StanCorp Financial Group's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.26.11 | About: StanCorp Financial (SFG)

StanCorp Financial Group, Inc. (NYSE:SFG)

Q3 2011 Earnings Call

October 25, 2011 12:00 PM ET

Executives

Jeffrey Hallin – Assistant VP, IR

Gregory Ness – President and CEO

Floyd Chadee – SVP and CFO

Daniel McMillan – VP, Insurance Services

Jim Harbolt – VP, Insurance Services

Scott Hibbs – VP, Asset Management Group

Analysts

Mark Finkelstein – Evercore Partners

Ryan Krueger – Dowling & Partners

Chris Giovanni – Goldman Sachs

Steven Schwartz – Raymond James & Associates

John Nadel – Sterne, Agee

Randy Binner – FBR Capital Markets

Bill Dezellem – Tieton Capital Management

Operator

Ladies and gentlemen, thank you for holding. Welcome to the StanCorp Financial Group, Inc. Third Quarter 2011 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’s Assistant Vice President of Investor Relations for opening remarks and introductions. Please go ahead, sir.

Jeffrey Hallin

Thank you, Jackie, and welcome to StanCorp’s third quarter 2011 financial review conference call. Here today to discuss the company’s third 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 of StanCorp Mortgage Investors; 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 development of 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 third quarter earnings release in our 2010 Form 10-K.

With that, I’d like to turn the call over to Greg. Greg?

Gregory Ness

Thank you, Jeff, and thanks to all of you, who’ve joined us for our third quarter earnings call today. This quarter’s results were driven by a lower benefit ratio than each of the first two quarters of this year, but earnings reflect the continued challenges of a weak economy.

I am encouraged by the positive movement in the fundamental drivers of our business. We had good premium and sales growth in the Insurance Services segment. We did not see further deterioration in our long-term disability incidence.

Our Asset Management segment reported steady earnings despite lower interest rates and declining assets under administration. Our investment portfolio continues to perform well and we have a solid capital base and rolling book value per share.

For the third quarter of 2011, the group insurance benefit ratio was 80.7% compared to 75.5% for the third quarter of 2010. It’s down from 84.8% for the second quarter of this year.

During the first half of the year, we noted that our claims experience was influenced by increased long-term disability incidence.

For the third quarter, long-term disability incidence levels remained elevated; however, there were pockets of improvement. Additionally, favorable group life claims experience contributed significantly to the sequential improvement in the benefit ratio. Because of our deep expertise in the employee benefit space, I can say with absolute certainty that we will continue to see fluctuations and claims experience on a quarterly basis. While we pay attention to these quarterly fluctuations and look to proactively identify trims in our claims data, it is important to look at claims activity over a longer period of time. We will continue to manage this business with a long-term perspective.

As we mentioned last quarter, we are implementing pricing actions to get our profitability back to targeted levels. While we more heavily weigh recent claims experience, our pricing will not be solely based on short-term experience. We are still in the middle of renewal season for larger customers. Thus far, we are generally pleased with the results of the pricing actions we’ve taken.

Our pricing reflects our long-term expectations of claims experience, demographic changes, return objectives, as well as interest rates.

Low interest rates continue to pressure our industry as a whole and Floyd will speak the interest rates in just a few moments.

Moving on to premiums, group insurance premiums increased 4.5% compared to the third quarter of 2010. Premium growth will continue to face the strong headwinds of declining employment within our customer base, which continues to decline although at a slower pace than in previous quarters.

Overall group insurance sales for the quarter were consistent with third quarter 2010 sales levels. Our sales indicated sustained customer interest in our enhanced products and services. Employers continue to see the value in our products and services and we will continue to target the type of buyer as we increase market share through responsible disciplined growth.

In our Asset Management segment, the earnings for the quarter reflected lower administrative fees due to the decline in asset balances and the impact of lower interest rates on the hedges used for our equity-indexed annuity product.

Assets under administration in the retirement plans business decreased 11% compared to the June 30, 2011 level. This decrease was driven by a drop in the equity markets during the third quarter.

While the economy continues to present challenges for each of our businesses we manage each challenge with the same financial and underwriting discipline. We continue to focus on providing products and services our customers want at a fair price; by focusing on delivering value to our customers and maintaining a solid balance sheet, we’ll ensure that StanCorp remains an attractive long-term investment for our shareholders.

With that, I’ll turn the call over to Floyd for a further discussion of interest rates, our investments as well as capital and of course we’ll leave plenty of time for your questions at the end. Floyd?

Floyd Chadee

Thank you, Greg. I would like to begin by focusing on interest rates. Interest rates and the impact on insurance companies have become an important topic lately with the 10-year treasury hovering near all time lows and with the Federal Reserve taking action designed to keep long-term rates low for an extended period of time.

The interest rate environment with its potential effect on our discount rate is a major driver of our reserve levels. We maintain a discipline and transparent approach to interest rate management and we closely monitor the interest margin in our reserves. This, we report every quarter.

In the third quarter, we lowered our discount rate used for newly established long term disability claim reserves by 25 basis points to 5.0%. A 25 basis point increase or decrease in the discount rate results in an increase or decrease in quarterly pre-tax income of approximately $1.6 million.

Over the longer term, we expected the effects of lower interest rates would be mitigated through pricing action. The 12-month reserve interest margin between our new money rate and average reserve discount rate increased to 56 basis points for the third quarter compared to 52 basis points for the second quarter.

The third quarter new money rate was 5.64% compared to 6.16% for the second quarter of 2011. The lower rate reflected lower investment yields on our bonds and mortgages together with fewer new tax advantage investments. In this low interest rate environment that prevails in the boarder economy, we remain very pleased with our solid investment portfolio performance or yields .

Moving on to the commercial mortgage loans, we continue to be very confident in our portfolio. The 60-day delinquency rate was 43 basis points at September 30th. In the third quarter, we foreclosed on 10 loans with a combined loan value of $7 million resulted in total losses on foreclosure of $3.3 million. Loan originations remain strong at over $270 million for the quarter. Mortgage spreads continue to be favorable when compared with other fixed income investments.

Next, I would like to give you an update on our real estate. In the third quarter, we sold investment real estate and REO properties with a total book value of approximately $20 million including ten of the properties acquired from a single borrower in 2010. Net capital gains and real estate for the third quarter were approximately $16 million primarily related to sales of investment real estate.

As of the third quarter, we had sold more than half of the single borrower properties and as of today we have sold almost all of the single borrower properties. The few remaining single borrower properties have a book value of approximately $2 million.

Operating expenses for the third quarter of 2011 included approximately $5 million in projected costs for information technology service changes. We expect to spend an additional $4 million during the fourth quarter in these areas mainly associated with information technology service efficiencies that will enhance our ability to invest in future technology improvements. The related expenses are reported in the other category of our segment reporting.

Moving on to share repurchases and our capital position, in the third quarter, we bought back 357,000 shares of our common stock at a total cost of $9.7 million and a weighted average price per share of $27.16. Year-to-date, we have repurchased 2.2 million shares at a cost of $90 million. We will continue to be opportunistic with our share repurchases keeping in mind both capital level and the uncertainty in the overall economy. The risk-based capital ratio at our insurance subsidiaries was 327% at September 30. Available capital was approximately $200 million at quarter end. The increase in available capital during the quarter was the result of higher income from our insurance subsidiaries together with real estate sales partially offset by share repurchases.

Lastly, I would like to provide you preliminary estimate of the impact of changes for the new accounting guidance related to deferred acquisition costs. We plan to adopt this guidance retrospectively in the first quarter of 2012. While we are still evaluating the full effects on our business and our financial statements, we estimate that the change to DAC will increase annual pre-tax expenses by approximately $3 million to $4 million with accumulative effect adjustment to retain earnings at the beginning of 2012 of approximately $20 million to $25 million. As a result we expect a reduction in book value per share of approximately 1% to 2%. As a reminder, this will not affect risk based capital or cash flows.

And with that, I will now turn the call back to Jeff to begin the question-and-answer portion.

Jeffrey Hallin

Thank you, Floyd. Jackie, we are now ready to take the first question from our participants.

Question-and-Answer Session

Operator

(Operator Instructions) We will now take our first question from Mark Finkelstein of Evercore Partners.

Gregory Ness

Morning, Mark.

Mark Finkelstein – Evercore Partners

How you guys doing?

Gregory Ness

Good.

Mark Finkelstein – Evercore Partners

Okay, I have a couple of questions. One is on the second quarter you noted that LTD incidents was about 12% higher, what would be that same ratio at the third quarter.

Gregory Ness

Dan, you want to...?

Daniel McMillan

Hello, Mark. Yeah, as we look at incidents for the quarter we noted pockets of improvement in the incidents itself. And really what we mean by that is that while still elevated – I don’t have a specific percentage for you what we saw in the first and second quarters was a broad based increase that we hadn’t seen historically at all across vintages, across diagnoses, across regions and across all of our effective years. That broad based phenomena deteriorated little bit in the quarter and that’s what we mean by pockets of improvement.

Mark Finkelstein – Evercore Partners

Okay. Well, maybe I’ll ask the question slightly differently. When you think about the improvement in the third quarter relative to the first half of the year, how would you apportion that between what appears to be a pretty good favorability on the group life side versus the pockets of improvement on the LTD side?

Daniel McMillan

Yeah, and I think, Greg alluded in his comments to significantly contributed to the improving the benefit ratio that is group life. As a reminder, group life premium exceeds our amount of group LTD premium on our books and I think it’s safe to assume the majority of that contribution came from group life. At the same time, too early to declare victory on the LTD incidents issue, but we saw some pockets of improvement there.

Mark Finkelstein – Evercore Partners

Okay. And then finally just a comment Floyd that you made, I think you said that the holding company real estate has been sold or largely sold subsequent to the second quarter. Would that effectively take your available capital from roughly $200 million to $300 million?

Floyd Chadee

No, we still have real estate that we’re not counting in the $200 million of excess of available capital. So if you look at the real estate on our balance sheet here, we still have about $100 million of REOs and investment real estate in that about $80 million actually down from the $100 million that it was earlier so –

Mark Finkelstein – Evercore Partners

Okay. So I may have misinterpreted. So that wasn’t sold after the second quarter?

Floyd Chadee

Yeah. So we sold some of it – we sold some of it. We sold about $20 million of it.

Mark Finkelstein – Evercore Partners

Okay.

Floyd Chadee

Because remember, we had $100 million earlier in the year.

Mark Finkelstein – Evercore Partners

Right, okay. All right. Thank you.

Gregory Ness

Mark.

Operator

Thank you. Our next question is coming from Ryan Krueger of Dowling & Partners.

Gregory Ness

Hey, morning Ryan.

Ryan Krueger – Dowling & Partners

Morning. A couple quick ones. First, the tax rate was pretty low in this quarter. Where do you expect that kind of a normalized level of the tax rate to be going forward?

Floyd Chadee

Yeah, if you look at the year-to-date tax rate, it’s a smidgen below 30%. I think that is our best estimate at this point.

Ryan Krueger – Dowling & Partners

Okay. And then can you guys give an update on the competitive environment in group disability if you’ve seen kind of any changes over the last few months since we talked to you last quarter?

Gregory Ness

All right, Ryan, we’ll do that. Jim, will you take that?

Jim Harbolt

Morning, Ryan.

Ryan Krueger – Dowling & Partners

Morning.

Jim Harbolt

don’t think we’ve seen too many changes. I think it remains very competitive out there. It’s hard to predict at any given day who’s going to kind of drop low with the price decrease. I will tell you that we’ve seen slower proposal activity and that might suggest there is some lateness in the sales cycle or that there is fewer cases coming out to market.

Ryan Krueger – Dowling & Partners

Okay, great. Thank you.

Gregory Ness

Thanks, Ryan.

Operator

Thank you. Our next question is coming from Chris Giovanni of Goldman Sachs.

Gregory Ness

Hi, Chris.

Chris Giovanni – Goldman Sachs

Good afternoon, thanks so much. One clarification question, I think on the 2Q call you guys had mentioned sort of the high single digit rate increases that you were going for, was based on an improving macro backdrop and an improving interest rate environment.

So I guess is, one is, is that true because I thought Floyd, you had mentioned, you are adjusting for the low rate environment through pricing, so I guess that’s sort of the first point of clarification. And then if you could give some more comments in terms of the success that you’re having, recognizing 3Q is not really one of the strongest periods for quoting, but the success you’re having pushing through some of the rate increases?

Gregory Ness

All right, Chris, let’s have Jim take those on. Jim?

Jim Harbolt

Morning, Chris. The first part I should remind you about is, yes, we did announce in May that we were looking at high single digit rate increases to reflect recent incidents. But I want to remind everybody that in the January call of this year we told folks that we had announced rate increase in the low single digits for interest rates and we had announced that in November to the marketplace. So I think you need to kind of put those two together and then take an aggregate of a low double digit rate increase overall.

So far, the rate increases, I would say that are being renewed we’re pleased with. It’s still a little bit early in the cycle. We have seen some more visibility into our larger renewals for 1/1. I tell you that we have put out some large rate increases; we’re pleased. I think our customers saw value in our offering. I’d also tell you that we haven’t kept every case, and we’ve seen some cases that weren’t meeting our target returns leave.

Chris Giovanni – Goldman Sachs

Okay. And, then just a follow-up; going back to November and the beginning of the year, we had the tenure closer to 3 versus today closer to 2. There was that risk that maybe we need to push it a bit more for rate given the current interest rate environment.

Jim Harbolt

Yeah, Chris, this is Jim again. I think right now we feel comfortable. We price for interest rates on what we see as a long-term perspective and when we made our decision, what I would say maybe even a little early back in November, we did it with the long-term rate – with the long-term decline in mind. Right now I think we’re okay. If – we want to make sure we don’t price for short-term volatility, and we’ve seen quite a bit of movement in the tenure even in the last 90 days. So, we’re a little cautious about that but if we think we see further long-term decline, we’ll take another pricing action.

Chris Giovanni – Goldman Sachs

Okay, question – thanks. And then just one quick one for Floyd; if we look at the historical payout ratio that you guys have had for buybacks and dividends, take it as a percentage of GAAP operating results and recognizing that’s not perfect comparable to stat earnings but it’s historically been about 50% or so, and obviously we are trending a lot above that this year given the more aggressive buybacks in the first half of this year and then the depressed earnings.

But, if we think about the sustainability of that going forward, is that how we should be thinking of it? And, then along those lines does that imply then, based on consensus numbers here that the run rate of buybacks that you had in 3Q is what we should be thinking about maybe as we work through the next five quarters or so?

Floyd Chadee

So, just a couple of things there; one I’d be careful of just using some payout ratio because we live in a very volatile world. So, our considerations around the dividends and our consideration around share repurchases, while both driven by our need to – our desire to return capital to shareholders if we’re not using it, then the considerations that go into both of them slightly different.

One, as far as our dividend payout goes, we have been consistent with that over a long period of time, increasing it over time, reflecting a long-term view of the stability of the company. I think that continues to be our overall philosophy in terms of how we think about dividends. As far as share repurchases go, we have always said that we will be opportunistic with respect to share repurchases, taking into consideration our capital levels and very importantly in this environment the risk in the external economy. So, I would just be careful using some sort of mechanical payout ratio.

Chris Giovanni – Goldman Sachs

Okay. Thank you.

Gregory Ness

Thanks, Chris.

Operator

Thank you. Our next question is coming from Steven Schwartz of Raymond James & Associates.

Gregory Ness

Good morning, Steven.

Steven Schwartz – Raymond James & Associates

Good morning, everybody. Okay, I got a little bit confused here. Floyd, when you were talking about adjusting prices for interest rates, you were not indicating that you have added on to what you are already doing. You were just saying if this stays the same, we can do this?

Floyd Chadee

Yes, I think the interest rate question for the entire insurance company is an important – insurance industry is an important question. In group insurance, unlike many other different kinds of insurance products, we have the ability to price and our industry has the ability to re-price over a long period of sustained low interest rate. So, our situation in group insurance is slightly different from many other insurance products.

Steven Schwartz – Raymond James & Associates

If there is – if there were big changes and the first question becomes, what makes you decide, yeah, this is the new normal and we have to do something?

Floyd Chadee

I think as Jim alluded to earlier, we try to take a long-term view, and of course, there is analysis and there is judgment in that. The business of predicting interest rates – short-term interest rates in this environment has been a very difficult one but it’s a judgment call that management makes at the time looking at where rates could be going.

Steven Schwartz – Raymond James & Associates

Okay. And, then, moving on back to the group disability business pockets of improvement; Dan, is there anything that you can say maybe about what those pockets might have been?

Daniel McMillan

Yeah, the – Steven, when you look at that – the benefit ratio and I know that you have been tracking this for a long period of time, we have seen some positive seasonality in the second quarters of the year.

There is some variation in that but when you look at the benefit ratio improvement in the third quarter, some of that was probably a little bit of seasonality, the majority driven by group life, and when we say pockets of LTD, we – again those remain elevated, as Greg alluded earlier, but we’re seeing some pockets that we didn’t see in the first two quarters of improvement. We can call out specific industries quarter by quarter but those would change quarter to quarter and volatility there just wouldn’t be meaningful, I don’t think.

Steven Schwartz – Raymond James & Associates

All right. Presumably, though, it’s not in the areas that had been most problematic, public sector and education?

Daniel McMillan

That would be correct.

Steven Schwartz – Raymond James & Associates

Okay. That’s what I was getting at. All right, thank you, guys.

Gregory Ness

Thanks, Steven.

Operator

Thank you. Our next question is coming from John Nadel of Sterne, Agee.

John Nadel – Sterne, Agee

Hey, good morning, everyone.

Gregory Ness

Good morning, John.

John Nadel – Sterne, Agee

A couple of questions for you; just – Floyd, just – I probably – I think I missed it. What was the new money yield in the – new money rate in the third quarter?

Floyd Chadee

So, the new money rate that the – new money rate was 5.64% in the third quarter.

John Nadel – Sterne, Agee

Thank you. The improvement quarter-over-quarter – I know you guys have alluded to group life maybe driving most of that improvement. Would you characterize mortality on the group life side in the quarter as favorable or in line or is that a recovery from maybe unfavorable mortality in 2Q? Can you just give us a sense?

Gregory Ness

Okay, Dan?

Daniel McMillan

John, I think I would characterize that as favorable and maybe even slightly better than the seasonal improvement we would expect.

John Nadel – Sterne, Agee

Okay. Then I guess the question I have for you – I know to Chris’s point in his earlier question that third quarter is not necessarily a critical quarter for sales and hugely indicative. But, you implemented pricing adjustments I think late second quarter aside from just the interest rate related stuff that you did late last year.

And, group life and group disability sales were both down year-over-year and 3Q. I am just wondering if – do you think that we should be reading into that that your pricing adjustments are going to cause you to lose some real share here? I assume that’s something that you are okay with given your focus on restoring the profitability, but how should we read into third quarter sales?

Gregory Ness

All right, good question, John. Jim, would you want to take that one?

Jim Harbolt

think, John, you are absolutely right that we’ll protect the bottom-line over the top-line all the time. And, I would say that pricing increases, as they have been implemented and rolled through, there is a little bit of a lag after quoting, so there was probably some impact on sales in the third quarter, maybe not a lot and not as much as we’ll see in the fourth quarter and probably in the first quarter. But, it remains competitive and pricing is important to customers right now.

John Nadel – Sterne, Agee

And as you look out Jim, I mean, I know you report on persistency once a year, I guess my question is, is there anything that you can do to help us get a sense for how much risk to the downside on persistency you think there is?

Jim Harbolt

think, John, you’re right that we do report persistency once a year and we’ll do that in the January call. Throughout most of this year we’ve said that we’ve been pretty pleased with our persistency numbers for 2011 and I think I’ll just leave it at that.

John Nadel – Sterne, Agee

Okay. And then the last one just on the tax rate, I know the year-to-date effective rate is around 30%, Floyd. Just wondering, given the tax advantaged investments, is that a rate that we should expect will continue into 2012 beyond then, I mean, can you give us a sense for how long the duration of these tax advantaged investments is?

Floyd Chadee

(inaudible) the difference between our year-to-date rate and the federal tax rate of 35%, so about 5 percentage points, about 4% of that comes from the tax advantaged instruments. The other one – approximately 1% or so comes from just having low earnings and affecting the tax rate. So, I would say about 4% of that given that we’ve made investments in these tax-advantaged instruments probably likely to continue for some time here.

John Nadel – Sterne, Agee

Some time being crossing over I assume into 2012 or beyond then?

Floyd Chadee

Yeah, it would not be unreasonable to expect some effect in 2012 too. So, yes, some portion of that will continue into 2012.

John Nadel – Sterne, Agee

Okay, thanks very much.

Gregory Ness

Thanks, John.

Operator

Thank you. Our next question is coming from Randy Binner of FBR Capital Markets Corporation.

Gregory Ness

Hey, Randy.

Randy Binner – FBR Capital Markets

Hi, how are you? Thank you.

Gregory Ness

(inaudible).

Randy Binner – FBR Capital Markets

On the Asset Management side, just a question on the impact – I think the way I heard it and read it was that the indexed annuity business there which is a small part of the segment had an impact on profitability. So, I guess one, just trying to understand what happened there with the hedge, and two, kind of how much of the earnings shortfall was attributed to that?

Gregory Ness

All right, good question Randy. I will ask Scott to take that one. Scott?

Scott Hibbs

Randy, good morning. This is Scott. Yeah, you are correct. The – our equity-indexed block is a very small part of our business. It’s about 10% of our overall annuity business. Our exposure in that prior to the S&P 500 is hedged. It’s the accounting for those hedges that causes volatility in net investment income and interest credited that you see in our staff supplement. Generally that is not material, any particular quarter. This quarter it happened to be a couple of million dollars to our detriment and we do see those fluctuations quarter-to-quarter and we will continue to do so. But it’s generally not material. We don’t expect it to be material in most quarters.

Randy Binner – FBR Capital Markets

And just to be clear, so it was S&P driven, it was not interest rate driven?

Scott Hibbs

No, Randy, actually it’s driven by some of each and I’ll let Jeff take you through the mechanics, the disclosers of exactly how we do it. But in this quarter actually the decline in the LIBOR rate, it’s used for determination of the hedge value, was the primary driver and as you know we saw a pretty significant drop in the LIBOR in the period.

Randy Binner – FBR Capital Markets

Okay, thanks. I might follow up with Jeff. Thank you.

Gregory Ness

Thanks, Randy.

Operator

Thank you. Our next question is coming from Bill Dezellem of Tieton Capital Management.

Gregory Ness

Good morning, Bill.

Bill Dezellem – Tieton Capital Management

ood morning. A couple of questions. First of all, relative to the group’s long-term disability premiums, what’s your speculation as to how long before it will be before we see the couple of hundred million of premiums in that bucket start to increase again? There are number of moving parts on that question.

Jim Harbolt

Hi, Bill. This is Jim Harbolt. Did you ask just about the long-term disability premium growth?

Bill Dezellem – Tieton Capital Management

That’s correct. It’s been hovering around a couple of hundred million and you have rate increases coming, but potentially offset by fewer units if you will and....

Jim Harbolt

Right. I think that we’ve seen it be relatively flat here for some period of time especially when compared to life premium which has been growing solid now for quite a while. I think in January we will give some guidance and we will be a little bit – and that number will be sort of built in there overall on premium growth, but you’re right our larger price increases are on disability insurance and that space maybe challenged for a while.

Bill Dezellem – Tieton Capital Management

And so we should not be thinking about much premium growth in that arena for at least a foreseeable future?

Jim Harbolt

Well, it’s going to take us a while to push through our pricing increases, so there will be a number of customers over say the next 18 months seeing pricing increases and they will react accordingly.

Bill Dezellem – Tieton Capital Management

And then my follow-up question is relative to the Asset Management Group, little lighter quarter than what you’ve had, would you please discuss the inter-workings of what’s taking place with that business please?

Gregory Ness

Sure, Bill.

Scott Hibbs

Yeah, Bill, this is Scott. As I mentioned to Randy’s question about $2 million of the decline in the quarter was related to this hedge accounting. So, ultimately $1 million or so, that’s the 14% drop we saw in the S&P quarter-over-quarter and of course our assets are leveraged to that. So that’s the bulk of the difference.

If you look back in the quarter to this year, of course in the first quarter, we had $4 million plus in bond call premiums, so you kind of have to pull those things out and I think you see what Greg described as a fairly steady run rate for the segment.

Bill Dezellem – Tieton Capital Management

Okay, I think you just hit on my confusion which was, there appears to be some volatility in what would normally be a more stable business, but what you’re saying is you did have some extra income earlier in the year with bond call premiums and then the equity-indexed annuity phenomenon negatively impacting this quarter giving the appearance of volatility which is not there in the underlying business, is that the essence of it?

Scott Hibbs

You got it, Bill.

Gregory Ness

Exactly, right.

Bill Dezellem – Tieton Capital Management

Thank you.

Gregory Ness

Thank you, Bill.

Operator

Thank you. Our next question is coming from John Nadel of Sterne, Agee.

John Nadel – Sterne, Agee

Hi, thanks for taking me back in. Just one to follow-up on sort of rolling forward, if you will, the exposure to the real estate owned properties and I know Floyd, in the past you guys have talked about how – that’s potentially going to be additive to the extent that it gets sold and turned into cash additive to your available capital. And it sounds like at least on the single borrower properties that that’s essentially down to very little if any exposure remaining. So the $200 million of available capital at the end of the quarter how would we adjust for that given your commentary about the single borrower properties?

Floyd Chadee

So the single borrower properties are sort of almost all gone $2 million of value left on that. So if you wanted to think of how our flexibility around the $80 million or so remaining of real estate on the balance sheet, that we don’t count an available capital, I mean, the way to think about that is that we’d want to be careful, I mean, we certainly don’t want to do a fire sale and lose value on that. So out of that $80 million, about $60 million of it would be REOs over time, about $20 million of it investment real estate. So I mean, the available for sale in the sense that if we see the opportunities – good market values, we will do that, but the reason we don’t count them is because we don’t want to be precipitous in selling.

John Nadel – Sterne, Agee

Understood, and that $80 million, is that already reflective of the single borrower properties coming down for stuff that you obviously have sold post the quarter? I guess that’s sort of what I’m trying to get to is you gave us the $2 million number of remaining exposure just trying to understand what that means for your available capital?

Floyd Chadee

Right. So the $80 million would include the single borrower property that we sold in the fourth quarter here.

John Nadel – Sterne, Agee

Okay. Okay, perfect. Thank you.

Gregory Ness

Thanks, John.

Operator

Thank you. Our next question is coming from Steven Schwartz of Raymond James

& Associates.

Steven Schwartz – Raymond James & Associates

Hey everybody, just a follow-up on the index annuity thing.

Gregory Ness

Yes.

Steven Schwartz – Raymond James & Associates

You are not describing a situation of say under hedging or something like that. What you guys are describing is the creation of the embedded derivative in the host under SFAS 133 and the fact that it doesn’t match the actual asset.

Scott Hibbs

Steven this is Scott. You got it right; that’s exactly right.

Steven Schwartz – Raymond James & Associates

Okay, great. I just want to make sure.

Gregory Ness

Okay, good, thank you.

Operator

Thank you. Our next question is coming from Chris Giovanni of Goldman Sachs.

Chris Giovanni – Goldman Sachs

Thanks for the follow-up.

Gregory Ness

Sure.

Chris Giovanni – Goldman Sachs

Just two ones, Dan, I think you had mentioned some favorable seasonality 3Q over 2Q based on historical metrics and certainly that trend probably holds through 4Q over 3Q so recognizing there is volatility is there a reason we shouldn’t be thinking the benefit ratio trends modestly lower in 4Q?

Daniel McMillan

I think Chris that would be something that I would not model on a straight line like you’ve seen in the current quarter. In fact when I mentioned that the group life results were slightly better than what we’d actually expect for seasonality, I am going to expect that to continue into the forward quarter as we look at those products.

Chris Giovanni – Goldman Sachs

Okay. And then just in terms of the investment portfolio. A number of sort of your competitors as they try and get incremental yield have talked about commercial mortgage whole loans in terms of an asset class where they’re looking to increase exposure to. So I guess how are you guys thinking on about yields in that asset class maybe moving forward as it gets even more competitive? And then other sort of options you guys have to try and maybe stump some of the pressure that you guys could see because of lower rates?

Gregory Ness

All right, Chris. Let’s have Scott take that one on. Scott?

Scott Hibbs

Yeah, Chris. We obviously like the yields we’re seeing in that asset class today. They continue to be substantially above long-term historical averages at 300 plus over benchmark. That being said, without question, we are seeing an increasing level of competition in the marketplace from other vendors. We expect that to continue into next year or so. We could see some pressure on our yields in mortgages as we move forward.

Chris Giovanni – Goldman Sachs

Thanks, so much.

Operator

Thank you. That was our final question. At this time, I’d like to hand the floor back over to Mr. Jeff Hallin.

Jeffrey Hallin

Thank you. I’m going to turn the floor over to Greg for some closing remarks.

Gregory Ness

Thanks, Jeff and thanks for all of you joining us this morning. I’d like to say that I’m encouraged by the positive movement in the fundamental drivers of our business; real pleased with the good premium and sales growth that we saw in the insurance services segment; and pleased that we did not see any further deterioration in our long-term disability incidents this quarter.

Our Asset Management segment reported steady earnings despite lower interest rates and a significant decline in assets under administration due to the equity markets. Our investment portfolio continues to perform very well. And finally, we have a very solid capital base in growing book value per share.

At StanCorp, we are focused on the long-term success and we know that the expertise of our people and the discipline we apply in managing our businesses are the key to that success.

Thanks for your time and attention as well as your support of StanCorp today.

Jeffrey Hallin

Thank you Greg. I’d like to thank everyone once again for joining our call. There will be a replay of this call starting this afternoon and running through November 4. To listen to this call you can dial 877-660-6853 and enter the account number 286 and the conference ID number 379467. A replay of today’s webcast is also available at www.stancorpfinancial.com. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!