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StanCorp Financial Group (NYSE:SFG)

Q4 2013 Earnings Call

January 30, 2014 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

Katherine Durham - Vice President of Individual Disability Insurance and Corporate Marketing & Communications - Standard Insurance Company

Scott A. Hibbs - Chief Investment Officer and Vice President

James B. Harbolt - Vice President of Asset Management

Analysts

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Seth Weiss - BofA Merrill Lynch, Research Division

Thomas G. Gallagher - Crédit Suisse AG, Research Division

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

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

Suneet L. Kamath - UBS Investment Bank, Research Division

Ryan Krueger - Dowling & Partners Securities, LLC

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

Operator

Ladies and gentlemen, thank you for holding. Welcome to the StanCorp Financial Group Inc. Fourth Quarter and 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 Vice President of Investor Relations and Capital Markets, for opening remarks and introductions. Please go ahead, sir.

Jeffrey J. Hallin

Thank you, Shay, and welcome, everyone to StanCorp's Fourth Quarter 2013 Earnings Conference Call. Here today to discuss the company's fourth quarter results are: Greg Ness, Chairman, President and Chief Executive Officer; Floyd Chadee, Senior Vice President and Chief Financial Officer; Scott Hibbs, Vice President and Chief Investment Officer; Dan McMillan, Vice President, Employee Benefits; Katherine Durham, Vice President, Individual Disability Insurance and Corporate Marketing and Communications; Jim Harbolt, Vice President, Asset Management; and Rob Erickson, Vice President and Controller. Today's call will begin with some brief comments from Greg and Floyd, and then we will open it up for questions.

Before we begin, I need to remind you that certain comments made during this conference call will include statements regarding growth plans and other anticipated developments for StanCorp's businesses, and the intent, belief and expectation of StanCorp's management regarding future performance. Some of 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 the 2012 Form 10-K.

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

J. Gregory Ness

Thank you, Jeff, and thanks to all of you who have joined us for our fourth quarter earnings call. Yesterday afternoon we reported fourth quarter and full year 2013 earnings and I'm very pleased with the results. For 2013, we reported full year earnings, excluding after-tax net capital gains and losses of $5.34 per share. Even when you exclude the additional income of $0.30 per share from the amendment to our postretirement medical plan, we had a record year of earnings per share. Return on equity, excluding after-tax net capital gains and losses and accumulated other comprehensive income for 2013, was 12.3%. As we reflect on 2013, I'm pleased with the contribution from each of our businesses.

We saw a strong earnings growth in Employee Benefits and record earnings in the Individual Disability and asset management businesses. We continue to execute our strategy of obtaining and retaining profitable business. We had another great year for commercial mortgage loans, with more than $1.3 billion in new originations, and we returned over $130 million of capital to shareholders through dividends and share repurchases. Our 2013 annual dividend per share increased by more than 18%. The 2013 dividend marks the 14th consecutive increase in our annual shareholder dividend since becoming a public company in 1999.

Now let's turn to our quarterly results. Earnings per share for the fourth quarter of 2013 was $1.49. That compares to $0.89 per share for the fourth quarter of 2012. All of our businesses contributed to the 67% increase in earnings per share. In Insurance Services, pretax income for the fourth quarter of 2013 was $83.9 million compared to $48 million for the fourth quarter of 2012. The growth in income was largely due to the very favorable claims experienced in Employee Benefits and Individual Disability. The benefit ratio for Employee Benefits was 76.1% for the fourth quarter of 2013 compared to 83.7% for the fourth quarter of 2012. On a constant discount rate basis, the benefit ratio has improved year-over-year for 6 consecutive quarters.

The benefits of the repricing actions we began in 2011, to address elevated long-term disability claims incidence and low interest rates, are clearly evident. In addition, we're beginning to see the effects of a slowly improving economy.

Our Individual Disability benefit ratio was 57.5% for the fourth quarter of 2013 compared to 73.8% for the fourth quarter of 2012. As a reminder, the benefit ratio for this business can be more volatile from a quarter-to-quarter basis, but tends to be more stable when measured on an annual basis.

Premium growth in sales for Employee Benefits reflect the effect of the pricing actions we took to deal with the claims experienced as well as the challenging economic environment. Consistent with our annual guidance for 2013, premiums for the fourth quarter of 2013 decreased 1.4% compared to premiums for the fourth quarter of 2012. Employee benefits sales were $69.6 million for the fourth quarter of 2013 compared to $73.4 million for the fourth quarter of 2012. Persistency in Employee Benefits was 86.7%, both for 2012 and 2013. This high persistency is the result of the efforts of our employees in implementing pricing actions while providing superior products and services to our customers.

Organic growth within Employee Benefits remains a significant challenge to growing premiums, as this measure depends on employment and wage growth of our current customers. During the first 3 quarters of the year, employment levels among our customers declined year-over-year. For the fourth quarter, employment levels were just positive at 0.2% growth. While this is a small change, I definitely like the direction it's heading.

In asset management, income before income taxes was $19.5 million for the fourth quarter of 2013 compared to $16.3 million for the fourth quarter of 2012. The Asset Management business contributed strong results and I am pleased with their performance. The increase resulted from higher administrative fee revenues and spread margin. In addition, we had a few nonrecurring items that added to earnings this quarter including higher bond and mortgage loan prepayment fees and a favorable change in fair values of the hedging assets and liabilities related to our equity index annuity product. A more typical quarter for Asset Management would likely have income before income taxes in the $16 million to $17 million range.

Our success has always come from delivering high quality customer service from a position of financial strength. This won't change. In 2014, we expect continuing pressure on the top line from the pricing actions we've taken to address higher claims incidence and lower interest rates. We will adapt to the top line challenges by investing in new ways of doing business and strengthening our connection with our distribution partners. We will always protect the bottom line over the top line, and that starts with getting the right rate on the right risk.

Our collection of high-performing businesses and an improving economy gives us confidence that 2014 will be another great year for StanCorp. I like the momentum.

With that, I'll turn the call over to Floyd for a further discussion of financial results as well as our 2014 financial outlook. Of course, we'll leave plenty of time for your questions at the end. Floyd?

Floyd F. Chadee

Thank you, Greg. Our fourth quarter and full year 2013 earnings demonstrate both the fundamental strength of our business and our expertise at managing through challenging economic conditions. I would like first to focus my comments on our fourth quarter new money investment rate and the discount rate used for newly established long-term disability claim reserves. I will then comment on the performance of our investment portfolio, our capital position, and finally, our 2014 guidance.

As you know, our discount rate is determined by the new money rates on the assets that we acquire, less the margin. Our new money investment rate for the fourth quarter increased to 4.33% from 4.23% for the third quarter. Despite this slight improvement, the low interest rate environment continues to put downward pressure on net investment income, as new money investment rates on bonds and commercial mortgages remain below our portfolio yield. We expect this pressure to continue into 2014. As always, we closely monitor the adequacy of the margin between the average new money investment rate and the reserve discount rate. The 12-month margin was 49 basis points for the fourth quarter of 2013 compared to 54 basis points for the third quarter of 2013. Our discount rate used for newly established long-term disability claim reserves was 3.75% for the fourth quarter of 2013 compared to 4.0% for the fourth quarter of 2012. The 25 basis point lower discount rate resulted in a corresponding decrease in quarterly pretax income of approximately $2 million, which equates to an increase of about 50 basis points in the quarterly benefit ratio for Employee Benefits. When normalized for the change in the discount rate, the benefit ratio improved 810 basis points compared to the fourth quarter of last year.

Moving on to investment. Our investment portfolio remains well positioned. We maintain a high quality investment portfolio composed primarily of 6 matured securities and commercial mortgage loans. Our fixed maturities security portfolio has an average credit quality of A- and 5.6% of the portfolio is rated below investment grade. Our commercial mortgage loan portfolio continues to provide excellent risk-adjusted returns with a total portfolio yield of 5.84%. The 60-day delinquency rate at December 31 was 28 basis points.

In 2013, we originated $1.3 billion of commercial mortgage loans, which represent our highest annual originations since 2008, and a 10% increase compared to 2012. We are encouraged by the increased activity in the commercial real estate market and remain committed to originating and underwriting high-quality commercial mortgage loans that provide us a significant yield advantage.

Now, I return to our capital position. During the fourth quarter available capital increased by approximately $115 million to $535 million at December 31, 2013. Available capital consist of capital in excess of our insurance subsidiary's target RBC ratio of 300% and cash and capital at the holding company in noninsurance subsidiaries. Approximately $50 million of the increase represents a capital benefit related to a regulatory change to the RBC model that eliminated the use of the mortgage experience adjustment factor. The new RBC approach measures the risk on each individual mortgage loan.

At the insurance subsidiaries, the estimated risk-based capital ratio was approximately 398% at December 31, 2013. This is after a $40 million dividend from the insurance subsidiaries to the holding company in the quarter. In addition to a strong capital -- available capital and estimated risk-based capital ratio as of December 31, 2013, we grew book value per share, excluding AOCI, by 9% for 2013, while returning over $130 million to shareholders in the form of share repurchases and dividends. During the fourth quarter, we repurchased 193,700 shares for approximately $11 million at a volume weighted average price of about $59 per share. Year-to-date, we have repurchased 1.6 million shares for approximately $82 million at a volume weighted average price of about $50 per share.

During the fourth quarter, we paid an annual dividend of $1.10 per share, an 18% increase compared to 2012. Since the financial crisis began in 2008, StanCorp has increased its annual dividend per share by 47%.

I would now like to focus on our expectations for 2014. 2013 was a very favorable year. Even after excluding the additional income of $0.30 per share from the change to a postretirement medical plan, the adjusted 2013 earnings per share of $5.04 was our highest ever. As outlined in our earnings release, we provide guidance on the following 4 factors: Employee Benefits premiums, the benefit ratio for Employee Benefits, the effective income tax rate and share repurchases. For 2014, we expect relatively flat premiums for Employee Benefits compared to 2013, and annual benefit ratio for Employee Benefits in the range of 77% to 79%, an effective income tax rate in the range of 25% to 26% and share repurchases in the range of $40 million to $80 million. We expect that achieving the midpoint of the ranges of these factors would result in a return on average equity excluding the after-tax net capital gains and losses on AOCI of approximately 11%, and the net income, excluding after-tax net capital gains and losses of approximately $5.15 per share for 2014.

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

Jeffrey J. Hallin

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll now take our first question from Christopher Giovanni from Goldman Sachs.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

I guess the first question. Maybe if you could talk a little bit about kind of the renewal cycle into 1/1 kind of competitive landscape there and kind of the expectation around premium growth which you expect to be flat. I guess I would have thought maybe it would have been a little bit better than that, just given you're through the repricing cycle. You've heard some more favorable commentary from some of your peers around the pressures from health care reforms starting to abate a bit.

J. Gregory Ness

All right, Chris. Dan, would you take that, please.

Daniel J. McMillan

Yes, Chris, this is Dan. A lot in your question there. Let me start by just referring back to last quarter. We provided some guidance that we expected first quarter sales in '14 to be down some. And a lot of that really has to do with the repricing work that we did, but mostly driven by a few less large cases that we sold and those decisions made early last year in the height of our repricing efforts. It appears, based on the benefit ratio here, clearly, that we weren't taking sufficient rates through those actions and that has played out very nicely. The other aspect here is really around growth going forward, and I would say that we do continue to see some distraction from the ACA. That means that you're seeing a few less cases come to market. Our proposal activity, I would say, is muted a little bit from that and it's not something -- really, when you're talking about the biggest regulatory change in the employee benefit space, in recent memory, is not something that's going to abate rapidly for the marketplace. I think I would add, too, it's really important, when you think about premium growth, to talk about it in kind of a broad perspective here, and that is that sales is one aspect of that and we have invested in a number of things to drive sales over the long term. But when you look at persistency, we're very pleased with the year-over-year results here, relative to last year, as well as having that result occur in a pricing environment where we're repricing business and able to hang on the business. And we find that when people experience the standard, they really like the service they have, we're able to hang on to more customers than some might have expected. The other aspect here is that, Greg alluded to it earlier in his comments, organic growth, edged positive late in 2014, for the first time since 2009. We like that a lot and we like the GDP numbers we saw this morning as well as some of the numbers around state budgets that are growing and like the aspects of the gradual improving economy that Greg alluded to. A couple of final comments, really, around -- we are investing in some of the things we talked about before. Employee choice and voluntary benefits, we'll continue to invest and expand our capabilities there. We're also looking to see greater sales and we're investing in local partnerships in each of our regions and also adding sales reps in each of our 4 regions across the country. We think that'll build momentum in 2014, and build a platform for growth in '15 and '16, as we move forward here.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay, very helpful. And I guess you commented on persistency. Any thoughts, just specific to the life and AD&D line. I guess the disability lines have been stable or improving, but the life and AD&D seems to be slipping here over the past couple of quarters. Anything you guys are doing, I guess, specifically around that book or is it just competitiveness in the marketplace?

Daniel J. McMillan

Yes, it really is what you referred to. We saw a couple of large cases on the life side that we weren't able to get adequate premium to cover the risk, and we'll look to see those return when they come back after going out into market. We saw a little benefit on the LTD line, from the repricing efforts, which really means we got more premium on the same cases. So nothing notable there other than the fluctuation.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. And then just one last one, for Floyd, around capital. I guess taking the results in '13, the positive bias you guys have here moving into '14, why shouldn't capital management be bigger than kind of what you've outlined even at the top end of your guidance range? Especially given the capital you're sitting on today.

Floyd F. Chadee

Absolutely. Absolutely, Chris. I mean, we had a great fourth quarter here. It gave us a lift in capital, both from the statutory earnings and from the MIF adjustment. And in addition, in the fourth quarter, we didn't pursue many share repurchases as we were earlier in the year, as the market got out of hand, which has played out over the last few days in a different direction. So as we approach 2014, what we would want shareholders to hear is that we haven't changed our position with respect to capital and our desire to make sure we act in the best interest of shareholders. But to remind you, our priorities for capital would be growth in the business, M&A possibilities and return to shareholders. So we will be opportunistic as we go through 2014, and as opportunities present, we will act in the best interest of shareholders.

Operator

Our next question comes from Seth Weiss from Bank of America.

Seth Weiss - BofA Merrill Lynch, Research Division

Maybe I'll take another just shot at the capital question. And if we look at previous commentary surrounding buffers above the excess capital sort of implies maybe a little bit north of $200 million in excess capital. Floyd, maybe you could go into little bit more detail in terms of what opportunities outside of buyback. You briefly outlined your priorities, but maybe on the M&A front what potential you're seeing and if there's any sort of alternative uses of capital that could be accretive to EPS when we think about 2014 and 2015.

Floyd F. Chadee

We're always on the lookout for such possibilities, Seth, but there's nothing specific to talk about at this point. But we always keep our eyes open for such possibilities. I mean, we would love to do a small block of something that would enhance our, for example, employee benefits business. But as you know, those are few and far between. Our priority still remains growth in the business. I know Dan just talked about the things that we're doing to enhance premium growth and we know the challenges as the economy improves there. So that remains a priority. And so nothing specific to talk about in terms of M&A possibilities at this point.

Seth Weiss - BofA Merrill Lynch, Research Division

And maybe I could ask just one other, just on the -- specific to the quarter and the positive benefit ratio. Could you give a little bit of color on maybe incidence rates versus severity and then if you saw any trends in this quarter, across geographies or industries that led to the positive results?

Daniel J. McMillan

Yes. On the benefit ratio, we had favorable, really, contribution for most of our product lines. The two biggest ones there, both life and disability, each performed very well. We're seeing the metrics around LTD really continue to moderate and improve in the quarter. And we probably won't be providing specific details on incidence and severity there because we're seeing that return more to normal ranges. Life, as you know, generally benefits from positive seasonality in the latter half of the year. We did see that and saw very favorable results from life in the quarter. No real outliers though, from geography or region that we saw in the quarter.

Seth Weiss - BofA Merrill Lynch, Research Division

Okay. And as that sort of returns to maybe a little bit more normalcy, does that play into a tighter range in terms of 77% to 79% outlook than maybe what you've given in the past?

Daniel J. McMillan

I think that's a fairly safe assumption. We're through some fairly rigorous repricing work. We made it through that cycle, and what we're seeing is allowing us to provide some guidance in the range that you saw today.

Operator

Our next question comes from Tom Gallagher from Credit Suisse.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Just a question on your flat revenue or premium growth guidance for '14. Is it your expectation that the underlying market and demand is going to be roughly flat or are you expecting to lose or gain share? And is that related to some of the -- and if it's losing, is that related to some of the large case losses or lapses that you had described?

J. Gregory Ness

Dan.

Daniel J. McMillan

Yes, the market remains very competitive. We're seeing -- you occasionally see a couple of carriers who will take cases on rate that we wouldn't support. And that's not a new phenomenon but we do see that continue in some segments. We saw fewer opportunities to write prop loss [ph] cases last year, which those sales come home to roost in the first part of this year. So that's some of the commentary that we have there. The market, overall, I don't see growing significantly in the coming year, from an organic standpoint, but I don't see it shrinking significantly either.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

So you wouldn't think that you're losing much share based on your premium growth that you would expect for the year? You think it's roughly flattish, would that be a fair description?

Daniel J. McMillan

Correct, that's fair.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

And how about on the Public Sector side? Is that a big driver for what's turning around here, when you kind of peel back the onion and say the underlying margin improvement, if you split it between private, public?

Daniel J. McMillan

I would really say is really in line with the other segments that we're seeing. All have improved to some degree. And what we're seeing, really, out in the marketplace, in the public market is some growing budgets at the education and state employment levels. That's a positive, we think, given the contraction we saw when tax-based entities really shrunk. We're not seeing that now. We think, overall, that environment will be a positive.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Got it, okay. And then lastly, Floyd, just to come back on capital management one more time. Can I just get a sense and I've heard what you said in terms of response and your thought process about considering opportunities and alternatives to dividends and buybacks. But what would the process be in terms of how much is too much? $200 million of starting excess deployable capital. I think your outlook continues to get better in terms of the capital generation and you're not expecting to grow organically, so you're not going to be putting capital back to work in your business. At what point would you, as a management team, start to think about enhancing the size of the capital return program? And just from a timing, from a size, any clarity you can give on that?

Floyd F. Chadee

Well, I wouldn't talk about specific plans around that but that is always foremost in management's minds, in terms of mechanisms of returning value to shareholders. Remember, Tom, in the fourth quarter here, the growth in capital that we saw was fairly unusual. One, we had a benefit ratio that is, in fact, for the quarter, lower than our expectation for next year. Lower than the lower-end of expectation for next year. So rate of capital generation was much higher than we would expect normally. And also, we had the MIF adjustment factor that gave us an extra boost in the beginning of the fourth quarter. So we had a rate of capital generation in the fourth quarter that is not expect to continue as we go forward.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Understood on that. But I guess my point would be your capital management plan appears to be a reasonable payout plan based on what you expect to earn in 2014, about 60% of a payout ratio. But what about the $200 million of excess above buffer, above money that's being set aside for potential M&A? I guess that's really my question. And if it's $200 million today, how big would the kind of immediately deployable cushion need to get before you decide it has become too big or...

Floyd F. Chadee

Tom, our view is that the 234, in excess of our normal buffers here, that's immediately deployable. And we look, every day, at ways to returning that to shareholders. So our intention is not really to grow that in huge numbers, that number is immediately deployable.

Operator

Our question comes from John Nadel from Sterne Agee.

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

I just wanted to be clear. I think you're guiding us -- if I'm hearing it correctly, I think you're guiding us to expect that the Employee Benefits or group insurance sales will be year-over-year, at least in the first quarter. Can you help us maybe with what kind of rate of decline you're expecting there? And then I know it's early in the year, but overall for 2014, are you currently expecting that group insurance sales will be down for the full year as well? I know it's kind of tough to look out that far, I guess, at this point.

J. Gregory Ness

Yes. We can at least talk a little bit to the early part of the year, but...

Daniel J. McMillan

I wouldn't give you a specific percentage, John, on the first quarter. We do predict it'd be down a little bit from the first quarter of last year. And for all of '14, we're not expecting something dramatic. I'm not going to provide specific guidance there, but we continue to invest in those areas that we think are going to generate smart growth for this business, and that's taking a long-term perspective there and that we will continue to do that.

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

Okay. And then just thinking about the Individual Disability block for 2014. Obviously, there's a lot of movement on a quarterly basis. Is there anything that's gone on in that business, from a pricing or otherwise perspective, where you'd expect that the benefit ratio would be declining versus your sort of historical long-term average there? Trying to understand how much of an impact that might be in 2014.

J. Gregory Ness

All right, fair question. Let's ask Katherine. Katherine?

Katherine Durham

John, you're absolutely right that we see volatility on a quarter-to-quarter basis. And given the small size of that business, that's what we expect. We're not expecting the benefit ratio to fall outside of our normal range for 2014, and this quarter's results fall within that range as well.

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

Okay. And then finally, maybe just broader question, and that is this. What's StanCorp up to as it relates to positioning for health care exchanges, small business markets adjustments? Can you give us an update on where you stand and what you've been up to over the last several months?

J. Gregory Ness

Again, Dan.

Daniel J. McMillan

Yes, John, the exchange marketplace is something that's evolving, I almost said day-to-day, at least week-to-week and definitely month-to-month. We see some movement there. We are actively engaged in the conversation there. We're already actively participating with about 3 different private exchanges and in conversations with several more. That's an area where we will continue to look at the objectives of each specific exchange because they're all different, and whether the objectives there match up with our own. And where we see opportunity, were going to seize that. The small marketplace can play into that, and our investment in employee choice and employee pay aspects of our products is only going to play into that as well.

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

Are you seeing any opportunities to develop any new products? Things that you haven't offered in the past, maybe to take advantage of that opportunity?

Daniel J. McMillan

There may be something that emerges. We are keeping our eye very close on that space. Oftentimes, some of the best opportunity is a slight modification of something that we do today or that somebody else does today, and that what we watch closely with some of our product people every day.

Operator

Our next question comes from Mark Finkelstein from Evercore.

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

Most of my questions have been asked. But I want to ask a little bit about pricing strategy in group. And obviously incidences have come back and the benefit ratio has obviously gotten a lot more favorable. But the question is, when you think about the rate increases that you've implemented, are you comfortable with the level that you've implemented or is there any view that perhaps you even oversteered a little bit and that's had the kind of pretty meaningful impact on sales levels?

J. Gregory Ness

Dan.

Daniel J. McMillan

Yes. Mark, I wouldn't characterize it that way. I think we are pretty sophisticated in the way that we price business. That's something that we are looking at and adjusting, month in and month out. We specifically called out, a number of months ago, the action related to LTD incidence because it was something we haven't seen visited before, but it also some real focus for the organization. And if you look pricing that's something that we adjust, whether it's interest rates, whether it's claim behavior, whether it's marketing conditions, month in and month out. We're not seeing evidence of overreaching, in terms of the repricing that took place, and I think that bears out in the persistency numbers.

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

Okay. And maybe just a little bit more on the experience in the fourth quarter. It sounds like it was across-the-board, but was there any distortionary benefits from the group life block, which can often have a fourth quarter benefit that's pretty meaningful?

Daniel J. McMillan

Yes, group life, I think I used the phrase very favorable in the quarter, it generally benefits from seasonality like, in our block, like most of our competitors in the fourth quarter, and we saw that. And it was pronounced in the fourth quarter. That was both incidence and severity in group life contributed to that.

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

Okay. And then just finally, commercial mortgage to loans spreads, I think they were a little under 300 basis points in the third quarter. Any changes in the fourth?

J. Gregory Ness

Scott?

Scott A. Hibbs

Mark, we saw actually a little bit of business spread in the commercial mortgage base, a little over 300 for the quarter. We do, looking forward into '14, we do see a lot of competition and I would expect we would continue to see pressure on those spreads.

Operator

Our next question comes from Suneet Kamath from UBS.

Suneet L. Kamath - UBS Investment Bank, Research Division

A couple of questions on the guidance if I could. First, is there an assumed discount rate adjustment, either up or down -- I'm assuming at this point it's gonna only go up -- embedded in that guidance?

Floyd F. Chadee

I would say, Suneet, that our expectation for rates in general is that there would be upward pressure on rates and during the course of 2014, though not necessarily supported by the last few days. So some expectation of moderate increase in new money rates, and therefore in our discount rate, built into our expectation for 2014.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay, got it. And then I guess I understand that you guys gave us a couple of the high-level pieces that formulate your overall guidance. But I was just wondering if, maybe directionally, you could give us a sense of how you're assuming businesses other than Employee Benefits are going to trend. I think there was recently -- just in past couple of answers, some comments around the Individual Disability, but I guess I'm thinking now asset management as well as the other segment. Any directional guidance in terms of how those segments will trend in 2014 versus '13?

J. Gregory Ness

Jim, why don't you talk a little bit about asset management?

James B. Harbolt

Suneet, I think I'd echo Greg's comments in the script and point people to the $16 million to $17 million run rate for the Asset Management businesses. Scott talked about it a little bit on our last call as well. We've seen some unusual prepayment activity the last few quarters. We certainly expect a little bit of that to continue but probably not at the levels that we've seen for the last year or so.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay. And then I guess in the other segment or if there's any comment on Individual Disability.

J. Gregory Ness

I think the Individual Disability comments that Katherine made earlier make good sense moving forward. You want to touch on other at all?

Floyd F. Chadee

Yes, I mean the other line had a bit of an unusual performance in the fourth quarter here, driven by some increase in the investment income, just some unusual items related to commitment fees. The other line is small, so we've have had a pickup in the favorable variance and expenses there, just on the elimination stuff going on. But also, on a normalized basis, we run through corporate projects through that and we didn't have much to run through this last quarter. And remember, the interest expense has gone down with our refinancing from last year. So some variances in the fourth quarter in other but nothing material really.

Suneet L. Kamath - UBS Investment Bank, Research Division

I guess the reason that I was asking the question is when we took your guidance from Employee Benefits and applied it to our model and ran through some of the other assumptions, we got to a much higher number than the $5.15 that you're guiding to, which would suggest that some of the other stuff that you don't give explicit guidance on would probably be lower next year versus what we have been assuming before your reported. So that's why I was asking the question. Is it fair to assume that -- I know you mentioned the asset management but some of the other businesses are going to have lower earnings power into '14 versus '13, and that's how you get to the $5.15?

Floyd F. Chadee

I can't comment specifically on the components of your model. But here are some things to think about. One is I think Greg already talked about the run rate of AMG being less than we would have seen in the fourth quarter here. So some unusual items there and we would want to guide you to a lower number, $16 million to $17 million for AMG on a run-rate basis. So that's one. Two, there's something I commented on earlier in the script, which was that investment income, this pressure on investment income as your new money rate continues to be below portfolio rate. So I don't know how you would pick that up in your model. But those are 2 high level comments I would make, not having access to your model or not looking at it in that detail.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay, got it. And then maybe just one last one on the Employee Benefit's benefit ratio. So, as we think about the guidance for this year, of 77% to 79%, and then we think about all that you've done on the pricing side and I guess the longer-term guidance that you used to give us, of the 73.6% to 78.3%. Is the glide path from where we are in '14 back to that lower former guidance that you used talk about? Is that really all about wage growth and employment growth and less about pricing actions since a lot of what you've done has a ready rolled through? Is that a fair way of thinking about it?

Floyd F. Chadee

I mean when you think of the sort of long-term view of the Employee Benefits business, the things that you're raising are absolutely important. Wage growth and unemployment growth absolutely affecting that business. We don't think of sort of a glide path that gets us back to the historical levels. The world has changed considerably since we used to give you that guidance. One of the things that's changed considerably is the interest rate environment. So we tend to price the business on ROE targets and look for ROE targets as opposed to thinking explicitly in terms of getting back to a benefit ratio range.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay. And can you just remind us where you're pricing the business, in terms of an ROE target?

Floyd F. Chadee

We don't really give out our pricing targets. But Greg has referred to it earlier, that we think this is a good low double-digit ROE business, as we look at the medium-term timeframe here.

Operator

Our next question comes from or Ryan Krueger from Dowling & Partners.

Ryan Krueger - Dowling & Partners Securities, LLC

I had a question about expenses which I don't think we've touched on yet. Could you just talk about your consolidated expectation for operating expense growth in 2014 versus 2013?

Floyd F. Chadee

Yes. So, one, I mean 2013 we like where expenses ended up relative to 2012, a great trend. As Greg has mentioned earlier that we manage this business to keep expenses in line with revenue. As we look towards 2014, there are many ins and outs but we don't expect any dramatic change in expenses, a modest pickup base on sort of your regular wage inflation sort of thing. So that doesn't mean, as we go through the year, if we see opportunities, we won't jump on them.

Ryan Krueger - Dowling & Partners Securities, LLC

Okay. So maybe modest growth [indiscernible]. And then I guess one more on capital. It seems like, from your comments, Floyd, that there's some price sensitivity when you're thinking about share repurchase. So I was curious if you have considered at all, the potential for a special dividend as an alternative way to return capital to shareholders.

Floyd F. Chadee

So on the special dividend thing, we always consider it. I mean we've been asked about it. So the way we think of dividends is we manage our dividends over the long-term and we like that pattern of managing our dividends over many, many years in the past, that steady increase over time, that demonstrates management's view of the viability and the robustness of this business over a long period of time. We tend to be opportunistic with respect to share repurchases. And you're absolutely right, we look at the behavior of the overall market as we did in the fourth quarter of 2013. And when we thought that the market was a little frothy, we pulled back on our share repurchases at that point in time.

Operator

Our next question comes from Steven Schwartz from Raymond James.

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

Floyd, if I did this right, given what you estimated RBC was for the end of the year and end of the third quarter, it would seem that the company action level capital decreased from about $392 million to $373 million call it. You said the MIF adjustment was $50 million. So that would take the capital same-store, if you will, to $423 million, which would imply about a $32 million increase in company action level capital, all else equal, without the MIF adjustment. Does that sound right to you and should we be thinking about that as kind of a quarterly increase or $120 million annual increase in company action level capital, given your guidance of premium growth is pretty much going to be nonexistent?

Floyd F. Chadee

Yes. I mean, there are many ins and outs in the RBC calculation, Steven. That's probably a good offline conversation to have. I mean, the big drivers are -- certainly in the fourth quarter here there's a MIF adjustment. But there's also, I mean the premium growth itself and the component of that premium growth that would affect it. So many ins and outs. We can probably take that question offline if you want to think about the components of that.

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

Yes, okay. I'll get together with Jeff. Okay. And then if I could, going back to the comment of some growth in the underlying customer base. Any place in particular that you're seeing that -- we tend to think of your business as public as teachers, as health care, is there anything in particular?

J. Gregory Ness

Dan.

Daniel J. McMillan

There's obviously an overall increase, Steven. And I think fourth quarter of last year it was negative 2%. So positive 0.2%, from our perspective, looks very good. And considering it hasn't been there for a number of years. That's a great development. We saw improvement in all segments, and if you look at the unemployment changes that we saw in U.S. economy, there were some pronounced changes in markets that we're not in, retail. We're in some of that but it's just not a significant portion of our book. A lot of temporary employees and things like that. So you saw some stronger growth in places where we may not have target markets. But the underlying business that we have today saw positive growth overall. And in that, I didn't see anything that was really an outlier but really just benefited from the overall improvement in the economy.

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

Okay. And then something way out there. Dan, do you happen to look at the Social Security DI data?

Daniel J. McMillan

Yes, I think most folks in my world do.

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

Okay. It looked like claim incidents in the quarter came way, way down, any idea what that was about?

Daniel J. McMillan

Yes, Steve, I don't know specifically. We did see really for the last, gosh, 18 to 24 months, we've seen a decline in Social Security disability awards from their peak from a couple of years ago. We know that was a huge concern. We know that the overall funding of the program is in jeopardy, even in the next 3 or 4 years. And that's something we watch very closely because of the tie to our benefits and that's the same for us as most of our competitors. And we think the decline in awards in part was due to a lot of the publicity of the mismanagement of some of those awards and the variability at the administrative law judge level, depending on which region you're in, and we think that's why that has come down. It does, ironically and kind of mysteriously, fluctuate quite a bit quarter-to-quarter. And given the size of that population, that's kind of interesting. But I think it has more to do with operational issues, with the Social Security administration, than anything else.

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

That doesn't affect you, I would think that would be -- I mean, my understanding is that's an offset to what you might pay.

Daniel J. McMillan

It is. It's important to remember I think that, that population is very different than the population that we insure overall. And because of that and our diligence around helping our claimants pursue the right benefits they're entitled to, we haven't seen a real dramatic change in how the offsets affect our claims.

Operator

Thank you. At this time, I see no further questions. I'll turn the call back to Mr. Hallin for closing comments.

Jeffrey J. Hallin

Thank you, Shay, and I'm going to pass it over to Greg for some closing comments.

J. Gregory Ness

Thank you, Jeff, and congratulations on your promotion to Vice President, Investor Relations of Capital Markets. Thanks to all of you for joining us on our call today. I'd like to leave with just a few thoughts. At StanCorp, we are focusing on the right things and taking care of the fundamentals. Insurance Services are generating great results in both Employee Benefits and Individual Disability. Asset Management has steadily increased its contribution to our bottom line. We continue to have a solid balance sheet and our capital position is very strong, and we are committed to delivering superior returns to shareholders. There will, no doubt, continue to be challenges in 2014, but we are well positioned for the future. We remain dedicated to disciplined pricing and providing the products that deliver long-term value to our customers. And our very committed group of employees remain passionate about providing industry-leading service to our customers. Thanks for joining us on our call today. Have a great day. With that, back to you, Jeff.

Jeffrey J. Hallin

Thank you, Greg. I'd like to thank everyone, once again, for joining our call. There will be a replay starting this afternoon and running through February 7. To listen to this call, you can dial (877) 660-6853 and enter the conference ID number 13573510. A replay of today's webcast is also available at www.stancorpfinancial.com.

Operator

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

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