StanCorp Financial Group, Inc. (NYSE:SFG)
Annual Shareholder Meeting
May 13, 2013 2:00 pm ET
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
Holley Y. Franklin - Vice President, Corporate Secretary and Assistant Counsel
J. Gregory Ness
Good morning. If you would please take your seats, we'll go ahead and begin.
Thank you, all, very much for attending this morning. And I'm Greg Ness, Chairman, President and CEO of StanCorp. I'm very pleased that you could be with us here today. It's now 11:00 a.m., and this meeting is officially called to order. Today's meeting is being webcast live over the Internet, as well as being recorded.
I'd like to begin the meeting by calling your attention to the order of business that was set forth in the agenda, which you received upon entering the room. You'll note that there is time for your questions and comments, which are welcome. Please hold them until that designated time, and we'll get to as many as we possibly can.
First thing this morning, it'd be my great pleasure to introduce to you our distinguished members of our Board of Directors. If you please stand as I call your name. Our lead Independent Director, Kay Stepp. Kay is retired Principal and Owner of Executive Solutions; Virginia Anderson, Principal, VLA Consulting; Fred Buckman, President, Frederick Buckman, Inc.; Stan Fallis, retired Chair and CEO, Everen Clearing Corporation; Deborah Horvath, Principal and Founder, Horvath Consulting LLC; Duane McDougall, retired President and CEO, Willamette Industries, Inc.; Eric Parsons, retired Chairman, StanCorp Financial Group; Mary Sammons, retired Chairman, Rite Aid Corporation; and Mike Thorne, retired Director and CEO of the Washington State Ferry System. We owe a continuing debt of gratitude to this Board of Directors who consistently provide valued advice and counsel to our company. Thank you, all.
At this time, I'd like to also acknowledge an outgoing board member, George Puentes. George is the retired President of Don Pancho Authentic Mexican Foods. George is not standing for reelection to the board this year due to increasing time commitments outside of StanCorp. He just returned from Argentina. We're grateful for his contributions as director since 2009. George, thank you very much. We'll miss having you.
Next, I'd like to introduce my senior management team. If you all just stand. Floyd Chadee, Senior Vice President and Chief Financial Officer; Katherine Durham, Vice President, Corporate Marketing and Communications; Jim Harbolt, Vice President, Insurance Services Group; Scott Hibbs, Vice President, Asset Management Group; Dan McMillan, Vice President, Insurance Services Group; David O'Brien, Senior Vice President, Information Technology; and Karen Weisz -- are you there, Karen? Vice President, Human Resources and Corporate Services. Thank you, all.
Here with me on stage this morning is Holley Franklin, Vice President, Corporate Secretary and Associate Counsel. Holley and I have been appointed as -- by the Board of Directors today to serve as proxies for today's meeting. The Board of Directors has appointed Computershare Shareholder Services to serve as inspector of election for this meeting. We have with us today Dennis Treibel. Dennis, thank you for being here with Computershare Shareholder Services, who will serve as our inspector of election. We also have with us today representatives from our independent registered public accounting firm, Deloitte & Touche USA LLP, including audit partner, Don Riggs. Don?
Let's now proceed with the business portion of our meeting. Our Notice of Meeting was sent to shareholders on the 25th of March, either by mail or electronic delivery, and I have an affidavit of mailing to that effect, which will be filed with the records of this meeting. A copy of the minutes of the 2012 Annual Shareholders Meeting is available for inspection at our inspector of election table just outside our room here. In the absence of any objection, they will be adopted in the form presented.
The inspector of election today have certified that a quorum is present, so this meeting may proceed. In addition, the inspector has reviewed the voting procedures and submitted a report verifying the number of shares represented by proxy. Holley, will you please provide the report?
Holley Y. Franklin
Mr. Chairman, the report from Dennis Treibel, the duly appointed inspector of election for this meeting, states that he has supervised the verification of proxies received by StanCorp Financial Group for use at this meeting and will provide the company with copies of the proxies executed by shareholders of record at March 8, 2013. The report further states that 34,947,832 shares of common stock, approximately 78.7%, out of the total of 44,361,583 shares issued and entitled to vote as of the record date are represented at this meeting by virtue of valid proxies on file before the meeting began.
J. Gregory Ness
Holley, thank you. The report of the inspector of election will be filed with the minutes of this meeting.
Let's now turn to the 4 items of business on our agenda today. The first item of business is the election of 4 Class 2 directors. The board's nominees for Class 2 directors are as follows: Deborah D. Horvath, Duane C. McDougall, E.Kay Stepp and Michael G. Thorne. Our second item of business is a proposal to ratify the appointment of Deloitte & Touche USA LLP as the company's independent registered public accounting firm for the year 2013. Our third item of business today is a proposal to reapprove and amend the amended 2002 stock incentive plan, and our fourth item of business is an advisory proposal to approve executive compensation.
We'll now vote on these 4 items of business. Any shareholders desiring to vote in person should do so at this time. If you've already voted by proxy, you don't need a ballot to vote at this meeting unless you wish to revoke that proxy and change your vote on any of the above item. If you do need a ballot, if you please raise your hand, we'll see that one is delivered directly to you.
Anyone need a ballot? Perfect.
J. Gregory Ness
With that, then we'll declare that the polls are now closed. We will announce the preliminary voting results at the conclusion of this meeting. And while Dennis tabulates the votes, I'd like to share with you some of the highlights of the company's activities during the past year. I'll use some slides to do that.
At StanCorp, as many of you know, our mission is really to help people achieve financial well-being and peace of mind. And in these days and times, there probably isn't anything much more important than that. That's what the people of StanCorp come to work for each and every day. So if you reviewed 2012, you'll note that we made very steady progress implementing a number of pricing actions, specifically in our long-term disability group insurance business, on both new business and renewal of business. We had very solid Asset Management results during 2012. Our investment portfolio performed very well, and I'll show you a little bit about that in just a moment. We were able to refinance $250 million of 6 7/8% 10-year senior debt at 5% during the year 2012 as well. For the 13th consecutive year, StanCorp increased its annual dividend to shareholders. And all the time, we grew available capital, as well as book value per share.
So here are the StanCorp operating segments, for those of you that might not be familiar. This is 2012 pretax income from our revenue-producing divisions. You'll see that about 75%, 3/4 of our income comes from our Insurance Services businesses. That, basically, about 53% or $130 million of that comes from our group insurance business, and about $50 million last year was derived from our individual disability income segment. The remainder of our 2012 pretax income was originated by our Asset Management group, $64 million.
So let's look a little bit at the insurance services side to give you a sense of it. You'll see the products that we offer along the left side of the screen here. You'll note that every one of those products is within the top 10 nationally here in the United States, although none have more than single-digit market share. On the right, you'll see a little bit further breakdown of our Insurance Services income. Sometimes we're painted as just a long-term disability carrier. That clearly is not true. As you look at this chart, you'll see that our life and accidental death and dismemberment premium actually exceeds our LTD premium, $880 million a year versus $809 million a year. You'll also see the contributions from individual disability and STD there at the bottom of the chart. The other line would represent premiums for products such as dental and vision.
One of the things we track very carefully in group insurance is the group insurance benefit ratio. As you can see from this chart, looking at the green lines, it fluctuates significantly over time, if you look at the green line. So what we tend to do is look at the rolling 4-quarter average of the benefit ratio. That's represented in this chart on the blue line, and it smooths that out a little bit. We have great concern about measuring the benefit ratio on a 90-day interval. It's not representative of probably the entire year, so we tend to look at on a rolling 4-quarter average basis. You'll see that where we are right now is squarely in our guidance range for 2013, which is in the 81% to 84% range.
Let's turn now to the Asset Management segment. You can see on the left side of this chart, the products that you see there, all certainly would help people with financial well-being and peace of mind: 401(k), 403(b) defined benefit plans, as well as individual fixed and indexed annuities. We also offer personal wealth management for groups and individuals, as well as a commercial mortgage loan company that we'll talk more about in just a moment. One of the things I very much like about this particular chart is this nice line right here. You can see in the $30 million range in pretax income in '08 and '09, and it has consistently increased every year thereafter at a very good clip.
Assets under management depicted in the bottom right of this chart, you see almost $22 billion worth of assets under administration at the end of the year. The largest segment, the dark blue here, would be retirement plans, followed by individual annuities, personal income management and then our mortgage business, where we actually originate mortgages for our own portfolio and then, at the same time, make a business of selling those to other individuals who want high-quality fixed income investment. You'll see in a moment how that process has worked out.
I'll talk just for a moment about our fixed maturity securities portfolio, which is just over 7 -- just under, rather, $7.2 billion at the end of last year. You'll see that the average investment grade is A-, with 2/3 of the portfolio at A- or better. You'll also see about 28.5% at the BBB area, that is in our efforts to acquire a yield in a very, very low interest rate environment. And then, down below, you'll see that there about 5.4% of our fixed maturity security portfolio is resident in below-investment-grade issues. However, about $350 million of that is in outside-managed portfolios that are managed on our behalf by experts in this particular area. There on the right, you see kind of our Wheel of Fortune. This is the broad spread of risks and diversification in the various industry classification that you can see very broad spread.
Let's move on and talk a little bit about our commercial mortgage loan portfolio. Here you see that we have over 6,300 loans in our portfolio today. And the average size of a retained loan in our portfolio is less than $1 million to date. It's about $800,000. Portfolio yield today is just over 6% and a remarkably low 60-day delinquency rate of 0.40%, 0.4% This portfolio has performed exceedingly well through this recessionary period that we have been in, and we expect it to continue to do so. It has a very long track record of very solid performance.
You can see that last year, we originated $1.18 billion of commercial mortgage loans for 2012. And as I mentioned before, this chart is broken into 2 segments. This is the mortgages in our portfolio, $5.267 billion, and up here, $2.7 billion is outside managed or other investors. During 2012, we're also able to enhance our capital levels. We generated capital in excess of our RBC or risk-based capital target of 300%, providing a very solid capital foundation for your company. Available capital at the end of the year was $360 million.
And of course, that allows us to provide persistent shareholder return. We increased the common share dividend by 4.5% during 2012, up to $0.93. You can see that. That includes our 13th consecutive year of dividend increase in common share. We also repurchased about $10 million of shares. We'd look at that on an opportunistic basis based upon what we see in the marketplace, as well as our capital production levels. But we view share repurchases as a very viable alternative to returning value to shareholders.
This chart really talks about the way we manage this business as a whole. It is very much a long-term business. We have people that are out selling our products today that we won't see a claim on for 5, 10, 15 or 20 years. So our job is to make certain that this company is managed in a manner so that when that claim does come due in 5, 10, 15 or 20 years, the resources are available to satisfy that claim at the time. That's what creates this kind of a chart. You see book value per share growing steadily each year at about a 9.3% compound annual growth rate, and that's driven absolutely by a consistent operating business, as well as very strong investment portfolio.
This chart shows the 5-year cumulative total return. It's a little difficult to read, but you can see that the S&P insurance index is represented by the green line, the S&P life and health index by the light blue line, the S&P 500 by kind of the orangey line and the dark blue line is StanCorp. You can see clearly the impact of the recession on us here, and you can see this line starting to tip back up, but at all times has been over the S&P health index, as well as the S&P insurance index.
One fact to know and tell, SFG's total shareholder return since 1999, at the point in time which we became a public company, 322% compared to 40% for the S&P 500 during that same time frame. This is the way the chart would look if we extended through the first quarter of this year. You can see that the trajectory is exactly right. As a matter of fact, our investor relations folks informed me that when we looked -- as of the close Friday, if we looked at the total shareholder return for StanCorp Financial Group as of Friday for 2013, you would see that StanCorp is up north of 20%, and that compares to something in the 14%, 15% range for both the S&P 500, as well as the Dow Jones industrial index.
So key takeaways. We clearly run this business for the long haul. That is our mission, is to leave it in better shape than when we found it, and we will absolutely do that. We're very pleased with the pricing actions that we're taking. While they are taking hold, we continue to see slow but steady improvement in our results. We expect that work to continue. We do see challenges in this very low interest rate environment going forward. We're closely monitoring that, as well as very closely managing our expenses at the same time to combat those low interest rates.
One the hallmarks of standard is a very, very transparent conservative approach to capital management. You could see that with excess capital of $360 million at the end of the year, as well as the transparency with the way we set our discount rates and the way we reveal or put our bond acquisition yields or our mortgage yields in any particular quarter. We'll continue to find ways to return value to shareholders. We have dividends or share repurchases as you we move forward.
Everybody get that? All right, perfect. So with that, that concludes our formal presentation today. So why don't we take a moment to open up the floor for questions and comments from shareholders relating to either our financial results or our items of business that are presented today. If you wish to speak, if you just raise your hand and wait just a moment, we'll have a microphone brought to you. Remember that the meeting today is being webcast, as well as recorded. So if you would start by stating your name, as well as the city and state where you live and your shareholder status, we'd appreciate it. We ask that you limit your remarks to 2 minutes. If you have additional questions or comments, we'll, of course, try to give you another turn to speak later in the discussion period, should time allow.
So with that, are there questions?
I'm Kim Ledbetter, and I live at Lancaster, New York. And I'm a shareholder and a former employee of The Standard. And I want to thank you for this opportunity to address the board. The Standard's mission statement, that the company relies on the application of specialized expertise to serve customers and build shareholder value, and the company's vision is to lead the industry in integrity, expertise and customer service. And the 10-K states that the company's seems to compete on expertise, differentiation and customer service. So clearly, it's the expertise that's very important for Standard. And one element of that expertise is actuarial expertise. Clearly, the last 6 presidents of the company have been actuaries. And for 29 of the last 30 years, there was at least 1 member of the board who was an actuary. The lone exception was that last year, after Ron Timpe retired, there was no actuary on the board. I know Mike Thorne and Stan Fallis will be leaving the board sometime in the next year, and they've made significant contributions to The Standard. And as members of the board and I'm sure their talents and knowledge will be missed when they leave the board sometime in the next 12 months. I'd like to ask the board as they consider new board members in the future that they consider adding an actuary to the board. Many actuaries are businesspeople who also happen to be actuaries. They have run businesses. They have built businesses. They've dealt with customers. They have experience with enterprise risk management. They play a valuable role in financial management and executive compensation matters. Most grasp new concepts quickly. They have strong analytical skills and are men and women with high integrity. They understand the economics of the business, and they're objective and have good judgment. That's a commercial for the actuarial profession, by the way. After all, actuaries -- SFG is primarily an insurance company and relies on actuarial expertise in many of its businesses to be successful. So I believe the board needs that expertise as well and that Standard will be well served by adding an actuary to the board. Thank you very much.
J. Gregory Ness
Thanks for your comments, Kim. I don't think that any of us would disagree with that. Apparently, the union is represented well here today, a couple of actuaries. No, we appreciate that. I think you're right on. The nominating corporate governance committee takes their charge very seriously to make sure that we have the skills and talent necessary. And as a matter of fact, they'll receive a report in the next 2 days about that director recruitment process though, when we'll take it.
Any other questions? All right. Hearing none, we'll provide you with preliminary results of the voting of the shares. I'm told the inspector of the election has filed certifications of the preliminary results with the tab -- there they are right now -- of the tabulations. Holley, would you please share those with us?
Holley Y. Franklin
Happy to. Mr. Chairman and shareholders, the preliminary results based on the voting of shares represented by valid proxies on file tabulated this morning show that each of our 4 nominees for Class 2 directors have been elected; the proposal to ratify the appointment of Deloitte & Touche USA LLP as the company's independent registered public accounting firm has been approved; the proposal to reapprove and amend the amended 2002 stock incentive plan has been approved; and the advisory proposal to approve executive compensation has been approved.
Mr. Chairman, that concludes the report of the preliminary voting results. The final results will be appropriately filed in Form 8-K, and shareholders may also obtain results by calling or writing my office, the Office of the Corporate Secretary.
J. Gregory Ness
Excellent. Thank you very much, Holley, and thank you to all of you who voted. Now that the preliminary voting results have been announced, is there any other business to come before this meeting today?
Holley Y. Franklin
Mr. Chairman, there's no further business to come before the meeting.
J. Gregory Ness
Excellent. There being no further business, the 2013 Annual Meeting of Shareholders of StanCorp Financial Group is now adjourned. Thank you very much for joining us today. Please enjoy some light refreshments and meet some of the directors or management team at your leisure. Thank you very much for being here.
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