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StanCorp Financial Group (NYSE:SFG)

Q3 2013 Earnings Call

October 23, 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 of Employee Benefits

Scott A. Hibbs - Chief Investment Officer and Vice President

James B. Harbolt - Vice President of Asset Management

Analysts

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

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

Seth Weiss - BofA Merrill Lynch, Research Division

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Ryan Krueger - Dowling & Partners Securities, LLC

Suneet L. Kamath - UBS Investment Bank, Research Division

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

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Operator

Ladies and gentlemen, thank you for holding. Welcome to the StanCorp Financial Group, Inc. Third 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 and Capital Markets, for opening remarks and introductions. Please go ahead, sir.

Jeffrey J. Hallin

Thank you, Rob, and welcome to StanCorp's Third Quarter 2013 Conference Call. Here today to discuss the company's third quarter results are Greg Ness, Chairman, President and Chief Executive Officer; Floyd Chadee, Senior Vice President and Chief Financial Officer; Jim Harbolt, Vice President, Asset Management; Dan McMillan, Vice President Employee Benefits; Scott Hibbs, Vice President and Chief Investment Officer; 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 of 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 third 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 have joined us for our third quarter earnings call. Before we go into a discussion of the results for the quarter, I'd like to first talk about some strategic leadership changes that we announced last month. We have a philosophy of creating opportunities to broaden our leaders' skills and expertise across the company and to deepen their management perspective. This is how we grow leaders at StanCorp. I'm a product of that philosophy.

To that end, we've made the following changes: Jim Harbolt has been named Vice President of Asset Management and will assume leadership of the Asset Management segment, which includes retirement plans, individual annuities, as well as StanCorp Investment Advisers. Jim was previously co-leader of the Insurance Services segment. Dan McMillan has been named Vice President of Employee Benefits and will assume leadership of our Group Insurance business. Dan was previously co-leader of the Insurance Services segment, which included our Group Insurance and Individual Disability Insurance businesses. Scott Hibbs has been appointed Vice President and Chief Investment Officer. In addition to his current responsibilities overseeing commercial mortgage loan investments, Scott will lead the fixed income investment team and will oversee investment strategies for StanCorp. Katherine Durham, Vice President of Corporate Marketing and Communications, will assume executive responsibility for our Individual Disability business in addition to her current duties.

We are fortunate to have very strong leaders at StanCorp, and these changes are important part of our executive development process. For this call, I've asked the prior leaders of each business to respond to questions regarding third quarter results.

Now on to earnings. We are very pleased to announce another very strong quarter for StanCorp. Earnings from operations, which exclude after-tax, net capital losses, were $1.45 per share for the third quarter of 2013 compared to $1.05 per share for the third quarter of 2012. The increase reflects solid earnings growth in all of our businesses. We had very favorable claims experience in our group insurance business and the Asset Management segment posted another quarter of record earnings.

In the Insurance Services segment, pretax income for the third quarter was $78.3 million. That compares to $62.4 million for the third quarter of 2012. This growth in income was largely due to the very favorable claims experience in our group insurance business. Our group insurance benefit ratio was 75.1% for the third quarter of 2013 compared to 79.7% for the third quarter of 2012. We are seeing the benefits of a slowly improving economy in conjunction with our repricing actions related to long-term disability claims incidence.

Every quarter, we remind you that claims experience can fluctuate from quarter-to-quarter and that the benefit ratio is more stable when measured over a longer period of time. In addition to the effects of our pricing actions, we saw the benefits of favorable claims volatility this quarter. To put these results in perspective, on a constant discount rate basis, the group benefit ratio is our third lowest in our 14 years as a public company.

Consistent with our guidance, group insurance premiums for the third quarter of 2013 decreased 1.7% compared to the third quarter of 2012. Experience rated refunds decreased group insurance premiums by $3.2 million for the third quarter of 2013 and $6.5 million for the third quarter of 2012. Excluding these ERRs, group insurance premiums decreased 2.4% for the third quarter of 2013 compared to the third quarter of 2012.

Contributing to the decline in premiums during the quarter was a slight reduction in the workforce among our current customers. As we have seen for several quarters now, the decline in employment levels continues to moderate, although year-over-year employment growth is still slightly negative. We are hopeful that organic growth will return in 2014.

Group insurance sales, reported as annualized new premiums, were $29.7 million for the third quarter compared to $20.5 million for the third quarter of 2012. And as you know, historically, the third quarter is typically one of our lower sales quarters.

This continues to be a difficult sales environment. There are still significant uncertainties in the general economy and distractions due to the introduction of the Affordable Care Act. Year-to-date, sales are down mostly due to fewer large cases, and the pipeline is not as robust as we would like. However, we are pleased with the high level of persistency which reflects the efforts of our sales force and account management teams in working with customers to accept our rate increases, coupled with our consistent focus on high-quality customer service. You only do that as a customer if you perceive real value.

Our Asset Management segment's record earnings of $21.9 million of pretax income for the third quarter contributed significantly to our overall results. Asset growth drove higher administration fees, as well as spread margin. Assets under administration at September 30, 2013 increased by $2.1 billion or 10% when compared to September 30, 2012. In addition, Asset Management earnings included approximately $4 million from a combination of bond call premiums, mortgage loan prepayment fees, unusually favorable mortality experience in our annuity business and favorable results from our annual DAC unlocking exercise.

Overall, the execution of our growth and profitability initiatives in all of our businesses has allowed StanCorp to deliver excellent results. As we continue to navigate the economic obstacles we face with sluggish employment, low interest rates and uncertainty surrounding the implementation of the Affordable Care Act, it is clear we have the expertise and discipline needed to manage our businesses through these uncertain times.

Our financial strength and discipline were recognized recently by both Moody's and Standard & Poor's. Both rating agencies revised their outlook on the ratings of StanCorp and Standard Insurance Company to stable, reflecting improved profitability in our group insurance business. I am confident that StanCorp will 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 a discussion of our capital, as well as investments. And 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 the performance of our investments and finally, our capital position.

During the third quarter, we saw volatility in interest rates as markets reacted to both the economic and the political environment. While our new money investment rate for the third quarter increased to 4.23% from 4.16% for the previous quarter, new money investment rates on bonds and commercial mortgage loans remained below our portfolio yields.

Our discount rate is determined by the new money rates on the actual assets that we acquire, less the margin. The 12-month reserve interest margin between our new money investment rate and our average reserve discount rate was 54 basis points for the third quarter of 2013 compared to 53 basis points for the second quarter of 2012.

Our overall portfolio margin -- I'm sorry, second quarter of 2013. Our overall portfolio margin was 45 basis points for both the second and third quarters of 2013. We closely monitor the adequacy of the margin between the average new money investment rate and the reserve discount rate.

Our third 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 third quarter of 2012. The 25 basis point lower discount rate used for this quarter resulted in a corresponding decrease in quarterly pretax income of approximately $2 million, which equates to an increase of about 40 basis points in the quarterly group insurance benefit ratio. When normalized for the change in the discount rate, our group insurance benefit ratio improved 500 basis points compared to the third quarter of last year.

Moving on to our investments. We maintain a high-quality investment portfolio composed primarily of fixed maturity securities and commercial mortgage loans. Our fixed maturity security portfolio has an average credit quality of A- and less than 6% of the portfolio is below investment grade, while commercial mortgage loan portfolio continues to provide excellent risk-adjusted returns with a total portfolio yield of about 5.9%.

During the third quarter, we originated $414 million of commercial mortgage loans, a 19% increase compared to the $347 million originated in the third quarter of last year. The 60-day delinquency rate at September 30 remained low at 35 basis points. We're encouraged by the activity in the commercial real estate market, and we remain committed to originating and underwriting high-quality commercial mortgage loans.

Now I will turn to our capital position. During the third quarter, we increased our level of share repurchases to more than 818,000 shares for approximately $44 million at a volume-weighted, average price of $53.93 per share. Year-to-date, we have repurchased 1.5 million shares at a total cost of $71 million.

During the quarter, available capital was relatively flat. At September 30, 2013, our available capital over a 300% RBC threshold was approximately $420 million. At the insurance subsidiaries, the estimated risk-based capital ratio was approximately 365% at September 30, 2013. This is after a $30 million dividend from the insurance subsidiaries to the holding company in the quarter.

Before moving on to Q&A, let me comment on a few items of note that contributed to the strong earnings this quarter. We saw the benefit of our pricing actions in our group insurance business, coupled with the positive effects of a slowly improving economy. Asset Management added another quarter of strong earnings and continues to provide diversification to insurance businesses, and we continue to see the benefits from the expense management actions that we took earlier this year.

In addition to the changes in the postretirement medical plan that provided a onetime benefit of $20.6 million over the first 2 quarters, we implemented many of the actions that are keeping expense growth in line with revenues. We remain deliberate and focused on our growth and our profitability plans.

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

Jeffrey J. Hallin

Thank you, Floyd. Rob, we're now ready to take the first question from our participants.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from Randy Binner of FBR.

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

Just -- I guess I'll start on capital management. The previous guide on buybacks, I believe, is $40 million to $80 million for the year. And so it seems like with a good buyback in the quarter, you've moved through that pretty well. And so trying to get a feel if that guide for the year has kind of upside, or if it's something that you're going to stick with and then kind of reset for next year.

J. Gregory Ness

Okay. Floyd?

Floyd F. Chadee

So Randy, we do try to stay away from giving guidance for 1 quarter. We will give guidance again as we get to the end of the year when we give our results for the fourth quarter. We are very pleased, as you rightly pointed out, with both our rate of capital generation this quarter and our ability to deploy our capital with share repurchases this quarter at a very good price.

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

If you're able to continue to generate capital at this level, though -- I mean, I'm not trying to kind of be too nuanced here, but I mean, if you continue to generate capital at this level, is it reasonable to think that $420 million is a good number to stay at over $300 million?

Floyd F. Chadee

Yes. Remember last quarter, Randy, we gave some further color on sort of how we think about that $420 million -- about $400 million above 300% of RBC. And when we set aside sort of the amount withhold at the statutory entity to probably stay about 325%, not below 325% of RBC, plus what we'd hold as above that, we tend to think of about -- the math works out to about $100 million of deployable capital. With capital being flat over this 1 quarter to the other sequentially here, that number remains about the same.

Operator

We'll take our next question from the line of Mark Finkelstein with Evercore.

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

Maybe just to get a little more color on the claims and the favorable actual expected in the quarter. And I guess, what did you see incidence, favorable recoveries? Was it broad-based across sectors? Maybe just a little bit more color on what was a fairly dramatic decline in ratios?

J. Gregory Ness

All right, Mark, we can do that. Dan?

Daniel J. McMillan

Yes. Mark, I think I'd start by saying, there's really 2 drivers on the benefit ratio here. One was really some favorable volatility that Greg mentioned in his comments a moment ago, and really, the traction that we're getting our repricing efforts, and that's really driving a lot of this. Having said that, we always caution against looking at the benefit ratio on any quarterly window because of the inherent volatility in a short period of time. And really, we'd point you to the annual ratio, which is right around 80 at this point, and we like that number a lot. Within the quarter, we saw a lot of things moving. And probably, just going from general to more specific, all product lines really contributed to the result this quarter. We did see good improvement in LTD, but we also saw contributions from Life. And even our smaller premium lines, like STD and Dental, played into it as well. Within the LTD line, which is something we've commented on historically at some detail, we've seen incidence moderate throughout the year in a positive way. Still remains, though, a little above where we're in pre-recessionary levels. Recoveries remain strong, and that helped out in the quarter as well.

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

Okay, great. And can you just talk about the favorability in asset management? I think you gave a few reasons. Maybe mortality was one of them on the annuity line. I think prepays, obviously, and then I think there may have been an unlocking. How do we think about these pieces in the context of a normalized number?

J. Gregory Ness

All right, Mark, let's ask Scott to do that. Scott?

Scott A. Hibbs

Yes. Mark, I'll take that one. We did see a very strong quarter, and Greg mentioned several of these items in his remarks. So I'll just say, obviously, we've had a very strong equity market performance for the year, and we certainly don't count on that year-over-year. So I don't think this quarter taking 1 would be an appropriate way to look at the forward run rate. Relative to the factors that you mentioned, we did have several of those DAC unlocking, bond call premiums, mortgage loan prepayment fees and the favorable mortality experience in the annuity products. Those things added over $4 million to the run rate for the quarter, and we can't count on those recurring going forward. So I would characterize this quarter an unusually positive outcome.

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

Okay. And then maybe if I can just ask one quick one, if I may. Spreads on commercial mortgage loans in the quarter on the originations?

Scott A. Hibbs

Yes, sure. The -- was obviously a very good quarter from an origination standpoint, spreads remain strong, although the trend over the last few quarters has been down in those spreads, and we were just under 300 basis points in the quarter.

Operator

We'll take our next question from the line of Seth Weiss with Bank of America Merrill Lynch.

Seth Weiss - BofA Merrill Lynch, Research Division

Just coming back to the group insurance benefit ratio, it seems like you're going to come in much better than the 81% to 84% that was guidanced at the beginning of the year. I know it's partially attributable to quarterly volatility, positive volatility there. But when thinking about 2014 and 2015, is an improvement on this 81% to 84% loss ratio still a fair way to think about this business? Or was there something about the original 2013 guidance that was maybe overly conservative?

Floyd F. Chadee

I think, Seth, one wants to avoid looking at any one quarter, whether the benefit ratio is high or whether the benefit ratio is low. I mean, we would, I mean, guide you back to one, our guidance for the year, but if you look on a year-to-date basis of benefit ratio, our benefit ratio fairly close -- below the low end of that guidance range, but pretty close to that. Remember, we manage this business. As Greg has said earlier, we think in this interest rate environment, we manage this business, we think, healthily -- at a healthy level of about low double-digit ROE business. So that's what we focus on, and not any 1 quarter is indicative of where the benefit ratio might go.

Seth Weiss - BofA Merrill Lynch, Research Division

Okay. And in terms of being able to get to a low double-digit ROE, where would the loss ratio probably need to get to normalize in order to get to your hurdle rate there?

Floyd F. Chadee

There's no 1 number, Seth. I mean, it would depend on the mix of business, the cases that we have. So large case is very different from small case. So it depends on what the interest rate environment is at those points in the future.

Operator

We'll take our next question from the line of Chris Giovanni of Goldman Sachs.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

One question just around the loss ratio, as well. So I mean, do you feel like you've seen enough kind of from the rate increases, the incident improvement where that benefit ratio can decline back towards that 74% to 78% historical range? Or have you not really seen enough yet in terms of a return of wage growth and employment levels?

J. Gregory Ness

Dan, why don't you start, then Floyd, I'll have you tag on.

Daniel J. McMillan

Yes. Chris, I think I would, again, kind of point you to the annual numbers that we're seeing. And even if you look at 2012, recorded volatility between second, third and fourth quarter jumped all over and fourth quarter after really good -- third quarter jumped back up. When we look at that -- at those numbers, that the annual number's a better place to look throughout the year. And as Floyd said earlier, it's right around 80, just below the bottom end of our range for guidance, and we think that's a pretty good marker.

J. Gregory Ness

Floyd?

Floyd F. Chadee

And Chris, when you think of sort of historical range that we've given, I mean, before the financial crisis 5 years, 5, 6 years, it's a long time now, we used to say 76 -- 73.6% to 78.3%. Now remember, that was sort of a 5-year range at that point in time. And even when we got those benefit ratios, we would have said, for example, in 2008 when we got the benefit ratio of 73.6%, we said this was not sustainable, so be cautioned. I mean, that was -- when you look at the historical numbers, that was in a different interest rate environment. Since then, our mix of business has changed. So you probably shouldn't -- don't want to get too hung up on sort of one benefit ratio number and particularly, not be distracted by sort of where the historical numbers have been.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. And I guess, maybe following up some on Dan's commentary. I mean, presumably, I mean, the 80% is a trailing number for the last 3 quarters, and you have continued to push through rate this year. So presumably, you're expecting the benefit ratio on an annual basis to improve next year, given the rate improvement. I guess, is that certainly the fair assumption? And can you remind us how much of this exercise you will now be through by the end of this year?

Daniel J. McMillan

Yes. We -- in terms of the pricing work that we're doing, I think my [indiscernible] would say, "we're in the middle of the eighth inning or so". We're -- the majority of the way through that, and so we're starting to see some traction there in terms of its effect, particularly in the LTD line which -- with the rate increase that I think you're referring to is a response to increasing incidents that we saw in 2011, and that work has largely been done. I would shy away from providing guidance outside of our normal annual guidance we'll provide in January on the benefit ratio.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. And then just 1 quick 1 for Floyd or maybe Scott. I guess, the investment portfolio. There's a big increase in kind of the cash on the balance sheet relative to where you've been in recent quarters. So just wondering what drove that big increase. And then the mortgage loans now are up to kind of 43% of the portfolio, and I think we're all used to you having higher exposure there and understand why. But at what level are you comfortable going to within the commercial mortgage loans?

Floyd F. Chadee

So on the cash items, Chris, nothing -- I mean, the number is unusual when compared with the historical numbers, but nothing -- no 1 thing drove that, and most of it is actually just related to timing. So for example, intercompany dividend on the last day of the month, some escrow balances related to property taxes, the timing of some high annuity sales. And then as you would expect, just a general prudent management as we navigated our investment decisions in a very volatile political environment that we saw towards the end of the quarter here. So not any 1 thing driving those cash balances and certainly, not a change in policy towards holding higher cash balances. With respect to the numbers on the mortgage portfolio, it is not our intent to drive that number significantly higher as a percentage of our overall portfolio. That number ebbs and flows just depending on our ability to originate mortgages. But also remember, I mean, if you -- depending on which numbers you look at, if you're looking at it on a market value basis, the bonds go down as interest rates go up. So if you look at it on a statutory basis, then the numbers are quite different in terms of percentages. And so looking at that number going up ever so slightly is not a reflection of any further risk in our portfolio.

Operator

We'll take our next question from the line of Ryan Krueger with Dowling & Partners.

Ryan Krueger - Dowling & Partners Securities, LLC

I had a question about healthcare reform. Wondering on the voluntary product side, how you guys are planning to participate in private exchanges once those go into effect?

J. Gregory Ness

All right. James, can you help us with that?

James B. Harbolt

Sure. Ryan, certainly, with the exchange business, I don't think you'll see us out on any of the public exchanges that are out there. We are continuing to look at private exchanges, and we'll pick a spot where we think it works best for us. We've got a long history of success in our voluntary benefits platform, and we continue to invest in that platform and we'll do so, I think, for the next couple of years.

Ryan Krueger - Dowling & Partners Securities, LLC

In terms of private exchanges, is the plan to go on a broker private exchange, or have you not decided yet?

James B. Harbolt

I think that's an area we probably don't want to go too deep into. We're certainly in conversations with a number of our brokerage partners, and some of them are investing at different levels in the exchange environment and it's about us finding the chance to best use our expertise in our underwriting and claims management. So we're looking for the right partnerships.

Ryan Krueger - Dowling & Partners Securities, LLC

Okay, great. And then I had 1 on group disability incidence. Just on -- not for the quarter, but if you're looking at incidents on a year-to-date basis, how would that compare to the precrisis levels?

James B. Harbolt

I think we'd characterize it, Ryan, as gradually moderating through the year, but still above the prerecession levels we saw before.

Operator

We'll take our next question from the line of Suneet Kamath of UBS Financial.

Suneet L. Kamath - UBS Investment Bank, Research Division

So wanted to try the benefit ratio 1 more time and just look at the change from the second quarter because you talked about 2 dynamics, I think the price increases working their way through and then just, I guess, the good type of volatility. But if we think about that benefit ratio around 75% for the third quarter, compare it to, I think, what was slightly over 80% in the second quarter of this year, can you give us a rough split between those 2 drivers, the price increases and then the good volatility?

J. Gregory Ness

Dan?

Daniel J. McMillan

Yes, it's always difficult to generalize, Suneet, because of how many variables are included in that benefit ratio calculation. And so we try to provide some generalities around volatility, the things that we're doing to impact that, and those were the 2 drivers. I'd be remiss if I try to put a specific number on either one. One of the reasons we called out, and I think it was Greg's script, around the third-best quarterly benefit ratio in 14 years was really just to call out how dramatic that volatility can be quarter-to-quarter and really point more towards an annual number in terms of looking at it.

Suneet L. Kamath - UBS Investment Bank, Research Division

Right. No, that makes sense. But I guess, if we think about the price increases working their way through the system, I think you said earlier in the year that as of the first quarter, you were maybe 75% of the way through the increases, and now you're close to 80%. So would that delta really be that meaningfully different in terms of second quarter versus third quarter?

Daniel J. McMillan

Well, you have to think about how that premium flows, too, because a lot of those price increases occur at renewal or at new sale, and then the premium flows then through the year. The biggest renewal period is in the first quarter, and so you saw a lot of big bump in how the pricing changes flow through at the first quarter, less of that in the second and third quarters, but then you get the full year effect of those changes in the current year, if that makes sense.

Suneet L. Kamath - UBS Investment Bank, Research Division

Yes, yes. No, I think I got it. I was, again, just trying to figure out third versus second quarter because that was a pretty dramatic change in benefit ratio as well. In any event. Sorry, my second question is just on -- you talked about the pipeline for new business not being kind of what you'd like. Is this just, again, continued ACA uncertainty that's creating that, or is it on a stubborn employment market? Just any additional color there would be helpful.

J. Gregory Ness

Jim?

James B. Harbolt

Suneet, the way we're -- we're disappointed with our 1-1 pipeline. And you mentioned the ACA. That's certainly a contributing cause. A number of our brokers and consultants are still working with employers on changes to medical insurance plans. It looks like that's going to continue into next year. But I also want to mention that new sales are particularly competitive out there right now. There probably are less opportunities in those that are there are extremely competitive, and this is all happening at a time when we've been very, very disciplined in our pricing. And so those things are all converging to push down our 1-1 outlook sales.

Suneet L. Kamath - UBS Investment Bank, Research Division

.

Just 2 quick things on that. Any sense order of magnitude of what 1-1 looks like versus what it looked like last year? And then, in terms of the incremental competition or aggressive competition, is it mostly sort of the traditional life insurance companies that a lot of us on the call would cover, or is it coming more from health insurance companies, or anything unusual there?

James B. Harbolt

Suneet, what I think I'll do is, in our January call, we'll give guidance on premium growth, and that will encompass our outlook on sales, renewal and organic growth, so I'll defer to that time frame. And I think I'll just stay away from talking about competitors because competition can vary by region and sector and kinds of case.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay. But basically, much more competitive than you guys have seen of late?

James B. Harbolt

I think there's less opportunities to quote due to a lot of market distractions. And I think, particularly in big case market, there's some pretty good price competition on new cases.

Operator

Our next question will be coming from the line of John Nadel of Sterne Agee.

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

So I'll beat the benefit ratio horse one more time, too. So third lowest, I mean, on a constant discount rate basis, I get what you're trying to say and I understand that there's volatility. I mean, we can see it just this year, we can see it in, frankly, most years. What I'm interested is more following up on Chris' question which is, if we go back and we thought about the business mix and the interest rate environment that you operated in when you last sort of talked about that range of 73.6% to 78.3% as sort of the targeted range which would meet your ROE expectations, and we compare your business mix today in the interest rate environment today, how does that change that range? I mean, I don't think that's really asking too much around sort of guidance or anything of that nature, but you're talking about pricing to a low double-digit ROE, but I don't think any of us on the call still have any real strong sense as to what benefit ratio that means. And not mailing you down to a single data point, but I'm trying to understand how that historical range may have shifted.

J. Gregory Ness

All right. Floyd?

Floyd F. Chadee

So one, I think, John, we gave some color earlier in the call here on caution around historical range. The historical range that we gave back, say, in 2008, 2009, reflected our 5-year range at that point in time. In fact, it was exactly a 5-year range over previous 5-year range, where our low was in 2008, 73.6% benefit ratio. Our high was previously at 78.3%. We thought given that, that operating environment where interest rates are ruling [ph] at that point in time give more focus on the mix of business if you were doing at that point in time, the trends. Remember, we were growing our large private business at that point in time. So all of those things factored into the guidance we would have given on the benefit ratio. Today, we're operating in an environment where interest rates are materially different, where we're not growing our sort of a larger -- we're not moving from a situation of growing our larger case sales as much as we were at that point in time. We sort of stabilized around that -- those numbers. So the expectations on our benefit ratio would have changed. Now we don't price to a single -- the important thing is we don't price to a single benefit ratio number. We price to ROEs, and what would happen with our business would depend on what mix of business -- how our mix of business actually changes over time and how we shift through a pricing based on the emerging interest rate environment, which has been extremely volatile as we saw recently and expected to continue to be so as we see fed policy change over time. So to get to 1 benefit ratio number, I think, or even a tight range, would be very difficult, given the changing environment.

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

Well, listen. I totally understand what you're saying, Floyd. I guess I'm -- let me -- I'll try it this way. A single quarter, recognizing all the volatility that can come in a single quarter, but your third quarter, I think, annualizes -- just on a reported basis of $1.45, annualizes to a 13% return on equity. And that's with the, I'll call it, the drag, if you will, of this extra $100 million or $120 million of deployable capital that you're sitting with, which I don't know how much that would add if we just assumed to buy -- you used it to buy back stock, but I assume it adds a little bit. And the benefit ratio was 75%, and I know there's a lot of other moving factors, moving parts, but that's in that range, that historical range. But I just wonder if that's at the lower end of what a new reasonable range would be based on the business mix. I don't know. I'm just trying to help -- I'm trying to get some help in understanding how that range may have shifted because there's so many moving parts.

Floyd F. Chadee

There are. So just I would -- I mean, I understand the analysis you're doing, John. I would just caution you on 2 things there. One is that you should not be using any 1 quarter in annualizing that. We have constantly said that when there's quarterly volatility in our business, the start and analysis that begins with 1 quarter annualized, I think starts probably in a flawed place. And then the second thing is, I would remind you, as we said earlier and we keep reiterating, we're pricing to ROE targets what we think is reasonable in this environment, and that's going to shift.

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

Okay. And so...

J. Gregory Ness

The other thing to keep in mind there, John, is the 13% ROE that you quote there also is the beneficiary of the retiring medical curtailment that occurred in the first half of the year and is not expected to reoccur.

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

Well, that's fair. And so, if I -- so then if I think about the denominator then, if you're pricing to low double-digit ROE, how do I think about the right denominator? Am I thinking about a 300% risk-based capital ratio plus that cushion, or am I thinking about -- how do I think about the denominator?

Floyd F. Chadee

So John, I mean, we're not going to get into the details of our pricing mechanism, I mean, but we anticipate that this business, over a reasonable period of time is a low double-digit ROE business, and that would take into consideration not just the 300% of the 325%, but any normalized excess capital that we would hold above that for the reasons that we said we would hold those normalized capital levels. So we're not going to get into the details of sort of our pricing algorithms.

Operator

Our next question will be coming from the line of Tom Gallagher of Crédit Suisse Group.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

I wanted to follow up with a higher-level question related to ACA and just the overall development of these exchanges, whether they are private or public. The -- have you done any analysis of what structural impact you think that's going to have for your business? That would be my first question. And I know you've referenced the impact on the pipeline, but I'm talking more structural. Are there any real significant changes structurally as you think about this -- the development and this change over the next several years? That's my first question.

J. Gregory Ness

Okay. Jim, will you take that, please?

James B. Harbolt

Tom, certainly, we've done a lot of analysis. I would also tell you and caution that there are still much settling out that needs to happen over the next couple of years. Certainly, the administration's extension of the employer mandate has disrupted the marketplace and kept the attention on medical insurance for much of next year. The excise tax looms out there for a couple of years. We have some thoughts around how that might play out differently in private versus public employers. And so there'll be a tremendous amount of settling out over the next couple of years. You will see us continue to invest strongly in the voluntary space. We think you've heard a lot of folks talk about moving to employee paid, particularly in the private side, so we'll continue to invest in there. And I think there's still a lot of clouds around how some of these changes will play out on the public side.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Got it. And your investment in the voluntary space suggests that's where you see the most potential upside or opportunity in terms of the changes that you see developing?

James B. Harbolt

I would say it's 1 area of upside that we see out there, and that is a lot of just enrollment tools, enhanced enrollment tools is an important place, and we'll continue to invest in those spaces.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

And how about -- just in your core group business, that part is a lot less clear to me in terms of how do we think it may or may not be impacted by these changes, whether there's actually going to be some portion of your business that actually does move to an exchange type of point-of-sale, or whether that's unlikely to happen. Is there any way you can frame out your group business in either pluses or minuses?

James B. Harbolt

I would tell you, Tom, the crystal ball is still very cloudy. I think we've all seen some employers out there, larger national employers, who have pointed employees to private exchanges for health insurance. They basically got out of providing health insurance. Our customer base, I think, I don't see large portions of them leaving the health insurance and employee benefit marketplace. They use those to compete to retain employees.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

But nothing that you've seen thus far with any movement of group life or disability onto an exchange purchase platform?

James B. Harbolt

Clearly, there's employers out there looking at options and talking, and I think the best place for us to maybe go over that is on the January call. We'll give guidance on premium, and that will assume some -- we'll report annual persistency numbers, and our guidance will look at both new sales opportunities, organic growth and persistency.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Got you, okay. And then, the -- and then, I just wanted to come back to the question about ACA, and how that's creating uncertainty and how that's negatively affecting the pipeline. And when you comment on the pipeline, is that both on new sales and renewals? So are you also seeing some negative impact on renewals, or are you pretty happy with what you think persistency is going to do?

J. Gregory Ness

Jim.

James B. Harbolt

Well, Tom, this is Jim again. I would tell you that my comments on the 1-1 pipeline have all been around new sales and limited to the new sales pipeline. We'll report out our full year persistency on our January call. I think we've said most of this year that we've been generally pleased with our persistency, and I think I'll leave it at that.

Operator

Our last question today will come from the line of Chris Giovanni of Goldman Sachs.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Just one quick follow-up to that. I guess -- I mean, at this stage, do you view health care reform as a bigger risk or an opportunity to your business model?

James B. Harbolt

Chris, this is Jim. I think that anytime that there is disruption in the marketplace, I think we view ourselves as experts. And as the settling out comes over the next couple of years, I don't think everybody knows all the directions and things that will happen, and I think it'll give us a chance to leverage our expertise.

Jeffrey J. Hallin

All right. I'd like to now turn the call over to Greg for some closing remarks.

J. Gregory Ness

Thanks, Jeff. At StanCorp, we are very pleased with the strong fundamental improvement in our results thus far in 2013. More than 2 years ago, we set in motion a plan to take pricing actions to address the elevated claims incidents within our group long-term disability business and the low interest rate environment. In addition, we continue to invest in claims administration capabilities and took very specific expense management actions, all of which have contributed to these results. We knew that it would take time to implement the pricing actions through our book of business. Results this quarter reflect the unique combination of our strong expertise, coupled with the execution of our plan. This has resulted in year-over-year earnings growth in all of our businesses, 5 consecutive quarters of year-over-year improvement in our benefit ratio on a constant discount rate basis; and strength and diversification in our Asset Management segment.

We appreciate your participation in our call today. Thank you much. Have a very good afternoon.

Jeffrey J. Hallin

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 November 1. To listen to this call, you can dial (877) 660-6853, and enter the conference ID# 100278. A replay of today's webcast is also available at www.stancorpfinancial.com. Thank you.

Operator

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

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Source: StanCorp Financial Group Management Discusses Q3 2013 Results - Earnings Call Transcript

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