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StanCorp Financial Group, Inc. (NYSE:SFG)

Q4 2009 Earnings Call Transcript

January 28, 2010 12:00 pm ET

Executives

Jeff Hallin – Assistant Vice President, Investor Relations

Greg Ness – President and CEO

Floyd Chadee – SVP and CFO

Jim Harbolt – VP, Insurance Services

Dan McMillan – VP, Insurance Services

Scott Hibbs – VP, Asset Management Group

Mark Fisher – VP and Managing Director

Analysts

Mike Finklestein [ph] – MacQuarie

Randy Binner – FBR Capital Markets

Ryan Kruger – KBW

Eric Berg – Barclays Capital

Beth Malone – Wunderlich Securities

John Nadel – Sterne, Agee & Leach

Alex Chau – Credit Suisse

Bill Develom – Titan Capital Management

Ed Spehar – Banc of America/Merrill Lynch

Operator

Ladies and gentlemen, thank you for holding. Welcome to the StanCorp Financial Group, Inc. fourth quarter 2009 financial review conference call. All lines have been placed on mute to prevent any background noise. Today's conference call is being webcast live over the internet and is also being recorded. A question-and-answer session will follow today's presentation. (Operator Instructions)

At this time, I would like to turn the call over to Mr. Jeff Hallin, StanCorp assistant vice president of Investor Relations for opening remarks and introductions. Please go ahead, sir.

Jeff Hallin

Thank you, Stephanie. And welcome to StanCorp's fourth quarter 2009 Financial Review conference call. Here today to discuss the Company's fourth quarter results are Greg Ness, President and Chief Executive Officer; Floyd Chadee, Senior Vice President and Chief Financial Officer; Jim Harbolt; Vice President, insurance services; Dan McMillan, Vice President, insurance services; Scott Hibbs, Vice President, Asset Management Group; Mark Fisher, Vice President and Managing Director, StanCorp. Mortgage Investors and Rob Ericsson, 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, any intent, belief and expectation of StanCorp's management regarding future performance.

Some of these 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 fourth quarter earnings release and 2008 Form 10-K. With that, I would now like to turn the call over to Greg. Greg?

Greg Ness

Thank you, Jeff and thanks to all of you who joined us for our fourth quarter earnings call. The fourth quarter of 2009 continued StanCorp's strong results throughout the past year, despite the U.S. experiencing the dubious recession since the great depression.

Our fourth quarter results demonstrate the underlying strength of the SFG franchise. Even during a period when top-line growth was constrained by economic and competitive forces. As you read in the release, earnings from operations, which exclude after-tax net capital gains and losses and one-time costs associated with our operating efficiency projects, were $1.23 per share for the fourth quarter of 2009 compared to $1.20 per share for the fourth quarter of 2008.

In addition, we generated GAAP earnings per share of $1.23, which represents our highest quarter of GAAP earnings over the last few years. Our performance in the midst of the challenges of the 2009 demonstrates StanCorp's financial strength. While other companies struggled with their capital position, our capital levels remain high and our book value grew steadily, even as we increased our dividend and resumed share repurchases.

While others cut shareholder returns, StanCorp increased its annual dividend by 7%, while at the same time buying back almost $60 million in shares. While some of our competitors have slashed prices to grab market share, we have stayed disciplined in our approach to pricing and underwriting and we are writing new business that meets our return objectives. And while commercial real estate markets and activity have faltered, our mortgage portfolio continued its excellent performance by providing outstanding risk adjusted investment returns.

Consistency and discipline keep our business operating profitably and dependably in the long-term. It's on these fundamental strengths that StanCorp is able to position itself for a profitable 2010. These are characteristic in which we take great pride and are part of our underlying DNA.

When we look into our insurance services segment, the group insurance benefit ratio was 72.5% for the fourth quarter of 2009 compared to 72.3% for the fourth quarter of 2008. The benefit ratio was slightly below our guidance and included the effects of a reserve release that was partially offset by the effect of a 125-basis point lower discount rate for our long-term disability reserves.

More importantly, there is nothing in our overall claims results that we can attribute to weaker employment data. In our individual disability business, the benefit ratio for the fourth quarter of 2009 was 94.2% compared to a fourth quarter 2008 benefit ratio of 82.6%. These results include an increase in individual disability reserves as part of our customary practice of reviewing reserves.

Please remember that claims experience can fluctuate widely from quarter to quarter, especially in our small block of individual disability business and of course experience tends to be more stable when measured over a longer period of time. Floyd will address the reserves and the discount rate in more detail in just a moment.

Premiums in our group insurance business declined by 3% for the fourth quarter compared to the fourth quarter of last year. While our group insurance business continues to show resiliency, premium levels have definitely been affected by a lack of organic growth due to negative employment and wage growth. Organic growth will be a key variable for premium growth during 2010.

Persistency is under pressure from intense pricing competition, especially in a larger case market. During these difficult economic times, certain customers have been forced to look only at price, not value. While we always look to provide a cost effective solution to our customers, we absolutely refuse to compete solely on price and will always look to grow our business in areas that meet our profit objectives.

We continue to hold the line on pricing discipline and we will not chase the market on terminated cases only to retain them at a loss. Persistency in our group insurance business increased to 83.8% for 2009. That compares to 82.9% for 2008. While the increase is favorable, this figure is still below our historical persistency numbers and can be affected by the loss of one or two large cases.

We expect persistency continue to increase during 2010. Group insurance sales for the fourth quarter of 2009 reported annualized new premiums were essentially level with the fourth quarter of last year. We continue to see good interest in our new services and capabilities and our encouraged by our proposal activity and early sales results for the quarter in our employee benefits business. We like the momentum.

Turning now to the asset management segment, we're pleased with the segment's$14.1 million pretax income for the fourth quarter compared to $3.2 million of pretax income in the fourth quarter of 2008. These greatly improved results reflect higher administrative fees due to continued positive cash flows and recovery in the equity markets as well as lower operating expenses due to the successful implementation of our 2009 operating expense initiatives. It was an all-around good quarter for asset management. We look to see continued growth from this segment and increased contributions to the bottom line over time.

As I conclude, I want to again stress the importance of the core fundamentals at StanCorp. We will continue to grow book value through solid earnings and investment returns. We will maintain our return on equity by continuing to write profitable business and finally, we will continue to deliver superior shareholder returns by utilizing our available capital opportunistically. By focusing on these long-term objectives, we lay the foundation for further growth and impressive results going forward.

With that, I'll turn the call over to Floyd for a deeper discussion of our operating expenses, capital and investments, as well as a 2010 financial outlook. We'll leave plenty of time for your questions at the end. Floyd?

Floyd Chadee

Thank you, Greg. As Greg mentioned, we continue to produce solid results and maintain a strong balance sheet, despite the current economic conditions. These results include several items within the insurance services segment that, when taken together, reduced pretax income by approximately $5 million.

During the fourth quarter, we made reserve adjustments in both group insurance and individual disability. We reduced our long-term disability incurred, but not reported reserves by $16.6 million pretax and increased individual disability reserves by $11.5 million pretax. In addition to these reserve adjustments for the fourth quarter, we lowered our discount rate used for establishing reserves and new claims to 4.5%, a rate which is 25 basis points lower than the 4.75% that was used for the third quarter of 2009 and a full 125 basis points lower than the discount rate used for the fourth quarter of 2008.

A 125-basis point reduction in the discount rate results in a quarterly reduction in pretax income of approximately $10 million. This is equivalent to an increase of about 215 basis points in the quarterly group insurance benefit ratio. As part of our reserve oversite, we monitor the ongoing adequacy of the margin between the average investment rate and the reserve discount rate.

The average reserve interest margin for newly incurred claims during the previous 12 months was 31 basis points, reflecting the lower reinvestment risk associated with the current low interest rate environment. The overall portfolio margin at the end of the quarter was 41 basis points.

Moving on to expenses, we completed our operating expense efficiency project in the fourth quarter. Total pretax costs for these projects were $1 million in the fourth quarter, an $18.6 million for the full year 2009. These efforts will result in a savings run rate of approximately $25 million annually. Now, on the subject of capital, at StanCorp, our capital position is the foundation on which we run our business.

For the full year 2009, we grew book value per share excluding ALCI by 11%. We accomplished this while in the middle of a recession, after raising our annual shareholder dividend by 7% and repurchasing almost $60 million of our common stock during the fourth quarter. We believe balance sheet growth is the key to healthy earnings going forward. And our 2009 growth in book value certainly displays the strength of our business and our investments.

At December 31, 2009, we had approximately $290 million of available capital. This consists of capital in excess of our insurance subsidiaries target capital ratio of 300% of company action level risk based capital, as well as cash and securities available to the holding company. For 2009, the NEIC adopted a new statutory accounting principal that includes additional deferred tax assets as admitted assets previously counted as non-admitted assets. This change added approximately $40 million to our excess capital and is effective through 2011.

Risk-based capital at insurance subsidiaries was 353%. This is subsequent to the $55 million in dividends from the insurance subsidiaries to the holding company in the fourth quarter. Our insurance subsidiaries provided a total of $170 million in dividends to the holding company in 2009. For share repurchases, we believe that the combination of our available capital levels and the market price of StanCorp's stock resulted in a good buying opportunity and we took advantage of it in the fourth quarter.

We were very active in share repurchases, acquiring approximately 1.6 million shares as a total cost of almost $60 million and a weighted average price of $38.20. While we plan to continue to buy back shares on an opportunistic basis, share repurchases during 2010 are expected to be at a slower pace of $10 to $20 million per quarter. We continue to consider share repurchases within the context of our current capital levels and the current business and market environment.

Within our investment portfolio, our fixed maturities securities continue to maintain a high credit quality, with an average portfolio credit rating of A and we have experienced very little ratings migration during the past year. Net unrealized gains in the bond portfolio were $243.7 million at December 31, 2009 and total net capital gains related to our bonds were $8.9 million in the fourth quarter.

For commercial mortgage loan portfolio continues its long history of excellent performance. With the current portfolio yield of 6.46%, our loan portfolio provides a superior balance of risk and return, as well as a good cash flow match with our liabilities. At December 31, 2009, our 60-day delinquency rate was 40 basis points, which is the same delinquency rate as of September 30, 2009.

This stands in sharp contrast to the 490 basis points on CMBS at year end as reported by Moody's. We anticipate that our delinquency rate will remain contained and that our mortgage loan portfolio will continue to deliver superior returns. In the fourth quarter, we foreclosed on $19.2 million in loans, consisting of 10 properties, resulting in a net loss of $3.7 million.

The foreclosed properties were scattered across a variety of states and property types. Only one foreclosure was in California and only two foreclosures were in retail property. Mortgage originations for the fourth quarter were $156 million. While this was a pickup in activity compared to the $99 million of originations for the third quarter, this level of originations still reflects lower purchase and sale activity in an uncertain economy.

We will continue to seek the right type of borrowers, while maintaining strict underwriting practices, in order to place these high quality, high yielding assets on our balance sheet.

Now, I would like to talk about our overall impression of 2009 and how this affects our outlook for 2010. In 2009, we demonstrated our ability to generate strong financial results in the midst of a recessionary environment. Return on equity for 2009 excluding after-tax one-time costs, after-tax net capital losses and AOCI was 14.9%, coming in at the high end of our target range of 14% to 15%.

GAAP book value per share increased 29% and book value excluding AOCI increased 11%, even after giving back to shareholders in the form of an increased dividend and a renewed share repurchase program. Our capital levels remain solid throughout 2009. While many other financial institutions will be securing expensive equity debt and government financing, our available capital increased from approximately $130 million at year end 2008 to approximately $290 million at year end 2009.

Our bond portfolio experienced lower losses in 2009, benefiting from prudent risk management, especially in late 2008 and early 2009. And our mortgage portfolio continued to outperform many other asset classes once viewed as having higher credit quality. All of these accomplishments point to our long-term perspective when it comes to growing our business and creating value for shareholders.

With this in mind, we have laid out the following expectations for 2010. We expect to achieve an annual return on equity excluding after-tax net capital gains and losses from income and accumulated other comprehensive income from equity throughout the lower end of our long-term target range of 14% to 15%, given the low interest rate environment. We expect premium growth to be in the flat to low single-digit percentage range.

We expect a continued challenging economic environment, although we could see improved performance in premium growth, should there be a material improvement in employment and wage growth. In addition, we expect the annual benefit ratio for group insurance to be consistent with the experience of the previous five years, during which it is a range from 73.6% to 78.3%.

In conclusion, our disciplined and conservative approach can be seen in the growth and value we consistently provide to shareholders and this approach will continue to serve us well as we encounter challenges and opportunities in 2010 and beyond. And with that, I'll now turn the call back to Jeff to begin the question and answer portion. Jeff?

Jeff Hallin

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Mike Finklestein [ph] from MacQuarie. Please go ahead.

Mike Finklestein – MacQuarie

A couple of questions, firstly can you just provide more color on what you're seeing in terms of the January renewals. I mean, I think you were pretty positive on kind of early sales. You were positive on quotations and I think the growth guidance for 2010 is actually a little bit better than certainly what we were expecting and I suspect others as well in terms of having positive growth. Can you give any metrics around what you're seeing, whether it's year-over-year, what have you, maybe kind of add a little bit more color on that, please.

Jeff Hallin

All right. Mark, we'll do it. Jim?

Jim Harbolt

Good morning, Mark. This is Jim Harbolt. And I think you covered all three areas of growth there and any sort of leading indicator of growth. Throughout the summer and the fall, we were very encouraged with our proposal activity and that sustained on through up until the close of the year. We're pleased with the proposal activity. We're highly encouraged with the sales activity we've seen thus far in January. We're not going to share any numbers. We're not ready to do that yet but we're encouraged by what we're seeing. When you mention renewals, what you should be thinking about is I think things are going to be slightly flat or maybe even be better on the renewals. We certainly losing very price sensitive customers to some competitors if they are price-only shopping, but on the other hand, there's some employers who are really looking for value and they are showing interest in our new service and capabilities, so we're encouraged.

Mike Finklestein – MacQuarie

Okay. And then just, Floyd on the buyback, I guess if I kind of model this out in a low-growth environment. I estimate that net of the dividend, you kind of generate about $40 million of free cash per quarter. You know, I guess, one, is that right or wrong roughly speaking? And then secondly, can you explain how you got to the 10 to $20 million buyback, kind of, you know, with $290 million of capital capacity, you know, at year end? It just seemed a little bit lighter than what I might have expected.

Floyd Chadee

Yeah, so there's no question, Mark, we did very well in generating excess capital in 2009. In fact, we generated a bit more than you estimated. It was actually north of $50 million a quarter. So if you think of it. We generated approximately about $225 million for the year and then, then if you think of what we use of share, we use about $145 million for dividends, share repurchases, interest charges and holding company expenses. So that left us with about $80 million remaining after all those uses for the year and then another 80 from the MIFF [ph] and the DTA adjustment that has then increase of 160 for the year. So we were very healthy capital generation for the year. I think what you see, I mean, it's -- as we go forward, there's greater uncertainty in the economy and we look at our premium growth and we think it could be flat, but we think there's upside too.

And I think you're hearing from us that we see, we are seeing opportunities for growth and opportunities for sales and that, as you know, is the first preference in terms of usage of capital. So 10 to 20, 10 would be modest, 20 would be certainly doable within the range of capital that we are generating, but our preference would be on behalf of shareholders to use that for growth.

Mike Finklestein – MacQuarie

Okay. Thank you.

Jeff Hallin

Thanks Mark.

Operator

Your next question comes from Randy Binner with FBR Capital Markets.

Randy Binner – FBR Capital Markets

Hi, thank you. Greg, I want to dig in a little bit more on the persistency effective by a few large cases. I guess I would like to get a little more color there on what else drives that and how we should think about it, maybe in the context of the macro economy. Looking back historically, it's hard to see how much correlation it had to the last soft economic cycle. So any color there would be helpful.

Jeff Hallin

All right. Let's do it, Randy. Dan?

Dan McMillan

Hello, Randy. Dan McMillan. Good question. We look at persistency and we see that going up in 2009 over 2008, but not really what we would like to see in terms of our historical levels. And quarter end and quarter out, that can be driven by a few large cases here and there and we did see some large cases leave in 2009 that were forced to choose price over value, similar to what Jim mentioned earlier. And in those cases, we just were not willing to chase the market after that low price and stay disciplined, protecting the bottom line or the top line.

Randy Binner – FBR Capital Markets

Well, how about this, Dan? So I guess if it's a soft market causes your competitors to be very competitive on price, would that then by extension be a pressure on persistency?

Dan McMillan

Absolutely.

Randy Binner – FBR Capital Markets

Okay. One more, if I could, just kind of thinking about modeling. The investment yields that are shared on Page 10 of the supplement, obviously this supply, they are showing pretty downward progression. At what point does that start to flatten, Floyd? I mean how low can that go in a zero entrance rate environment basically?

Floyd Chadee

Yeah. So -- I would talk about the drivers of our investment yield. So we do approximately 60/40 on bonds and mortgages. Bond yields, anybody's guess at this point, given the government intervention in the economy. So there are some economists who believe that rates are going to be low for a long time because of lower credit multi pliers. There are those who believe that the government injection into the economy will eventually result in inflation and drive treasuries up and drive bond yields up. So I think the big lever that one would have to think about would be on our mortgage side.

If you look at 2009, you would see every quarter in 2009, where mortgage originations actually less than the corresponding quarter in 2008. We are very excited by the opportunities we are seeing in the -- in the purchase and sale activity and quote activity in the mortgage world. We think there's a lot of money there that could come into the market to drive purchase and sale activity and we view that as a source of differentiation for us when it comes to investment income. So very excited by the possibilities there. Spreads on mortgages have remained very, very healthy, even as the rest of the economy has been under pressure.

Randy Binner – FBR Capital Markets

All right. That's fair. I'm sure there will be other follow-ups on that. Thank you very much.

Jeff Hallin

Thanks, Randy.

Operator

Your next question comes from Ryan Kruger with KBW.

Ryan Kruger – KBW

Good morning.

Jeff Hallin

Good morning, Ryan.

Ryan Kruger – KBW

First question is on the operating expense line in the insurance services. Looked like it picked up quite a bit in the quarter versus the last couple of quarters and I was wondering if there was anything unusual that happened in 4Q and then also could you tell us how much of the run rate cost save hit on a consolidated basis in the fourth quarter?

Floyd Chadee

So, so I think nothing, nothing really to draw from the third quarter to fourth quarter pattern, in terms of a look forward. There was some unusual items in the third quarter that affected the third quarter favorably and some small, unusual items in the fourth quarter that affected the fourth quarter unfavorably. So in the third quarter, we had some favorable changes in accrual related to incentive comp. We had some favorable reassessment of costs related to our benefit plans. So that flowed through in the third quarter, making the third quarter good.

In the fourth quarter, we had some excess IT spend related to project spending in the fourth quarter, nothing ongoing. We also had miscellaneous other things that made the fourth quarter high. So for example, in the fourth quarter, we had, we had expenses related to -- increase in expenses related to employee giving (inaudible) where the company matches the employee contributions and that led to some of the increase in the fourth quarter. I think, so third quarter to fourth quarter, not indicative of what's going to happen going forward. I think as we look at expenses going forward, what we, what we are very sensitive to is the significant, the effect of our expense, efficiency projects this year.

And you can see, we did achieve our $25 million savings. If you look at the change in headcount between the end of 2008 and the end of 2009, you would see your head count went down by about 304 people at an average base salary of about 55, scaled up for benefits, getting you to about 70,000, that effect brought us to savings run rate of about $21, $22 million a year. And then a few other savings related to leasing and miscellaneous other expenses, efficiency expenses, gets you to the $25 million. So we feel very good about having achieved that expense savings come year end 2009 and as we look forward, you know, we think -- there were some other expenses that came into the picture. So we told you last year about the increases in our pension expenses, for example. Medical expenses have gone up and you would expect some little lift in expenses related to just increases in employee compensation. So when we look at the expenses going into 2010 here, we are thinking expenses overall net of this $25 million savings would bring us back to an expense level that actually goes back a couple of years to about 2008 levels.

Ryan Kruger – KBW

Okay. That's very helpful. 2010, you mentioned that the low interest rate environment is going to cause somewhat of a drag on your ROE outlook. You also mentioned that you remain disciplined and not chase pricing like some of your competitors. But I was wondering, is it fair to assume, though, that due to the high competitive environment you've not been able to actually increase pricing enough that that would kind of fully offset the impact of the lower investment income and that's kind of the main issue that's been caused by the interest rate environment.

Jim Harbolt

Brian. This is Jim Harbolt. Certainly what we look to is always the price that the right case at the right rate for the long-term. And we're constantly looking at that. We're not going to sacrifice the bottom line for the top line. You're right, that we have had to let some cases go by where we think that was going on in the marketplace, price competition is there and we've not chased some of those cases. We've let them go. And we're sticking to our principles and to looking for valued customers. Our quoting activity and early sales returns are showing that that strategy is working.

Ryan Kruger – KBW

Okay. Thank you.

Operator

Your next question comes from Eric Berg with Barclays Capital.

Jeff Hallin

Good morning, Eric.

Eric Berg – Barclays Capital

Good morning to everyone in Portland. While I have several questions, I'll ask one and a follow-up and then requeue so as to follow your guidelines here.

Jim Harbolt

Thank you.

Eric Berg – Barclays Capital

Sure, of course. My main question concerns the earnings in the asset management business, which were up dramatically from a year ago and I guess what I would like to know is this. It looks like as I look at the income statement, it looks like the biggest change is taking place in the net investment income line. What exactly is in that line? Is it what one would expect, namely coupon income only from bonds in the general account? I mean the reason I ask is because it looks like in your retirement business, in 2009 full year, you were on average managing less assets than you were on average in 2008 and yet for the full year, there was a leap upward in net investment income. So we were -- we're just trying to understand better than we do that net investment income line. Then I'll have a follow-up.

Jeff Hallin

Yeah, so you're absolutely right. We did have some increase in assets year-over-year. For example, in 2008, we sold a lot of annuities, if you remember, so that was on the books by 2009 and some of that flowed through. To your fundamental question, Eric, which was, is it just coupon income, it's not just coupon income, so we have a small line of equity index annuities and for which we hedge. So for example one of the things that we follow through both the interest credited line and investment income line would be the hedge effect.

The changes in the hedge valuations would flow through the net investment income line and interest credited would flow through the value of the liabilities related to that. So you get some other things there that caused some fluctuations over time. Now, I would caution you though that this equity index annuity is extremely small for us and while it does cause some fluctuation quarter-over-quarter in the total assets, for example, related to this is just about $350 million, so you can tell it's very small.

Eric Berg – Barclays Capital

The individual annuities that you are selling, are they principally IEAs, or are they fixed annuities?

Scott Hibbs

Eric, this is Scott Hibbs. The annuities sales are primarily are fixed rate annuities, so the equity index annuity represents maybe 10% or so of our production in our block. I wanted to go back and answer I think one other part of your question and that was the assets for the line. You did see a decline in the fourth quarter and that is because we sold a block of non strategic RP business that wasn't meeting our return objectives and that was about $1 billion. So that's masking some of what we saw in the quarter, which was good lift in the equity markets, positive cash flows for both the quarter and for the full year and then for the line generally, the benefits of our expense reduction work for the year.

Eric Berg – Barclays Capital

Great. My follow-up question. And then I'll requeue, relates to your financial disclosure. Since this asset management business is an important business for you, you've identified as a strategic focus it was the -- of the two businesses, it was the one that showed the earnings growth in the quarter. Have you made a decision and what is your decision regarding the disclosure of cash flows? I mean I would think that you've cited cash flows repeatedly in this call and in your news release, yet you're not disclosing them. Do you plan to?

Scott Hibbs

Eric, this is Scott again. We don't intend to be more specific at this time. The cash flows have been positive. They are important for this line, but overall for the enterprise, this is just not material for us.

Eric Berg – Barclays Capital

Well, I mean I beg your pardon. You know, this is for when you say not materially, the asset management business was the business that, that -- it showed dramatic earnings growth. So when you say it's not material, could you define what you mean by that? Because it showed a four-fold increase in earnings compared to declining earnings in your insurance business, so how could you say asset management is not material?

Scott Hibbs

When we think of the materiality, Eric, we think materiality as a percentage not -- not as a percentage of the growth, percentage of the overall earnings. I want to stress, though I mean, while asset management certainly picked up significantly over the disaster that we had in the general economy in 2008, we view our experience in the insurance services group and in particular, EB group the real part of our business as having been excellent. I think if you look at that experience versus the previous year and you back out the effect for the full year -- you back out the effect of the discount rate change, we had a year that was equally as good as 2008, which was our best loss ratio ever.

Eric Berg – Barclays Capital

Thank you. I'll requeue. Thank you.

Scott Hibbs

Thanks, Eric.

Operator

Your next question comes from Beth Malone with Wunderlich.

Beth Malone – Wunderlich Securities

Thank you. Good morning. My first question is on the mortgages. Is there an opportunity to expand your market for these mortgages beyond where you're currently selling them and does that create -- is that how you can see -- since the demand is down overall, or is the market condition such that you, competitively you really can't get beyond where your core is currently?

Mark Fisher

Hi, Beth, this is Mark Fisher. I think you're referring to do we need more places to place loans. And the answer is no, we're watching the market very carefully and there are a lot of loans to be made in the market today, but there are a lot of loans that we don't want to make as well. So we're very pleased that production came up from the third quarter to the fourth quarter and we're looking forward to 2010.

Scott Hibbs

I mean, Beth, in the space that we play, Mark has been seeing great opportunity there, lots of quotes. So I'm not sure that we want to wander far away from our niche of expertise here. And certainly we don't want to go into construction loans and highway stuff that others have indulged in.

Beth Malone – Wunderlich Securities

Okay. So you're satisfied with the markets you're in and the product that you're marketing in and it's just a matter of waiting for demand to improve to see more increase in mortgages?

Mark Fisher

Absolutely.

Scott Hibbs

Absolutely.

Beth Malone – Wunderlich Securities

Okay. My second question is on the benefit side, sales. Seems, as you mention, seems like you've held up, sales have held up fairly well given market conditions. But you keep, you've commented several times on this call and as well as earlier that there's significant competition in the marketplace. Is that competition coming from a pricing perspective, is that coming from the existing players, or are there new players that are desperate for pricing or desperate for premiums and it's coming into the benefit market that normally wouldn't have been there? I mean what is, what is the -- who is creating this competition and do you think -- what conditions would have to occur for that competition to go away or get better?

Jeff Hallin

Jim?

Jim Harbolt

Hi, Beth. This is Jim Harbolt. You are right that we've been citing strong competition now for quite some time, both in terms of low price and the willingness to give a price, a low price guarantee for multiple years. We're not seeing any new players and I would tell you that the competitiveness comes across the board and can vary sometimes among other carriers and it can vary by region and certain areas.

We, we'll continue to stay in there and slug it out and we're winning our fair share of customers who are concerned about values and services, capabilities. There are some that seem to be focused on price and in this particular marketplace, they are able to find a carrier sometimes who want to compete solely on price.

Beth Malone – Wunderlich Securities

Okay, thank you.

Jim Harbolt

Thanks, Beth.

Operator

Your next question comes from John Nadel with Sterne, Agee.

Jeff Hallin

Good morning John.

John Nadel – Sterne, Agee & Leach

Hey good morning, everybody. A quick question, can you give us a little bit more color on the changes in the reserves, the reduction in the IBRN Group and increase in reserves in IDI, what sort of the primary drivers there?

Jim Harbolt

The individual disability change was driven by, largely by a small, small closed block of planes, business that we don't sell anymore related to what we see as some slight deterioration in the termination rates related to those. So having no effect on sort of the business that we active in today. On the IBNR side, this is nothing more than the usual actuarial reserve review, which comes a natural rhythm throughout the year.

We do year-over-year in terms of looking at our reserves. We don't view the IBNR changes -- the IBNR change, had we had enough information earlier in the year, we would have changed our formulas with respect to the IBNR accruals and that effect would have been spread throughout the year. So we think while that it distorts the loss ratio in any one quarter, it's probably useful when we think of the performance in 2009 to think of that as incorporated in our sort of underlying earnings in 2009, for the full year 2009.

John Nadel – Sterne, Agee & Leach

Okay, all right. So I think maybe another way of saying that, if I can paraphrase that and maybe you can just say if I'm right or wrong, is, is if we sort of thought about that spread out over the full year, that sort of, that's the right way to think about looking forward, ex any sort of major change in the macro environment?

Jim Harbolt

Yeah, I think that's exactly what it is, John. I mean we would look, we would review -- IBNRs are related to premiums, so they are related to very current business. We review those all the time. If you look at page 47 of our 10-K last year, you would see great detail on these reserve adjustments that we do year after year. This is nothing new. And we would expect to continue to see changes in IBNR. Usually we do it in the third quarter or the fourth quarter, sometimes towards the latter half of the year, but these are under constant review.

John Nadel – Sterne, Agee & Leach

Okay, all right. That's helpful. The second question and I'll jump back in, is, is just to get a couple of details on the RBC and holding and your dividend capacity. So the holding company in 2010, if I look at that 353% RBC ratio that you quoted, what in, what in absolute terms does that indicate as the, is the capital above 300% in the statutory entity?

Floyd Chadee

I, -- we don't have the number exactly here, John, but I think it could be about $200 million.

John Nadel – Sterne, Agee & Leach

Okay. So that's about 200 of your 290 that you talked about. And what's the dividend capacity without, without an insurance commissioner approval for something special?

Scott Hibbs

$200 million.

John Nadel – Sterne, Agee & Leach

Okay. Perfect. Thank you.

Floyd Chadee

Thanks, John.

Operator

Your next question comes from Tom Gallagher with Credit Suisse.

Scott Hibbs

Good morning, Tom.

Alex Chau – Credit Suisse

Good morning. This is Alex -- I started with Tom Gallagher's line. Just two quick questions. The first one, on your loss severity for the commercial mortgages that were foreclosed on, have personal guarantees been a factor in any of those 10 foreclosures from the fourth quarter?

Floyd Chadee

Okay.

Scott Hibbs

Have -- yes. In a couple of cases, we have deficiency adjustments that we're pursuing and I think the way to think about -- personal guarantees in particular are all the loans that are still performing.

Alex Chau – Credit Suisse

Okay. And then the second question is just on the, on the asset management side, looking at the benefits to policy holders line and there's been some volatility in that line as well, I guess can you comment on that at all?

Scott Hibbs

Yes, I can. This is Scott again. The benefits the policy holders line tends to fluctuate with the premium line you see up above. And those are our immediate annuities that are sold out of annuities line. And despite the fluctuation there, you don't see any material impact in any quarter from that.

Alex Chau – Credit Suisse

Okay. Great. Thank you very much.

Scott Hibbs

Thanks, Alec.

Operator

Your next question comes from the line of Bill Develom with Titan Capital Management.

Scott Hibbs

Good morning, Bill.

Bill Develom – Titan Capital Management

Good morning, thank you. So would you please address the large case market that has been spoken of on the last conference call or two and now that we've passed that January 1 date, how your level of anticipated success related to actual success in the timeframe at which we might see any benefit in the premium line, please?

Scott Hibbs

Certainly.

Jim Harbolt

Good morning, Bill. This is Jim Harbolt. You are right to recall that we are seeing strong quoting activity last summer and throughout the fall, across the board but in particularly what we would call our national accounts business, which I'll remind everybody is 2500 lives and up, certainly not up into the jumbo case but up above 2500 lives. We remained encouraged throughout the quoting period. I also commented on the last call about a later sales cycle. Seems like the economy was driving people to sort of delay their decision making throughout the year as opposed to summertime decision, we were seeing more later in the year. And we remain pleased with the early sales returns on that, that we're seeing in January and the quoting activity there is, we remain encouraged with that too as well. We have some people even looking towards larger cases later in the year in activity and interest in our new capabilities and services has been strong. We're pleased with that.

Bill Develom – Titan Capital Management

So is the implication that the success that you had hoped for the January 1 renewal, that that did take place but now you're saying in addition to that, that you are seeing some interest in renewals also in addition to what you have for later in the year as a result of your new services?

Jim Harbolt

I wouldn't say renewals as much as new customers in the large national accounts. We're getting some shots and request for proposals and ask for quotes on large cases with our new services and capabilities. Our new services and capabilities get at things that lighten the burden for employers, the regulatory, the administrative burden. And so larger employers are quite interested in things that, where we can help them lighten the burden. And we'll be releasing Q1 sales numbers at the end of Q1 but so far in January, we're very encouraged.

Bill Develom – Titan Capital Management

Thank you.

Jim Harbolt

Thanks, Bill.

Operator

Your next question comes from the line of Ed Spehar with Bank of America/ Merrill Lynch.

Ed Spehar – Banc of America/Merrill Lynch

Thank you, good morning. I just wanted to follow up on the expense run rate question. It wasn't clear to me, Floyd, when you talk about the $25 million of annualized savings, how much of that was recognized in the fourth quarter numbers?

Floyd Chadee

Yeah, we don't have an exact number for that because I think when you think of the annualized run rate, we think of it in terms of that largely driven by that head count reduction. I think you can back into that number, because I think you can back into that number by looking at the difference in head count between the third quarter and the fourth quarter and using the statistics that I used. So that difference would give you a feel for how much of an effect came through in the fourth quarter.

So, if you look at the month I did, would show you end of 2008 to 2009, head count change times about 70,000 individual gives you the full, would give you the full effect to get the run rate change. So if you want the run rate change as it existed at the end of the third quarter, the same mass going from end of 2008 to the third quarter of 2009 would give you feel for any one quarter how that would flow through the fourth quarter. That make sense.

Ed Spehar – Banc of America/Merrill Lynch

It does, but can you give me, can you tell me the head count change?

Floyd Chadee

Yeah, you would have that, you would actually have that in the QSS. It's on the first page of the QSS. So actually, I think it's about 50 people between the fourth quarter of 2008. Fourth quarter of 2008, if you look at Page 1 in our QSS, the fourth quarter of 2008 would be 34, 36 and then the third quarter 2009 would be 3202. And so that difference there.

Ed Spehar – Banc of America/Merrill Lynch

Okay. Thank you.

Floyd Chadee

Thanks, Ed.

Operator

Our final question today will come from Eric Berg with Barclays Capital.

Eric Berg – Barclays Capital

Thanks very much for permitting me to do the follow-up. My one follow-up relates, is in the request to clarify the persistency outlook. If you expect the economy, as you say in your news release to remain challenging and the challenging economy in turn has led more employers than ever to shop to focus on price rather than on the value that you provide, why are you expecting persistency to improve this year?

David O'Brien

Yeah, Eric, this is Dan again. Some of the encouragement there really is related to what Jim mentioned earlier around the activity we're seeing at the beginning of the year. And as you know, 1-1 is the key date in terms of new sales, renewals and the activities around that date is encouraging for us in terms of persistency and that has allowed us to say, okay, the trend that we see from 2008 to 2009is good not as good as we like it. What we're seeing earlier in the year would position us to say that we expect that to go up in 2010 as well.

Eric Berg – Barclays Capital

I'm sorry. Maybe my understanding of how the accounting works is off. When you talk about new sales, that's new customers, right? So if that's right, does that have anything to do with persistency?

David O'Brien

Well, the measure is at 12-month rolling average that we report annually. And so the clock stops ticking at the end of the year and we'll report that again at the end of next year and so it's the premium number that comes in during that period of time.

Eric Berg – Barclays Capital

Thank you.

David O'Brien

You're welcome.

Floyd Chadee

Thanks, Eric.

David O'Brien

Before we close, I would like to turn the call back over to Greg for some closing remarks.

Greg Ness

Thanks, Jeff. StanCorp's results this quarter reflect our ongoing commitment to operating this business for the long-term. Despite the economic conditions, we continue to generate very good earnings, while maintaining financial strength. Rather than seek out additional sources of capital, we can deploy capital to further increase returns to our shareholders. We are continuing to invest in new capabilities and services that relieve our customers of the administrative burdens of making their employee benefit plans. We are encouraged by the continued interest, proposal activity and early sales results for this quarter. Even in this economy, customers are seeking high value products and services. The momentum is encouraging. We'll see organic growth return to more normal levels, as wage and employment growth begins to recover. We'll pick up our share of that growth and then some, as we continue to find customers who value the excellent products and services that StanCorp has to offer. At StanCorp, we prepared for the difficult times during periods of prosperity. And during the difficult times, we prepared ourselves for the growth opportunities that lie ahead. We're ready. Thank you for participating in our call. Have a great day.

David O'Brien

I would like to thank everyone, once again, for joining our call. There will be a replay of this call starting this afternoon and running through February 5. To listen to this call, you can dial 800-642-1687 and enter the conference ID number 471-94065. A replay of today's webcast is also available at www. StanCorp Financial.com. Stephanie?

Operator

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

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Source: StanCorp Financial Group, Inc. Q4 2009 Earnings Call Transcript
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