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StanCorp Financial Group (NYSE:SFG)

Q2 2013 Earnings Call

July 24, 2013 12:00 pm ET

Executives

Jeffrey J. Hallin - Assistant Vice President of Investor Relations and Capital Markets

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

Ryan Krueger - Dowling & Partners Securities, LLC

Seth Weiss - BofA Merrill Lynch, Research Division

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

Suneet L. Kamath - UBS Investment Bank, Research Division

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

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

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

Operator

Ladies and gentlemen, thank you for holding. Welcome to the StanCorp Financial Group, Inc. Second Quarter 2013 Earnings Conference Call. [Operator Instructions] Today's conference call is being webcast live over the Internet and 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 introduction. Please go ahead, sir.

Jeffrey J. Hallin

Thank you, Jesse, and welcome, everyone, to StanCorp's Second Quarter 2013 Conference Call. Here today to discuss the company's second 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 second quarter earnings release and the 2012 Form 10-K.

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

J. Gregory Ness

Thanks, Jeff, and thanks to all of you who've joined us for our second quarter earnings call today. We are pleased to announce a very strong quarter for StanCorp Financial Group. Earnings from operations, which exclude after-tax net capital losses were $1.34 per share for the second quarter of 2013, compared to $0.51 per share for the second quarter of 2012. The increase reflects solid earnings growth in all of our businesses.

There are a number of key contributors to the excellent second quarter. Solid underwriting results in the Insurance Services segment, record earnings in the Asset Management segment and continued success with our expense management actions.

In the Insurance Services segment, pre-tax income for the second quarter was $61.4 million compared to $23.3 million for the second quarter of 2012. This growth is largely due to very favorable claims experience in our group long-term disability insurance business. Our group insurance benefit ratio was 80.4% for the second quarter of 2013, compared to 88.5% for the second quarter of 2012. We are seeing the benefits of our pricing actions within our group insurance businesses, now that we are more than 3 quarters of the way through our repricing efforts. We also see positive trends continuing in long-term disability claims incidents.

We often caution you to look at the benefit ratio on more of an annual basis. To put these results in perspective, on a constant discount rate basis, the group benefit ratio has shown year-over-year improvement for 4 consecutive quarters. Quarterly claims experience can be volatile, but when measured on a year-to-date basis, the group benefit ratio of 82.1% is well within our annual guidance range of 81% to 84%. While this quarter's results are clear evidence of our profitability and expense initiatives, please remember that claims experience can fluctuate widely from quarter-to-quarter and experience tends to be more stabled when measured over a longer period of time.

Group insurance premiums decreased 3.5%, compared to the second quarter of 2012. Experience rated refunds decreased group insurance premiums by $4.3 million for the second quarter of 2013 and they increase group insurance premiums by $7.1 million for the second quarter of 2012. Excluding these ERRs, group insurance premiums decreased 1.3% for the second quarter of 2013, compared to the second quarter of 2012.

Contributing to the slight decline in premiums during the quarter was a declining workforce among our current customers. Employment levels among our customers declined 0.2% from the second quarter of last year. While still negative, this is a significant improvement from the 1.5% decline that we saw on the second quarter of last year. We are cautiously optimistic that organic growth will return as we head into 2014.

Persistency remains high overall, reflecting the efforts of our sales force in working with customers to accept our rate increases, coupled with our consistent focus on high-quality customer service. Group insurance sales reported as annualized new premiums were $25 million in the second quarter, and that compares to $22 million in the second quarter of 2012. Historically, the second quarter typically one of our lower sales quarters, and we're very pleased with this result.

Our Asset Management segment's record earnings of $20.7 million of pre-tax income during the second quarter certainly contributed to our overall results. Asset growth drove higher administration fees and spread margin. Assets under administration at June 30, 2013, increased by $1.8 billion or 8%, when compared to June 30, 2012. Changes in fair values of hedging assets and liabilities related to our equity index annuity product also benefited the segment during the quarter.

Overall, StanCorp delivered excellent results this quarter reflecting good execution of growth and profitability initiatives in all of our businesses.

There continues to be significant disruption in our industry, fueled by the changes in the U.S. economy and the Affordable Care Act. The low-interest rate environment, sluggish employment growth and the trend for more consumerism in employee benefits all present differing challenges for companies in our niche. We posses the depth of expertise needed to manage these businesses, we understand the market trends and we are in a strong capital position and poised to take advantage of any opportunities that always accompany disruptions in any market over time. I'm confident that StanCorp will manage the business to continue to increase shareholder value, while providing superior products and services to our customers.

With that, I'll turn the call over to Floyd for discussion of our capital and investments. And of course, we'll leave plenty of time for your questions. Floyd?

Floyd F. Chadee

Thank you, Greg. I will first discuss the impact of recent interest rate trends on both our new money investment rates and on the discount rate used for newly established long-term disability claim reserves. Then, I will provide an update on our expense management initiatives, some details on the performance of our investment portfolio and finally, our capital position.

Since the beginning of May, the 10-year treasury yield has climbed by more than 80 basis points. We like the positive direction, as this can result in higher investment yields and higher discount rates over time. However, it is important to note that interest rates still remain below historical averages.

For the second quarter of 2013, the new money investment rate decreased to 4.16% from 4.25% in the previous quarter. The 12-months reserve interest margin between our new money rate and our average reserve discount rate was 53 basis points for the second quarter of 2013, compared to 62 basis points for the first quarter of 2013.

On the overall portfolio, our margin was 45 basis points for the second quarter of 2013, compared to 44 basis points for the first quarter. While second quarter discount rate used for newly established long-term disability claim reserves was 3.75%, 25 basis points lower than the 4% discount rate used for the second quarter of 2012. The 25 basis points lower discount rate used for this quarter resulted in a corresponding decrease in quarterly pretax income of approximately $2 million. When normalized for the change in the discount rate, our group insurance benefit ratio improved 850 basis points, compared to the second quarter of last year.

Our discount rate is determined by the actual new money rates on assets that we acquire less than appropriate margin. This is a disciplined approach to discount rate determination that is consistent with our tight Asset Liability Management.

Our results for the first 2 quarters of 2013 were positively affected by expense management actions. The most significant of which was the amendment to a post-retirement medical plan. The planned amendment reduced operating expenses by $10.3 million or $0.15 per diluted share for both the first and the second quarters of 2013. This reduction in operating expenses for the first 2 quarters of 2013 will not recur in the second half of 2013. We will continue to manage expenses in line with our revenues.

Moving on to investments. Our investment portfolio remains well positioned, having no significant exposure to high-risk asset classes and is managed within a tight asset liability framework. While fixed maturity security portfolio has an average credit quality of A minus. Less than 6% of the portfolio is below investment grade, with the majority of this in an outside managed high-yield portfolio.

As one might expect, while commercial mortgage loan portfolio continues its track record of excellent performance. During the second quarter, we originated $364 million of commercial mortgage loans, a 21% increase compared to the $300 million originated for the second quarter of last year. The 60-day delinquency rate at June 30 remained low at 23 basis points. Our current portfolio provides superior risk-adjusted returns, the total portfolio yield of just under 6%, and it serves as a good cash flow match with our liabilities.

Now I will turn to our capital position. During the second quarter, we repurchased over 380,000 shares or approximately $17 million at a volume weighted average price of $44 per share. At June 30, 2013, our available capital over 300% RBC threshold was in excess of $400 million. During the quarter, available capital was flat with statutory income from the insurance subsidiaries being offset by a higher RBC requirement by the $17 million of share repurchases and by an accrual for approximately $20 million for debt service and dividends. At the insurance subsidiaries, the estimated risk-based capital ratio was 365% at June 30, 2013. This is subsequent to the $30 million dividend from the insurance subsidiaries of the holding company in the quarter.

I would like to take a moment to clarify our measures of excess capital. When quoting our excess capital, we used an RBC ratio target of 300%. We view this measure to be appropriate for our lines of business, which have a lower risk profile than those of most life insurance companies. Our insurance liability lines do not carry the extreme types of risk that have been experienced elsewhere in the industry, in line such as variable annuities and long-term care. And our asset classes have never experienced the extreme downturn that others have seen in classes such as CMBS or RMBS. Under normal circumstances, in the absence of pressing strategic possibility, we would expect that the capital of the insurance subsidiaries would not fall below 300% -- 325% of RBC, and that we would hold a buffer of approximately $150 million to $200 million to take advantage of business opportunities and to provide for external economic risk. Currently, our capital position in excess of these normal levels is approximately $100 million.

Before moving on to Q&A, let me comment on a few items of note. We are pleased with the broad-based earnings growth among all of our businesses. We continue to make steady progress in implementing pricing actions on both new and renewal

[Audio Gap]

business and the group insurance benefit ratio continues to improve. Asset Management added another quarter of strong earnings and continues to provide stable diversification to insurance businesses. We continue to execute on a growth and profitability plan in order to provide increasing value to both customers and shareholders.

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

Jeffrey J. Hallin

Thanks, Floyd. And Jesse, we're now ready to take the first question from the participants.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question, which is coming from the line of Mark Finkelstein with Evercore Partners.

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

I wanted to start with incidence trends that you're seeing. Can you just elaborate on the comment that you are seeing some improvement, how much are you seeing and how does it compare to what you would consider to be a normalized level?

J. Gregory Ness

We can do that. Dan?

Daniel J. McMillan

The claims behind the benefit ratio I would say we -- I think, we said slow steady progress in instance in the first quarter for long-term stability, which in the competitive quarter last year was what really drove the higher benefits ratio. We saw that continue in the current quarter and we're pleased with the progress there. I think we would be hesitant to say that we have arrived or anything like that. We'd like to see some continued improvement and sustainability at those levels.

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

I guess, is there any way of framing out how far above a normalized level we're still at?

Daniel J. McMillan

We can look at some historical markers and we'd say we're probably still a little bit elevated, but are approaching some of those markers. But on any given quarter, that can fluctuate some.

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

Okay. Floyd, you kind of framed out that, maybe a slightly different way of thinking about capital capacity, kind of 325%, $150 million to $200 million. And then you kind of used a $100 million marker above those levels. I guess, what would you need to see to maybe go into that $100 million?

Floyd F. Chadee

Well, I mean, Mark, the $100 million is available as we always said for the things that we would prioritize capital for. Growth in business is really what we would like to use it for. We saw the -- our capital was flat for the quarter, which means our retention was very good in terms of -- and that's where we would like to invest that money first of all, in growth of the business. If we see opportunity in the market for some small block acquisition or something, we would certainly go through that. And then I think you see we've had a very good quarter here. We gave you guidance on share purchases at the beginning of the year and it's -- I don't think we're looking for anything different from what we've already laid out in terms of our priorities for capital.

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

I mean, I guess are you changing the way we should think about RBC ratios and holding company cash? I mean, if I go back historically, you always kind of use 300%, a $100 million roughly or 5% of equity as a holding company cushion. Are we changing that, I guess is the question?

Floyd F. Chadee

Yes. I think, Mark, we're seeking to clarify that. There's a lot of diversity within our industry in terms of how excess capital is quoted. Some companies might quote amounts in excess of what percentage of company action levels. Some companies quote a margin in excess of authorization control level. Some companies use lines of credits in their available capital. But we wanted to make sure that there's clarity in the communication that we have here which is, we think it's important for investors to think of the amount we have in excess of 300% of RBC. Because we think, thinking about 300% of RBC, our lines of business that are relatively safe compared with others in the industry is an important measure. Now having said that though, we anticipate that we would have buffers under normal circumstances. In excess of that, what we are seeking to clarify with investors is that sense of buffer here.

Operator

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

Ryan Krueger - Dowling & Partners Securities, LLC

I had a question on the discount rate. We came into the year guiding a reduction of 50 to 75 basis points, and you've done 25 basis points of that so far. And understanding interest rates are still quite low, but if rates were just to stay right where they are as we speak for the rest of the year, how do you think about the discount rate going forward?

Floyd F. Chadee

Yes. So Ryan, I mean rates, where they are at this point, is anybody's guess because rates have been moving very quickly over the last month or so. Certainly, we came into this year with an expectation of reducing the discount rate. And you can see in the first quarter, we did reduce it by 25 basis points. We, certainly, there's -- it feels in the external environment that there's upward pressure on rates here, which would be realized in the assets that we actually acquired during the quarter, and we will just continue to follow our normal process of looking at the assets that we acquired. But as of today, where we sit, it feels as though there's an upward pressure, but that is -- could turn on a dime as you and I well know.

Ryan Krueger - Dowling & Partners Securities, LLC

Yes. And maybe going at it a bit differently, you're new money rate actually declined about 10 basis points in the quarter, but I believe the commercial mortgage loans are somewhat lag given the origination time period. Could you -- maybe it will be helpful if you could give us a sense of what type of new money rate your getting so far in July in terms of investment yield?

Floyd F. Chadee

Yes. So in terms of the new money rate going down, Ryan, you're absolutely right. I mean, we've seen some upward pressure, but that came towards the end of the quarter. So on our bonds, we didn't see much of a decline, but I'll let Scott give you some color on the mortgages.

J. Gregory Ness

Now let's do that, Scott.

Scott A. Hibbs

Yes. Ryan, good question. We continue to see downward pressure on spreads on the mortgage side in the quarter. And you hit the point exactly. The lag time from when we get mortgage commitments and they come on our balance sheet is maybe 60 days or so. So we love what we see towards the end of June and end of July, and we hope we can capture some of that. But certainly in the second quarter, the pressure was to the downside. We saw spreads just a little bit less than 300 basis points over for the period.

Operator

The next question is coming from the line of Seth Weiss with Bank of America.

Seth Weiss - BofA Merrill Lynch, Research Division

Question on just the philosophy of share buyback. As the stock is running now, we're above book value. I'm thinking of capital capacity, would you think about shifting between buybacks and dividends as the buyback process isn't going to be as naturally accretive anymore and assuming the stock stays above book value?

J. Gregory Ness

Okay. Floyd?

Floyd F. Chadee

So one, I mean we always look at buybacks because we think that our stock has a lot of value in it. That's one. We try to maintain our dividend philosophy to be very steady over time and we're one of the few companies within the insurance world that has had a very steady increase in our dividends over a very long period of time. And we would like to maintain that going out into the future. That's our basic philosophy of dividends. So I think both our options on the table but one, we tend to view as stable and the other one is opportunistic.

Seth Weiss - BofA Merrill Lynch, Research Division

Okay. And maybe just one question just on the sales environment. I know 2Q is a lower sales quarter, but the number was year-over-year at least strong. Any comments on what you're seeing in terms of the competitive landscape if the market is perhaps still behaving more rationally than maybe you would thought at the beginning of the year when thinking about the single digit or low-single-digit premium declines?

J. Gregory Ness

Good. Jim, give us a read on that.

James B. Harbolt

In the quarter we saw sales up just a little bit. We saw some stronger success in the small case marketplace, but I would counsel you to look at the year-to-date sales numbers, it's more informative. I think that's a better place to look. I would tell you that the marketplace remains competitive in the new sales environment. We've seen a little bit more price firming in the renewal space. There also seems to be some pressure out there, particularly in the larger case market. Folks are still distracted with the Affordable Care Act and some of the disruption over health insurance. So I would expect it to remain competitive, our guidance counsel is towards that for the full year.

Operator

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

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

I just want to kind of do a couple of follow-ups. So on capital, Floyd, could you just clarify for us, you mentioned there was a higher risk-based capital requirement in the math for the available capital, what was that piece of it?

Floyd F. Chadee

In terms of a capital rolling forward, Randy?

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

Yes.

Floyd F. Chadee

Yes. So really, nothing more than the normal change of business. So if look at our capital roll forward or if you take our statutory income, you take out the share repurchases, you take out the accrual for dividend and interest. You get to a number that's pretty close. So the remainder is that increase in RBC. We did -- we do try when we calculate the RBC to anticipate short-term movement in RBC requirements, when we calculate our available capital. And I would say that as you went through the quarter, our retention was somewhat better than we would have anticipated, which is a good thing for a business. Particularly, in an environment in which we've been doing all this repricing. So that's part of the explanation there. The other part of the explanation is in the complex RBC calculation, there are certain policyholder deposits with us, they may come in the form of experience rating refunds or clean fluctuation reserves. They were drawn down during the quarter and that forms an offset to RBC.

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

Okay. So it was driven, really, by kind of I guess business growth and business retention changes on the liability side?

Floyd F. Chadee

Absolutely.

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

Understood. And then to follow-up on the line of questioning around incidence trends. I'd be curious if you could provide perspective potentially on how the macro is helping that? What I mean is, a lot of your business is in California, and California has a volatile economy, which seems to be doing quite a bit better now. So do you have any view on how a better California economy, particularly maybe in the public sector area, might be helping that incidence trend from the macro perspective while you're on the ground you're also doing your repricing initiative?

J. Gregory Ness

Jim?

James B. Harbolt

Yes. Randy, it would be difficult to attribute any particular piece of this to California, and we don't have a significant concentration there. We have about 1/3 of our premium in each of the thirds of the United States, if we were to cut that vertically, and it's spread nationally fairly evenly. We do have, as you know, expertise in the public sector. We are pleased with what I would call the slow rebound of job growth or stabilization in that market. Greg mentioned the job levels at negative 0.2% for the quarter, which is quite a bit of an improvement over the last year. And we think that, that overall economic environment provides for a back drop that should see incidence levels continue to improve, and that's what we're watching very closely.

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

Yes. I guess my follow-up there is, in the past, you've provided a slide that shows kind of how a job growth is changing and all the different kind of SIC codes that you write, would public sector and education, would those be kind of more on the improvement side now from where they were before?

J. Gregory Ness

Yes. They both have improved, education more than public. I think they'd both still be in the bottom 2 quartile zone overall growth for the U.S. economy.

Operator

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

Suneet L. Kamath - UBS Investment Bank, Research Division

I just wanted to follow-up on the group benefit ratio again, if we could. You talked about a lot of the pricing actions that you've taken sort of flowing through. I'm just trying to get a sense of how much of that strategy is actually showing up now in the benefit ratio?

J. Gregory Ness

All right. Jim?

James B. Harbolt

Suneet, the way we think about this is that we're absolutely pleased with the repricing work we've seen and the results, particularly this quarter. But we also saw good return to work in the quarter. We also got some external environmental lift in there as well. You can see what happens when they all come together. But the cornerstone for all of this is being disciplined and being expert when we're going through our repricing plan. And it's very hard to parse out little pieces there, but the cornerstone is the repricing effort.

Suneet L. Kamath - UBS Investment Bank, Research Division

Understood. I mean, I know this is a critical number for the overall earnings and EPS picture for the company, clearly. But I guess what I'm wondering is, if I think back to the third quarter of 2012, you had a benefit ratio in this line that was below 80%, I think it surprised a lot of us and that kind of popped right back up in the fourth quarter. So I guess what I'm wondering is if this improvement, which is pretty significant, is something that we expect will sort of sustain going forward or should we think about this as a lot of things that you just mentioned going right at the same time and maybe we tick back up in the subsequent quarters of the year?

Daniel J. McMillan

Suneet, this is Dan. I would -- I think I would probably echo and highlight something that Greg mentioned earlier, which is when you look at the benefit ratio quarterly, fluctuations are to be expected with the vast majority of all the disability carriers. When you look at our benefit ratio over the last 4 quarters, you see year-over-year improvement in every one of those quarters on a constant discount rate basis. And that longer-term picture is one that we like. That really speaks to the management of this business and the expertise that's required here.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay. And then maybe just to follow-up on the capital. And Floyd, thanks for the incremental disclosure of the buffers. I just want to make sure I understood, and I apologize if I just missed it. The $150 million to $200 million additional buffer above and beyond the 325% RBC, what is that there for, again?

Floyd F. Chadee

So as I said in my prepared remarks, that would be to take advantage of business opportunity and to provide for some buffering in terms of external economic risk.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay. So when, I guess, Mark asked the question about the $100 million, it would seem like you have a couple of different buffers here now, the 325% and $150 million to $200 million. In net of all that, you have $100 million of extra stuff, which I think in response to his question you said you might think about using for new business growth. But I mean, I guess, what I'm wondering is if this $100 million is truly available, I mean, could you or would you be willing to use it more aggressively in a shorter period of time like accelerated buyback or something. Yes, I just want to get a sense of how we should think about this redeployability, if that's the word, of this $100 million?

Floyd F. Chadee

So we absolutely view that $100 million as available to be deployed in all of the areas that I talked about earlier when Mark asked question, whether it's good in business or in share buybacks or otherwise.

Operator

Our next question is coming from the line of Christopher Giovanni with Goldman Sachs.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

One quick question and then just a follow-up. The new money rate that you guys talked about in July, what was that new money rate?

Floyd F. Chadee

The quote on new money rate was 4.16%.

J. Gregory Ness

For Q2.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

I'm sorry, for 2Q. Sorry about that, for July though?

Floyd F. Chadee

We don't give out a monthly new money rate.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. Any comments around -- you mentioned the end of June new money rates were trending better. Could you talk some about kind of June new money rates?

Floyd F. Chadee

No. Actually, what I was talking about was the overall change in rates in the market generally in terms of the run up that we saw. During the quarter, a lot of it concentrated in the latter half of the quarter versus the earlier part.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. I'm just trying to think about kind of the model that you guys have laid out in terms of setting the reserve interest margins sort of that rolling 4 quarter average of new money rates and then 3 quarter discount rate and then kind of plugging for the current discount rate. And that margin that you alluded to at 54-or-so basis points, I guess it's still above kind of the overall target that you guys have pointed to in the past of 40 basis points. I mean you had been running sort of in the 60s on the margin side, I'm just trying to think about where we should level out or thinking about leveling out on that margin? Are we at a point where we're moving down towards 40, or is 54 kind of a level you feel comfortable with?

Floyd F. Chadee

I mean, our sense of where that margin should be has not changed from the past in terms of 30 to 40 basis points under normal circumstances. We have allowed it to rise during this period of sort of interest rate pressures and all of that. But I think, Chris, to the extent that if rates were to remain where they are or go lower, we would even look at taking that margin beyond the sort of 30 to -- even lower than the 30 to 40 basis points that we've articulated in the past. Because, remember, that margin is there mainly to provide for reinvestment risk. So if rates were to remain low, then that reinvestment risk is low and you could think of taking that below the 30 basis points. So where we are sitting today we do have some margins that I think you could see changing over time. Now there is external pressure on rates going up, if the trends that we saw towards the second half of the quarter continue. And then in a high-interest rate environment, you would see that margin moving in the opposite direction, going up.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. All right. Then I guess around the capital questions. I mean, if we think about sort of payout ratios, your dividends and buybacks, historically, since you've been a public company have been in and around 55% of your operating results. And that certainly has fluctuated as high as '07 when you issued some debt to do some buybacks and then the financial crisis, obviously, much lower. But I mean, is that sort of the appropriate level of payout ratio we should be thinking about going forward?

Floyd F. Chadee

Yes. So we have a philosophy around dividends if we like that steady increase in dividends over a long period of time, we managed this business for the long term and that's our philosophy around dividends. I mean, around buybacks and other business opportunities, I think that's much more opportunistic and we look at what's actually the current environment is. So I don't know that I would point you to a particular threshold there, particular target payout ratio, anything like that, because one is meant to be steady over time and one is meant to be opportunistic.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. And then lastly, and apologies if I missed this. Within Asset Management, the crediting rates, particularly in the annuities product line was certainly much lower than we were looking for. Anything unusual there or is that sort of a steady run rate going forward?

Scott A. Hibbs

Chris, this is Scott. I'll take that one. There wasn't any unusual level of bond calls or prepays in the quarter. What's really affecting that crediting rate is the impact of the hedging accounting in the quarter. And it's probably bigger than you're seeing with the $1.6 million that we disclosed in the release, because that's got a DAC amortization piece of it. So the gross impact on interest credited and net investment income, when you strip that out, the crediting rates were very consistent with last quarter and the same quarter last year.

Operator

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

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

I have a couple of questions for you guys this morning. First, a little bit more involved on long-term disability or maybe on the group insurance business as a whole. I think in the response to a question earlier, it was indicated that claims incidence is getting back near historical markers. And so I guess my question is this, if we assume that we got all the way back to those historical levels, it sounds like the gap between current and whatever the historical average is, is pretty narrow at this point. And then if we baked in the remaining of your pricing, I think you mentioned that you're about 3/4 of the way through, so if we assumed 100% of the pricing actions is then baked in, I guess simplistically, does the combination of those 2 things bring the benefit ratio, the group insurance benefit ratio back within the historical range or are there other any factors that we need to consider?

J. Gregory Ness

Dan?

Daniel J. McMillan

John, I'll start there and Jim may have some color he'd like to add too. There are number of ingredients in the benefit ratio, as you know, that move along here. Our pricing actions have landed heavier in the long-term disability line than the other lines. And when you look at that benefit ratio, it includes all of the products. In the quarter, we were pleased with the kind of performance of that whole suite of products that we offer on the group side, and they can all affect that benefit ratio. Just looking at incidence and pricing increases, you're going to miss some significant portions of the equation there.

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

And maybe a couple of those other important equations, may I assume you're talking about just group life mortality being in line or something like that or am I missing something else?

Daniel J. McMillan

Yes. Group life would be the next biggest driver given the premium levels there. And you have some other smaller products that contribute as well, but that would be the bigger one.

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

And claim recovery is and return to work and those other factors on the disability side, I mean, are they within your targeted parameters at this point or are there still some work there too?

Daniel J. McMillan

I would say that they have remained strong. We reported strong recoveries even late last year, and in the first quarter we saw those. That continued into the current quarter and we consider ourselves one of the top carriers in the industry helping people get back to work. We'll continue to invest there and make sure that we are doing everything we can to assist claimants, and we really like the results we're seeing so far.

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

Okay. And then I have a question on the Asset Management segment, just thinking about assets under administration. I think this request was made maybe some time last year, maybe it was a little bit earlier than that. But I'm curious, 8% year-over-year growth in assets under administration, I'm just curious whether if we stripped out market performance, whether you're still seeing organic growth in AUA? And if so, at what level? And is there a way that maybe we can think about some disclosure to help us understand the net flows there?

J. Gregory Ness

Scott?

Scott A. Hibbs

Yes. John, let me -- I think what you're speaking to is mainly around the retirement plan...

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

The retirement plans, yes.

Scott A. Hibbs

Yes. We've had -- we've obviously had good market lifts there and I'll tell you that the trend of our sales is good. Our sales are up relative to a year ago. And the trends in our retentions are at like a 4-year high. We have talked in past quarters, and the last couple of years about being very focused on retaining profitable business and to the extent that it wasn't. We lost some business there for a while. So the trends are good and in terms of additional disclosure, I think we just -- that's something we needed to take under advisement.

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

Yes. Okay. Understood. I just want to -- especially in retirement plans, I just want to drill down and understand whether there is truly some organic growth going on there, and it seems like it was. And then the last question maybe more of a comment/question. Floyd, it does appear to me that -- or it does seem to me that it's a pretty significant change, I think, in the view of deployable capital relative to what you guys have termed available capital. Deployable capital of $100 million, I mean, if I just think back rather simplistically, I know money is fungible, but it seems to me that if you didn't do the group life reinsurance deal late last year, you might be at the point right now where you tell me -- tell us, that you had 0 deployable capital. Is that fair or am I thinking about it the wrong way?

Floyd F. Chadee

So John, I think this is where the question of deployable and what it means across the industry and all of that. It's deployable under what circumstance. So under certain circumstances, you can think of the $100 million as what we define as deployable today. On the other circumstances, you can think of the entire $400 million as being deployable. So if we were to think that we have a business opportunity that warrants it, we could think of that entire $400 million of being deployable. So there is no consistency across the industry in terms of how that term is defined.

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

Okay. No, that's very helpful. That's very helpful to understand it. I assume you're talking about some kind of larger, very attractive M&A opportunity or something along those lines where you'd be really to go and dig the RBC down to the 325% level for instance?

Floyd F. Chadee

That would certainly be one scenario.

Operator

Our final question today will come from the line of Steven Schwartz of Raymond James.

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

Everything's been hit. We can end this here if you'd like.

J. Gregory Ness

Perfect. All right. Thanks for tuning in for us today.

Jeffrey J. Hallin

Thanks, Steven. I'd like to turn the call back over to Greg for some closing remarks.

J. Gregory Ness

Thanks, Jeff. Overall, StanCorp delivered excellent results this quarter with all of our businesses contributing to the higher profitability. We continue to make steady progress in implementing our pricing actions on new and renewal group business, and we are clearly seeing the benefits of these pricing actions in our earnings. We also see positive trends continuing in group long-term disability claims incidence, reflecting the improving economy. In addition, I'm very pleased with the earnings growth in our Asset Management segment, as well as the success we're experiencing with our expense management actions. Although economic challenges clearly remain, we are confident in our ability to continue executing on our plan, and our strong capital position gives us the flexibility to take advantage of attractive opportunities.

We appreciate you all participating in our call today. Have a great day.

Jeffrey J. Hallin

Thank you, Greg. I'd like to thank everyone once again, for joining our call. There will be a replay of this call starting this afternoon and running through August 2. To listen to this call, you can dial (877) 660-6853 and enter the conference ID number 416270. A replay of today's webcast is also available at www.stancorpfinancial.com. Thank you.

Operator

Thank you. Thank you, everyone, for participating in today's teleconference. You may now disconnect.

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Source: StanCorp Financial Group, Inc. (SFG) Management Discusses Q2 2013 Results - Earnings Call Transcript
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