Management considers certain non-GAAP financial measures, including adjusted operating income (loss), adjusted book value, adjusted book value per common share, adjusted book value per common share, as converted, and operating ROAE to be useful to investors in evaluating our financial performance and condition. These measures have been reconciled to their most comparable GAAP financial measures. For a definition of these non-GAAP measures and other metrics used in our analysis, see “- Use of non-GAAP Financial Measures.”
On January 27, 2010, we completed an initial public offering of our common stock at $12.00 per share. Of the 34,960,000 shares registered, 9,700,490 were registered on behalf of existing stockholders. As a result of our initial public offering, we received net proceeds of $282.5.
Group. We offer medical stop-loss insurance, limited benefit medical plans, group life insurance, accidental death and dismemberment insurance and disability income insurance mainly to employer groups of 50 to 5,000 individuals. In addition to our insurance products, we offer managing general underwriting services.
Retirement Services. We offer fixed and variable deferred annuities, including tax sheltered annuities, individual retirement accounts, or IRAs, and group annuities to qualified retirement plans, including Section 401(k), 403(b) and 457 plans.
Income Annuities. We offer single premium immediate annuities, or SPIAs, for customers seeking a reliable source of retirement income and structured settlement annuities to fund third-party personal injury settlements. In addition, we offer funding services options to existing structured settlement clients.
To succeed in this environment, we expect to continue focusing on our strategic objectives of capitalizing on favorable demographic trends including the increasing need for retirement savings and income and the growing demand for affordable health insurance. We are also focused on expanding our distribution network, and providing simple to understand savings and investment products. However, the success of these and other strategies may be affected by the factors discussed in Item 1A− “Risk Factors,” and other factors as discussed herein.
One of the significant estimates related to available-for-sale securities is the evaluation of investments for OTTI. We analyze investments that meet our impairment criteria to determine whether the decline in value is other-than-temporary. The impairment review involves the investment management team, including our portfolio asset managers. To make this determination for each security, we consider both quantitative and qualitative criteria including:
for fixed maturities, our intent to sell the security or whether it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost considering any regulatory developments and our liquidity needs.
Prior to January 1, 2009, under the then existing accounting guidance, if the loss was determined to be other-than-temporary, we recorded an impairment charge equal to the difference between the fair value and the amortized cost basis of the security within net realized investment gains (losses) in our consolidated statements of income in the period that we made the determination. The fair value of the other-than-temporarily impaired investment became its new cost basis. We also recorded an impairment charge if we did not have the intent and/or the ability to hold the security until the fair value was expected to recover to amortized cost or until maturity, resulting in a charge recorded for a security that may not have had credit issues.
Effective January 1, 2009, we adopted new accounting guidance for the recognition and disclosure of OTTI for our fixed maturities. Our available-for-sale marketable equity securities consist primarily of nonredeemable preferred stock, which are evaluated similarly to fixed maturities. The adoption of the new accounting guidance required that OTTI losses be separated into the amount representing the decrease in cash flows expected to be collected (“credit loss”), which is recognized in earnings, and the amount related to all other factors (“noncredit loss”), which is recognized in other comprehensive income (loss). In addition, the new guidance replaces the requirement for management to assert that we have the intent and ability to hold an impaired fixed maturity security until recovery with the requirement that management assert that it does not have the intent to sell the security and that it is more likely than not that we will not be required to sell the security before recovery of our amortized cost basis. For securities we intend to sell or it is more likely than not that we will be required to sell the security before recovery, the impairment charge is equal to the difference between the fair value and the amortized cost basis of the security in the period of determination. In determining our intent to sell a security or whether it is more likely than not that we will be required to sell a security, we evaluate facts and circumstances such as decisions to reposition our security portfolio, sales of securities to meet cash flow needs and sales of securities to capitalize on favorable pricing.
As a result of the adoption of the new OTTI accounting guidance, we recorded a cumulative effect adjustment, resulting in an increase of $15.7, net of tax, to retained earnings as of January 1, 2009, with a corresponding decrease to AOCI, to reclassify the noncredit portion of previously other-than-temporarily impaired fixed maturity securities. In addition, the amortized cost basis of fixed maturities for which a noncredit OTTI loss was previously recognized was increased by $24.1.
Fixed maturities include bonds, mortgage-backed securities and redeemable preferred stock. We classify all fixed maturities as available-for-sale and carry them at fair value. We report net unrealized investment gains and losses related to all of our available-for-sale securities, which is equal to the difference between the fair value and the cost or amortized cost, in accumulated other comprehensive income (loss) in stockholders’ equity. We report net realized investment gains and losses in the consolidated statements of income. These investments are subject to impairment reviews to determine when a decline in fair value is other-than temporary. See “- Other-Than-Temporary Impairments (OTTI)” above.
We determine the fair value of fixed maturities primarily by obtaining prices from third-party independent pricing services, and we do not adjust their prices or obtain multiple prices for these securities. As of December 31, 2009 and 2008, our pricing services priced 93.6% and 95.1%, respectively, of our fixed maturities. The third-party independent pricing services we use have policies and processes to ensure that they are using objectively verifiable, observable market data, including documentation on the observable market inputs, by major security type, used to determine the prices. Securities are priced using evaluated pricing models that vary by asset class. The standard inputs for security evaluations include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and other reference data, including market research publications. Because many fixed income securities do not trade on a daily basis, evaluated pricing models apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. In addition, models are used to develop prepayment and interest rate scenarios, which take into account market convention.
If our pricing services determine that they do not have sufficient objectively verifiable information about a security, they will not provide a valuation for that security. In such situations, we determine the security’s fair value using internal pricing models that typically utilize significant, unobservable market inputs or inputs that are difficult to corroborate with observable market-based data.
When we have significant observable market inputs, which is generally the case when the security is priced by our pricing services, it is classified as a Level 2 measurement. When there is not sufficient observable market information and the security is priced using internal pricing models, which is generally the case for corporate private placements and other securities our pricing services are unable to price, it is classified as a Level 3 measurement. The inputs used to measure the fair value of securities priced using internal pricing models may fall into different levels of the fair value hierarchy. It has been our experience that, in these situations, the lowest level input that is significant to the determination of fair value is a Level 3 input and thus, we typically report securities valued using internal pricing models as Level 3 measurements. In limited situations, private placement securities are valued through the use of a single broker quote because the security is very thinly traded. In such situations, we consider the fair value a Level 3 measurement.
Fixed maturities categorized as Level 3 investments were $1,183.5 and $674.3 as of December 31, 2009 and 2008, respectively. The increase is primarily due to purchases near the end of the third quarter of
We have audited the accompanying consolidated balance sheets of Symetra Financial Corporation as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Symetra Financial Corporation at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the financial statements, in 2008 the Company changed its method of accounting for certain marketable equity securities and limited partnership funds. As discussed in Note 2 to the financial statements, in 2009 the Company changed its method of accounting for other-than-temporary impairments of fixed maturity securities.
(All dollar amounts in millions, except per share data, unless otherwise stated)
On January 27, 2010, the Company completed the initial public offering (IPO) of its common stock at an offering price of $12.00 per share. The IPO included 25,259,510 newly issued shares of common stock sold by the Company and 9,700,490 existing shares of common stock sold by selling stockholders. Upon completion of the IPO, the Company had 117,988,965 shares of common stock outstanding. The Company received net proceeds from the offering of approximately $282.5. The Company did not receive any proceeds from the sale of shares by the selling stockholders. In February 2010, Symetra Financial Corporation contributed $236.6 of the IPO proceeds to its subsidiaries. If the IPO had been effected on January 1, 2009, the pro forma basic and diluted net income per share would have been $0.94 for the year ended December 31, 2009.
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP), including the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that may affect the amounts reported in the audited consolidated financial statements and accompanying notes.
The consolidated financial statements include the accounts of Symetra Financial and its subsidiaries that are wholly owned, directly or indirectly. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior year financial information to conform to the current period presentation.
Premiums from group life and health insurance products are recognized as revenue when earned over the life of the policy. The Company reports a liability for the portion of premiums unearned on the consolidated balance sheets. Benefit claims are charged to operations as incurred. These policies are short-duration contracts.
Traditional individual life insurance products, primarily term and whole life insurance products, are long-duration contracts consisting principally of products with fixed and guaranteed premiums and benefits. Premiums from these products are recognized as revenue when due. Benefits and expenses are associated with earned premiums to result in the recognition of profits over the life of the policy. This association is accomplished by the provision for future policy benefits and the deferral and amortization of policy acquisition costs.
Deposits related to universal life-type, limited payment-type and investment-type products are credited to policyholder account balances and reflected as liabilities rather than as premium income when received. Revenues from these contracts consist of investment income on the policyholders’ fund balances and amounts assessed during the period against policyholders’ account balances for cost of insurance charges, policy administration charges, and surrender charges. The Company includes these cost of insurance charges in premiums and other considerations. Policy administration charges and surrender charges are included in other revenues in the consolidated statements of income. Amounts that are charged to operations include interest credited and benefit claims incurred in excess of related policyholder account balances.
The Company reports net unrealized investment gains (losses) related to its available-for-sale securities in accumulated other comprehensive loss in stockholders’ equity, net of related DAC and deferred income taxes.
The Company uses quoted market prices or public market information to determine the fair value of its investments when such information is available. When such information is not available, as in the case of securities that are not publicly traded, the Company uses other valuation techniques. These techniques include evaluating discounted cash flows, identifying comparable securities with quoted market prices, and using internally prepared valuations based on certain modeling and pricing methods. The Company’s investment portfolio as of December 31, 2009 and 2008 included $901.3 and $632.2, respectively, of fixed maturities that were not publicly traded. Values for these securities were determined using these other valuation techniques. See Note 7 for additional disclosures about fair value measurements.
The cost of securities sold is determined by the specific-identification method.
Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. The Company’s review of investment securities includes both quantitative and qualitative criteria. Quantitative criteria include the length of time and amount that each security is in an unrealized loss position and, for fixed maturities, whether the issuer is in compliance with the terms and covenants of the security. See Note 4 for additional discussion about the Company’s process for identifying and recording OTTI.
The allowance for losses on mortgage loans provides for the risk of credit losses inherent in the lending process. The allowance includes a portfolio reserve for probable incurred but not specifically identified losses and specific reserves for non-performing loans. We define non-performing loans as a loan for which it is probable that amounts due according to the terms of the loan agreement will not be collected. As of December 31, 2009, one loan was considered non-performing. As of December 31, 2008, no loans were considered non-performing. The portfolio reserve for probable incurred but not specifically identified losses considers our past loan experience and the current credit composition of the portfolio, and takes into account market considerations. See Note 4 for a rollforward of the allowance for mortgage loan losses.
The Company has identified certain investments in limited partnerships that meet the definition of a variable interest entity (VIE). Based on the analyses of these interests, the Company does not meet the definition of “primary beneficiary” of any of these partnerships and therefore has not consolidated these entities. The maximum exposure to loss as a result of the Company’s involvement in its VIEs was $147.3 and $181.4 as of December 31, 2009 and 2008, respectively. The maximum exposure to loss includes commitments to provide future capital contributions as described in Note 15.
Cash and cash equivalents consist of demand bank deposits and short-term highly liquid investments with original maturities of three months or less at the time of purchase. Cash equivalents are reported at cost, which approximates fair value, and were $244.4 and $441.6 as of December 31, 2009 and 2008, respectively. As of December 31, 2009 and 2008, $223.8 and $366.9 of total cash equivalents, respectively, were held at a single highly rated financial institution.
The Company’s financial statement recognition of the change in fair value of a derivative depends on the intended use of the derivative and the extent to which it is effective as part of a hedging transaction. Derivative financial instruments consist primarily of S&P 500 index options and are included in other invested assets at fair value on the Company’s consolidated balance sheets. See Note 5 for additional discussion about the Company’s derivative financial instruments.
The Company utilizes reinsurance agreements to manage its exposure to potential losses. The Company reinsures all or a portion of its risk to reinsurers for certain types of directly written business. In addition, the Company reinsures through pools to cover catastrophic losses. Accordingly, the future policy benefit reserves and policy and contract claims liabilities are reported gross of any related reinsurance recoverables. The Company reports premiums, benefits, and settlement expenses net of reinsurance ceded on the consolidated statements of income. The Company accounts for reinsurance premiums, commissions, expense reimbursements, benefits and reserves related to reinsured business on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. The Company remains liable to its policyholders to the extent that counterparties to ceded reinsurance contracts do not meet their contractual obligations.
deferrals to the lesser of the acquisition costs contained in the Company’s product pricing assumptions or actual costs incurred.
For some products, policyholders can elect to modify product benefits, features, rights or coverage by exchanging a contract for a new contract or by amendment, endorsement or rider to a contract or by election of a feature or coverage within a contract. These transactions are known as internal replacements. If the modification substantially changes the contract, the existing DAC is immediately written off through income and any new deferrable costs associated with the replacement contract are deferred. If the modification does not substantially change the contract, the existing DAC is retained and amortized over the life of the modified contract and any acquisition costs associated with the related modification are expensed.
Certain operating leases of the Company provide for minimum annual payments that change over the life of the lease. The aggregate minimum annual payments are expensed on the straight-line basis over the
minimum lease term. Rent holidays, rent incentives, and tenant improvement allowances are amortized on the straight-line basis over the initial term of the lease and any option period that is reasonably assured.
Separate account assets are reported at fair value and represent segregated funds that are invested on behalf of the Company’s variable annuity, life, and universal life policyholders. The assets of each separate account are legally segregated and are not subject to claims that arise out of the Company’s other business activities. Investment risks associated with market value changes are borne by the policyholder, except to the extent of minimum guaranteed death benefits (GMBD) made by the Company with respect to certain accounts. Net investment income and realized investment gains and losses accrue directly to the policyholders and are not included in the Company’s revenues. Separate account liabilities primarily represent the policyholder’s account balance in the separate account. Fees charged to policyholders include mortality, policy administration, and surrender charges and are included in other revenues.
Liabilities for fixed deferred annuity contracts and universal life policies, including bank-owned life insurance (BOLI), are computed as deposits net of withdrawals made by the policyholder, plus amounts credited based on contract specifications, less contract fees and charges assessed, plus any additional interest. For single premium immediate annuities (SPIAs), including structured settlements, future benefits are either fully guaranteed or are contingent on the survivorship of the annuitant. Liabilities are based on discounted amounts of estimated future benefits. Contingent future benefits are discounted with current pricing mortality assumptions, which include provisions for longer life spans over time. The interest rate pattern used to calculate the reserves for SPIAs is set at issue. The interest rates within the pattern vary over time and start with interest rates that prevailed at the contract issue. As of December 31, 2009, the weighted-average implied interest rate on the existing book of business was 6.0% and is expected to grade to 6.7% during the next 20 years.
assumptions in the year of issue and includes a provision for adverse deviation. These liabilities are contingent upon the death of the insured while the policy is in force. The Company derives mortality assumptions from both company-specific and industry statistics. The Company discounts future benefits at interest rates that vary by year of policy issue, are set initially at a rate consistent with portfolio rates at the time of issue, and graded to a lower rate, such as the statutory valuation interest rate, over time. Assumptions are set at the time each product is introduced and are not updated for actual experience unless the total product liability amount is determined to be inadequate to cover future policy benefits. The provision for adverse deviation is intended to provide coverage for the risk that actual experience may be worse than locked-in best-estimate assumptions.
Income taxes have been provided using the liability method. The provision for income taxes has two components: amounts currently payable or receivable and deferred income taxes. The deferred income taxes are calculated as the difference between the book and tax basis of the appropriate assets and liabilities and are measured using enacted tax rates. Deferred tax assets are recognized only to the extent that it is probable that future tax profits will be available. A valuation allowance is established where deferred tax assets cannot be recognized.
Accounting Standards Codification 105-10 (formerly SFAS No. 168), FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles
In July 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 168 (ASC 105-10), FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, which established the FASB Accounting Standards Codification (Codification or ASC) as the single source of authoritative GAAP recognized by the FASB. The Codification was applicable to nongovernmental entities for financial statements issued for interim and annual periods ending after September 15, 2009. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification became non-authoritative.
GAAP is not intended to be changed as a result of the FASB’s Codification project, but it does change the way the guidance is organized and presented. The Company has implemented the Codification in this report by referencing the Codification topics where appropriate. References to the superseded standards have been included for informational purposes.
ASU 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
and increase accumulated other comprehensive loss by $29.4, or $19.1 net of taxes, to reclassify net unrealized gains as a result of adoption. See Note 7 for additional disclosure about the effects of this adoption and fair value measurements.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurement. This update requires additional disclosures about an entity’s fair value measurements, including information about gross transfers into and out of Levels 1 and 2 and information about activity for Level 3 measurements on a gross basis. It also clarifies the level of disaggregation required for existing fair value disclosures. The Company prospectively adopted this guidance on January 1, 2010 and will include the appropriate disclosures in its interim and annual consolidated financial statements thereafter.
Basic earnings per share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common stock, if dilutive.
Represents the amount of cumulative non-credit OTTI losses transferred to or recorded in accumulated other comprehensive loss for securities that also had a credit-related impairment.
Of the U.S. government and agencies securities, agencies comprised $23.7 and $132.1 of the fair value as of December 31, 2009 and 2008, respectively. As of December 31, 2009, these securities had gross unrealized gains of $1.0 and gross unrealized losses of $(0.1). As of December 31, 2008, these securities had gross unrealized gains of $2.6 and gross unrealized losses of $(3.9).
At December 31, 2009 and 2008, the Company held below-investment-grade fixed maturities, based on National Association of Insurance Commissioners (NAIC) ratings, with fair values of $1,032.1 and $767.5, respectively, and amortized costs of $1,165.1 and $1,115.0, respectively. These holdings amounted to 5.6%
As of December 31, 2009 and 2008, the majority of the Company’s mortgage-backed securities were classified as prime. Based on a review of the characteristics of their underlying mortgage loan pools, such as credit scores and financial ratios, the Company classified $125.5 and $155.5, of mortgage-backed securities as Alt-A as of December 31, 2009 and 2008, respectively, as each has overall collateral credit quality between prime and subprime. These securities represented 2.4% and 3.1%, respectively, of the fair value of total mortgage-backed securities at December 31, 2009 and 2008. Of the securities classified as Alt-A, 90.7% and 100% had an NAIC rating of 1, and 58.9% and 100% had a Standard and Poor’s (S&P) equivalent credit rating of AAA, based on the highest credit agency rating, as of December 31, 2009 and 2008, respectively.
The following table summarizes the amortized cost and fair value of fixed maturities as of December 31, 2009, by contractual years to maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
During 2009, the Company recorded OTTI charges in earnings on fixed maturities totaling $86.5. The largest write-downs were from investments in the diversified financial services industry, totaling $27.2, or 31.4%; the publishing industry, totaling $6.7, or 7.7%; and the consumer finance industry, totaling $6.2, or 7.2%. During 2008, the Company recorded OTTI charges on fixed maturities totaling $86.4. The largest write-downs were from investments in the paper-related industry, totaling $14.2, or 16.4%; the diversified financial service industry, totaling $8.4, or 9.7%; and FNMA - U.S. federal government securities, totaling $8.0, or 9.3%. During 2007, the Company recorded OTTI charges of $16.2, primarily on investments in the paper-related industry, totaling $7.6, or 46.9%, and in the brewing industry, totaling $1.7, or 10.5%.
As of January 1, 2008, changes in fair value related to certain marketable equity securities are recognized in net realized investment gains (losses) due to the Company’s election of the fair value option. Refer to Note 7.
Net gains (losses) on trading securities includes $28.3 and $(60.7) of gains (losses) on trading securities held as of December 31, 2009 and 2008, respectively.
As of December 31, 2009 and 2008, mortgage loans constituted approximately 5.4% and 5.1% of total assets, respectively. These loans are secured by first-mortgage liens on income-producing commercial real estate, primarily in the retail, industrial and office building sectors. The weighted average loan-to-value (LTV) ratio, which is a loan’s carrying amount divided by its appraised value at loan inception, was 49.4% and 54.7% for loans funded during 2009 and 2008, respectively. The weighted average LTV ratio for the Company’s entire mortgage portfolio was 53.5% and 51.2% as of December 31, 2009 and 2008, respectively. The majority of the properties are located in the western United States, with 28.6% of the total in California and 18.5% in Washington State. Individual loans generally do not exceed $15.0.
If the value of a security falls into category (ii) or (iii), the Company analyzes the decrease in fair value to determine whether it is an other-than-temporary decline in value. To make this determination for each security, the Company considers, among other factors:
The financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations, earnings potential, or compliance with terms and covenants of the security;
Based on the analysis, the Company makes a judgment as to whether the loss is other-than-temporary. The Company’s available-for-sale marketable equity securities consist primarily of non-redeemable preferred stock, which are evaluated similarly to fixed maturities.
For underwater fixed maturities, if the Company intends to sell a security or it is more-likely-than-not it will be required to sell a security before recovery of amortized cost, an OTTI has occurred and the amortized cost is written down to current fair value, with a corresponding charge to net realized investment gains (losses) in the consolidated statements of income. If the Company does not intend to sell a security, but the present value of the cash flows expected to be collected is less than the amortized cost of the security (that is, a credit loss exists), the Company concludes that an OTTI has occurred and the amortized cost is written down to the discounted estimated recovery value with a corresponding charge to net realized investment gains (losses) in the consolidated statements of income, as this is deemed the credit portion of the OTTI. The remainder of the decline in fair value is recorded in other comprehensive income (loss) in the consolidated statements of stockholders’ equity, as this is considered the portion of the impairment due to other, non-credit factors.
When assessing the Company’s intent to sell a fixed maturity or if it is more likely than not it will be required to sell a fixed maturity before recovery of its cost basis, the Company evaluates facts and circumstances including, but not limited to, decisions to reposition its security portfolio, sales of securities to meet cash flow needs and sales of securities to capitalize on favorable pricing. In order to determine the amount of the credit loss for a fixed maturity, the Company calculates the recovery value by performing a discounted cash flow analysis based on the current expectations of future cash flows it expects to recover. The discount rate is the effective interest rate implicit in the underlying fixed maturity. The effective interest rate is the original yield for corporate securities, current yield for mortgage backed securities, or the coupon if the security was previously impaired. See the discussion below for additional information on the methodology and significant inputs, by security type, used to determine the amount of a credit loss.
Earnings multiples for the given industry or sector of the industry that the underlying issuer operates within, divided by the outstanding debt to determine an expected recovery value of the security in the case of a liquidation;
Susceptibility to fair value fluctuations due to changes in the interest rate environment;
Susceptibility to reinvestment risk in cases where market yields are higher than the book yields earned and the Company’s expectation of the sale of such security; and
Represents circumstances where the Company determined in the current period that it intends to sell the security or it is more likely than not that it will be required to sell the security prior to recovery of its amortized cost.
The Company has a closed block of fixed indexed annuity (FIA) product that credits the policyholders’ accounts based on a percentage of the gain in the S&P 500 Index. In connection with this product, the Company has a hedging program with the objective to hedge the exposure to changes in the S&P 500 Index. This program consists of buying S&P 500 Index options. Although the Company uses index options to hedge the equity return component of the FIA, the options do not qualify as hedging instruments or for hedge accounting treatment. Accordingly, the options are recorded at fair value as free-standing derivative assets in other invested assets, with the impact of changes in the options’ fair value recorded in net realized investment gains (losses). The Company recognized pre-tax gains (losses) on these options of $0.8, $(2.9) and $(2.3) for the years ended December 31, 2009, 2008 and 2007, respectively.
The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest-level input that is significant to the fair value measurement. The Company’s financial assets recorded at fair value on the consolidated balance sheets are categorized as follows:
Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 - Instruments whose significant value drivers are unobservable. This comprises financial instruments for which fair value is estimated based on industry-standard pricing methodologies and internally developed models utilizing significant inputs not based on or corroborated by readily available market information. In limited circumstances, this category may also utilize non-binding broker quotes. This category primarily consists of certain less liquid fixed maturities, including corporate private placement securities, investments in private equity and hedge funds, and trading securities where the Company cannot corroborate the significant valuation inputs with market observable data.
As of December 31, 2009 and 2008, this amount included investments in private equity and hedge funds.
and back-testing of selected sales activity to determine whether there are any significant differences between the market price used to value the security prior to sale and the actual sales prices.
In situations where the Company is unable to obtain sufficient market-observable information upon which to estimate the fair value of a particular security, fair values are determined using internal pricing models that typically utilize significant, unobservable market inputs or inputs that are difficult to corroborate with observable market data. When there is not sufficient observable market information and the security is priced using internal pricing models, which is generally the case for private placement securities and other securities the pricing services are unable to price, it is considered a Level 3 measurement.
term of the partnership or fund, which range from five to twelve years. As such, the Company classifies these securities as Level 3 measurements.
The following table presents additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable inputs (Level 3) to determine fair value between January 1, 2009 and December 31, 2009:
Realized and unrealized gains and losses for investments in limited partnerships are included in net investment income. All other realized and unrealized gains and losses are included in net realized investment gains (losses).
Other is comprised of transactions such as pay downs, calls, amortization, and redemptions.
The fair values of the Company’s mortgage loans are determined by discounting the projected future cash flows using the current rate at which the loans would be made to borrowers with similar credit ratings and for the same maturities.
Investments in limited partnerships are comprised of private equity and hedge funds and affordable housing projects and state tax credit funds. Investments in limited partnerships associated with private equity and hedge funds are carried at fair value based on the NAV. Investments in limited partnerships associated with affordable housing projects and state tax credit funds are carried at amortized cost. Fair value is estimated based on the discounted cash flows over the remaining life of the tax credits.
The fair values of the Company’s notes payable are based on quoted prices for similar instruments. The fair value measurement assumes that liabilities are transferred to a market participant of equal credit standing and without consideration for any optional redemption feature.
The fair value of securities lending collateral is the cash and non-cash collateral received by the custodian and held on the Company’s behalf, based on quoted prices for similar instruments. The carrying amount of securities lending payable approximates fair value.
For the individual life business, the Company has reinsurance agreements that limit the maximum claim on a single individual to $0.5. The reinsurance agreements vary by product and policy issue year. Most of the reinsurance recoverable relates to future policy benefits and is covered by coinsurance agreements where the reinsurer reimburses the Company based on a percentage, which ranges from 50% to 85%, as specified in the reinsurance contracts.
The following table provides a reconciliation of the beginning and ending balance for deferred sales inducements, which are included in other assets:
The Company uses estimates in determining its liability for policy and contract claims. These estimates are based on historical claim payment patterns and expected loss ratios to provide for the inherent variability in claim patterns and severity. For the year ended December 31, 2009, the change in prior year incurred claims was primarily due to favorable changes in liability estimates for group medical stop-loss claims offset by higher than expected paid claims for individual life. For the year ended December 31, 2008, the change in prior year incurred claims was primarily due to higher than expected paid claims and unfavorable changes in liability estimates, primarily in the Group segment. For the year ended December 31, 2007, the change in prior year incurred claims was primarily due to favorable changes in liability estimates related to group medical stop-loss claims. This was partially offset by higher-than-expected claims experience related to individual life insurance.
On March 30, 2006, the Company issued $300.0 of 6.125% senior notes due on April 1, 2016, which were issued at a discount yielding $298.7. Proceeds from the senior notes were used to pay down the outstanding principal on a revolving line of credit. Interest on the senior notes is payable semi-annually in arrears, beginning on October 2, 2006. The effective interest rate on the senior notes is 6.11%.
On August 16, 2007, the Company entered into a $200.0 senior unsecured revolving credit agreement with a syndicate of lending institutions led by Bank of America, N.A. The credit facility matures on August 16,
Under the terms of the credit agreement, the Company is required to maintain certain financial ratios. In particular, each of the Company’s material insurance subsidiaries must maintain a risk-based capital ratio of at least 200%, measured at the end of each year, and the Company’s debt-to-capitalization ratio, excluding accumulated other comprehensive loss, may not exceed 37.5%, measured at the end of each quarter. In addition, the Company has agreed to other covenants restricting the ability of its subsidiaries to incur additional indebtedness, its ability to create liens, and its ability to change its fiscal year and to enter into new lines of business, as well as other customary affirmative covenants.
On February 12, 2009, Bank of America, N.A. issued a notice of default to one of the lending institutions in the syndicate with a commitment of $20.0, effectively limiting the Company’s ability to borrow under this facility to $180.0. On October 7, 2009, the defaulted lending institution assigned its interest to another lending institution, effectively restoring capacity in the facility to $200.0.
The Company files income tax returns in the U.S. federal and various state jurisdictions. The Company’s federal income tax returns have been examined and closing agreements have been executed with the Internal Revenue Service, or the statute of limitations has expired for all tax periods through December 31, 2003. The Internal Revenue Service is in the process of auditing the Company’s life insurance and non-life insurance company returns for the tax year period July 31, 2004, filed in consolidation with the Company’s former parent, Safeco Corporation. To date, no significant issues or proposed adjustments have been raised by the examiners. The Internal Revenue Service has also completed an audit of the Company’s life insurance company returns for the years ended December 31, 2004 and 2005. The non-life insurance company tax returns are currently not subject to an Internal Revenue Service audit, and the statute of limitations has expired for the tax years ended December 31, 2004 and 2005. The Company is not currently subject to any state income tax examinations.
Net of taxes of $599.5, $(615.3) and $3.7 for the years ended December 31, 2009, 2008 and 2007, respectively.
Net of taxes of $13.4, $55.5 and $(7.3) for the years ended December 31, 2009, 2008 and 2007, respectively. For the year ended December 31, 2009, $30.5 (net of taxes of $16.4) of the reclassification adjustment is related to losses previously classified as other-than-temporary impairments not related to credit losses.
Net of taxes of $(44.2), $10.0, and $1.1 for the years ended December 31, 2009, 2008 and 2007, respectively.
Net of taxes of $(20.2) for the year ended December 31, 2009.
Net of taxes of $0.0, $0.0, and $(2.6) for the years ended December 31, 2009, 2008, and 2007, respectively.
At December 31, 2009, the Company was invested in 13 limited partnership interests related to affordable housing projects and state tax credit funds, two of which were entered into in 2009. The Company unconditionally committed to provide capital contributions totaling approximately $117.1, of which the remaining $38.9 is expected to be contributed over a period of three years. These investments are accounted for under the equity method and are recorded at amortized cost in investments in limited partnerships, with the present value of unfunded contributions recorded in other liabilities.
Capital contributions of $78.2 were paid as of December 31, 2009, with the remaining expected cash capital contributions as follows:
The Company has office space, commercial real estate, and certain equipment under leases that expire at various dates through 2015. The Company accounts for these leases as operating leases. Certain leases include renewal options.
The Company had no other material commitments or contingencies at December 31, 2009 and 2008.
The Company has a performance share plan (the “Performance Share Plan”) that provides incentives to selected executives based on the long-term success of the Company. Awards under the Performance Share Plan are typically made in the form of performance shares with a three-year award period. The value of each performance share is determined at the discretion of the Company’s Board of Directors, based on achievement of a specified growth target, and is paid in cash. The expense recorded for grants related to the Performance Share Plan was $8.3, $6.0 and $9.4 for the years ended December 31, 2009, 2008, and 2007, respectively.
market value of $1.1 and a 28-month vesting period. As of December 31, 2009, no shares have been issued under the ESPP.
Life and health insurance companies are subject to certain risk-based capital requirements as specified by the NAIC. Under those requirements, the amount of capital and surplus maintained by a life and health insurance company is to be determined based on various risk factors related to it. At December 31, 2009 and 2008, Symetra Life Insurance Company and its subsidiaries met the risk-based capital requirements.
The Company entered into an Investment Management Agreement on March 14, 2004, with White Mountains Advisors, LLC (WMA), a subsidiary of White Mountains Investment Group, Ltd. This agreement,
The Company offers a broad range of products and services that include retirement, life insurance, group health and employee benefits products. These operations are managed separately as five reportable segments based on product groupings: Group, Retirement Services, Income Annuities, Individual and Other.
When evaluating segment pre-tax adjusted operating income (loss) in the Retirement Services’ segment, management includes the net investment gains (losses) from options related to an FIA hedging program. This program consists of buying S&P 500 Index call options. The Company uses index options to hedge the equity return component of FIA products. These options do not qualify as hedge instruments or for hedge accounting treatment. The net gains (losses) from the options are recorded in net realized investment gains (losses). Since the interest incurred on the Company’s FIA products is included as a component of interest credited, it is more meaningful to evaluate results inclusive of the results of the hedge program.
Retirement Services. Retirement Services offers fixed and variable deferred annuities, including tax-sheltered annuities, IRAs and group annuities, to qualified retirement plans, including Section 401(k) and 457 plans.
Income Annuities. Income Annuities offers SPIAs for customers seeking a reliable source of retirement income and structured settlement annuities to fund third party personal injury settlements.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies (see Note 2).
The Company allocates capital and related investment income to each segment using a risk-based capital formula.