StanCorp Downgraded to Underperform - Analyst Blog

We recently downgraded StanCorp Financial Group (SFG) to Underperform from Neutral, as we suspect organic growth will remain restricted in the near term given the sluggish economic environment and challenging labor market conditions. Additionally, delinquencies on commercial mortgage loans are expected to remain modestly high in the foreseeable future.

StanCorp's premiums remain stressed as the group insurance market continues to reflect a price-competitive sales environment with declines in wage growth and employment levels, as its customers navigate a challenging economy.

The Insurance Services segment continues to see an increase in claim incidence. Increasing long-term disability incidents, mainly in the education and manufacturing sectors, drove increased group insurance claims.

Also, StanCorp has a higher exposure in commercial mortgages loan. The company has been experiencing higher delinquency rates as well as an increase in foreclosure activity.

StanCorp's second-quarter operating earnings of $1.04 per share lagged the Zacks Consensus Estimate of $1.22 due to lower favorable claims in the Insurance Services segment.

During the second quarter conference call, management noted its apprehensions about its failure to achieve an annual return on equity even at the low end of its long-term target range of 14% to 15%, as earlier professed. Unfavorable claims experienced in the second quarter along with a persistently low interest rate environment are primarily responsible for the anticipated shortfall.

The Zacks Consensus Estimate for third-quarter 2010 is $1.18 per share. For full year 2010 and 2011, the Zacks Consensus Estimates are $4.64 per share and $5.24, respectively.

The quantitative Zacks #5 Rank ('Strong Sell') for the company indicates downward directional pressure on shares over the near term.

 
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