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SFG > SEC Filings for SFG > Form 10-Q on 6-Nov-2013All Recent SEC Filings

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Form 10-Q for STANCORP FINANCIAL GROUP INC


6-Nov-2013

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used in this Form 10-Q, the terms "StanCorp," "Company," "we," "us" and "our" refer to StanCorp Financial Group, Inc. and its subsidiaries, unless the context otherwise requires. The following analysis of the consolidated financial condition and results of operations of StanCorp should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto. See Item 1, "Financial Statements."

Our filings with the Securities and Exchange Commission ("SEC") include our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, registration statements and amendments to those reports. Access to all filed reports is available free of charge on our website at www.stancorpfinancial.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC also maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.

The following management assessment of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto in our 2012 Form 10-K. Those consolidated financial statements and certain disclosures made in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and require us to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent assets and contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during each reporting period. The estimates most susceptible to material changes due to significant judgment are identified as critical accounting policies. The results of these estimates are critical because they affect our profitability and may affect key indicators used to measure our performance. See "Critical Accounting Policies and Estimates."

Financial measures that exclude after-tax net capital gains and losses and accumulated other comprehensive income ("AOCI") are non-GAAP 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.

Management believes that measuring net income per diluted share excluding 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.

This management's discussion and analysis of financial condition and results of operations contain forward-looking statements. See "Forward-looking Statements."

EXECUTIVE SUMMARY

Financial Results Overview

The following table sets forth selected consolidated financial results:



                                             Three Months Ended                        Nine Months Ended
                                               September 30,                             September 30,
                                         2013                 2012                 2013                 2012
                                                       (Dollars in millions-except share data)
Net income                           $        59.0        $        44.9        $       163.5        $       100.1
After-tax net capital losses                  (5.5 )               (1.7 )               (8.1 )               (4.3 )

Net income excluding after-tax
net capital losses                   $        64.5        $        46.6        $       171.6        $       104.4

Diluted earnings per common
share:
Net income                           $        1.32        $        1.01        $        3.67        $        2.26
After-tax net capital losses                 (0.13 )              (0.04 )              (0.18 )              (0.09 )

Net income excluding after-tax
net capital losses                   $        1.45        $        1.05        $        3.85        $        2.35

Diluted weighted-average common
shares outstanding                      44,610,358           44,238,372           44,514,600           44,349,725

Net income excluding after-tax net capital losses increased to $1.45 per diluted share for the third quarter of 2013 from $1.05 per diluted share for the third quarter of 2012. The increase was primarily due to more favorable claims experience in the group insurance businesses and higher earnings in the Asset Management segment.

Net income excluding after-tax net capital losses increased to $3.85 per diluted share for the first nine months of 2013 from $2.35 per diluted share for the first nine months of 2012. The increase was primarily due to more favorable claims experience in the group insurance businesses, lower operating expenses as a result of expense management actions and higher earnings in the Asset Management segment. Operating expenses were reduced by $20.6 million for the first half of 2013 due to the amendment of the postretirement benefit plan.


Table of Contents

Outlook

Our third quarter results reflected earnings growth in all of our businesses, which included more favorable group insurance claims experience and higher earnings in our Asset Management segment. Favorable claims experience in the group insurance businesses was partially offset by a decline in group insurance premiums. The decline in group insurance premiums was primarily due to lower group insurance sales for 2012 and the first nine months of 2013.

During the third quarter of 2013, we continued to see volatility in interest rates. Fluctuations in interest rates can have a direct correlation on our investment income and discount rate used for newly established long term disability claim reserves over time.

As a result of our earnings growth for the first nine months of 2013 and capital generation from our insurance subsidiaries, we increased the amount of shares repurchases during the third quarter and first nine months of 2013. For the third quarter and first nine months of 2013, we repurchased 818,478 and 1,450,767 shares at a total cost of $44.1 million and $70.9 million, respectively.

Primary Drivers of 2013 results

The primary drivers of our results for the first nine months of 2013 were the group insurance benefit ratio and expense management actions. The group insurance benefit ratio is primarily affected by reserves established based on premium levels, claims experience, assumptions used to establish related reserves, such as our discount rate, and growth of our in-force block of business. Our group insurance benefit ratio for the third quarter of 2013 was 75.1%, compared to 79.7% for the third quarter of 2012. Our group insurance benefit ratio for the first nine months of 2013 was 79.8%, compared to 84.0% for the first nine months of 2012. Our discount rate used for newly established long term disability claim reserves for the third quarter of 2013 was 3.75%, compared to 4.00% for the third quarter of 2012. The 25 basis point lower discount rate used for newly established long term disability claim reserves increased the group insurance benefit ratio for the third quarter of 2013 by approximately 40 basis points compared to the third quarter of 2012. Excluding the effect of the lower discount rate, the group insurance benefit ratio improved approximately 500 basis points compared to the third 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.

Our Insurance Services segment premiums decreased 0.9% to $523.0 million for the third quarter of 2013 compared to the third quarter of 2012 and decreased 2.2% to $1.59 billion for the first nine months of 2013 compared to the same period of 2012, primarily due to lower group insurance sales for 2012 and the first nine months of 2013 and from the impact of Experience Rated Refunds ("ERRs"). Premium growth was also affected by the economic environment, which has caused lower wage rate and job growth for our group insurance customers. We will continue to invest in product capabilities that add value to our customers, and we will continue to write business that meets our long term profit objectives.

We are seeing the benefits of a slowly improving economy as well as actions within our group insurance business now that we are almost finished with our re-pricing efforts related to higher long term disability claims incidence.

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