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StanCorp Financial Group, Inc. (SFG)

Investor Meeting Call

May 22, 2012 09:00 ET


Jeff Hallin – Assistant Vice President, Investor Relations

Greg Ness – Chairman, President and Chief Executive Officer

Dan McMillan – Vice President, Insurance Services Group

Jim Harbolt – Vice President, Insurance Services Group

Scott Hibbs – Vice President, Asset Management Group

Floyd Chadee – Senior Vice President and Chief Financial Officer


Ryan Krueger – Dowling

Randy Binner – FBR Capital Markets

Chris Giovanni – Goldman Sachs

Tom Gallagher – Credit Suisse

Eric Berg – RBC Capital Markets

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Mark Finkelstein – Evercore

Steven Schwartz – Raymond James

Stewart Johnson – Brookville Fund Managers


Jeff Hallin – Assistant Vice President, Investor Relations

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Hi, good morning everyone. I’m Jeff Hallin, Assistant Vice President, Investor Relations and I want to thank everyone for attending today both here and on the web. So, this year this meeting is being webcast over the Internet and we will have microphones available for our question-and-answer period at the end.

Today, representing StanCorp with presentations will be Greg Ness, Chairman, President and Chief Executive Officer; Floyd Chadee, Senior Vice President and Chief Financial Officer; Jim Harbolt, Vice President, Insurances Services Group; Dan McMillan, Vice President, Insurance Services Group; and Scott Hibbs, Vice President, Asset Management. Also representing StanCorp in the room today, we have Rob Erickson, our Vice President and Controller and Jane Keister, Manager of Shareholder Services.

Before I turn it over to Greg I need to remind you that certain comments made during this meeting will include statements regarding our 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 statements are forward-looking, they are subject to risks and uncertainties and 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 our first quarter earnings release and first quarter Form 10-Q.

With that, I’d like to turn the meeting over to Greg. Thank you.

Greg Ness – Chairman, President and Chief Executive Officer

Thanks, Jeff. Thank you very much. Good morning everyone. Thank you all for being here with us today. I understand this is a big week for lots of you with other meetings going on. So, we are going to move through this rapidly, because we want to frankly get to the end where you can ask questions of whatever you’ve seen here and we give you the information that you need beyond the forward-looking statement.

And move into this first chart. This is kind of what we hear and we are talking to analysts and buy side folks and investors and there is kind of a range or concerns or issues or carriers of questions that come up and then you can see those depicted on this particular chart. We’re going to try to take a number of these on today and try to get you some information about them to the extent that you don’t have what you need please be sure and ask questions as we move on.

So, today, what we’d really like to cover is quick recap on our first quarter claims and highlights there. So, you just get a sense of where we would end up – at the end of first quarter. We are going to spend some time today breaking down our claims activity in more detail. So, you really get an understanding of what it is that we are seeing in terms of incidence, in terms of long-term visibility. That’s a big driver of our results if they want to share with you information about that. Going to talk a little bit about what we see in the sales environment, it changes about daily, but we are going to give you some intents or some insight rather into what we are seeing in terms of pricing. That's a very important factor. Now, that we have seen a number of other competitors talked about incidence issues in their block of business. They've talked about, it's actually we are going to raise prices, so we are going to talk a little bit about what we see there.

As you know, we began raising prices last year. I am very pleased that we are on the front end of this curve and moving to it and we are going to show you kind of our pricing curve if you will you’ll see that we've really already priced about 30% of the block of business and by this time next year we'll be well over three quarters. So, you get a sense of where we are on that and actually I think Jim and Dan like to share with you some actual examples of some pricing increases, give you a good sense of how we look at it and what the average price increases are that have been moving through.

Going to give you a quick update on asset management, so you can see what’s going on, on that side of the house, remember that's the 401(k), the annuities and mortgage company and so on, so Scott will give us an update there. And then I am going to ask Floyd to talk a lot about capital interest rate management and so on. And I show you exactly how we set our discount rates. My perception is that we are very, very transparent in the way we do that based upon our average of portfolio yields and new money rates, Floyd will actually fit you through that process and makes sure that everybody understands that (indiscernible) capital.

So, let's talk about the first quarter that we can send it here in the March. We viewed the quarter as an in line quarter if you will that the results were certainly in line with what our expectations were in terms of what we would see. Historically Q1, Q2 generally a higher quarters in terms of claims results, we like what we saw there. We did see an improvement in LTD claims incidence in Q1. We think that’s a very good sign moving forward. These are things that don’t change very rapidly, but what we look for changes on a relatively small scale, but we did see a change there that we like a lot. At the same time, group insurance premiums continued to grow. That’s a very healthy sign too. That means that we are either writing new business, retaining current business forward, that current business that you have is growing, which would be a very good sign if you begin to see some organic growth.

We saw very good results from our Asset Management Group as a matter of fact they were probably record results from that first quarter. Scott will touch on that what he talks a little bit. And our investment portfolio continues to perform very well. As you know, we have a significant portfolio of commercial mortgage loans, which has behaved exceedingly well through duration of this economic scenario that we've all been through continues to perform very, very well. And frankly, it's a differentiator from a lot of companies that we compete.

Finally, we grew our book value per share and have a very good strong capital position to see in the first quarter. Floyd again will touch more on that as we move forward. So, some of you have been coming to this meeting a number of different times, others relatively new, but in some respects this is the same story you've heard from of a contributive company that’s been around for more than 100 years. It’s just the same story at little bit of a different size. We are very, very careful about the businesses that we choose to compete in. We try not to be everything to everyone because we think that's a rest of peace for doing a halfway job on a whole lot of thing.

So, what we do is we choose very carefully the businesses that we are in and we become experts at those particular businesses and then we just stick to our nettings in that particular space. We look for profitable long-term businesses. We don't run this company on a quarter-to-quarter basis. This is really very much a long-term business. We have people out that are making a sale today that we won't see a liability on for 5, 10, 15, or 20 years. If that's the model of your business, you have to take a long-term perspective when you operate it. You've been our operator on a (inaudible). We avoid high-risk businesses. You don't see us in variable annuities, you don't see us with minimum guarantees that are causing our claims department you certainly don't see us in a long-term care business or something like that. Those are businesses that we don't think have a very good long-term profile and clearly it’s been very difficult for those businesses you cross on this environment.

Very conservative reserving practices at our company, StanCorp continues to never have had a material reserve change. My sense is that when you see those material reserve changes, that’s in essence of passive admission – that's in essence of passive admission that there was some business that was under-priced, if you acquired business and did not appropriately reserve for that business moving forward. That has not happened at StanCorp.

You also know that we are very disciplined in terms of our approach to interest rate management, how we manage our investments and then of course how we use the interest earnings to us, discount or reserves moving forward and Floyd will talk about that in detail.

The last couple of three items here, high-quality investment portfolio, little different in terms of our investment mix than many other companies that you might cover. He will talk about that a little bit. It's an elegantly simple story as Floyd likes to say. It's really corporate bonds and commercial mortgages and the beauty of it is that we originate all those commercial mortgage loans ourselves and we service those as well. And then a very strong balance sheet with very low debt and you will see some charts later on from Floyd that demonstrates with the new debt rule changes, how did StanCorp actually came out compared to some of the other folks.

So, when we look at our business from a long-term standpoint, one of the things we like to look at is book value per share, because while this looks through obviously at your earnings, we also give some insight into how those investments are performing and how they have performed through this. You can see a very nice track record of 10% compound annual growth over the period and that's really driven by not only operations that have very solid investment portfolio and we can talk more about that later as well.

When you have that kind of compound annual growth rates, you are able to return dollars to shareholders. And this is a chart depicting those shareholder dividends at $0.75, $0.80, $0.86, and $0.89. StanCorp has paid a dividend every single year as a public company and has increased that dividend every year as a public company. And you can see the blue charts there – the blue bars rather depict the actual repurchase activity and other form of returning value to shareholders.

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