We lease our headquarters in Bellevue, Washington, which consists of 221,000 square feet in the Symetra Financial Center building and 72,000 square feet in the Key Center building. Leases for both facilities expire in 2015 with multiple options to renew. Our headquarters in Bellevue serves as the primary location for operations of all of our business segments. In addition to our headquarters, we lease 18 other properties throughout the U.S. which comprise a total of 66,000 square feet.
You should read the following discussion in conjunction with the audited consolidated financial statements and the accompanying notes included in this report, as well as the discussion under Item 6 - “Selected Financial Data.” This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in or implied by any of the forward-looking statements as a result of various factors, including but not limited to those listed under “Forward-Looking Statements” and Item 1A - “Risk Factors.” Our fiscal year ends on December 31 of each calendar year.
We are a financial services company in the life insurance industry focused on profitable growth in selected group health, retirement, life insurance and employee benefits markets. Our operations date back to 1957 and many of our agency and distribution relationships have been in place for decades. We are headquartered in Bellevue, Washington and employ approximately 1,100 people in 16 offices across the United States, serving approximately 1.8 million customers.
Individual. We offer a wide array of term and universal life insurance as well as bank-owned life insurance, or BOLI.
Other. This segment consists of unallocated corporate income, composed primarily of investment income on unallocated surplus, returns from our investments in limited partnerships unallocated corporate expenses, interest expense on debt, tax credits from our tax preferred affordable housing investments, the results of small, non-insurance businesses that are managed outside of our operating segments, and inter-segment elimination entries.
During 2009, the capital and credit markets showed signs of improvement following a period of extreme volatility and disruption that affected equity market returns, interest rates, liquidity, access to capital and the cost of capital. We expect that a challenging business climate will persist for the foreseeable future as the timing, magnitude and duration of an economic recovery still remain uncertain. Tight liquidity in the credit markets in 2008 and the first half of 2009 resulted in us holding new cash inflows from sales in cash and cash equivalents longer than anticipated as it was difficult to invest in quality, higher income earning assets. Yields on cash and cash equivalents are lower than our historical yields and our investment income for the year has been less than expected, especially in our Retirement Services segment. Although the credit markets improved in the second half of 2009 we experienced high demand for high quality investments making it challenging to get cash invested. We expect this trend to continue and could cause us to carry higher cash balances than in normal market conditions.
We believe the economic environment during 2008 and 2009 also created opportunities for us. During this time period we concentrated on expanding the product lineups of our existing distribution partners and developing new distribution relationships. For example, we have seen significant increases in sales of our fixed deferred annuity product and SPIA products as consumers turned to investment products that provide fixed returns.
any reduction or elimination of dividends or nonpayment of scheduled interest payments; and
Based on the analysis, we make a judgment as to whether the loss is other-than-temporary. The amount of the loss recorded in our consolidated statements of income is determined based on the accounting guidance in effect during the period of the other-than-temporary determination. We adopted new accounting guidance for impairments of our fixed maturities effective January 1, 2009. See Note 2 to the accompanying audited consolidated financial statements.
We carry certain assets on our consolidated balance sheets at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an “exit price”). The accounting guidance establishes a fair value hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value hierarchy prioritizes fair value measurements into three levels based on the nature of the inputs. 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. For further discussion of the levels of the fair value hierarchy, see Note 7 to the accompanying audited consolidated financial statements.
Our pricing services routinely review the inputs for the securities they cover, including broker quotes, executed trades and credit information, as applicable. We perform analyses on the prices received from our pricing services to ensure that the prices represent a reasonable estimate of fair value. We gain assurance on the overall reasonableness and consistent application of input assumption valuation methodologies, as well as compliance with accounting standards for fair value determination through various processes, including: evaluation of pricing methodologies and inputs; analytical reviews of changes in certain prices between reporting periods; 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 price. Through our analysis, we have engaged our pricing services in discussion regarding the valuation of a security; however, it has not been our practice to adjust their prices.
As of December 31, 2009 and 2008, we had, $901.3, or 4.8%, and $632.2, or 4.0%, respectively, of our fixed maturities portfolio, was invested in private placement securities, which are not actively traded. The fair values of these assets are determined using a discounted cash flow approach. The valuation model requires the use of inputs that are not market-observable and involves significant judgment. The discount rate is based on the current Treasury curve adjusted for credit and liquidity factors. The appropriate illiquidity adjustment is estimated based on illiquidity spreads observed in transactions involving other similar securities. We consider this approach appropriate for this asset class, which comprises 76.2% of our Level 3 fixed maturities.
We use our judgment in assigning our fixed maturities to a level within the fair value hierarchy by determining whether the market for a given security is active and if significant pricing inputs are observable. We determine the existence of an active market by assessing whether transactions occur with sufficient frequency and volume to provide reliable pricing information, as discussed below.
$263.5 of residential mortgage-backed securities backed by reverse mortgages, which is a new asset class for which we did not have significant observable inputs; the purchase of $167.1 of private placement securities; and an increase in the fair value of private placement securities of $118.7 due to the tightening of credit spreads during 2009. As of December 31, 2009 and 2008, we had net unrealized gains (losses) of $25.2 and $(103.8), respectively, on our Level 3 fixed maturities. For the year ended December 31, 2009 and 2008, we reported net realized losses of $5.6 and $12.1, respectively, on our Level 3 fixed maturities.
We believe that the amount we may realize upon settlement or maturity of our fixed maturities may differ significantly from the estimated fair value of the security, as we do not actively trade our fixed maturity portfolio. Our investment management objective is to support the expected cash flows of our liabilities and to produce stable returns over the long term. To meet this objective, we typically hold our fixed maturities until maturity or until market conditions are favorable for the sale of such investments.
We estimate that a 1% increase in interest rates would cause the fair value of our fixed maturity portfolio that is subject to interest rate risk to decline by approximately $1.00 billion and $0.81 billion, based on our securities positions as of December 31, 2009 and 2008, respectively (see
Symetra Financial Corporation is a Delaware corporation that, through its subsidiaries, offers group and individual insurance products and retirement products, including annuities marketed through benefits consultants, financial institutions and independent agents and advisors in all states and the District of Columbia. The Company’s principal products include medical stop-loss insurance, fixed and variable deferred annuities, single premium immediate annuities and individual life insurance. The accompanying financial statements include, on a consolidated basis, the accounts of Symetra Financial Corporation and its subsidiaries, which are collectively referred to as “Symetra Financial” or “the Company.”
The Company has 750,000,000 authorized shares of common stock, $0.01 par value per share, and 10,000,000 authorized shares of preferred stock, $0.01 par value per share. The Company’s Board of Directors has the authority to designate the preferred stock into series and to designate the voting powers, preferences and other rights of the shares of each series without further stockholder approval. The Company also has warrants outstanding as of December 31, 2009, which are recorded in total stockholders’ equity. The warrants are exercisable at any time until August 2, 2014, to acquire 18,975,744 shares of common stock in the aggregate at an exercise price of $11.49 per share.
The most significant estimates include those used to determine the following: valuation of investments; the identification of other-than-temporary impairments (OTTI) of investments; the balance, recoverability and amortization of deferred policy acquisition costs (DAC); the liabilities for funds held under deposit contracts, future policy benefits, and policy and contract claims; and the recoverability of deferred tax assets. The recorded amounts reflect management’s best estimates, though actual results could differ from those estimates. Management believes the amounts provided are appropriate.
Variable product fees are charged to variable annuity and variable life policyholders’ accounts based upon the daily net assets of the policyholders’ account values and are recognized as other revenues when charged. Mortality and expense charges, policy administration charges, and surrender charges are included in other revenues in the consolidated statements of income.
The Company classifies its investments in fixed maturities and certain marketable equity securities as available-for-sale securities and carries them at fair value. Fixed maturities include bonds, mortgage-backed securities and redeemable preferred stock. Marketable equity securities primarily include nonredeemable preferred stock.
Prior to January 1, 2008, these investments were accounted for as available-for-sale securities. On January 1, 2008, the Company adopted new accounting guidance that allowed the Company to elect fair value accounting for its investments in common stock. As a result, the impact of changes in the fair value of the
Company’s trading portfolio is recorded in net realized investment gains (losses) in the consolidated statements of income. The Company reports dividends earned on trading securities in net investment income.
The Company carries mortgage loans at outstanding principal balances, less a valuation allowance. Loan origination fees and expenses are deferred and amortized over the life of the loan. Interest income, including amortization of deferred fees and expenses, is recorded in net investment income.
Investments in limited partnerships as of December 31, 2009, consisted of $85.5 of investments in affordable housing projects and state tax credit funds recorded at amortized cost and $24.7 of investments in private equity and hedge funds recorded at fair value. The impact of changes in the fair value of private equity and hedge funds is recorded in net investment income in the consolidated statements of income. Prior to the adoption of accounting guidance on January 1, 2008, private equity and hedge funds where the Company had a 3% or greater interest were accounted for under the equity method. Income (loss) from those limited
The Company includes a note receivable in its other invested assets, which is a loan to a third party agency. The agency’s equity at risk is not sufficient to finance its activities, and it is therefore considered a VIE. The loan is secured by the assets of the agency, and the majority of the loan amount is personally guaranteed by the agency’s equity holders. The Company is not the primary beneficiary. The maximum exposure to losses is limited to the carrying value of the note receivable, which was $5.5 and $6.5 as of December 31, 2009 and 2008, respectively. This excludes the value of rights to the assets of the agency and personal guarantees provided by the equity holders.
The Company amortizes acquisition costs for deferred and immediate annuity contracts and universal life insurance policies over the lives of the contracts or policies in proportion to the estimated future gross profits of each of these product lines. In this estimation process, the Company makes assumptions as to surrender rates, mortality experience, maintenance expenses, and investment performance. Actual profits can vary from the estimates and can thereby result in increases or decreases to DAC amortization rates. For interest-sensitive life products, the Company regularly evaluates its assumptions and, when necessary, revises the estimated gross profits of these contracts, resulting in adjustments to DAC amortization. When such estimates are revised, they are recorded in current earnings. The Company adjusts the unamortized balance of DAC for the impact on estimated future gross profits as if net unrealized investment gains and losses on securities had been realized as of the balance sheet date. The Company includes the impact of this adjustment, net of tax, in accumulated other comprehensive loss in stockholders’ equity.
The Company conducts regular recoverability analyses for deferred and immediate annuity contract, universal life contract, and traditional life contract DAC asset balances. The Company compares the current DAC asset balances with the estimated present value of future profitability of the underlying business. The DAC asset balances are considered recoverable if the present value of future profits is greater than the current DAC asset balance. As of December 31, 2009 and 2008, all of the DAC asset balances were considered recoverable.
Goodwill is not amortized but is tested for impairment at least annually using a fair value approach, which requires the use of estimates and judgment. No goodwill impairment was recorded for the years ended December 31, 2009, 2008 or 2007.
The Company offers sales inducements on certain deferred annuity contracts. The inducement interest entitles the contractholder to an incremental amount of interest to be credited to the account value over a 12- to 60-month period following the initial deposit, depending on the product. The incremental interest causes the initial credited rate to be higher than the contract’s expected ongoing crediting rates for periods after the inducement. Deferred sales inducements to contractholders are reported as other assets and amortized into interest credited using the same methodology and assumptions used to amortize DAC. Deferred sales inducement balances are subject to recoverability testing at the end of each reporting period to ensure that capitalized amounts do not exceed the present value of anticipated gross profits.
For variable annuity contracts with GMDB, the Company contractually guarantees total deposits, less any partial withdrawals, in the event of death. The Company offers three types of GMDB contracts consisting of return of premium and two versions of ratchet, which are evaluated every fifth and eighth year, respectively. The ratchet reset benefit is equal to the immediately preceding GMDB or is “stepped up” to the account value on the evaluation date, if higher. The Company reinsures nearly all of the GMDB risk on its individual variable annuity contracts. Therefore, the net GMDB liability balance is not material.
The Company computes liabilities for future policy benefits under traditional individual life and group life insurance policies on the level premium method, which uses a level premium assumption to fund reserves. The Company selects the level premiums so that the actuarial present value of future benefits equals the actuarial present value of future premiums. The Company sets the interest, mortality, and persistency
Liabilities for policy and contract claims primarily represent liabilities for claims under group medical coverages and are established on the basis of reported losses (case basis method). The Company also provides for claims incurred but not reported (IBNR), based on expected loss ratios, claims paying completion patterns, and historical experience. The Company reviews estimates for reported but unpaid claims and IBNR quarterly. Any necessary adjustments are reflected in current operating results. If expected loss ratios increase or expected claims paying completion patterns extend, the IBNR claim liability increases.
Following the Codification, the FASB ceased issuance of new guidance in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it issues Accounting Standards Updates (ASUs), which serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.
In September 2009, the FASB issued ASU 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This update amends ASC 820 to permit entities to estimate the fair value of certain investments using the net asset value (NAV) per share as of the measurement date, if the fair value of the investment is not readily determinable. The guidance applies to investments in entities that calculate NAV in accordance with guidance for investment companies and requires increased disclosures for such investments. The Company prospectively adopted this guidance on October 1, 2009, and it did not have a material impact on its audited consolidated financial statements.
ASC 320-10 (formerly FSP SFAS 115-2 and SFAS 124-2) Other-than-Temporary Impairments (OTTI)
In April 2009, the FASB issued FASB Staff Position (FSP) SFAS 115-2 and SFAS 124-2 (ASC 320-10), Recognition and Presentation of Other-than-Temporary Impairments. This guidance amends OTTI guidance for fixed maturities and modifies the OTTI presentation and disclosure requirements for both fixed maturities and equity securities. The FSP replaces the provision that management must positively assert the intent and ability to hold a fixed maturity until recovery in determining impairment, with the assertion that the Company does not intend to sell or it is not more-likely-than-not that the Company will be required to sell a fixed maturity prior to recovery. In addition, if a credit loss exists, it is recognized in earnings, whereas the portion due to other factors is recognized in other comprehensive income (loss). The Company elected to prospectively adopt the guidance effective January 1, 2009, which resulted in an increase of $15.7 (net of taxes of $8.4) to the opening balance of retained earnings with a corresponding decrease to accumulated other comprehensive loss to reclassify the noncredit portion of previously impaired fixed maturities still held as of January 1, 2009, for which the Company did not intend to sell and it was not more likely than not that the Company would be required to sell the security before recovery of its amortized cost.
To determine the cumulative effect of adoption, the Company compared the present value of cash flows expected to be received as of January 1, 2009, to the amortized cost basis of the fixed maturities. The discount rate used to calculate the present value was the rate for each respective fixed maturity in effect before recognizing any OTTI. The cumulative effect adjustment increased the amortized cost of our fixed maturity securities, primarily corporate securities, by $24.1.
SFAS No. 157 (ASC 825-10), Fair Value Measurements defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. On January 1, 2008, the Company elected the partial adoption of SFAS No. 157 under the provisions of FSP FAS 157-2, which allowed an entity to delay the application of SFAS No. 157 until January 1, 2009 for certain non-financial assets and liabilities, including fair value measurements used in the impairment testing of goodwill and eligible non-financial assets and liabilities acquired in a business combination. The Company adopted the guidance for fair value measurements for these non-financial assets and liabilities on January 1, 2009. The adoption did not have a material impact on the Company’s audited consolidated financial statements.
On January 1, 2008, the Company prospectively adopted SFAS No. 159 (ASC 825-10), The Fair Value Option for Financial Assets and Financial Liabilities. The Statement allows companies to make an election, on an individual instrument basis, to report financial assets and liabilities at fair value. The election must be made at the inception of a transaction and may not be reversed. The election may also be made for existing financial assets and liabilities at the time of adoption. The Company elected the fair value option for certain of its investments in common stock, which are presented as trading securities, and its investments in private equity and hedge funds, regardless of ownership percentage, which are presented as investments in limited partnerships. The Company recorded an adjustment to increase retained earnings as of January 1, 2008
ASC 810-10 (formerly SFAS No. 167), Amendments to FASB Interpretation No. 46(R)
In June 2009, the FASB issued SFAS No. 167 (ASC 810-10), Amendments to FASB Interpretation No. 46(R), which provides guidance for determining whether an entity is a VIE, which enterprise, if any has a controlling financial interest in a VIE, and requires additional disclosures about involvement in such entities. SFAS No. 167 changed the guidance for determining the primary beneficiary of a VIE from a quantitative analysis to a primarily qualitative analysis and requires reassessment of this determination at each reporting period. The Company prospectively adopted this guidance on January 1, 2010, and it will not change the Company’s conclusions regarding its VIEs.
The outstanding warrants, exercisable for 18,975,744 common shares, are considered participating securities or potential common stock securities that are included in weighted-average common shares outstanding for purposes of computing basic earnings per share using the two-class method. The warrants are considered participating securities or potential common stock securities because the terms of the agreements entitle the holders to receive any dividends declared on the common stock concurrently with the holders of outstanding shares of common stock, on a one-to-one basis. In periods of net loss, none of the loss is allocated to the outstanding warrants; therefore, the warrants are not included in the basic or diluted earnings per share calculation in such periods.
The following tables summarize the Company’s available-for-sale fixed maturities and marketable equity securities:
At December 31, 2009 and 2008, the Company had $51.8 and $50.5, respectively, of convertible fixed maturities recorded at fair value.
and 5.2% of the Company’s investments in fixed maturities at fair value as of December 31, 2009 and 2008, respectively.
In addition, one security, with a fair value of approximately $0.2 and $0.8 as of December 31, 2009 and 2008, respectively, was classified as subprime. This subprime security had an NAIC rating of 1 and 4 and an S&P equivalent credit rating of AAA, based on the highest credit agency rating, as of December 31, 2009 and 2008, respectively.
The carrying value of certain securities and cash on deposit with state regulatory authorities was $10.1 and $10.6 at December 31, 2009 and 2008, respectively.
As of December 31, 2009, financial institutions, U.S. federal government, and industrials industries represented 21.7%, 18.6% and 11.6%, respectively, of the Company’s investments in fixed maturity and marketable equity securities at fair value.
As of December 31, 2008, financial institutions, U.S. federal government, and utilities industries represented 24.8%, 20.6% and 11.1%, respectively, of the Company’s investments in fixed maturity and marketable equity securities at fair value.
The fair value of investments in fixed maturities that have not produced income for the last twelve months was $65.6 and $6.5 at December 31, 2009 and 2008, respectively. As of December 31, 2009, one of the Company’s mortgage loans was classified as non-performing. All of the Company’s mortgage loans produced income during 2008 and 2007.
The following table provides additional detail of net realized investment gains (losses):
This allowance relates to outstanding mortgage loan investments of $1,209.9 and $993.7 at December 31, 2009 and 2008, respectively. One loan was classified as non-performing as of December 31, 2009, and a specific reserve of $2.2 was established. All of the Company’s mortgage loan investments were in good standing as of December 31, 2008 and 2007.
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 expected future cash flows indicate a credit loss exists.
Securities for which cost or amortized cost exceeds fair value are considered underwater. The Company’s review of its underwater fixed maturities and available-for-sale marketable equity securities for OTTI includes an analysis of the gross unrealized losses by three categories of securities: (i) securities where the estimated fair value has declined and remained below cost or amortized cost by less than 20%, (ii) securities where the estimated fair value has declined and remained below cost or amortized cost by 20% or more for less than six months and (iii) securities where the estimated fair value has declined and remained below cost or amortized cost by 20% or more for six months or longer. While all securities are monitored for impairment, the Company’s experience indicates that the first category does not represent a significant risk of impairment and, often, fair values recover over time as the factors that caused the declines improve. In times of economic turbulence, such as those of 2008 and 2009, securities in category (ii) represent a significant risk. Securities in category (iii) are always considered to represent a significant risk. The Company performs a qualitative analysis by issuer to identify securities in category (i) that should be further evaluated for OTTI.
Any reduction or elimination of dividends or nonpayment of scheduled interest payments;
For fixed maturities, the Company’s intent to sell the security or whether it is more likely than not the Company will be required to sell the security prior to recovery of its amortized cost, considering any regulatory developments and the Company’s liquidity needs.
In periods subsequent to the recognition of an OTTI, the security is accounted for as if it had been purchased on the measurement date of the OTTI, with a par value equal to the expected principal to be recovered. Therefore, for fixed maturity securities, the revised discount or reduced premium is reflected in net investment income over the contractual term of the investment in a manner that produces a constant effective yield.
To determine the recovery value of a corporate security, the Company performs an analysis related to the underlying issuer including, but not limited to, the following:
To determine the recovery value of a mortgage-backed security, including residential, commercial and other asset-backed securities, the Company performs an analysis related to the underlying issuer including, but not limited to, the following:
Discounted cash flow analysis based on the current and future cash flows the Company expects to recover;
Susceptibility to reinvestment risk in cases where market yields are lower than the book yield earned;
The following table presents the severity and duration of the gross unrealized losses on the Company’s underwater available-for-sale securities:
As of December 31, 2009, $136.9, or 59.7%, of the unrealized losses on fixed maturities in an unrealized loss position by more than 20% for a period of six months or more related to investment-grade securities. Unrealized losses on investment-grade securities are principally related to changes in interest rates or changes in the issuer and the sector-related credit spreads since the securities were acquired.
The Company reviewed its investments in fixed maturities with unrealized losses at the end of 2009 in accordance with its impairment policy. The Company’s evaluation determined, after the recognition of other-than-temporary impairments, that the remaining declines in fair value were temporary, as it did not intend to sell these fixed maturities and it was not more likely than not that it will be required to sell the fixed maturities before recovery of amortized cost. This conclusion is supported by the Company’s cash flow modeling and expected continuation of contractually required principal and interest payments.
As of December 31, 2009, the Company did not intend to sell its underwater available-for-sale marketable equity securities, primarily consisting of non-redeemable preferred stock, and it had the intent and ability to hold them until recovery. Therefore, the Company concluded that the declines in fair value of these securities were temporary.
Prior to January 1, 2009, when a loss was determined to be other-than-temporary, the Company 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. The fair value of the other-than-temporarily impaired investment became its new cost basis. The Company also recorded an impairment charge if it 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. As of December 31, 2008, the Company reviewed all of its investments with unrealized losses in accordance with the impairment policy and accounting guidance in effect at that time. The Company’s evaluation determined, after the recognition of other than temporary impairments, that the remaining declines in fair value were temporary and it had the intent and ability to hold them to recovery.
Derivatives are instruments whose values are derived from underlying instruments, indices or rates; have a notional amount; and can be net settled. This may include derivatives that are “embedded” in financial instruments or in certain existing assets or liabilities. The Company uses derivative financial instruments, including options, as a means of hedging exposure to equity price changes. In 2006 and 2007, the Company used interest rate swaps to hedge exposure to interest rate risk on anticipated transactions related to the Company’s notes payable.
The Company discontinued its securities lending activities in 2009 and, as of December 31, 2009, had no securities on loan and no securities lending collateral under its control. As of December 31, 2008, the securities loaned under the program had an amortized cost of $117.1 and a fair value of $102.8. Also as of December 31, 2008, the Company was liable for securities lending collateral under its control of $105.7. The fair value of that invested collateral was less than the amounts required to be returned to the counterparty upon return of the loaned securities by $2.3.
The Company determines the fair value of its financial instruments based on the fair value hierarchy, which requires an entity to maximize its use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Level 1 - Unadjusted quoted prices in active markets for identical instruments. Primarily consists of financial instruments whose value is based on quoted market prices, such as exchange-traded marketable equity securities, and actively traded mutual fund investments.
The vast majority of the Company’s fixed maturities have been classified as Level 2 measurements. To make this assessment, the Company determines whether the market for a security is active and if significant pricing inputs are observable. The Company predominantly utilizes third party independent pricing services to assist management in determining the fair value of its fixed maturity securities. As of December 31, 2009 and 2008, pricing services provided prices for 93.6% and 95.1% of the Company’s fixed maturities, respectively. Prices received from the pricing services are not adjusted and multiple prices for these securities are not obtained. The pricing services provide prices where observable inputs are available. The Company’s pricing services utilize 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 maturities do not trade on a daily basis, evaluated pricing applications apply available information through processes, such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing, to prepare evaluations. In addition, the pricing services use models and processes to develop prepayment and interest rate scenarios. These models take into account market convention. If sufficient objectively verifiable information about a security’s valuation is not available, the pricing services will not provide a valuation for the security until it is able to obtain such information.
The Company performs analysis on the prices received from the pricing services to ensure that the prices represent a reasonable estimate of fair value and gains assurance on the overall reasonableness and consistent application of input assumptions, valuation methodologies and compliance with accounting standards for fair value determination. This analysis is performed through various processes including evaluation of pricing methodologies and inputs, analytical reviews of certain prices between reporting periods,
As of December 31, 2009 and 2008, the Company had $901.3, or 4.8%, and $632.2, or 4.0%, of its fixed maturities invested in private placement securities, respectively. The valuation of certain private placement securities requires significant judgment by management due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets. The fair values of these assets are determined using a discounted cash flow approach. The valuation model requires the use of inputs that are not market-observable and involve significant judgment. The discount rate is based on the current Treasury curve adjusted for credit and liquidity factors. The appropriate illiquidity adjustment is estimated based on illiquidity spreads observed in transactions involving other similar securities. The use of significant unobservable inputs in determining the fair value of the Company’s investments in private placement securities resulted in the classification of $819.8, or 91.0%, and $583.2, or 92.2%, as Level 3 measurements, as of December 31, 2009 and 2008, respectively.
Marketable equity securities are primarily investments in common stock and certain nonredeemable preferred stocks and mutual fund assets, which consist of investments in publicly traded companies and actively traded mutual fund investments. The fair values of the Company’s marketable equity securities are based on quoted market prices in active markets for identical assets and are primarily classified as Level 1.
On January 1, 2008, the Company elected the fair value option for the majority of its marketable equity securities, comprised mostly of investments in common stock. Certain nonredeemable preferred stocks continue to be reported as available-for-sale. Subsequent to making the election, investment gains and losses on trading securities are reported in the consolidated statements of income as net realized investment gains (losses). The Company believes this results in reporting its investment results for these securities on a basis that is more consistent with management’s operating principles, as the Company considers unrealized gains (losses) on its common stock when evaluating net income. Prior to the election, unrealized investment gains and losses on available-for-sale common stock was reported net, after-tax, as a component of other comprehensive income (loss).
Investments in limited partnerships recorded at fair value are investments in private equity and hedge funds. On January 1, 2008, the Company elected the fair value option for its investments in private equity and hedge funds, regardless of ownership percentage, to standardize the accounting and reporting for these investments. Investments in private equity and hedge funds with less than three percent ownership were previously classified and accounted for as available-for-sale securities. Upon making the election, $21.1 in investments in limited partnerships (with less than three percent ownership) that was previously reported as available-for-sale marketable equity securities were reclassified to investments in limited partnerships. For the years ended December 31, 2009 and 2008, changes in the fair value of private equity and hedge funds were $6.1 and $(30.1), respectively. These changes in fair value were reported in net investment income.
The fair value for the Company’s investments in private equity and hedge funds is based upon the Company’s proportionate interest in the underlying partnership or fund’s net asset value (NAV), which is deemed to approximate fair value. The Company is generally unable to liquidate these investments during the
Separate account assets are primarily invested in mutual funds, which are included in Level 1.
Other invested assets recorded at fair value primarily consist of life settlement investments, S&P 500 Index options, and short term investments. The carrying value of these assets approximates fair value.
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, 2008 and December 31, 2008:
The following table summarizes the carrying or reported values and corresponding fair values of financial instruments subject to fair value disclosure requirements:
The Company reports funds held under deposit contracts related to investment-type contracts at carrying value and estimates the fair values of these contracts using an income approach based on the present value of the discounted cash flows. Cash flows are projected using best estimates for lapses, mortality and expenses, and discounted at a risk-free rate plus a nonperformance risk spread.
The Company evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. The Company is not aware of any of its major reinsurers currently experiencing material financial difficulties. The Company analyzes reinsurance recoverables according to the credit ratings
The following table sets forth net life insurance in force as of December 31:
Ceded reinsurance reduced policyholder benefits and claims by $54.1, $54.3 and $51.4 for the years ended December 31, 2009, 2008 and 2007, respectively.
On October 10, 2007, the Company issued $150.0 aggregate principal amount CENts with a scheduled maturity date of October 15, 2037, subject to certain limitations, with a final maturity date of October 15, 2067. The Company issued the CENts at a discount yielding $149.8. For the initial 10-year period following the original issuance date, to but not including October 15, 2017, the CENts carry a fixed interest rate of 8.300% payable semi-annually. From October 15, 2017, until the final maturity date of October 15, 2067, interest on the CENts will accrue at a variable annual rate equal to the three-month LIBOR plus 4.177%, payable quarterly. The Company applied the net proceeds from the issuance to pay a cash dividend of $200.0 to its stockholders on October 19, 2007. The effective interest rate on the CENts is 9.39%.
2012. The revolving credit facility is available to provide support for working capital, capital expenditures, and other general corporate purposes, including permitted acquisitions, issuance of letters of credits, refinancing and payment of fees in connection with this facility.
To be eligible for borrowing funds under this facility, the representations and warranties that the Company made in the credit agreement must continue to be true in all material respects, and the Company must not be in default under the facility, including failure to comply with the covenants described above.
As of December 31, 2009 and 2008, and during the years ended December 31, 2009, 2008, and 2007, the Company had no borrowings outstanding under this facility and was in compliance with all covenants.
The tax effects of temporary differences that gave rise to the deferred income tax assets and deferred income tax liabilities were as follows:
The Company’s deferred tax asset decreased significantly from December 31, 2008 to December 31, 2009, due almost entirely to the decrease in unrealized losses on investment securities. The large unrealized losses as of December 31, 2008 were attributable to the volatility and disruption within the capital markets. The Company reviews its deferred tax assets quarterly to determine whether there is a need for a valuation allowance. For December 31, 2008, this included a review of the Company’s invested assets supporting the liquidity requirements of its insurance and investment product liabilities to assess future reversals and utilization. The Company’s analyses indicated that it would be able to fully realize the deferred tax assets as of December 31, 2009 and 2008, and thus no valuation allowances were necessary.
The Company includes penalties and interest accrued related to unrecognized tax benefits in the calculation of income tax expense. For the years ended December 31, 2009, 2008, and 2007, amounts recognized for interest and penalties in the consolidated statements of income were not material.
Under state insolvency and guaranty laws, insurers licensed to do business in a state can be assessed or required to contribute to state guaranty funds to cover policyholder losses resulting from insurer insolvencies. Liabilities for guaranty funds are not discounted or recorded net of premium taxes and are included in other liabilities in the consolidated balance sheets. At December 31, 2009, the Company had liabilities of $11.5 for estimated guaranty fund assessments. The Company has a related asset for premium tax offsets of $8.0. As of December 31, 2008, the Company had liabilities for estimated guaranty fund assessments of $7.3, with a related asset for premium tax offsets of $5.8. Premium tax offsets are available for a period of five to twenty years.
Because of the nature of the business, the Company is subject to legal actions filed or threatened in the ordinary course of its business operations. The Company does not expect that any such litigation, pending or threatened, as of December 31, 2009, will have a material adverse effect on its consolidated financial condition, future operating results or liquidity.
Future minimum lease commitments, including cost escalation clauses, for the next five years and thereafter are as follows:
The amount of rent expense was $7.9, $8.0, and $8.1 for the years ended December 31, 2009, 2008 and 2007, respectively.
At December 31, 2009 and 2008, unfunded mortgage loan commitments were $4.5 and $9.0, respectively.
The Company sponsors a defined contribution plan for all eligible employees that includes a matching contribution of 100% of a participant’s contributions up to 6% of eligible compensation. Defined contribution plan expense was $4.5, $4.5 and $4.2 for the years ended December 31, 2009, 2008, and 2007, respectively.
In October 2007, the Company’s Board of Directors adopted, and the Company’s stockholders approved, the Equity Plan and the Employee Stock Purchase Plan (or ESPP) and reserved 7,830,000 and 870,000 shares of common stock, respectively, for issuance under these plans. In August 2009, the Company’s Board of Directors granted 83,160 shares of restricted stock under the Equity Plan with an aggregate fair
The Company’s insurance subsidiaries are restricted by state regulations as to the aggregate amount of dividends they may pay in any consecutive 12-month period without regulatory approval. Accordingly, based on statutory limits as of December 31, 2008, the Company was eligible to receive dividends from its insurance subsidiaries during 2009 without obtaining regulatory approval as long as the aggregate dividends paid over the twelve months preceding any dividend payment date in 2009 did not exceed $117.9. The Company received no dividends from its insurance subsidiaries during 2009. Based on state regulations as of December 31, 2009, the Company is eligible to receive dividends from its insurance subsidiaries during 2010 without obtaining regulatory approval as long as the aggregate dividends paid over the 12 months preceding any dividend payment date in 2010 do not exceed $141.5.
The statutory net income (loss) for the Company’s insurance subsidiaries is as follows:
Statutory capital and surplus for Symetra Life Insurance Company was $1,415.4 and $1,179.0 for the years ended December 31, 2009 and 2008, respectively.
as amended, provides for investment advisory services related to the Company’s invested assets and portfolio management services. Expenses amounted to $14.0, $14.6, and $15.3 for the years ended December 31, 2009, 2008 and 2007, respectively. As of both December 31, 2009 and 2008, amounts due to WMA were $3.5.
The primary segment profitability measure that management uses is segment pre-tax adjusted operating income (loss), which is calculated by adjusting income (loss) before federal income taxes to exclude net realized investment gains (losses), and for the Retirement Services’ segment to include the net investment gains (losses) on FIA options.
Individual. Individual offers a wide array of term, universal and variable life insurance products, as well as BOLI.
Other. This segment consists of unallocated corporate income, composed primarily of investment income on unallocated surplus, unallocated corporate expenses, interest expense on debt, the results of small, noninsurance businesses that are managed outside of the operating segments and intersegment elimination entries. In addition, beginning in the third quarter of 2008, the Company includes its net gains (losses) related to investments in hedge and private equity funds in this segment, reported through net investment income.
The following tables present selected financial information by segment and reconciles segment pre-tax adjusted operating income (loss) to amounts reported in the consolidated statements of income.
Quarterly earnings per share amounts may not add to the full year amounts due to share weighting, rounding, and, in periods of quarterly net losses, the anti-dilutive effect of the outstanding warrants and restricted shares.