 6.5%, and revenue growth for the Asset Management segment was 9.8%. In addition, diluted weighted-average shares were 49.4 million for the first six months of 2008 compared to 53.8 million for the first six months of 2007.
Guidance For 2008, the Company expects: -- That its long-term target for return on average equity of 14% to 15% will be met or exceeded, -- That its long-term target for earnings per diluted share growth of 12% to 15% will be achieved, and -- That its premium growth will be at or below the low end of its previously stated 2008 range of 6% to 8%. The Company is maintaining its group insurance benefit ratio guidance of 77.5% to 79.5%. However, actual experience over the past four years indicates that the benefit ratio for 2008 could be at the lower end of the range. The Company expects positive net cash flows in its asset management businesses but will not provide specific short-term guidance with regard to overall asset growth due to the current volatility in the equity markets. The Company's actual results for 2008 could differ from the ranges described above due to many factors. For more information about factors that may change the Company's 2008 financial results, see Forward-Looking Information.
Business Segments Insurance Services The Insurance Services segment reported income before income taxes of $89.3 million for the second quarter of 2008, compared to $72.4 million for the second quarter of 2007. Results for the second quarter of 2008 were affected by premium growth and comparatively favorable claims experience in the group insurance businesses. Premiums for the Insurance Services segment increased 4.1% to $534.0 million for the second quarter of 2008, compared to $512.9 million for the second quarter of 2007. Premiums for the second quarter of 2007 included a single premium of $19.3 million related to a reserve buyout. Adjusted for the 2007 reserve buyout, premium growth for the second quarter of 2008 was 8.2%. Sales for group insurance products, reported as annualized new premiums, were $43.0 million for the second quarter of 2008, compared to $58.3 million for the second quarter of 2007. Adjusted for the 2007 reserve buyout, sales growth for the second quarter of 2008 was 10.3%. The benefit ratio for group insurance products for the second quarter of 2008 was 74.4%, compared to 79.0% for the second quarter of 2007. Claims experience can fluctuate widely from quarter to quarter and tends to be more stable when measured over a longer period of time. The discount rate used in the second quarter of 2008 for newly-established long term disability claim reserves was increased 25 basis points to 5.25% from the 5.00% used in the first quarter of 2008. The discount rate used in the second quarter of 2007 was 5.50%. Asset Management The Asset Management segment reported income before income taxes of $12.6 million for the second quarter of 2008 compared to $12.2 million for the second quarter of 2007. The increase primarily reflected the impact of increased revenues due to higher asset balances partially offset by increased expenses related to integration and infrastructure work in the retirement plans business. Revenues for this segment increased 13.6% to $88.8 million for the second quarter of 2008, compared to $78.2 million for the second quarter of 2007. Assets under administration for the Asset Management segment, which includes retirement plans, individual annuities and outside managed commercial mortgage loans, increased 8.3% to $22.19 billion at June 30, 2008 compared to June 30, 2007. The increase reflected growth in retirement plans customer deposits, individual annuities and mortgage loans under management partially offset by declines in market values of equity assets under administration. StanCorp Mortgage Investors originated $380.5 million and $395.9 million of commercial mortgage loans for the second quarters of 2008 and 2007, respectively. Mortgage loans managed for other investors were $2.26 billion at June 30, 2008, a 39.9% increase compared to June 30, 2007. Other The Other category includes net capital gains and losses, return on capital not allocated to the product segments, holding company expenses, interest on debt, and adjustments made in consolidation. The Other category reported a loss before income taxes of $31.4 million for the second quarter of 2008, compared to a loss before income taxes of $5.6 million for the second quarter of 2007. The loss before income taxes for the second quarter of 2008 included net capital losses of $21.6 million, compared to net capital gains of $0.7 million for the second quarter of 2007. The increase in net capital losses was primarily related to asset write-downs of fixed maturity securities. The loss before income taxes also included additional interest expense of $3.6 million compared to the second quarter of 2007, which primarily resulted from $300 million in long-term debt issued in May 2007. Fixed Maturity Securities and Commercial Mortgage Loans At June 30, 2008, the Company's investment portfolio consisted of approximately 57% fixed maturity securities, 42% commercial mortgage loans and 1% in real estate. The overall rating of the fixed maturity securities portfolio was A (Standard & Poor's) at June 30, 2008. The Company's holdings in bond insurers Ambac, Radian and MBIA had a book value of approximately $35 million. In the second quarter, the Company recognized other-than-temporary impairments for these holdings of $18.9 million. At June 30, 2008, commercial mortgage loans in the Company's investment portfolio totaled $3.97 billion on approximately 5,161 commercial mortgage loans. The average loan-to-value ratio for the overall portfolio was 58.3%, and the Company's average exposure was approximately $0.8 million per loan. The Company has the contractual ability to pursue personal recourse on most of the loans. Mortgage loans more than 60 days delinquent were 0.13% of the portfolio balance at June 30, 2008, compared to 0.09% of the portfolio balance at June 30, 2007. Commercial mortgage loan prepayment fees were $2.2 million for the second quarter of 2008, compared to $2.4 million for the second quarter of 2007. The Company does not have direct exposure to sub prime or alt-A mortgages in its investment portfolio. There were no material losses in our mortgage loan portfolio during the second quarter of 2008. Shares Outstanding Diluted weighted-average shares outstanding for the second quarters of 2008 and 2007 were 49.4 million and 53.7 million, respectively. During the second quarter of 2008, the Company repurchased 0.1 million shares at a total cost of $5.0 million, a volume weighted-average price of $50.52 per common share. At June 30, 2008, the Company had 1.1 million shares remaining under its repurchase program, which expires December 31, 2008. Non-GAAP Financial Measures Financial measures that exclude after-tax net capital gains and losses and accumulated other comprehensive income (loss) 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 accumulated other comprehensive income (loss) 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 equity. Measuring return on average equity without accumulated other comprehensive income (loss) excludes the effect of market value fluctuations of the Company's fixed maturity securities primarily associated with changes in interest rates. Management believes that measuring return on average equity without accumulated other comprehensive income (loss) 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 accumulated other comprehensive income (loss) are ultimately realizable. Furthermore, for the purpose of calculating this ratio, management believes exclusion of other comprehensive income (loss) 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, StanCorp Equities, and StanCorp Trust Company -- is a leading provider of financial products and services. StanCorp's subsidiaries serve approximately 8.5 million customers nationwide as of June 30, 2008, with group and individual disability insurance, group life, AD&D and dental insurance, retirement plans products and services, individual annuities and investment advice. For more information about StanCorp Financial Group, Inc., visit its Web site at http://www.stancorpfinancial.com. Conference Call StanCorp management will hold an investor and analyst conference call to review StanCorp's second quarter 2008 results on July 22, 2008, at noon Eastern time (9:00 a.m. Pacific time). To listen to the live webcast of this conference call, logon to http://www.stancorpfinancial.com/investors. Windows Media Player(TM) 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 September 12, 2008. A telephone replay of the conference call will also be available approximately two hours after the conference call by dialing (800) 642-1687 or (706) 645-9291 and entering conference identification number 53288913. The replay will be available through July 31, 2008. Forward-Looking Information Some of the statements contained in this earnings release, including those relating to the Company's strategy and 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. Given these uncertainties or circumstances, readers are cautioned not to place undue reliance on such statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following factors could cause results to differ materially from management expectations as suggested by such forward-looking statements: -- Growth of sales, premiums and annuity deposits, cash flows, gross profits and profitability. -- Availability of capital required to support business growth and the effective utilization of excess capital. -- Integration and performance of business acquired through reinsurance or acquisition. -- Financial strength and credit ratings. -- Changes in the regulatory environment at the state or federal level or changes in U.S. GAAP accounting principles, practices or policies. -- Findings in litigation or other legal proceedings. -- Receipt of dividends from, or contributions to, our subsidiaries. -- Adequacy of the diversification of risk by product offerings and customer industry, geography and size. -- Adequacy of asset/liability management. -- Events of terrorism, natural disasters or other catastrophic events. -- Changes in federal or state income taxes. -- Growth in assets under administration including performance of equity investments in the separate account. -- 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. -- The impact of rising benefit costs on employer budgets for employee benefits. -- Levels of employment and wage growth. -- Competition from other insurers and financial services companies, including the ability to competitively price our products. -- Concentration of risk that is especially inherent in group life products. -- Ability of reinsurers to meet their obligations. -- Availability, adequacy and pricing of reinsurance and catastrophe reinsurance coverage and potential charges incurred. -- Losses from a disease pandemic. -- Achievement of anticipated levels of operating expenses. -- Credit quality of the holdings in our investment portfolios. -- The condition of the economy and expectations for interest rate changes. -- The effect of changing levels of commercial mortgage loan prepayment fees on cash flows. -- Experience in delinquency rates or loss experience in our commercial mortgage loan portfolio. -- Concentration of commercial mortgage loan assets collateralized in California. -- Environmental liability exposure resulting from commercial mortgage loan and real estate investments.
StanCorp Financial Group, Inc. Consolidated Statements of Income and Comprehensive Income (Amounts in millions - except share data) Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Revenues: Unaudited Unaudited Premiums: Insurance Services $534.0 $512.9 $1,068.3 $1,002.7 Asset Management 9.0 5.2 15.2 7.4 Total premiums 543.0 518.1 1,083.5 1,010.1 Administrative fees: Insurance Services 2.4 1.9 4.7 3.9 Asset Management 31.7 29.4 60.5 56.8 Other (3.2) (2.9) (6.4) (5.8) Total administrative fees 30.9 28.4 58.8 54.9 Net investment income: Insurance Services 85.3 81.5 168.2 161.1 Asset Management 48.1 43.6 88.0 84.9 Other 3.2 5.6 9.2 8.0 Total net investment income 136.6 130.7 265.4 254.0 Net capital gains (losses) (21.6) 0.7 (26.0) 1.6 Total revenues 688.9 677.9 1,381.7 1,320.6 Benefits and expenses: Benefits to policyholders 409.2 409.9 820.9 791.9 Interest credited 27.8 28.0 49.0 53.6 Operating expenses 115.8 105.7 232.7 212.0 Commissions and bonuses 54.9 46.4 112.1 96.4 Premium taxes 9.4 9.3 18.4 18.2 Interest expense 9.9 6.3 19.6 10.8 Net increase in deferred acquisition costs, value of business acquired and intangibles (8.6) (6.7) (17.6) (15.1) Total benefits and expenses 618.4 598.9 1,235.1 1,167.8 Income (loss) before income taxes: Insurance Services 89.3 72.4 168.2 139.5 Asset Management 12.6 12.2 20.9 22.6 Other (31.4) (5.6) (42.5) (9.3) Total income before income taxes 70.5 79.0 146.6 152.8 Income taxes 22.1 26.9 47.9 52.4 Net income 48.4 52.1 98.7 100.4 Other comprehensive loss, net of tax: Unrealized gains or losses on securities available-for sale: Unrealized capital losses on securities available-for-sale, net (78.1) (54.8) (57.6) (46.2) Reclassification adjustment for net capital (gains) losses included in net income, net 0.1 (1.5) (1.1) (1.8) Employee benefit plans: Prior service cost arising during the period, net - - - (1.4) Reclassification adjustment for amortization to net periodic pension cost, net 0.2 0.2 0.4 0.5 Total (77.8) (56.1) (58.3) (48.9) Comprehensive income (loss) $(29.4) $(4.0) $40.4 $51.5 Net income per common share: Basic $0.99 $0.98 $2.02 $1.88 Diluted 0.98 0.97 2.00 1.86 Weighted-average common shares outstanding: Basic 48,943,331 53,195,859 48,950,232 53,311,550 Diluted 49,414,086 53,735,309 49,387,519 53,846,800 StanCorp Financial Group, Inc. Consolidated Balance Sheets (Dollars in millions) June 30, December 31, 2008 2007 Assets: Unaudited Investments: Fixed maturity securities $5,285.9 $4,997.1 Short-term investments 1.8 4.5 Commercial mortgage loans, net 3,967.8 3,657.7 Real estate, net 72.2 71.8 Policy loans 3.8 3.9 Total investments 9,331.5 8,735.0 Cash and cash equivalents 72.2 205.8 Premiums and other receivables 101.5 106.8 Accrued investment income 100.5 93.1 Amounts recoverable from reinsurers 937.8 929.6 Deferred acquisition costs, value of business acquired, intangibles and goodwill, net 345.7 324.8 Property and equipment, net 134.0 126.9 Deferred tax assets, net 11.9 - Other assets 33.7 74.5 Separate account assets 4,157.8 4,386.4 Total assets $15,226.6 $14,982.9 Liabilities and equity: Liabilities: Future policy benefits and claims $5,246.0 $5,158.7 Other policyholder funds 3,533.3 3,153.8 Deferred tax liabilities - 15.6 Short-term debt 22.0 4.0 Long-term debt 562.3 562.6 Other liabilities 239.4 272.8 Separate account liabilities 4,157.8 4,386.4 Total liabilities 13,760.8 13,553.9 Contingencies and commitments Shareholders' equity: Preferred stock, 100,000,000 shares authorized; none issued - - Common stock, no par, 300,000,000 shares authorized; 49,029,174 and 49,155,131 shares issued at June 30, 2008 and December 31, 2007, respectively 263.5 267.1 Accumulated other comprehensive income (loss) (41.5) 16.8 Retained earnings 1,243.8 1,145.1 Total shareholders' equity 1,465.8 1,429.0 Total liabilities and shareholders' equity $15,226.6 $14,982.9 StanCorp Financial Group, Inc. Statistical and Operating Data at or for the Periods Indicated (Dollars in millions) Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Unaudited Unaudited Benefit ratio: % of total revenues: Group Insurance (including interest credited) 64.6% 68.9% 65.7% 69.0% Individual Disability Insurance 61.9 59.3 57.8 49.2 Insurance Services segment (including interest credited) 64.4 68.2 65.1 67.5 % of total premiums: Group Insurance (including interest credited) 74.4% 79.0% 75.5% 79.3% Individual Disability Insurance 84.3 84.2 76.9 68.5 Insurance Services segment (including interest credited) 75.0 79.3 75.6 78.6 Reconciliation of non-GAAP financial measures: Net income $48.4 $52.1 $98.7 $100.4 After-tax net capital gains (losses) (14.0) 0.4 (16.8) 1.0 Net income excluding after-tax net capital gains (losses) $62.4 $51.7 $115.5 $99.4 Net capital gains (losses) $(21.6) $0.7 $(26.0) $1.6 Taxes on net capital gains (losses) (7.6) 0.3 (9.2) 0.6 After-tax net capital gains (losses) $(14.0) $0.4 $(16.8) $1.0 Diluted earnings per common share: Net income $0.98 $0.97 $2.00 $1.86 After-tax net capital gains (losses) (0.28) 0.01 (0.34) 0.01 Net income excluding after-tax net capital gains (losses) $1.26 $0.96 $2.34 $1.85 Shareholders' equity $1,465.8 $1,439.7 Accumulated other comprehensive loss (41.5) (57.0) Shareholders' equity excluding accumulated other comprehensive loss $1,507.3 $1,496.7 Net income return on average equity 13.6% 13.8% Net income return on average equity (excluding accumulated other comprehensive loss) 13.5 13.5 Net income return on average equity (excluding after-tax net capital gains (losses) and accumulated other comprehensive loss) 15.8 13.4 Statutory data - insurance subsidiaries: Net gain from operations before federal income taxes $86.2 $56.6 $162.7 $113.9 Net gain from operations after federal income taxes and before net realized capital gains (losses) 57.2 36.2 113.3 74.3 June 30, December 31, 2008 2007 Unaudited Capital and surplus $1,146.5 $1,047.8 Asset valuation reserve 101.5 102.2
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