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StanCorp Financial Group (NYSE:SFG)

Q1 2013 Earnings Call

April 24, 2013 12:00 pm ET

Executives

Jeff Hallin - Assistant Vice President of Investor Relations

J. Gregory Ness - Chairman, Chief Executive Officer, President, Chairman of Standard Insurance Company, Chief Executive Officer of Standard Insurance Company and President of Standard Insurance Company

Floyd F. Chadee - Chief Financial Officer and Senior Vice President

Daniel J. McMillan - Vice President Insurance Services Group and Vice President of Insurance Services Group - Standard Insurance Company

Scott A. Hibbs - Vice President Asset Management Group and Vice President of Asset Management Group for Standard Insurance Company

James B. Harbolt - Vice President Insurance Services Group and Vice President of Insurance Services Group - Standard Insurance Company

Analysts

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Randy Binner - FBR Capital Markets & Co., Research Division

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Suneet L. Kamath - UBS Investment Bank, Research Division

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Richard Torado

Ryan Krueger - Dowling & Partners Securities, LLC

Operator

Ladies and gentlemen, thank you for holding. Welcome to the StanCorp Financial Group, Inc. First Quarter 2013 Earnings Conference Call. [Operator Instructions] Today's conference call is being webcast live over the Internet and is also being recorded. [Operator Instructions] At this time, I would like to turn the call over to Mr. Jeff Hallin, StanCorp's Assistant Vice President of Investor Relations, for opening remarks and introductions. Please go ahead, sir.

Jeff Hallin

Thank you, Brenda, and welcome to StanCorp's First Quarter 2013 Earnings Conference Call. Here today to discuss the company's first quarter results are Greg Ness, Chairman, President and Chief Executive Officer; Floyd Chadee, Senior Vice President and Chief Financial Officer; Jim Harbolt, Vice President, Insurance Services Group; Dan McMillan, Vice President, Insurance Services Group; Scott Hibbs, Vice President, Asset Management Group; and Rob Erickson, Vice President and Controller.

Today's call will begin with some brief comments from Greg and Floyd, and then we will open it up for questions.

Before we begin, I need to remind you that certain comments made during this conference call will include statements regarding growth plans and other anticipated developments for StanCorp's businesses and the intent, belief and expectation of StanCorp's management regarding future performance. Some of the statements made are not historical facts but are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Because these forward-looking statements are subject to risks and uncertainties, actual results may differ from those expressed or implied. Factors that could cause actual results to differ materially from those expressed or implied have been disclosed as risk factors in the company's first quarter earnings release and the 2012 Form 10-K.

With that, I'll turn the call over to Greg. Greg?

J. Gregory Ness

Thank you, Jeff, and thanks to all of you who have joined us for our first quarter earnings call. Overall, this quarter represents a good start to 2013. In particular, we continue to make good progress on our repricing efforts to address the impact of the elevated disability claims and the impact of continued low interest rates on our group insurance business.

We continue to manage our expenses tightly in this low-growth environment. Disability claims instance levels continue to show a slow but steady improvement. Our Asset Management segment delivered another strong quarter of results. Our capital level remains strong, with an estimated RBC ratio of 377% for our insurance subsidiaries and more than $400 million of available capital. In addition, during the quarter, we repurchased approximately $10 million of shares, and we continue to grow book value per share.

Let's talk a few details about our group insurance results next. Our group insurance benefit ratio for the first quarter of 2013 improved compared to the first quarter of 2012 when adjusted for the 100 basis point change in the discount rate year-over-year. Using a common discount rate, the benefit ratio for the quarter improved by 120 basis points compared to the first quarter of 2012.

Declining premiums reflected lower sales results as we implement pricing actions. In addition, experience rated refunds decreased group insurance premiums by $4.5 million for the first quarter of 2013 and increased group insurance premiums by $4.1 million for the first quarter of 2012. If we exclude these ERRs, group insurance premiums decreased 2.4% for the first quarter this year compared to the first quarter of last year. Continued declines in employment levels and low-wage growth have also put pressure on premium growth from our existing customers.

Following the January renewal season, we are now about 3/4 through the repricing of our customers that have experienced higher claims incidence, and we are pleased with the acceptance of the rate increases. I'm very proud of the work our field representatives are doing to communicate and sell our unique value proposition in this very difficult sales environment. As a result of their efforts, we had very strong customer retention in 2012, and we are pleased with our retention thus far in 2013.

Let's shift our focus now to the Asset Management segment. Asset Management delivered another strong quarter, producing $17.2 million in pretax income. Operating expense reductions were the primary driver of the improvement compared to the first quarter of last year. We like the steady growth in earnings contribution from our Asset Management business over the last few years.

First quarter earnings in each of our business segments reflected the actions we took at the beginning of 2013 to lower our operating expenses in light of declining revenues. Excluding nonrecurring items, which Floyd will cover in just a moment, we expect a decrease in operating expenses in line with the low single-digit percentage decline in premiums for 2013.

At StanCorp, we provide high-quality products and services at fair prices and distinguish ourselves by providing superior customer service with a dedicated team of people who understand the importance of a positive customer experience. We believe staying focused on this mission and maintaining uncommon financial strength will yield superior value for shareholders over time.

With that, I'll turn the call over to Floyd for further discussion of interest rates, capital, as well as an update on our 2013 guidance. Of course, we'll leave plenty of time for your questions at the end. Floyd?

Floyd F. Chadee

Thank you, Greg. I will begin by focusing on our new money investment rate and the discount rate used for newly established long-term disability claim reserves. Then I will comment on our expense management efforts, the performance of our investment portfolio, our capital position. And finally, I will explain an update to our 2013 guidance.

As one would expect, the low interest rate environment continues to put downward pressure on new money investment rates and reserve discount rates. The new money investment rate decreased to 4.25% for the first quarter compared to 4.77% for the fourth quarter of 2012. The 12-month reserve interest margin between our new money rate and our average reserve discount rate was 62 basis points for the first quarter compared to 68 basis points for the fourth quarter of 2012. Our overall portfolio margin was 44 basis points for the first quarter compared to 45 basis points for the fourth quarter of 2012.

Our first quarter discount rate used for newly established long-term disability claim reserves was 3.75% compared to 4.75% for the first quarter of 2012. The 100 basis point lower discount rate used for this quarter resulted in a corresponding decrease in quarterly pretax income of $8 million and an increase in the group insurance benefit ratio of approximately 160 basis points. Excluding the effect of the lower discount rate, the group insurance benefit ratio improved 120 basis points for the first quarter of 2013 compared to the first quarter of 2012.

The continued low interest rate environment will likely remain a challenge for the entire industry. We will continue to implement pricing actions and carefully manage expenses to offset the negative effects of the low interest rate environment on our profitability.

Our expense management efforts contributed to our favorable results for the first quarter. An amendment to our post-retirement medical plan reduced operating expenses by $10.3 million, or $0.15 per diluted share, for the first quarter of 2013, and we expect a similar reduction in operating expenses for the second quarter of 2013. I will talk about our updated guidance related to this adjustment in a moment.

Moving on to our investment portfolio. We are pleased with the performance of our investment portfolio. We maintain a high quality investment portfolio with no significant exposure to high-risk asset classes. We have a solid fixed maturity security portfolio, with an average credit quality of A-, and we continue to demonstrate our strong expertise in originating and servicing high-quality loans at attractive spreads.

During the first quarter of 2013, we originated $274 million of commercial mortgage loans compared to $210 million for the first quarter of last year. The 60-day delinquency rate remains low at 35 basis points at March 31, 2013.

We are encouraged by the increased activity in the commercial real estate market and remain committed to originating and underwriting the high-quality commercial mortgage loans that provide us a significant yield advantage.

Next, I would like to discuss our capital position. At March 31, 2013, our available capital was approximately $410 million, a $50 million increase from December 31, 2012. The increase in available capital was primarily due to income from the insurance subsidiaries for the first quarter of 2013 and a lower RBC requirement due to lower expected group insurance premiums for 2013.

Our insurance subsidiaries held an estimated risk-based capital ratio of 377% at March 31, 2013. During the quarter, we repurchased almost 250,000 shares for $10 million at a volume weighted average price of $39.55 per share. We expect to repurchase between $40 million and $80 million in shares during 2013. As always, we will continue to further evaluate share repurchases opportunistically based on the consistency of capital generation and our view of equity market valuation.

I would now like to address the update to our 2013 guidance. We updated our guidance to include the effect of the amendment to our post-retirement medical plan, which will reduce 2013 operating expenses by $20.6 million or $0.30 per diluted share spread evenly over the first and second quarters of 2013.

For 2013, the company now expects net income per diluted share, excluding after-tax net capital gains and losses, to be in the range of $3.70 to $4.10, and to achieve a return on average equity, excluding after-tax net capital gains and losses from net income and AOCI from equity, in the range of 8.5% to 9.5%.

As a result of the increase in pretax income, we also expect the effective income tax rate to be in the range of 22% to 24%, which is an increase of 1% from the original guidance provided in our fourth quarter earnings release.

Our guidance reflects our expectations of annual results. Quarterly benefit ratios can fluctuate outside of the expected annual range as a result of normal volatility. We are pleased with the first quarter results, and our businesses are off to a good start for 2013.

With that, I will now turn the call back to Jeff to begin the question-and-answer portion.

Jeff Hallin

Thank you, Floyd. Brenda, we are now ready to take the first question from our participants.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mark Finkelstein with Evercore Partners.

A. Mark Finkelstein - Evercore Partners Inc., Research Division

I guess, can we just talk about the group benefits ratio a little bit? I understand the first quarter can be challenging; I get it. Discount rates are an issue. But you've also said that the incidence levels are starting to trend down, and you're putting in place some reasonable rate increases. So I'm just curious how you're feeling about the pace of improvement and why we aren't seeing a little bit better improvement.

J. Gregory Ness

Good question, Mark. Let's ask Dan to take that. Dan?

Daniel J. McMillan

Overall, we're pleased with the progress we're seeing in the core drivers of the benefit ratio. I'll share a couple of details we haven't mentioned before just to provide a kind of perspective on how we look at it. The first is, Greg mentioned about 120 basis point improvement on the quarter-over-quarter benefit ratio on a discount rate constant basis. I'd point out -- and this is a detail that might be missed if you don't have the historical data -- on a discount rate constant basis, the benefit ratio also improved from fourth quarter of last year to first quarter of this year. And that's something we haven't seen in several years, and we think that's important. The second is, I'd remind, I guess, everybody that the benefit ratio includes claims and benefits for all products, group long-term disability being one of those, and a mix of products with group life and STD and dental and some others. And when you look at the seasonality of group life that we typically see in the first quarter, it's a little more pronounced in the quarter than what we've typically seen. And what that did is it served to mask some of the improvement in the LTD line in the quarter. Obviously, for competitive reasons, we're not going to break out the benefit ratio by line, but that's what we saw in the quarter.

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Okay. So a little bit is from the group life side?

Daniel J. McMillan

Yes.

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Okay. How sustainable are the expenses in Asset Management? They seem to be very low this quarter. I know you talked about expense initiatives. Is this level sustainable?

J. Gregory Ness

Scott?

Scott A. Hibbs

Yes, Mark, this is Scott. It's a good quarter for Asset Management. Obviously, there's a lot of, in addition to expenses, and I'll get to that, there's other variables here that cause it. You'd want to look at more than 1 quarter. A really good quarter from an operating expense standpoint, but I don't believe we'll achieve this quarter's level of run rate over the full year. I would expect something more like the past couple of quarters. One of the reasons for that is that our base salaries for our employees around here kick in, in the second quarter, and so the last 3 quarters of the year, you'd see a little bit of uptick.

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Okay. Just one actually quick final question. Is there any ongoing impact or benefit after -- on the post-retiree health benefit change? Like is there outside of kind of the write-off of the reserves, if you will, is there an ongoing benefit that we should be thinking about?

Floyd F. Chadee

Yes, I think the way you should be thinking of the benefit, Mark, is most of it will happen in the first and second quarters here. The GAAP accounting rules drive us to that. The effect thereafter is not material.

Operator

Our next question comes from the line of Randy Binner with FBR.

Randy Binner - FBR Capital Markets & Co., Research Division

So I guess, this is kind of related I think to Mark's question there. But can you update us on where you are in the price increase process, and kind of, as a segue to that, where the kind of price increases are in the market? I think last time I've heard from StanCorp was kind of high single digits was the price increase expectation you could push into the market this year and maybe into next year. So I'm just kind of wondering where we are in the press of increasing rates and what kind of rate you're having success in pushing into the market.

J. Gregory Ness

All right, Randy. Let's take a shot, Jim?

James B. Harbolt

Let me talk about 3 broad-based price increases that we instituted, and I'm going to give you progress with where each one is. The first one that we did was very late in 2010, and that was for interest rates. That was in the low single-digit space. That one is about 80% of its way through. The large one that I think most people are tracking closer on, Greg mentioned, is that we're about 3/4 of the way through. That was a higher single-digit price increase for the higher incidence that we were seeing, and that was done and started in the summer of '11, 2011. And then last year, we took one for largely interest rates that was in the low single digits to mid-single digits for interest rates, and we're about 30% of the way through the block with that one. So there's sort of 3 large cohorts that are working their way through on a broad-based basis. And so far, I would tell you that when we're working with our in-force customers, who've experienced our customer service and how we provide that and at the levels that we do, we've been quite pleased with the uptick or the taking of the rate increases and the experience that we've seen there.

Randy Binner - FBR Capital Markets & Co., Research Division

Okay. And so do you have -- I mean, is there anything -- I mean, outside of these initiatives, are there just kind of general price increases you're trying to push through? I mean, do you think of everything in these blocks? Or are you kind of generally pushing rate beyond these initiatives?

James B. Harbolt

Well, I will tell you that we are continuously refining our pricing and that we do it on a case-by-case basis, and we're looking at sectors all the time. So I've described the 3 broad-based ones, but those are not the whole of it.

Randy Binner - FBR Capital Markets & Co., Research Division

How -- and could you characterize how competition is out there? I mean, you did have less sales, so there is -- some of the business is going somewhere else. Is there anything different with competition? And in particular, are the managed care companies more competitive this year than last?

James B. Harbolt

What I would say, Randy, is that prices seem to be firming for us when you're working with in-force customers and folks who have experienced our good customer service and get a chance to work with our account representatives. When you're talking about brand-new sales, it's a very price competitive environment right now in an environment where we're raising rates, and I think our sales reflect that, particularly in the LTD line.

Randy Binner - FBR Capital Markets & Co., Research Division

So the bottom line here, pushing kind of mid, high single digits seems still sustainable going forward this year?

James B. Harbolt

Randy, we're always protecting our bottom line over the top line, and we're going to be disciplined in how we go forward with those rate increases, and our premium guidance for the full year reflects that.

Operator

Our next question comes from the line of Steven Schwartz with Raymond James.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Along with the savings in the post-retirement, the offset to that was some saving initiatives that were also another, I think, $4 million. Could you -- first thing would be if you could detail what those are and maybe the savings expectations from them on a go-forward basis?

J. Gregory Ness

Absolutely.

Floyd F. Chadee

Yes, so we had savings, Steven, of $10 million from the post-retirement medical. The $4 million actually went in the opposite direction. They were excess expenses related to -- fairly related to severance type cost. So the way you should think about expenses for the total company in terms of sustainability for the rest of the year, if I take the number that we had in the first quarter, adjust for the $10 million that you wouldn't see, that probably -- that you'd only see in the first and second quarter, adjust that out, then you'd probably get a good run rate for the rest of the year. And the reason that I wouldn't also include in that the $4 million of severance, because while that's not going to be there later in the year, we'll have other increases in expenses that Scott already made mentioned of, for example, just normal increases in salary and all of that. So the first quarter adjusted for the $10 million probably gives you a good run rate that's in line with our premium expectations.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Okay. And then was there any -- another numbers question. In the fourth quarter you had some. Was there any outside variable investment income in the quarter?

Floyd F. Chadee

When you said variable investment income, Steven, are you thinking in terms of prepayments related to our bonds and mortgages?

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Exactly. Yes, exactly right, Floyd.

Floyd F. Chadee

Yes, so in the first quarter here, we had approximately about $3 million. As you would expect in this environment, there are always going to be some level -- there's always going to be some prepayment level. This compares with something, a number that rounds up to about $2 million in the first quarter of last year, so you can see small -- in the first quarter of last year, small in this first quarter, not much of a material variance. This compares, by the way, with about $20 million total in prepayments last year. So you can see this quarter, not much.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Okay. But I was looking -- the reason I was asking, I was looking at the variability of investment income in Asset Management. So given those numbers, should I assume that that's been caused by the index annuities and the hedging?

Scott A. Hibbs

Yes, Steven, this is Scott. That's exactly right. You need to look both at the net investment income and the change in interest credited, and I think when you net those out for the quarter, there's not much difference.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Yes, okay. And then one more, if I may. There have been a couple of articles now on, for a lack of a better term, what a disaster the Social Security DI program has been and the number of people that have been hanging on and on and on and on and on there. And I'm just wondering if there's anything coming down the road that may change that and affect you.

Daniel J. McMillan

Steven, this is Dan. And we, like others in the industry, are watching the developments there very closely. I think current predictions have financial crisis in 2016 for the Social Security disability program. It's a key component of almost all group disability plans, and we're involved in the industry groups that are watching that and are prepared to adjust our business and our pricing if that's something that goes away. And it's something that we will continue to monitor.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Okay. But there's nothing out there yet?

Daniel J. McMillan

No.

Operator

Our next question comes from the line of John Nadel with Sterne Agee.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

I guess my question is on repricing relative to capital and relative to your buybacks. How about that? With confidence -- I mean, from the prepared remarks for sure, I take away that you've got a lot of confidence in the repricing. You've got a lot of confidence in the improvement you expect to see over time. As a result of that and expense initiatives and other things that underwriting margins should improve, that return on equity ought to improve, that it seems like something you're expecting to see consistently as we look out over the next year or 2 or more. So I guess, the question is, with that as the backdrop and $400 million plus of available capital, and I would assume an expectation that there's some level of earnings that's free cash flow as we move forward, particularly given slow growth, then why isn't the buyback bigger?

J. Gregory Ness

Floyd?

Floyd F. Chadee

Well, John, we gave a range. And as we said in the prepared remarks, that we'll further evaluate it as we go along. So I think you can expect us to do what is consistent with our stated philosophy. I mean, we will look at the state of the external economy, the improvements expected in our business and the movements in the equity markets. So we will proceed as we've said in the past.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Well, and I've heard you in the past on this topic. I guess what I hear differently in the tone of especially Greg's commentary at the open of the call, is I hear more confidence than I think I've heard in the last several quarters at least, and maybe that's reflective -- or maybe that's reflected in the introduction of the $40 million to $80 million range of buybacks in your guidance now. But again, that's only 10% to 20% of your existing available capital, not even counting on free cash flow generation from here. So I guess, I'd still like to push you a little bit further, if I could, Floyd, on I guess, what is it that makes you nervous about deploying something more than 10% to 20% of that $400 million today?

Floyd F. Chadee

I mean, we specifically said in the prepared remarks, John, that we will continue to further evaluate, so I'm not sure that you should necessarily think of us as either being too conservative or expressing any nervousness. I mean, I think, to the extent that you're reading into our call that our remarks are more confident, I mean, I think we've stated very clearly what we're doing with the business. As Greg said in his prepared remarks, things are proceeding as we would have anticipated and consistent with the way we're managing our business. So hopefully, you're not hearing much of a change in our level of confidence with the way we're managing the business.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

I think that's fair. I think, though, there is a difference over time, right, when you get to 80% of the first price increases now baked in, 75% of the second, et cetera, right? I mean, that's different as you go through those repricings. Let me now change gears a little bit as it relates to capital and just ask you, are you seeing, and maybe this is more for Greg, are you seeing opportunities that we ought to be at least mindful of, at least in part, as it relates to potential acquisition opportunities, either related to the group business or your Asset Management business? Or is that something we ought to think about for maybe further down the road?

J. Gregory Ness

John, I appreciate the question, but you also know that we certainly wouldn't comment on any activity in that particular regard. Having said that, however, we're always open to possibilities on either side of the house.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Yes, no, I'm not asking you to name names. I'm just asking you whether you've characterized it as an active market or not.

J. Gregory Ness

I think that would probably be an overstatement to say that it's an active market.

Operator

Our next question comes from the line of Suneet Kamath with UBS Financial.

Suneet L. Kamath - UBS Investment Bank, Research Division

So I wanted to talk about the capital issue first, maybe go at John's line of questioning in a slightly different way. So it looks like based on the press release, your risk-based capital ratio estimate for March 31 is 377%, which is above where you were at the end of the year. Your commentary about, I guess, lower new business is creating some capital. So as we think about where -- I know it's early in the year, but is your expectation that 377% would start to come down over time? Or given your -- do you think that it would possibly push higher as we move through the course of the year?

Floyd F. Chadee

Yes. So the way we've thought of capital in the good times, and the good times, I think, that we all can remember, Suneet, would be pre-1980 -- pre-2008. Pre-1980 was actually quite good, too. But before the financial crisis, we always said that we hold a certain percentage of GAAP equity, which works out about $100 million of excess capital. Now clearly, at this point, we were in excess of that, but these are not the times before 2008. But we are deploying capital and share repurchases back to shareholders, I think. So as you think of our targets, our targets would certainly be less than the $400 million that we're holding today but something north of $100 million that you would have held in good times, as opposed to particular 377 percentage points in the statutory entity.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay. I mean, I guess, I'm just trying to think about these companies, yourselves included -- you mentioned available capital relative to some minimum, and it looks like your minimum is 300%. And I guess, I'm just wondering if maybe part of the reason we're not seeing aggressive buyback is -- is that really the right minimum if you're not planning on drawing down the excess capital?

Floyd F. Chadee

We always -- I mean, we've stated this minimum for quite some time in terms of 300% of RBC. We've stated the reason for that, which is we think that's appropriate for the kinds of businesses that we're in. We think our business are relatively low risk. Group disability, while it has its normal quarterly volatility, does not come in -- we're close to the kinds of risky types of liabilities that other insurance carry that drove them to the edge of the precipice. On the other side of our balance sheet, our investment portfolio is very conservative. Our mortgages, while other people's mortgage portfolios blew up, always performed extremely well in the midst -- in the depths the financial crisis. So we think of ourselves as a very conservative company from a balance sheet point of view, and we think that 300% is very, very appropriate. So the reasons we use -- deploying capital would be the ones we've stated and not that.

Suneet L. Kamath - UBS Investment Bank, Research Division

Sorry. So then, just one more line of questioning on this topic. So at what point maybe would you expect to get to that 300% RBC ratio? I agree with everything you're saying about the relative comparisons to VA writers and all that, and I think you deserve credit for your business mix. I'm just wondering if that's the real target, at what point do we think that we're going to be closer to that target?

Floyd F. Chadee

So one, it's not -- it's 300% plus excess capital, our target excess capital above that, which, in good times, would've been $100 million. So we're not shooting for the 300%, which is 300% plus the buffer. I think the timing of that would depend on what we see happening with the external economy and our progress in terms of revising our business, too.

Suneet L. Kamath - UBS Investment Bank, Research Division

All right, so my second question, or second line of questioning is just on the new money investment rate. Obviously, it's a challenging environment out there, but we've been tracking this for a while and it seems like we had a pretty big drop sequentially here, about 50-plus basis points. So I'm just wondering what -- obviously, rates are moving around quite a bit in the first quarter now. We've come down in the second quarter. What is that new money investment rate looking like as we move into the second quarter?

Floyd F. Chadee

Well, I mean, it will depend on the state of the market. It will depend on what kind of assets we're able to source in the second quarter here. So I'm not sort of confident that I want to give an expectation here for the second quarter. But remember, in our guidance we did say that we expect for the full year that there would be a drop of 50 to 75 basis points in our discount rates. So I mean, I don't think we've changed that in our guidance. I don't think we've -- and that is still consistent with the way the external markets might be behaving.

Suneet L. Kamath - UBS Investment Bank, Research Division

Understood. But the timing of when you make that discount rate adjustment is important for the full year guidance, right? The sooner you take it, the bigger impact it has on the full year. So that's why I was sort of curious about. When you established the guidance, did you assume that it was going to happen sort of over the course of the year, a little bit per quarter? Did you expect that it would happen in the first half of the year? I mean...

Floyd F. Chadee

For something like that, Suneet, I mean, I think we would expect it to happen over the course of the year.

Operator

Our next question comes from the line of Chris Giovanni with Goldman Sachs.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

The question around the guidance, I guess, in terms of -- you took the range up to reflect the changes in the retirement plan and then to reflect the buybacks. So I guess then on a core operating basis, on an earnings basis, it looks like maybe you're pointing to a bit lower earnings. And I guess, if that's -- if I'm wrong there, please correct me. If I'm not, I guess why would that be the case? Because if 1Q tends to be maybe one of the more unfavorable quarters historically from a seasonal standpoint, you're at just below kind of the top end of the range. If we look at the path the past few years, wouldn't we expect that ratio to come down and then, therefore, result in maybe even better earnings on a core basis?

Floyd F. Chadee

You're absolutely right, Chris. Our intent in updating the guidance was to update guidance for the significant numbers related to our retiree medical plan, the $0.15 in the first quarter and $0.15 in the second quarter. We specifically did not change the EPS estimates based on the buybacks that might be anticipated through the rest of this year. The numbers around that, if you think about how much we might do and the timing of that, might work out on the order of $0.05, say, for the year, which is pretty small compared with the range that we already have in our EPS guidance. So it's not specifically included there, and there's no expectation of deterioration in our core earnings, because we haven't reflected that directly.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. So the buyback doesn't -- isn't factored in the range that you updated?

Floyd F. Chadee

That's correct, yes.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. And then just one question in terms of controlling the expenses, controlling the headcount. You guys I'd say probably have been one of the best in the industry here. I mean, you're down, I guess another 4% quarter-over-quarter, and your headcount's down almost 20% since the end of '08, right? So I guess, one is kind of what are the positions that you're finding opportunities to maybe reduce some headcount? And then how should we think about the recoverability of earnings and returns, when you can fully reflect kind of the better profitability, the better benefit ratios as the pricing actions get through. Should we basically just be thinking that the lower headcounts resulting -- is needed in effect to reduce the lower investment income? Or I guess, how should we think about the potential for profitability to accelerate maybe even more than what we would be seeing just from an underwriting standpoint?

J. Gregory Ness

Chris, this is Greg. What you see us doing is exactly what we said we would do last year is that we would work on our expenses to make sure that they were in sync with our projected revenues. That's exactly what's going on. And so if we expected revenues are going to decline in a low single-digit percentage, we would expect a similar kind of a change in terms of our expense load. That's exactly what you see us doing and executing on what we said we would last year.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. So if you get to a point where your revenue growth is accelerating, we would expect that your headcount would accelerate at a similar pace? Or can you maintain the expense side even if you're growing your revenue base?

J. Gregory Ness

I don't know that I'd go so far as to say that there's a perfect 1:1 relationship there, but I would be fair to say that if we're able to grow revenues, that would put upward pressure on expenses. Our job, of course, is to gain as much revenues as we can and hold the lid on expenses as tightly as we can. You should expect us to do that.

Operator

Our next question comes from the line of Rich Torado with Kennedy.

Richard Torado

I see a lot of analysts focused on your benefit ratio has not improved, but it seems like it's -- the underlying trends are improving and it's more of a discount rate issue at this time. So can you help us, if today, if you were 100%, all the price increases were impacted, what would your benefit ratio be if the discount rate was the same as it is today? So if you're guiding to 82.5 this year, fully impacted with the price increases in today's discount rate, what would your benefit ratio be?

Floyd F. Chadee

So, Rich, we haven't given out a number on that specifically because -- I mean, as we go through the pricing action here, Jim talked about different tranches of pricing -- pricing for incidence, continuously pricing for interest rate changes in the external environment. So the way we think of it is not -- at this point, as we think of the entire industry adjusting to the economic environment here, our goal is to shoot for reasonable ROE targets. We think this business has a reasonable ROE target in lower double digits, and that's how we would manage a business. It will be some combination of benefit ratio, expense ratio, other initiatives. So that's what we would target, which is what's the return to shareholders as far as ROE goes.

Richard Torado

Well then, let me ask it this way. In this interest rate environment, to achieve your ROE targets, what would you be pricing your benefit ratio to, to achieve that? Would you have to price it to 76 on the new business? Or how does that work?

Floyd F. Chadee

Yes, the one thing we want to be careful about, Rich, is giving out sort of specifics on our pricing side here because we think that puts us -- I mean, we don't want to talk too much into the competitive environment here. So we just -- I mean, our intent is to manage the business, to think of return to shareholders here ultimately as ROE targets.

Richard Torado

Well, let me ask it another way. So you said that this year, you would've been up 120 bps year-over-year, excluding discount rate changes. This time next year, if the discount rate's the same, would it be more than 120 bps improvement if the claims and all the other incidents were the same?

Floyd F. Chadee

We don't really want to give out guidance for next year at this point, which I think is what this question is sort of getting into.

Richard Torado

I guess I'm trying to see is if the price increases will have a bigger impact on the benefit ratio going into next year than the leverage you saw this year.

Floyd F. Chadee

Remember, Rich, I mean, Dan made some comments about sort of -- he's very pleased with the progress on our pricing front here. Some of that is masked by the normal quarterly volatility. Dan also pointed out that some of that was masked by sort of the light volatility this quarter. So you've got to be careful about interpreting very specific sort of quarterly targets on benefit ratio.

Richard Torado

Okay, and one last question. I'm not really sure what you guys did to the post-employee medical benefits that benefited you guys so much here near term and how all this works out. Can you kind of give us an example of what's going on?

Floyd F. Chadee

So this was related to the ending of benefit related to post-retiree medical, bringing us in line with many other companies. Rich, this is actually detailed -- a great deal of detail is given on this in our 2012 10-K. So you can find a lot of detail there, in fact, of the overall impact there.

Operator

Our next question comes from the line of Ryan Krueger with Dowling & Partners.

Ryan Krueger - Dowling & Partners Securities, LLC

I had a question on capital generation. Floyd, I guess your available capital went up $50 million this quarter. And if we added the share repurchase back to that, it would be $60 million of, I guess I'd call it, free cash flow prior to capital management. Is that something that is a sustainable type of number on a quarterly basis if your premiums continue to shrink at the current pace and your earnings are similar to what they were in the first quarter?

Floyd F. Chadee

Let me take this opportunity, Ryan, to give you some sort of the components of the capital rule forward, so you can get more color on that. So we increased by about $50 million. So think of share repurchases, putting aside money for debt servicing, share repurchases at $10 million, debt servicing at about $8 million, dividend accrual, about $10 million. So that's $28 million down. So those are the down numbers. And what the up numbers would've been, insurance, statutory income would have been in the order of $23 million. The change in RBC requirements related to sort of the level of the business would've been about $30 million, given the change in our premium levels this quarter. And then you saw -- if you do that math, you have about $25 million left. About $16 million of that actually relates directly to changes in statutory surplus. A good portion of it relates to the post-retirement medical benefit change that we made here. It flows directly into statutory surplus from a statutory accounting side but flowed into GAAP income in the first 2 quarters of this year. So the difference in treatment there may had a direct impact on our statutory surplus. And then you're left with about $9 million to $10 million of just miscellaneous nonstatutory earnings.

Ryan Krueger - Dowling & Partners Securities, LLC

Okay, that's really helpful. And then are you going to have another benefit from the post-retirement change in the second quarter after stat or was that all in the first quarter?

Floyd F. Chadee

Stat is all in the first quarter, and GAAP is spread through income in the first and second.

Ryan Krueger - Dowling & Partners Securities, LLC

All right. And then just one more question on this. The $30 million decline in RBC requirement, is that an ongoing quarterly type of number if premiums are down a few percent?

Floyd F. Chadee

I think it depends on premiums being down. But remember, very often this depends on the geography of the premium. The RBC formula is fairly complicated, and it also depends on where the premiums are down, so it may not be consistent quarter-to-quarter.

Operator

Our next question comes from the line of Steven Schwartz with Raymond James.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

No, it was asked and answered.

Operator

And our final question comes from the line of John Nadel from Sterne Agee.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

I wanted to sort of go along Rich's line of questioning. And listen, I know -- I'll try to do this in a way that doesn't put you at a competitive disadvantage, but I do want to try to understand the sensitivity a bit more, and I've talked with Rich, among others, about this. If I want to solve, with no other changes to my model of StanCorp, if I want to solve for a low double-digit ROE, let's call it 12%, with all other assumptions held constant, of course, a lot of things could change, but I need to drop what is today's group benefit ratio from around 83%, 84%. I need to drop that all the way to the mid-70s. Now I understand expenses can be a driver, buybacks could be bigger, other assumption changes can occur. That maybe means that the benefit ratio doesn't need to come down that much to get to that double-digit or 12% ROE. But I guess the question is, do you feel confident that once all the 3 sets of pricing increases have been fully baked into your book of business, do you feel confident that, that benefit ratio can come down by, order of magnitude, 5 or 6 full points?

Floyd F. Chadee

So John, I am -- one, I mean, I don't have access to your model, so I don't know that I want to comment on that.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Well, I'm sure it's not as good as yours, but...

Floyd F. Chadee

Two, I don't think we'd throw a specific number on the ROE target. We do think this business is a low double-digit ROE business. That's the second point. The third point is we feel very good about the action we're taking. It may not be immediately obvious in a particular quarter given the volatility, and it's not immediately obvious when you have volatility in some other lines. But as Jim and Dan have already pointed out, we feel very good about the progress we're making on all the fronts in terms of our action here.

Jeff Hallin

So I'd like to turn the call over to Greg for some closing remarks.

J. Gregory Ness

Thanks, Jeff. In closing, I'd like to leave you with just a few thoughts as we close the first quarter of 2013. We are absolutely off to a good start. We're making good progress on our repricing efforts to address the impact of the elevated disability claims and the impact of the continued low interest rate environment on the group insurance business. That progress is evident in the benefit ratio. We're also managing expenses in line with our expectation of premiums, and we have updated our guidance to reflect the additional income generated as part of our expense reduction efforts. With the consistent generation of capital, we have resumed share repurchases. I'm pleased with these results of our deliberate and purposeful strategy for StanCorp. They reflect our disciplined and financial strength, as well as our resolve.

Due to the nature of the business that we are in, we do expect to see quarterly volatility. However, this is a long-term business. And over time, our results will yield superior long-term results for shareholders. We're confident of that.

We appreciate you listening to our first quarter earnings call today. Have a great afternoon.

Jeff Hallin

Thanks, Greg. I'd like to thank everyone once again for joining our call. There will be a replay of this call starting this afternoon running through May 3. To listen to this call, you can dial (877) 660-6853 and enter the conference ID number 410589. A replay of today's webcast will also be available at www.stancorpfinancial.com.

Operator

Thank you for participating in today's telephone conference. You may now disconnect.

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