StanCorp Financial Group's CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: StanCorp Financial (SFG)

StanCorp Financial Group Inc (NYSE:SFG)

Q1 2012 Earnings Call

April 24, 2012 12:00 p.m. ET

Executives

Jeffrey Hallin – AVP, IR

Greg Ness – Chairman, President, CEO

Floyd Chadee – CFO, SVP

Analyst

Randy Binner – FBR

Mark Finkelstein – Evercore Partners

Ryan Krueger – Dowling & Partners

Steven Schwartz – Raymond James & Associates

Christopher Giovanni – Goldman Sachs

Edward Spehar – Bank of America

John Nadel – Sterne Agee

Bill Dezellem – Titan Capital Markets

John Hatcher – Jefferies

Operator

This is PrecisionIR conferencing and we are about to begin. Ladies and Gentlemen, thank you for holding. Welcome to the StanCorp Financial Group Inc First Quarter 2012 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’d 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, Kevin, and welcome to StanCorp’s First Quarter 2012 financial review Conference Call. Here today to discuss the company’s first quarter results are Greg Ness, Chairman, President and Chief Executive Officer; Floyd Chadee, Senior Vice President and Chief Financial Officer; Jim Harbolt, Vice President, Insurance Services Group; Dan McMillan, Vice President, Insurance Services Group; Scott Hibbs, Vice President, Asset Management Group; 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 developments for StanCorp’s businesses, and the intent, belief and expectation of StanCorp’s management regarding future performance.

Some of the statements made are not historical facts, but are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements are subject to risks and uncertainties, actual results may differ from those expressed or implied. Factors that could cause the actual results to differ materially from those expressed or implied have been disclosed as risk factors in the company’s first quarter earnings release and the 2011 Form 10-K. Effective January 1st, 2012, the company adopted AFU2010-26 accounting for costs associated with acquiring or renewing insurance contracts on a retrospective basis and in accordance with the adoption the company has adjusted its financial results for periods prior to the first quarter of 2012. Prior period results discussed in this call will reflect these adjustments.

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

Greg Ness

Thanks, Jeff, and thanks to all of you who have joined us for our first quarter earnings call. Overall, I’m encouraged by our first quarter results. Here is why. Earnings were in line with our expectations. Claims results in our long-term disability business showed steady improvement. Group insurance premiums continued to grow. Asset Management delivered another strong quarter of results. Our commercial mortgage loan portfolio continues to perform very well. Our capital level remains strong and we grew book value per share.

Now a few key details about our Group Insurance business. Claims in our Group Insurance business were in line with our expectations. For the first quarter of 2012, our discount rate used for newly established long-term disability claim reserves remained at 4.75%. This represents a 75 basis point decrease from the first quarter of 2011 due to the continued low interest rate environment.

A 75 basis point decrease in the discount rate results in a decrease in quarterly pre-tax income of $4.8 million, using a common discount rate, the benefit ratio for this quarter improved by 170 basis points compared to the first quarter of 2011. While incidence levels remain high, they continue to show a steady decline.

We continue to see a correlation between the rate of job losses for our customers and the level of claims incidents. Overall, employment levels within our customer base declined about 1% this quarter compared to the first quarter of last year. This was an improvement from the 2% decrease for the fourth quarter of 2011 when compared to the fourth quarter of 2010. We expect to see incidence levels decrease over time as our customers employment levels continue to stabilize.

Despite the pressure that declining employment and low wage growth have on organic growth, we grew premiums in our group insurance business by 3.8%. We continue to make progress with the implementation of our pricing actions related to higher claims incidents that began in 2011.

We are only through about one-third of our customers following the January renewal season, and we are getting good acceptance on our rate increases. We anticipate being through about 75% of our customers after the January 2013 renewal season. Our sales force is communicating and selling our unique value proposition while the rest of our employees are delivering the quality service on which we have based our reputation in the employee benefits marketplace.

Shifting focus now to our Asset Management segment. Asset Management delivered another strong quarter producing $15 million in pre-tax income. The $19 million of pre-tax income in the first quarter of last year included bond called premiums, which added approximately $3 million of additional income compared to this quarter. Overall, we liked the steady progress we’ve seen from our Asset Management business.

Last week, Moody’s lowered the financial strength and credit ratings for StanCorp and our insurance subsidiaries one notch. Moody’s actions reflect the impact of the recent economic times on our disability business. This rating action will not affect our ability to compete in the market. Our ratings continue to be high quality investment grade and well positioned within the insurance industry.

Our financial discipline has enabled us to thrive during more than a century of economic cycles and we remain strong and profitable today. As StanCorp has done in the past, we’ll manage through the cycle with our customary discipline and dedication to industry leading customer service and our continued commitment to delivering superior long-term shareholder value.

With that, I’ll turn the call over to Floyd for a further discussion of interest rates, investments and 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 providing you an update on our adoption of the new accounting guidance related to deferred acquisition costs which Jeff had previously mentioned.

The adoption of this guidance resulted in an increase in pre-tax expenses to the first quarter of 2012 of $0.7 million. As a result of the adjustment, net income excluding after-tax net capital losses per diluted share decreased by $0.01 for the first quarter, and book value per share decreased $0.40. Adoption of this guidance did not affect capital or cash flows.

Next, I would like to provide some detail regarding our first quarter new money rate. The new money investment rate increased to 5.5% for the first quarter of 2012 compared to 5.13% for the fourth quarter of 2011. We were able to continue to invest an additional tax advantage investment, which have provided a good opportunity to improve our investment yield and lower our effective tax rate.

The 12 month reserve interest margin between our new money rate and the average reserve discount rate increased to 67 basis points for the first quarter compared to 64 basis points for the fourth quarter. The increase in the reserve margin is primarily due to the higher new money investment yields from tax advantage investments. Our overall portfolio margin was 42 basis points.

As always, the interest rate environment with its potential effect on our discount rate is a major driver of our reserve levels. As we disclosed in our 2012 annual guidance in January, the continued low interest rate environment would put downward pressure on our discount rate during 2012.

Despite this low interest rate environment, our investment portfolio has performed well. Our fixed maturity securities investments remain strong with the average credit quality of rating of A.

The performance of our commercial mortgage loan portfolio continues to provide evidence of our longstanding expertise at originating and servicing high quality commercial mortgage loans. The mortgage portfolio has generated favorable interest spreads when compared with other fixed income investments.

The 60 day delinquency rate dropped to 33 basis points, which represents the lowest 60 day delinquency rate since the first quarter of 2009. Our mortgage foreclosure level in the first quarter of 2012 remained low. We foreclosed on 11 loans with a combined loan value of $8.6 million. Net capital losses for commercial mortgage loan portfolio were $1.1 million for the first quarter.

In addition, our commercial mortgage loan loss allowance of $45.6 million was $2.5 million lower than the fourth quarter of 2011. During the First Quarter we originated approximately $210 million of mortgage loans.

Moving on to share repurchases and our capital position. We did not repurchase any shares during the first quarter of 2012. As we have mentioned in the past, we will be opportunistic with respect to our share repurchases, keeping in mind both the uncertainty in the economy and on going pricing action within our group disability business.

In addition to share repurchases, we continue to consider other capital deployment opportunities. The risk-based capital ratio at our insurance subsidiaries was 332% at the end of the first quarter and available capital was approximately $235 million up from $220 million at the end of 2011.

During the first quarter of 2012, we generated approximately $35 million of capital net of the effects of changes in required risk-based capital. In addition, we set aside $20 million of capital for debt service in shareholder dividends.

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

Jeffrey Hallin

Thank you, Floyd. Kevin, we’re now ready to take our first caller.

Question-and-Answer Session

Operator

Thank you. (Operator Instruction) We will now take our first question from Randy Binner from FBR. Please proceed with your question.

Greg Ness

Good morning, Randy.

Randy Binner – FBR

Hi, good morning. Thanks. Just a question on capital and I think it’s pretty clear from the commentary, but it seems to us like the lower sales both in annuities as well as group benefits helped kind of drive capital generation higher and so on a net basis, you were up, I think, about 15 million. And so the question is how much did the lower sales help in generating positive capital even though the benefit ratio is relatively high?

Greg Ness

Yeah, I mean, I think you are correct, Randy. I mean what drives our increase in statutory capital would be a statutory earnings less the increase risk-based capital. Now it’s hard to tease out the effective sales and isolation because it’s sales depending on the mix of sales whether it’s annuities, sometimes life insurance would drive the required capital higher so it does depend on the mix but on the other hand, we did see very good premium growth to which also drives the requirement up. So, it’s hard to isolate out just the effect of sales.

Randy Binner – FBR

Okay. I mean – but the lower sales, is beneficial, I think you’d agree to that right?

Greg Ness

Absolutely, and in particular the lower sales in annuities would be beneficial.

Randy Binner – FBR

Right. And then, so thinking about that going forward because at least at the moment group benefit side you do a lot of your business in the first quarter, but there is kind of a trend shift, I guess, annuities sales. Could we expect kind of similar decreases or right size in sales in both those segments throughout the rest of 2012?

Scott Hibbs

Randy, this is Scott Hibbs. We have been very disciplined in our pricing in this low-interest rate environment, so that has made us a little less competitive in this marketplace recently. We also see the trend in the deferred annuity marketplace where a lot of the in force policies have minimum guarantees, they are actually above today’s current crediting rate. So I think you can anticipate that we may have a somewhat lower level of annuity sales until market conditions change.

Greg Ness

Jim, do you want to touch that briefly on the group sales?

James Harbolt

Randy, when you’re asking about what do group sales maybe look like for the balance of the year, I think you can expect continued strong competition and you can also expect us to continue with our price increase actions.

Randy Binner – FBR

That’s helpful. Thanks so much.

Greg Ness

Thanks, Randy.

Operator

Thank you. Our next question is coming from Mark Finkelstein from Evercore Partners. Please proceed with your question.

Greg Ness

Good morning, Mark.

Mark Finkelstein – Evercore Partners

Good morning. I guess one follow-up question on capital. I guess how should we think about the lack of buybacks in the quarter, and do we still expect to kind of fulfill the $40 million to $80 million plan for the year?

Greg Ness

Floyd.

Floyd Chadee

Yeah. We feel comfortable with the guidance. We gave at the beginning of the year, Mark, so we will be opportunistic with respect to share repurchases and we’ll continue to review it as we go through the year.

Mark Finkelstein – Evercore Partners

Okay. Moving on, I guess it was interesting because you’re raising prices, high single digits in disability, but where you saw the sales impact was on group life and maybe could you talk about what you are exactly seeing in the market in terms of group life pricing generally?

Greg Ness

We can do that. Jim, do you want to take that?

James Harbolt

All right. Mark let me see if I can get all of the pieces there for you. There are some details I’ll share here on our life and LTD sales. I think we saw a competitive marketplace and we were increasing prices for the quarter. I think we are pleased at the rates that we wrote. It’s important to remember that many of the investments that we’ve made here at StanCorp over the last few years have played well on the private sector and we continue to see more stronger sales in the private sector versus the public sector.

Some of those are around our return to work platform called workplace possibilities and that was significant in a larger LTD sale that we saw in the quarter. Life sales down 20 million really what’s going on there is that we saw life sales were down really due to the absence of a few large life cases that we did sell a year ago in the quarter. We actually saw a modest increase in life sales in our smallest case segment.

When we think about what happened with the increasing prices in LTD and the LTD sales results for the quarter, one of the ways to, one of the things to keep in mind is that we saw really sales down in nearly every segment for LTD in the quarter with the exception of a couple of larger LTD sales in the quarter that sort of mass an overall decline in LTD sales.

So I think that’s trying to get to your question there about what’s going on. I would tell you that what we’re seeing from competition in the marketplace is we do hear other competitors talking about prices firming. We don’t disagree with that but I also tell you that it doesn’t happen on every case from every competitor.

Mark Finkelstein – Evercore Partners

Okay. Maybe just one follow-up, in terms of LTD rate increases, one of the comments you’ve made on the last call was if you take the view that interest rates are going to be at these levels for prolonged period of time, the high single-digit rate increase may need to go up a bit. And so I am curious about what your view is on that high single-digits kind of looking three months later and whether or not we’re pushing pricing and up or we’re planning on putting it higher?

Greg Ness

James, do you want to take that?

James Harbolt

Mark you’re right. At today’s current interest rates we’re working on a low single-digit pricing adjustment that’s similar to the pricing adjustment we made for low interest rates in late 2010, but it appears that this interest rate environment is remaining very challenged for us and that means we need to – we’ll be working on an additional pricing increase.

Mark Finkelstein – Evercore Partners

Okay, great. Thank you.

Greg Ness

Thanks, Mark.

Operator

Thank you. Our next question is coming from Ryan Krueger from Dowling & Partners. Please proceed with your question.

Greg Ness

Hi, Ryan.

Ryan Krueger – Dowling & Partners

Hi good morning. Floyd you mentioned exploring other capital management opportunities besides share repurchase. I was just hoping if you could elaborate that, on that a little bit. Are you referring to M&A opportunities or dividends or something else that I’m missing?

Floyd Chadee

Nothing has changed from earlier stated position, Ryan. We always would like to reinvest in the business, but that always is constrained by competitive environment and we always would be interested in M&A opportunities that are within our appetite. So, to the extent we don’t get those, then we look at other – look at share repurchases.

Ryan Krueger – Dowling & Partners

When you think about M&A, is really the primary focus or would you also consider something in the retirement space?

Greg Ness

Ryan, this is Greg. I think we would always look at options, acquisition on any side of the house that really would increase shareholder value. We obviously don’t talk about specific opportunities but we certainly wouldn’t preclude anything.

Ryan Krueger – Dowling & Partners

Okay, and then could you just give a bit more color on group LTD incidents? I know you noticed there was some steady progress but I was just hoping for perhaps some additional detail on that?

Greg Ness

We can do that, Dan?

Daniel McMillan

Hello, Ryan, this is Dan. The overall incidence levels in the quarter were better than either the first quarter of last year or the second quarter and obviously we’re impatient here and we’d like to see it improve more quickly but was really in line with what we were expecting. Gradual improvements and something that we’ll continue to watch closely and evaluate month-to-month.

Ryan Krueger – Dowling & Partners

Okay. Great, thanks.

Greg Ness

Thanks, Ryan.

Operator

Thank you. Our next question is coming from Steven Schwartz from Raymond James & Associates. Please proceed with your question.

Steven Schwartz – Raymond James & Associates

Hi, good morning guys.

Greg Ness

Good morning.

Steven Schwartz – Raymond James & Associates

Got a few here. First, most of my questions, previous questions have been answered. Bond call premium which you pointed out, what would you consider normal I guess would you consider this quarter normal or would you consider a year ago more normal?

Greg Ness

This quarter is normal. We had very unusual bond call premiums in the first quarter of last year.

Steven Schwartz – Raymond James & Associates

Okay. And then I was wondering if maybe I can get a – maybe some color on what’s going on in the commercial mortgage loan market in terms of rates that you’re getting in terms of quality out there in terms of competition out there?

Greg Ness

We can do that, Scott?

Scott Hibbs

Yeah, Steve. Good morning. I can address that one. We’re continuing to get the volume of high quality loans that we need at good spreads. Our spreads again this quarter averaged over 300 basis points over Treasurys. We do see both transaction activity picking up but also more competitors lenders coming into the marketplace. So, our expectation for the balance of the year is that that competition will probably continue to put some downward pressure on spreads.

Steven Schwartz – Raymond James & Associates

Okay. And then one more if I may. The investments, I’m assuming you say tax advantaged, I’m assuming those are investment tax credits for housing, for low income housing?

Greg Ness

Yeah.

Steven Schwartz – Raymond James & Associates

And is that expected to continue, Floyd? What are you currently looking at in terms of rate there and your ability to keep on investing in that?

Floyd Chadee

So when we originally looked at this market 12 to 18 months ago and got into its rates were way in excess of 10%, very much more so on any of the assets you could acquire. That market has now come back in terms of – buyers have now come back to that market so rates have come down and we think that we are pretty much are at the tail end of that opportunity.

Steven Schwartz – Raymond James & Associates

So should we be thinking about the tax rate heading back up to some more normal level?

Floyd Chadee

Well, I think with the assets we already have on the books, the tax benefit of that would continue over a few years, yes, so I wouldn’t think within the short term here you’d see the tax rate coming up.

Steven Schwartz – Raymond James & Associates

Okay. Thank you.

Operator

Thank you. Our next question is coming from Chris Giovanni from Goldman Sachs. Please proceed with your questions.

Greg Ness

Hi, Chris.

Christopher Giovanni – Goldman Sachs

Good afternoon. Thanks so much. First question just in terms of, I guess the competitive environment within the groups that you guys noted sort of continued price competition but probably I’d say maybe over the last quarter or so, it seems like some of the competitors have talked a bit more about some rationality coming back into the marketplace, so can you comment a little bit there?

And then in terms of the price actions that you did take, you noted those were sticking sort of inline maybe a little better than some of the expectations. Is there a need as you guys sit today where maybe there’s an opportunity to push forward for a bit more price?

Greg Ness

Yeah, Chris let’s take them on. Jim, do you want to start?

James Harbolt

Chris, we’ve heard some of those same comments from competitors that pricing seems to be firming and we don’t disagree with that. But at the same time, it doesn’t happen on every case and not every competitor stays in that stance of affirming pricing. So it remains very competitive out there.

In general, on our renewals that we push through in the quarter with price increases, we felt good about that. We were targeting high single-digit increases, both in new sales and renewals. We like the customers we retained. For those customers who required a rate increase, we like the quality of the rate increase. We also had some customers leave us as expected and in general those were customers that were not meeting our targeted returns.

I can tell you one of the ways to look at the success from renewals is that premium grew in this quarter despite challenged organic growth, and the lower sales and we think that premium growth is a strong testimony to the renewal results for the quarter.

Christopher Giovanni – Goldman Sachs

Okay. And then maybe one just for Floyd, I guess one of the things a lot of life insurers are struggling with this sort of what’s the appropriate capital levels that people should be managing too and certainly your business mix is different than others, but one of the things I guess Moody’s cited in terms of a potential upgrade would be a 350% RBC ratio, so curious to see if you guys would be willing to push up your target level from the 3 to 350 to achieve that upgrade or is that something you are not willing to do.

Floyd Chadee

Well we tend to think our mix of business 300% seems appropriate. We know a lot about the insurers have raised their targets over the last few years. We think appropriately so, and it’s always open to debate and whether they should raise it even more given their mix of business. But we’re looking at our types of the business and relative stability of the businesses we’re in. We think 300% works well for us.

Christopher Giovanni – Goldman Sachs

Okay. Thanks so much.

Operator

Thank you. Our next question is coming from Ed Spehar from Bank of America, Merrill Lynch. Please proceed with your question.

Edward Spehar – Bank of America

Thank you, good morning. I’d also like to talk about the lack of share buyback in the quarter. And I guess this is the first time you haven’t bought back stock I think in the quarter since the crisis. And Floyd I know you say that you want to be opportunistic. But if we look in the first half of last year, I think you spent about $80 million to buyback stock at 1.1 to 1.2 times book value. And in the first quarter, the price of stock averaged slightly below book.

So I’m wondering why this first quarter wasn’t considered an opportunistic time, especially when you consider that I believe you guys would characterize the pricing issues with your book of business as a manageable risk factor that you’re working through and I think the employment picture as you said in your opening remarks is weak, but better today than what it was?

Floyd Chadee

Yeah, so a couple of things there. So we do intend to be opportunistic and that’s always been the intention and we continue to take that position. Opportunistic is always based on expectation. And ex-post; one can look at it and say well that wasn’t really opportunistic. I would think, given the way the general markets has moved and our stock has moved since the first half of last year, I would agree on a ex-post basis that one could argue that our purchases in the first half of last year weren’t opportunistic, but the intention is always to be opportunistic.

I would say in the first quarter of this year we had generally a rising market. So between that, between the efforts that we have with respect to pricing on our group LTD business, and given the volatility, the nervousness that was still being felt in the overall market reflective of a general economy that is still a bit fragile in which we still emerge after the end of the first quarter in the equity market.

I think on balance we feel that that for this first quarter we acted appropriately. So we do intend to be opportunistic, but one can always look ex-post and say well, with the benefit of hindsight one may not have been opportunistic. Did that make sense?

Edward Spehar – Bank of America

Yeah. Well, just to follow-up, I’m not sure that I understand that because I mean, when you are looking at the company and the value of what you think it’s worth, I would say regardless of the market condition at the time, why would 1.1 to 1.2 times book value be viewed as a okay price to pay when slightly below books a not okay price.

When as you I think correctly point out, this is a business that has underlying risk profile that I mean you view as very favorable and you’re targeting a 300 RBC ratio, that’s something we don’t hear from – I mean, that’s something we hear from very few companies. So I guess forgetting about the market, you’re looking at your company and thinking about buying it below net asset value versus above net asset value, I don’t get why there’s an ex-post consideration.

Floyd Chadee

I think the ex-post consideration comes in only if you’re looking at the market value of our stock as an indicator of buying, but when we look at – we look at the market value of our stock, we also look at the performance of the equity market as a barometer of the overall economy and the nervousness and volatility and the fragility of that overall economy, which I think is the overall context in which we think of capital deployment opportunities. So I think you’ve got to put that in the mix there too. I think if you were just looking at is our stock in isolation value or not, then you would proceed to buy when it’s cheap, but we also look at the overall markets to think of the overall economy.

Edward Spehar – Bank of America

Thank you.

Floyd Chadee

Thanks.

Greg Ness

Thanks, Ed.

Operator

Thank you. Our next question is coming from John Nadel from Sterne, Agee. Please proceed with your question.

Greg Ness

Good morning, John.

John Nadel – Sterne Agee

Good morning out there on the West Coast. Greg, you mentioned in your opening remarks that the quarter’s results were I think matched your internal expectations. I guess my question is; is that a comment that’s more on a consolidated basis because I mean individual disability results this quarter – I mean is that something you expected to see a benefit ratio quite that low?

Greg Ness

John, clearly my comments relate to the company as a whole, but we look at it on an enterprise level. And you’re correct.

John Nadel – Sterne Agee

Okay.

Greg Ness

We experienced very good results in the individual disability segment, which is not totally uncommon in the first quarter of a year.

John Nadel – Sterne Agee

Understood, understood. And so, I guess then taking that aside and assuming that that would revert back toward more normalized levels particularly seasonally. As you isolate more for the group insurance side of the house, how did results in the first quarter there compare to your own internal expectations. I know earlier in the Q&A it was mentioned that incidents was perhaps in line with your expectations, but how – I guess maybe you could characterize just the overall group insurance underwriting results relative to your expectations?

Greg Ness

John, let me start. My expectations were met in the group insurance side although I will tell you as Dan alluded to I’m relatively impatient about the level of improvement that we see. We are seeing improvement there. It is not as fast as necessarily I would like it, but I like the improvement on the incidence rate and frankly the way LTD claims are behaving right now.

John Nadel – Sterne Agee

Okay.

Greg Ness

Dan, do you want to add anything to that?

Daniel McMillan

John, the only, I mean, the real driver of the improvement of the benefit ratio was an improvement in the LTD line and incidents and that’s what we predicted and that’s what we hope to see, are seeing it. Obviously we would like to see it move faster but the progress there is encouraging.

John Nadel – Sterne Agee

Okay, that’s helpful. And then I guess wrapping up sort of your view of the quarter relative to your own internal budget, is there anything that you see relative to that budget that alters your outlook or at least would I guess I’ll say it that way that would alter your outlook relative to your guidance?

Greg Ness

No.

John Nadel – Sterne Agee

Okay. And then final question is just a quick one on insurance services specifically. The operating expense line there looked like it was elevated in the quarter. I don’t tend to like to knit pick on those kinds of things on the conference call, but that was a pretty big move. Is there anything that was sort of one-time’ish in nature or is that an ongoing level?

Greg Ness

Yes, I think, John, one has to be careful looking at expenses in isolation by any one line. If we revert back to the total company level, you can probably pick up the trends more easily, so couple of things there. If you look at the movement in expenses between the fourth quarter of last year and the first quarter of this year, you can see us up by about $5 million or more. It’s the big movement there was in the fourth quarter of last year. We had a reversal of incentive comp to the order of $7 million.

So that accounts sort of variance and sort of sequential quarter-over-quarter. If you look at our expenses year-over-year first quarter last year to first quarter this year we went from 118 to 123. That $5 million move is accounted mostly by IT sort of ongoing elevated IT expenses which we expect to go down later in the year related to sort of initiatives that we undertook last year.

In order to think of the sort of the expense on a run-rate basis, it’s probably best to look at it on an overall annual basis. So if you – we ended up the year 2011 with about $471 million of overall expenses, but we had a savings of about $10 million just under $10 million was related to not being incentive comp, but we also had unusual expenses last year of just above $10 million related to this technology projects that we engaged in. So they both came out in the wash. So the $471 million that we ended the year last year would be sort of a run-rate, and if you think of 2012 being in the order of targeting maybe 2% to 3% above that – that would be sort of normal run rate of our expenses.

John Nadel – Sterne Agee

Very helpful, thank you very much, Floyd.

Floyd Chadee

Sure. Thanks John.

Operator

Thank you. Our next question is coming from Bill Dezellem from Titan Capital Management. Please proceed with your question.

Bill Dezellem – Titan Capital Markets

Thank you. My question...

Greg Ness

Good morning, Bill

Bill Dezellem – Titan Capital Markets

Good morning. My question I believe was just answered. But I was going to ask it in a slightly different way which is from page four of the supplement looking at operating expenses where they had been running in the low to mid 80s and now jumping up to 93 million. And I recognize that phrase, operating expenses is different in the press release itself. But did you just address that or is there something else that would be specific to what I’m looking at here on page four of the supplement?

Greg Ness

I did just address that, Bill. I think the issue is really when you look at it quarterly, there could be things happening in a particular quarter. So reverting back to the annual run rate is probably best, the best way to look at it in the overall Company level.

Bill Dezellem – Titan Capital Markets

Great. Thank you.

Greg Ness

You bet.

Operator

Thank you. Our next question is coming from John Hatcher from Jefferies. Please proceed with your question.

John Hatcher – Jefferies

Thank you.

Greg Ness

Good morning, John.

John Hatcher – Jefferies

Could you spend a few minutes discussing your liquidity at the Hold Co and any plans to refi the 250 million of debt coming due. And secondly, just to talk about your discussions with the rating agencies and the importance of maintaining your current ratings? Thank you.

Floyd Chadee

So liquidity at the Holding Company, we tend to think of overall capital excess capital of about $235 million, which is distributed throughout our entities here as being available capital, so we don’t tend to focus specifically on Holding Company, money at the Holding Company. Having said that, though just to give you the number; the cash at the Holding Company was about $36 million at the end of the quarter. With respect to refinancing of the debt, we do have debt coming due. And as you can imagine in this – with the capital markets being as favorable as they are, we continue to explore the possibilities around that and we actively engage in all sorts of discussions and analysis around that, and with respect –

Greg Ness

Moody’s and the discussion there, John, really I think that it’s fair to say that more than anything else their action really represents a reflection of the economic environment on our disability business. It will not impair our ability to compete in the marketplace. Our current rating is very solid investment grade. Incidentally, out of the top five disability competitors there’s only one that has a higher rating than us.

John Hatcher – Jefferies

Great. Thank you.

Greg Ness

You bet.

Operator

Thank you. Our last question today will be a follow-up from Mr. Steven Schwartz from Raymond James. Please proceed with your question.

Steven Schwartz – Raymond James & Associates

Hi guys. Just a couple more. Just to follow-up on the discussion about the operating expenses looking to say a different way. The expense ratio for the group insurance business had been in Q1 16.3%, 16% in 2Q, 15.7% in 3Q and then 15.4% in 4Q and Floyd, I think the incentives thing, would that have affected the fourth quarter of 2011?

Floyd Chadee

Yes.

Steven Schwartz – Raymond James & Associates

Okay. And then it bounced back up to 16.9 for this quarter that just ended. Are you implying that this number should go back around to the 16 level?

Floyd Chadee

Yeah, what I would do is I would look at last years, just look at the overall expense ratio for all of last year and use that as your own proxy because it bounced around a lot quarter-to-quarter depending on sort of unusual items, it expected technology projects or the incentive accrual reversal.

Steven Schwartz – Raymond James & Associates

Okay. And then one more if I may. Just on the experience rated refunds how should we think about that going forward through the year? Do you expect those to continue to add to premium?

Greg Ness

Steven, those can as you know quarter-to-quarter those can jump around quite a bit. In the quarter we saw positive addition to premium which supported premium growth. Very pleased with the premium growth with or without the ERR contribution. Historically that has probably trended more negative than positive and it will jump around.

We view that as a key tool for part of our business in terms of retaining and creating stabilization of costs for those customers. We don’t see the trend there or anything you can read that on a quarterly basis and that’s something that you’ll probably see jump around quarter-to-quarter.

Steven Schwartz – Raymond James & Associates

Okay. So I guess the question that I have here is let’s suppose that the benefit ratio for the year came in 82, 82.5 something like that, slow but steady improvement, there – you can’t relate that to the experience related refund number is that what you’re telling me or would you expect the experience refunds to continue to be additive but at less of a rate?

Greg Ness

I wouldn’t see that as a key driver, Steven. In the quarter it was less of 1% of the overall premium level. And so I wouldn’t see that as a big player in that benefit ratio guidance.

Steven Schwartz – Raymond James & Associates

I guess the reason why I bring it up, Dan is it does add or subtract to earnings. There’s no real loss ratio or expenses against that, right?

Greg Ness

It has a premium.

Steven Schwartz – Raymond James & Associates

Right.

Greg Ness

Right. A little over 4 million in the quarter.

Steven Schwartz – Raymond James & Associates

Okay. Maybe I’ll follow-up with Jeff on this afterwards. I appreciate the help.

Greg Ness

You bet.

Steven Schwartz – Raymond James & Associates

Okay.

Operator

Thank you. We do have one follow-up question from John Nadel from Sterne, Agee. Please proceed with your question.

John Nadel – Sterne Agee

Hi thanks. I’ll use the line from one of my friends on the sales side from a couple of quarters ago. You know it’s early in earnings season. We still have some strength here. Back to insurance services and I’m just looking at the commission line. Commission expense was down 3.5% year-over-year, if I look at Q1 versus Q1’11, but your sales were down significantly year-over-year and just it begs the question I guess at least from my perspective whether your commission rate that you’re paying has gone up and is that the case and is that something that you see occurring only at StanCorp or is that something that you see occurring industry wide?

Greg Ness

Thanks John, Jim, do you want to take that?

James Harbolt

John I’ll leave the industry wide comments alone. One of the important things to remember with the commission line there that you’re referring to is in a group insurance market. It also reflects premium growth, in force premium growth. It’s not just sales.

John Nadel – Sterne Agee

Okay, is there a decent rule of thumb that you can help us with then to think about what proportion of commissions of your total Commission expenses from new sales versus the in force?

Greg Ness

John, I don’t know there’s a rule of thumb right off the top of our head but maybe we’ll ask Jeff to see if we can look at that and see if there is one, but there’s not been an underlying change in the commission structural rate.

John Nadel – Sterne Agee

Okay that’s helpful. So it really is much more about the in force book of premium?

Greg Ness

That’s the right way to think about it.

John Nadel – Sterne Agee

Got it. Thank you very much guys.

Greg Ness

You bet.

Operator

Thank you. Next we have a follow-up from Chris Giovanni from Goldman Sachs. Please proceed with your question.

Christopher Giovanni – Goldman Sachs

Floyd, I think at one point you had provided a number in terms of average sort of cost per employee when you were sort of initiating your expense reductions. I wanted to see if you could provide an update with that number. And then also, in terms of head count you have done a pretty good job of, sort of taking that down every time and I wanted to see what your outlook was for potential further reductions?

Floyd Chadee

Chris, I don’t have an update for that particular number. We had engaged in that discussion when we were fairly significant reduction of head count a couple of years ago. But we have been successful in reducing head count as you can see but one of the things that you should know which is that it was IT operations and the expenses associated with that are not directly related to head count as such, so...

Greg Ness

Chris the other way to think about that is I don’t think it’s appropriate to expect significant head count reductions for what you see here but the key for us is to correlate our expense growth and ultimately head count growth with revenue growth. And so what you’ll see is those two numbers move together.

John Nadel – Sterne Agee

Okay, that’s helpful. Thanks so much.

Operator

Thank you. Our final question will be a follow-up from Mark Finkelstein from Evercore Partners. Please proceed with your question.

Mark Finkelstein – Evercore Partners

Thanks. Just, I guess on the real estate owned that M&A is from foreclosed properties. Can you just frame out how much is on the balance sheet now that you would be looking to sell and what is the progress of those sales?

Greg Ness

Okay, Scott? Will you take that?

Scott Hibbs

Sure, Mark. You’ll see on the stat supplement about $100 million, just over $100 million on that real estate line. About half of that is REO properties.

Mark Finkelstein – Evercore Partners

Okay.

Scott Hibbs

What we’re seeing is and expecting is a slow decline. So over the balance of the year, next year, we expect that to go down slowly. I wouldn’t expect a real significant move in that this year.

Mark Finkelstein – Evercore Partners

Okay. So just going back to last quarter of the guidance on capital deployment the 40 to 80 million, was that range at all dependent upon the ability to divest some of these real estate properties?

Greg Ness

I don’t think we tied it specifically to that. So it would depend on all of the considerations that we talked about earlier which would be sort of being opportunistic in the market, progress on a pricing action and the volatility and nervousness in the overall economy.

Mark Finkelstein – Evercore Partners

Okay. Thank you.

Greg Ness

Thanks, Mark.

Jeffrey Hallin

All right, I want to thank everyone once again for joining our call. There will be a replay of this call starting this afternoon and running through April 27th. To listen to this call you can dial 877-660-6853 and enter the account number 286 and the conference ID number 391143. A replay of today’s webcast will also be available at www.stancorpfinancial.com. Thank you.

Operator

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

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