StanCorp Financial Group Inc.’s (SFG) third quarter earnings of $1.21 per share were just a penny ahead of the Zacks Consensus Estimate of $1.20 per share. The company had earned $1.46 per share in the year-ago quarter. High unemployment rate and rising joblessness continue to impact the company’s earnings.

Quarterly results reflect higher-than-expected claims activity and reduced premiums in the group insurance business. However, the company benefited from the expense reduction initiatives.

Insurance Services segment reported income before income taxes of $84.3 million compared to $103.4 million in the year-ago quarter. The decrease was driven by unfavorable claims experience and a drop in premiums in the group insurance business, partially offset by comparatively favorable claims experience in the individual disability insurance business. Results for this segment were also hurt by a 50 basis point reduction in the discount rate to 4.75% for the newly established disability claim reserves.

Premiums were down 3.9% year-over-year to $501.9 million. Group insurance premiums were down 4.7% year-over-year due to challenged labor market conditions.

The benefit ratio for group insurance products for the quarter was 76.3%, compared to 71.1% for the third quarter of 2008. The benefit ratio for individual disability insurance was 58.3% for the reported quarter, compared to 78.1% for the third quarter of 2008.

Asset Management’s income before taxes was $11.0 million, compared to $10.8 million in the prior year period. Results reflected the benefits from the cost reduction initiatives, which were partially offset by lower administrative fees.

Assets under administration increased 7.3% sequentially to $21.94 billion at Sep 30, 2009, primarily reflecting higher equity values in retirement plan assets under administration.

However, the origination of commercial mortgage loans by StanCorp Mortgage Investors was significantly impacted by the current credit environment and lower purchase and sale activity in the commercial real estate market. StanCorp Mortgage Investors originated $98.7 million of commercial mortgage loans compared to $346.7 million in the year-ago period.

At Sept. 30, 2009, Stancorp’s investment portfolio consisted of 57.8% fixed maturity securities, 41.3% commercial mortgage loans and 0.9% real estate. The overall rating of the fixed maturity securities portfolio was A (Standard & Poor’s) at Sept. 30, 2009.

StanCorp Financial’s available capital increased $90 million from the prior quarter to approximately $290 million at Sept. 30, 2009. The company had approximately 0.9 million shares remaining under its repurchase program at Sept. 30, 2009, which expires on Dec. 31, 2009. StanCorp intends to resume its share repurchases on an opportunistic basis during the fourth quarter of 2009.

StanCorp Financial 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. However, we think that given the stressed economic environment and the current labor market challenges, significant growth in premiums will be restricted in the coming quarters. We have a Neutral recommendation on the shares of StanCorp Financial.
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