Low interest rates and soft employment are continuing to chill the group benefits market.
StanCorp Financial Group Inc. (NYSE:SFG) cut the discount rate it used for the long-term disability (LTD) claim reserves it established in the fourth quarter of 2012 0.75 percentage points below the discount rate it was using in the fourth quarter of 2011.
The company has warned that more discount rate cuts may be on the way.
Because “a continued low interest rate environment” seems likely to continue to put downward pressure on the discount rate for new LTD reserves, “the discount rate may be lowered 50 to 75 basis points during 2013,” the company said in a discussion of its fourth-quarter earnings.
A basis point is equal to one hundredth — or 1 percent — of a percentage point.
StanCorp, the parent of Standard Insurance, is reporting $38.4 million in net income for the latest quarter on $718 million in revenue, compared with $38.6 million in net income on $728 million in revenue for the comparable quarter in 2011.
New group insurance sales premiums fell to $73 million, from $75 million.
“The decrease in group insurance sales was primarily due to pricing competition as the company implemented pricing actions on its long-term disability business to address the impact of the elevated claims incidence and the continued low interest rate environment,” the company said.
Total group insurance premiums fell 2.4 percent, to $486 million.
The discount rate fell to 4 percent, from 4.75 percent.
The benefits ratio, or ratio of benefits payments and interest credited to policyholders as a percentage of premiums, rose to 83.7 percent, from 82.8 percent. The benefit ratio increase was mainly due to the drop in the discount rate, the company said. The biscount-rate-adjusted benefits ratio improved slightly, the company said.
J. Greg Ness, StanCorp’s president, said during a conference call held to discuss the results that the company has repriced about half of the group LTD business to reflect an increase in claims incidence that the company began to notice in mid-2011 as well as low interest rates.
The company “implemented further pricing actions” in 2012, Ness said.
Group insurance business persistency fell to 86.7 percent, from 88.8 percent. Although the percentage of business that stayed on the books fell, the persistency level was still “very respectable,” given the challenges the company has faced, Ness said.
“We will always protect the bottom line over the top line,” Ness said.
Executives noted that pricing increases might take a “couple of years to roll through” because of the effects of multi-year pricing agreements.
The executives reported that they see some evidence of LTD prices firming in some markets but expect to continue to face tough pricing competition both when they sell new cases and renew cases already on the books.
Employment levels at StanCorp’s group insurance customers fell 2 percent year-over-year, Ness said.
The company already has taken action to align its expenses with the expected revenue levels, Ness added.
An analyst said StanCorp appears to have 20 percent fewer employees than it had in 2008. Executives said they have used outsourcing to compensation for some of the reduction in employees.