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 divisions. In addition to our headquarters, we lease 16 other properties throughout the U.S. which comprise a total of 59,000 square feet.
We adopted new OTTI accounting guidance effective January 1, 2009, which changed the recognition and measurement of OTTI for fixed maturities. See Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates-Other-Than-Temporary Impairments (OTTI).”
Basic and diluted net income per common share includes all participating securities, such as warrants and unvested restricted shares, based on the application of the two-class method. Diluted net income per common share also includes the dilutive impact of non-participating securities, to the extent dilutive, such as stock options and shares estimated to be issued under the employee stock purchase plan, based on application of the treasury stock method.
For a definition and discussion of this non-GAAP measure and other metrics used in our analysis, see Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Use of non-GAAP Financial Measures.”
Book value per common share is calculated based on stockholders’ equity divided by outstanding common shares and shares subject to outstanding warrants totaling 137.191, as of December 31, 2010, 111.705, as of December 31, 2009 and 111.622 as of December 31, 2008, 2007 and 2006.
Our first day as an independent company was August 2, 2004, when Symetra was formed by acquiring a group of life insurance and investment companies from Safeco Corporation (which we refer to as the “Acquisition”).
Management considers certain non-GAAP financial measures, including adjusted operating income, adjusted operating income per common share, adjusted book value, adjusted book value per common share, adjusted book value per common share, as converted, operating ROAE, and debt to capital ratio, excluding AOCI 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, see “- Use of non-GAAP Financial Measures.”
We manage our business through three divisions composed of four operating segments and one non-operating segment:
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, or MGU, services.
Life. We offer a wide array of individual products such as term and universal life insurance, including single premium 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, unallocated corporate expenses, interest expense on debt, earnings related to our limited partnership interests, the results of small, non-insurance businesses that are managed outside of our divisions, and inter-segment elimination entries.
We are entering 2011 with positive momentum and an energized executive team that is focused on growing and diversifying the Company. We are diversifying our product offerings to profitably grow in a wider variety of economic environments. The work to build and launch new products will continue well into 2012. Meanwhile, we continue to face economic uncertainty and we recognize that this environment may slow our deployment of capital.
The economic recovery was slow during 2010 and we expect the recovery to continue at a fairly slow pace in 2011. Although interest rates increased at the end of 2010 from the recent historic low levels, low interest rate conditions and tight credit spreads continue to be a challenge for our asset-based businesses and make it difficult for us to generate attractive product returns. To mitigate the risk of unfavorable consequences in this environment, such as spread compression or instances where our returns on investments are not enough to support the interest rate guarantees on the products we sell, we remain proactive in our investment and product strategies, interest crediting strategies and overall asset-liability management practices.
The lack of supply of investments with attractive risk-return profiles and yields continues to be a challenge as we try to invest cash. To improve our asset yield in this environment, we have been and plan to continue increasing our investments in commercial mortgage loans. In addition, we also plan to continue managing our cash levels through temporary investments in U.S. Treasury securities until more permanent investments with attractive risk-return profiles can be acquired.
During 2011 we will focus on executing our strategic growth initiatives. We expect to organically deploy our capital as we grow through sales of new and refreshed products. In addition, we will look for acquisition opportunities that fit our strategies and help us drive improved earnings. 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.
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements. The accounting policies discussed in this section are those that we consider to be particularly critical to an understanding of our consolidated financial statements because their application places the most significant demands on our ability to judge the effect of inherently uncertain matters on our financial results. In applying the Company’s accounting policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company’s businesses and operations. For all of these policies, we caution that future events rarely develop exactly as forecast, and our management’s best estimates may require adjustment.
One of the significant estimates related to available-for-sale securities is the evaluation of investments for OTTI. Revised accounting guidance related to OTTI was adopted effective January 1, 2009. We record OTTI on fixed maturity securities which are in an unrealized loss position when one of the following occurs:
we do not expect to recover the entire amortized cost basis of the security, based on the estimate of cash flows expected to be collected; or
how long and by how much the fair value has been below cost or amortized cost;
the financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations or earnings potential, or compliance with terms and covenants of the security;
any reduction or elimination of dividends or nonpayment of scheduled interest payments;
For securities which are considered to have OTTI, it is required that the 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), or OCI. For securities we intend to sell or for which it is more likely than not that we will be required to sell 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.
measurement. For further discussion of the levels of the fair value hierarchy, see Note 7 to the Consolidated Financial Statements.
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, 2010 and 2009, our pricing services priced 95.6% and 93.6%, 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.
When we have significant observable market inputs, which is 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 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 $926.9 and $1,183.5 as of December 31, 2010 and 2009, respectively. The decrease is primarily due to the transfer out of $250.5 in reverse mortgages that were classified as Level 3 to Level 2, but are now priced by our pricing services. As of December 31, 2010 and 2009, we had net unrealized gains of $57.9 and $25.2, respectively, on our Level 3 fixed maturities. For the year ended December 31, 2010 and 2009, we reported net realized losses of $5.0 and $5.6, 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 current 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 defer as assets certain costs, including commissions, distribution costs and other underwriting costs, that vary with, and are primarily related to, the production of new and renewal business. We limit our
deferral to acquisition expenses contained in our product pricing assumptions. The following table summarizes our DAC asset balances by segment:
In our Group segment, the DAC amortization period for medical stop-loss policies is one year as these policies are one year policies and can be renewed or repriced on an annual basis.
Deferred Annuities. The DAC amortization period is typically 20 years for deferred annuities, although most of the DAC amortization occurs within the first 10 years because the EGPs are highest during such period. It is common for deferred annuity policies to lapse after the surrender charge period expires.
the current period, decreases to expected future interest margins and decreases to current or expected equity market returns.
We regularly conduct DAC recoverability analyses, where we compare the current DAC asset balance 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.
We compute 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. We select the level of premiums at issuance so that the actuarial present value of future benefits equals the actuarial present value of future premiums. We set the interest, mortality and persistency assumptions in the year of issue and include provisions for adverse deviations. These liabilities are contingent upon the death of
Liabilities for policy and contract claims primarily represent liabilities for claims under group medical coverages and are established on the basis of reported losses. We also provide for claims incurred but not reported, or IBNR, based on expected loss ratios, claims paying completion patterns and historical experience. We continually review estimates for reported but unpaid claims and IBNR. Any necessary adjustments are recorded in the consolidated statements of income in the period in which the variance occurs. If expected loss ratios increase or expected claims paying completion patterns extend, the IBNR amount increases.
Each of our four operating segments maintains its own portfolio of invested assets, which are centrally managed. The net investment income and realized investment gains (losses) are reported in the segment in which they occur. We also allocate surplus net investment income to each segment using a risk-based capital formula. The unallocated portion of net investment income is reported in the Other segment.
Policyholder benefits and claims consist of benefits paid and reserve activity on medical stop-loss and individual life products. In addition, in accordance with purchase method of accounting (referred to as PGAAP), we record, as a reduction of this expense, PGAAP reserve amortization related to our BOLI policies. PGAAP reserve amortization related to our fixed deferred annuities was fully amortized as of September 30, 2009.
Other underwriting and operating expenses represent non-deferrable costs related to the acquisition and ongoing maintenance of insurance and investment contracts, including certain non-deferrable commissions, policy issuance expenses and other business operating costs.
We defer as assets certain costs, commissions, distribution costs and other underwriting costs, that vary with, and are primarily related to, the production of new and renewal business. Amortization of previously capitalized DAC is recorded as an expense.
Many of the non-GAAP measures, including adjusted operating income, adjusted operating income per common share, adjusted book value, adjusted book value per common share, adjusted book value per common share, as converted, operating ROAE, and debt to capital ratio, excluding AOCI are included specifically for the purpose of excluding AOCI from the GAAP measure stockholders’ equity. We present each of these non-GAAP measures because we believe investors find useful financial measures that remove the temporary and unrealized changes in the fair values of our investments, and the related effects on AOCI. This allows investors to assess our financial condition based on our general practice of holding our fixed investments to maturity. For example, we believe it is important that an investor not assume that an increase in stockholders’ equity driven by unrealized gains means our company has grown in value and alternatively, it is important that an investor not assume that a decrease in stockholders’ equity driven by unrealized losses means our company’s value has decreased.
economic developments unrelated to our management of the insurance and underwriting aspects of our business. The one exception to the exclusion of realized investment gains and losses is the gains (losses) on our FIA options in our Deferred Annuities segment. Each year, we use the realized gains from our FIA options, similar to the way we use investment income, to meet our obligations associated with our FIA product, which credits interest to policyholder accounts based on equity market performance.
Adjusted Operating Income per Common Share-Basic and Adjusted Operating Income per Common Share-Diluted
Net income per common share-basic, and net income per common share-diluted, are the most directly comparable GAAP measure to adjusted operating income per common share-basic, and adjusted operating income per common share-diluted, respectively. See “Adjusted operating income” above, for an explanation of the differences between net income, which is the numerator for the GAAP measures, and adjusted operating income, the numerator for these non-GAAP measures.
Stockholders’ equity is the most directly comparable GAAP measure to adjusted book value. AOCI, which is primarily composed of the net unrealized gains (losses) on our fixed maturities, net of taxes, is a component of stockholders’ equity. Book value per common share is the most directly comparable GAAP measure to adjusted book value per common share. Book value per common share is calculated as stockholders’ equity divided by the sum of our common shares outstanding and shares issuable pursuant to outstanding warrants.
We purchase fixed maturities with durations and cash flows that match our estimate of when our insurance liabilities and other obligations will come due. We typically expect to hold our fixed maturities to maturity, using the principal and interest cash flows to pay our obligations over time. Since we expect to collect the contractual cash flows on these fixed maturities, we do not expect to realize the unrealized gains (losses) that are included in our AOCI balance as of any particular date. AOCI primarily fluctuates based on changes in the fair value of our fixed maturities, which is driven by factors outside of our control, including the impact of credit market conditions and the movement of interest rates and credit spreads.
Book value per common share is the most directly comparable GAAP measure to adjusted book value per common share, as converted and is calculated as stockholders’ equity divided by the sum of our common shares outstanding and shares issuable pursuant to outstanding warrants.
We believe investors find it useful to review the results of our insurance operations separate from the gain and loss activity attributable to most of our investment portfolio because it highlights trends in the performance of our insurance operations. In addition, we believe investors find it useful if we present them with a financial measure that removes from stockholders’ equity the temporary and unrealized changes in the fair values of our investments, and the related effects on AOCI, because we do not expect to realize the
.unrealized gains (losses) that are included in our AOCI balance as of any particular date. By referring to operating ROAE, an investor can form a judgment as to how effectively our management uses funds invested by our stockholders to generate adjusted operating income growth. Thus, we present operating ROAE for a period to measure the rate of return produced by our adjusted operating income in such period based on our average adjusted book value for such period.
Set forth below is a summary of our consolidated financial results. The variances noted in the total company and segment tables should be interpreted as increases (decreases), respectively.
We adopted new OTTI accounting guidance effective January 1, 2009, which changed the recognition and measurement of OTTI for fixed maturities. See “- Other-Than-Temporary Impairments (OTTI)” above.
For a definition and discussion of the uses and limitations of this non-GAAP measure and other metrics used in our analysis, see “- Use of non-GAAP Financial Measures” above.
Net income increased $72.6 as a result of an increase in adjusted operating income and net realized investment gains for the year ended December 31, 2010, versus losses during the same period in 2009. Adjusted operating income increased $27.3, primarily due to a $38.2 increase in the investment margin (net investment income less interest credited) in our Deferred Annuities segment and increased profitability in our Group and Life segments. Our Group segment’s loss ratio improved to 64.9% for the year ended December 31, 2010, compared to 68.3% for the same period in 2009. These favorable drivers were partially offset by mortality losses in our Income Annuities segment and increased DAC amortization, primarily in our Deferred Annuities segment.
Our Deferred Annuities segment’s investment margin increased $38.2 on a $1.6 billion increase in our fixed account values, driven by strong sales over the past three years. Partially offsetting the increase in the investment margin was a $16.0 increase in DAC amortization also related to the increase in fixed account values as our DAC balances grew from increased sales.
Our Life segment’s individual insurance claims, decreased $2.8 on favorable mortality experience. Life’s results also included a $7.4 benefit related to the release of bonus interest reserves and decreased amortization of deferred acquisition costs as the credited interest rate on our universal life products was adjusted downward to the guaranteed minimum over 2010. This was partially offset by a decrease in the BOLI return on assets (ROA) driven by a decrease in the PGAAP reserve amortization, and an increase in BOLI claims.
The provision (benefit) for income taxes increased $61.9 primarily due to higher income from operations before income taxes in 2009, compared to 2008.
Our Deferred Annuities segment’s investment margin increased $46.4 as a result of a $1.9 billion increase in our fixed annuity account value. Strong sales of fixed deferred annuity products drove this increase as there was a higher demand for fixed retirement savings products during the economic downturn, and we continued to capitalize on our broad distribution network. The strong year over year sales growth also led to a $21.5 increase in amortization of DAC.
Our Income Annuities segment experienced favorable mortality as mortality gains increased to $5.1 for the year ended December 31, 2009, compared to $2.1 for the same period in 2008. In addition, we experienced strong sales growth as total sales for 2009 nearly doubled 2008 production.
Our other underwriting and operating expenses decreased $13.1 as a result of an overall reduction in non-deferrable operating expenses. Primarily, we experienced a $4.0 decrease in payroll and employee related expenses due to attrition and disciplined expense management.
Our Life segment’s pre-tax adjusted operating income increased $6.6, driven by favorable mortality on all insurance products leading to improved underwriting results, partially offset by a decrease in BOLI ROA.
Expense ratio is equal to other underwriting and operating expenses of our insurance operations and amortization of DAC divided by premiums earned.
Medical stop-loss-loss ratio represents medical stop-loss policyholder benefits and claims divided by medical stop-loss premiums earned.
Segment pre-tax adjusted operating income decreased $11.5 driven by a decrease in premiums while our claims expense remained relatively flat, as evidenced by our higher loss ratio. In particular, there was a higher frequency of large claims in excess of $0.5. The decrease in premiums was a result of lower sales and renewals related to the medical stop-loss line as we focused on pricing to achieve our target loss ratio. Our
The overall decrease in other underwriting and operating expenses is consistent with the decrease in premiums as our expense ratio remained relatively flat in 2009. Our commissions decreased $4.3 and our premium tax decreased $0.5 driven mainly by decreased premiums. In addition, $3.4 of the total $9.5 decrease was attributable to a reduction in expenses as a result of the sale of our third party administrator.
In addition to the drivers discussed above, we consider the following information regarding operating revenues and benefits and expenses useful in understanding our results.
Net investment income increased $74.9, which was driven by a $1.5 billion increase in average invested assets from increased fixed annuities account values. Further growth of net investment income was limited in 2009 and, to a lesser extent, 2010 as sales during a tight credit market have resulted in us carrying higher levels of cash than during normal economic periods, which earn lower yields. During 2010, we began investing in U.S. Treasury securities as a strategy to help reduce cash levels and increase yields. We expect future growth in our investment yield as the credit markets have opened slightly, allowing us to carry less cash.
Segment pre-tax adjusted operating income increased $22.0 as a result of strong sales of fixed annuities, which led to growth in our fixed annuity account values and a $46.4 increase in our investment margin, partially offset by an increase in DAC amortization.
Net investment income increased $126.9, of which $104.6 was a result of a $2.0 billion increase in average invested assets. Also driving the increase was a $22.3 positive rate variance as yields on assets purchased were higher and yields increased to 5.47% from 5.15%. Although our yields increased, the 2009 yield was unfavorably impacted by uninvested cash as a result of increased sales in a tight credit market. This dampened growth in margins primarily during the first nine months of 2009, consequently limiting the growth of segment pre-tax adjusted operating income.
Net investment gains (losses) on FIA options increased $3.7 with gains of $0.8 in 2009 compared to losses of $2.9 in 2008, as the S&P 500 index increased 23.5% in 2009, as compared to a 38.5% decrease in 2008. The gains in 2009 partially offset the increase in interest credited of $5.9 noted below.
Amortization of DAC increased $21.5, which was primarily driven by a growing block of business and corresponding DAC asset, as sales grew year over year. In addition, increased amortization was driven by an increase in margins in 2009.
Interest spread is the difference between net investment yield earned and the credited interest rate on policyholder reserves. The investment yield is the approximate yield on invested assets, excluding equities, in the general account attributed to the segment. The credited interest rate is the approximate rate credited on policyholder reserves and excludes the gains and losses from funding services and mortality.
Net investment income increased slightly, the net effect of $5.8 of additional income from mortgage loans offset by a $5.5 reduction due to a smaller fixed maturities portfolio. The increase in income from mortgage loans was due to increased originations, which increased our average assets invested in mortgage loans in this segment by $74.9 to $386.4. The smaller asset portfolio is the result of a decrease in reserves.
Interest credited increased $8.4 primarily driven by a $7.7 unfavorable fluctuation in our mortality experience as we experienced mortality losses of $2.6 in 2010 versus mortality gains of $5.1 in 2009. The gains from the first quarter of 2009 were the highest quarterly mortality gains we have experienced over the past five years. In addition, the $3.9 reduction in benefit from funding services activity was driven by a decrease in the number of cases factored as well as the average gain per case due to strong competition in this market. Offsetting these increases was a $3.1 reduction in interest credited due to lower reserves.
Segment pre-tax adjusted operating income increased $5.9 due to an increase in mortality gains associated with life contingent annuities and improved yields on our invested assets. In addition, we had a $0.7 increase in gains from funding services activities. We ended the year with sales momentum as SPIA sales began to increase as distribution through our financial institutions channel grew. Sales of structured settlements also increased as competitors exited the market.
Individual insurance sales represents annualized first year premiums for recurring premium products, and 10% of new single premium deposits.
Net investment income increased $6.1. Of this increase, $14.0 was due to an increase in average invested assets, which increased to $5.2 billion from $4.9 billion mainly due to growth in the BOLI account value. This was partially offset by a negative rate variance of $7.9 as yields decreased to 5.24% from 5.39%.
Segment pre-tax adjusted operating income increased $6.6 primarily driven by improved underwriting results from favorable mortality on all life insurance products, partially offset by a decrease in BOLI ROA.
Premiums increased $1.7 driven by an increase in premiums on our term products resulting from increased term sales.
Interest credited increased $7.6 primarily due to growth in BOLI account value as a result of strong persistency. Interest related to the growth in BOLI account value was partially offset by decreases related to BOLI separate account claims experience and a surrender. BOLI separate account interest credited was favorably impacted by BOLI separate account claims.
Amortization of DAC increased $4.1 primarily due to the continued increase in the DAC asset balance from a growth in sales, and a refinement of reserve assumptions as a result of a conversion to a new actuarial reserve model.
Our Other segment reported pre-tax adjusted operating losses of $11.4 and $11.5 for the years ended December 31, 2010 and 2009, respectively. Contributing to the current period losses were other underwriting and operating expenses, which increased $8.4 due to $3.4 of transition expenses, primarily severance, related to the change in our CEO and other management positions in 2010. The remaining increase relates to higher broker-dealer commission expense on higher sales, which is offset by a $5.2 increase in policy fees, contract charges, and other. The $3.6 increase in net investment income was due to an increase in invested assets in the surplus portfolio, offset by a decrease in private equity and hedge fund income.
Twelve Months Ended December 31, 2009 Compared to the Twelve Months Ended December 2008
Segment pre-tax adjusted operating loss decreased $20.1 primarily as a result of an increase in net investment income of $20.6 from an increase in investment yields, which increased to 4.85% from (0.08)%. This was driven by an increase in the fair value of our investments in limited partnerships, which is included in net investment income, as equity markets improved during 2009. These improvements resulted in a loss of $0.1 in 2009 versus a loss of $34.5 in 2008. Excluding the impact of investments in limited partnerships, net investment income decreased $13.8 from an increase in allocated investment income to the operating segments to fund growth.
Yields are determined based on monthly averages calculated using beginning and end-of-period balances. Yields are based on carrying values except for fixed maturities and equity securities. Yields for fixed maturities are based on amortized cost. Yields for equity securities are based on cost.
The negative yield from tax credit investments is offset by U.S. federal income tax benefits. The resulting impact to net income was $4.6, $3.7 and $0.5 for the years ended December 31, 2010, 2009 and 2008, respectively.
For the year ended December 31, 2010, net investment income increased 7.7% compared to 2009 driven primarily by an increase in invested assets on strong sales of our fixed deferred annuities in 2009 and 2010. In addition, income from mortgage loans increased as we continue to grow our mortgage loan portfolio. These were partially offset by a decrease in net investment yields, which decreased to 5.49% in 2010 from 5.62% in 2009. The reduction in yields is the result of the low interest rate environment as we have experienced lower yields on recent purchases of fixed maturities, a negative impact from reinvestment at lower yields, and the partial write-off of unamortized fixed maturities’ premium from prepayments of mortgage-backed securities.
For the years ended December 31, 2010 and 2009, respectively, the Company had average daily cash balances of $302.3 and $406.9. The decrease in the 2010 average daily cash balance is primarily attributable to investing in U.S. Treasury securities on a short-term basis until appropriate investments can be purchased. As of December 31, 2010, the Company held U.S. Treasury securities with a fair value of $19.3.
Our portfolio produced total net realized gains of $39.8 for the year ended December 31, 2010 as compared to net losses of $29.3 for the same period in 2009, primarily due to a significant reduction in impairments. Starting in the third quarter and through the fourth quarter of 2010, equity markets rebounded which led to net gains on our trading securities for the year, but remained slightly below 2009 levels, as illustrated in the following table.
We monitor our investments for indicators of possible credit-related impairments, with a focus on securities that represent a significant risk of impairment, primarily securities for which the fair value has declined below amortized cost by 20% or more for a period of six months or more, or for which we have concerns about the creditworthiness of the issuer based on qualitative information. When evaluating a security for possible impairment, we consider several factors, which are described in more detail in Note 4 to the accompanying Consolidated Financial Statements.
Impairments for the years ended December 31, 2010, 2009 and 2008 were $20.9, $86.5 and $86.4, respectively. The significant decrease in impairments during 2010 was primarily driven by an improvement in
the overall economy. For those issuers in which we recorded an impairment during the year ended December 31, 2010, we had remaining holdings with an amortized cost of $290.5 and a fair value of $270.9 as of December 31, 2010.
Fixed maturities represented approximately 91% and 92% of invested assets as of December 31, 2010 and 2009, respectively. As of December 31, 2010, publicly traded and privately placed fixed maturities represented 95.8% and 4.2%, respectively, of our total fixed maturity portfolio at fair value. We invest in privately placed fixed maturities to enhance the overall value of the portfolio, increase diversification and obtain higher yields than can ordinarily be obtained with comparable public market securities.
Certain of our fixed maturities are supported by guarantees from monoline bond insurers. The credit ratings of our fixed maturities set forth in the table above reflect, where applicable, the guarantees provided by
During the year ended December 31, 2010 we increased our investments in corporate securities with cash generated from sales, primarily fixed deferred annuities. We have primarily purchased new issues of
investment grade corporate securities with a focus on obtaining appropriate yields and duration to match our policyholder liabilities while retaining quality.
As of December 31, 2010 and 2009, approximately 27% and 29%, respectively, of the fair value of our fixed maturity portfolio was held in mortgaged-backed securities, and 24% and 27%, respectively, of our portfolio was due after ten years, which we consider to be longer duration assets. Fixed maturities in these categories primarily back long duration reserves in our Income Annuities segment, which can exceed a period of 30 years. As of December 31, 2010 and 2009, approximately 75% and 82%, respectively, of the gross unrealized losses on our investment portfolio related to these longer duration assets, which fluctuate more significantly with changes in interest rates and credit spreads.
Our fixed maturity securities portfolio includes $5.7 billion of residential and commercial mortgage-backed securities at fair value. Approximately 70% of these securities are agency securities and approximately 21% are AAA rated non-agency securities in the most senior tranche of the structure type.
We classify our investments in RMBS as agency, prime, Alt-A, and subprime. Agency RMBS are guaranteed or otherwise supported by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation or the Government National Mortgage Association. Prime RMBS are loans to the most credit-worthy customers with high quality credit profiles. Alt-A RMBS have overall credit quality between prime and subprime, based on a review of their underlying mortgage loans and factors such as credit scores and financial ratios.
On a fair value basis as of December 31, 2010, our Alt-A portfolio was 86.0% fixed rate collateral and 14.0% hybrid adjustable rate mortgages, or ARMs, with no exposure to option ARMs. Generally, fixed rate mortgages have performed better with lower delinquencies and defaults on the underlying collateral than both option ARMs and hybrid ARMs in the current economic environment. As of December 31, 2010 and 2009, respectively, $62.6, or 56.2%, and $73.9, or 58.9%, of the total Alt-A portfolio had an S&P equivalent credit rating of AAA.
As of December 31, 2010, our Alt-A, prime and total non-agency RMBS had an estimated weighted-average credit enhancement of 13.5%, 8.6% and 9.8%, respectively. Credit enhancement refers to the weighted-average percentage of the outstanding capital structure that is subordinate in the priority of cash flows and absorbs losses first. As of December 31, 2010 and 2009, 58.8% and 59.6%, respectively, of the fair value of our RMBS had super senior subordination. The super senior class has priority over all principal and interest cash flows and will not experience any loss of principal until lower levels are written down to zero. Therefore, the majority of our RMBS investments have less exposure to defaults and delinquencies in the underlying collateral than if we held the more subordinated classes.
The disruptions in the CMBS market that began in 2009 and continued through 2010 were attributable to weakness in commercial real estate market fundamentals, and previously reduced underwriting standards by some originators of commercial mortgage loans, particularly within the more recent vintage years (2006 through 2008). This has reduced market liquidity and availability of capital, increased market belief that default rates will increase, and increased spreads and the repricing of risk. As of December 31, 2010, on an amortized cost basis, 97.4% of our entire CMBS portfolio were rated AAA, 1.3% were rated AA or A, and 1.3% were rated B and below.
was at 29.8%. We believe this additional credit enhancement is significant in a deep real estate downturn during which losses are expected to increase substantially.
Prospector manages a portfolio of equity and equity-like investments, including publicly traded common stock and convertible securities. Previously, our relationship with Prospector had been through our investment advisor, White Mountains Advisors, LLC, with Prospector serving in a sub-advisory role. We entered into an investment management agreement, effective July 1, 2010, directly with Prospector under which they will continue to supervise and direct our equity and equity-like investment portfolio. The following table compares our total return to the benchmark S&P 500 Total Return Index for the years ended December 31, 2010, 2009 and 2008. For the years ended December 31, 2010 and 2009, convertible securities were $83.0 or 30.5%, and $51.8 or 25.2% of the portfolio, respectively. We believe that these equity and equity-like investments are suitable for funding certain long duration liabilities in our Income Annuities segment, and, on a limited basis, in our surplus portfolio.
Our mortgage loan department originates new commercial mortgages and manages our existing commercial mortgage loan portfolio. The commercial mortgage loan holdings are secured by first-mortgage liens on income-producing commercial real estate, primarily in the retail, industrial and office building sectors. All loans are underwritten consistently to our standards based on loan-to-value ratios and debt service coverage ratios based on income and detailed market, property and borrower analysis using our long-term experience in commercial mortgage lending. A substantial majority of our loans have personal guarantees and are inspected and evaluated annually. We diversify our mortgage loans by geographic region, loan size and scheduled maturities. On our consolidated balance sheets, mortgage loans are reported net of an allowance for losses, deferred loan origination costs, unearned mortgage loan fees, and a PGAAP adjustment; however, the tables below are reported excluding these items.
The stress experienced in the U.S. financial markets and unfavorable credit market conditions led to a decrease in overall liquidity and availability of capital in the commercial mortgage loan market, which has led to greater opportunities for more selective loan originations. We believe a disciplined increase in our mortgage loan portfolio will help maintain the overall quality of our investment portfolio and obtain appropriate yields to match our policyholder liabilities. We are prudently increasing our investments in mortgage loans primarily in our Income Annuities and Deferred Annuities segments to improve our overall investment yields. We originated $592.1 of mortgage loans during the year ended December 31, 2010 and expect strong originations to continue during 2011.
We use the loan-to-value (LTV) ratio and debt service coverage ratio (DSCR) as our primary metrics to assess mortgage loan quality. The following table sets forth the LTV ratios for our gross mortgage loan portfolio:
The DSCR compares the amount of rental income a property is generating to the amount of the mortgage payments due on the property. DSCRs are calculated using the most current annual operating history for the collateral. As of December 31, 2010 and 2009, the mortgage loan portfolio had weighted-average DSCRs of 1.73 and 1.75, respectively. For loans originated during the years ended December 31, 2010 and 2009, 58.4% and 58.9%, respectively, had a debt-service coverage ratio of 1.60 or more.
The following table sets forth our gross mortgage loans by contractual maturity date:
funds. We accounted for these investments under the equity method and they are recorded at amortized cost in investments in limited partnerships, with the present value of unfunded contributions recorded in other liabilities.
The following table provides the future estimated impact to net income:
Sales for the year ended December 31, 2010 were solid across all distribution channels. Although below the record levels for the same period in 2009, sales continued to generate strong cash inflows on our deposit contracts (annuities and universal life policies, including BOLI).
The amount of AOCI, net of taxes, on our balance sheet increased to income of $432.5 as of December 31, 2010 from a loss of $49.7 as of December 31, 2009. The primary driver was an increase in the fair value of our available-for-sale securities, due to the low interest rate environment.
As of December 31, 2010, we had the ability to borrow, on an unsecured basis, up to a maximum principal amount of $200.0 under a revolving line of credit arrangement.
These contracts cannot be surrendered. The benefits are specified in the contracts as fixed amounts, primarily to be paid over the next several decades.
Approximately half of this business has been with the Company for over a decade, contains lifetime minimum interest guarantees of 4.0% to 4.5%, and has been free of surrender charges for many years. This business has experienced high persistency given the high lifetime guarantees that have not been available in the market on new issues for many years.
We consider attributes of the various categories of liquid assets (for example, type of asset and credit quality) in evaluating the adequacy of our insurance operations’ liquidity under a variety of stress scenarios. We believe that the liquidity profile of our assets is sufficient to satisfy current liquidity requirements, including under foreseeable stress scenarios.
On August 16, 2007, we entered into a $200.0 senior unsecured revolving credit agreement with a syndicate of lending institutions led by Bank of America, N.A. This credit facility matures on August 16, 2012, and loans under this facility bear interest at varying rates depending on our credit rating. This facility requires us to maintain specified financial ratios, and includes other customary restrictive and affirmative covenants. This revolving credit facility is available to provide support for working capital, capital expenditures and other general corporate purposes.
The payment of dividends and other distributions to Symetra by its insurance subsidiaries is controlled by insurance laws and regulations. In general, dividends in excess of prescribed limits are deemed “extraordinary” and require insurance regulatory approval. During the twelve months ended December 31, 2010, Symetra received dividends of $40.0 from its insurance subsidiaries. Symetra received no dividends from its insurance subsidiaries in 2009.
We declared and paid quarterly dividends of $0.05 per common share for a total of $20.6 during the second, third, and fourth quarters of 2010. On February 9, 2011, we declared a dividend of $0.05 per common share to shareholders, warrant holders, and unvested restricted shareholders of record as of February 22, 2011, for a total of $6.9, paid by March 9, 2011.
The following table sets forth a summary of our consolidated cash flows for the dates indicated.
Cash flows from our operating activities are primarily driven by the amounts and timing of cash received for premiums on our group medical stop-loss, group life and term life insurance products, income on our investments, including dividends and interest, as well as the amounts and timing of cash disbursed for our payment of policyholder benefits and claims, underwriting and operating expenses and income taxes. The following discussion highlights key drivers in the level of cash flows generated from our operating activities:
Cash flows from our investing activities are primarily driven by the amounts and timing of cash received from sales of investments and from maturities and calls of fixed maturity securities, as well as the
amounts and timing of cash disbursed for purchases of investments and funding of mortgage loan originations. The following discussion highlights key drivers in the level of cash flows used in our investing activities:
Years ended December 31, 2009 and 2008. Net cash provided by financing activities for the year ended December 31, 2009 was $1,133.7, a $675.8 increase over the same period in 2008. This was primarily due to a $609.2 increase in deposits primarily related to the sales of fixed deferred annuities.
We have investments in sixteen limited partnership interests related to tax credit investments, and five private equity partnerships. We will provide capital contributions to the five private equity partnerships through 2013 with a remaining committed amount of $11.5 at the discretion of the general partner, subject to certain contribution limits. Since the timing of payment is uncertain, the unfunded amount has been included in the payment due in less than one year. For more information, see Note 16 to the Consolidated Financial Statements. Amounts recorded on the balance sheet are included in “other liabilities.”
We do not have any off-balance sheet arrangements that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, or capital resources.
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
We have audited the accompanying consolidated balance sheets of Symetra Financial Corporation as of December 31, 2010 and 2009, 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, 2010. 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.
(All amounts in millions, except per share data, unless otherwise stated)
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 authorized shares of common stock, $0.01 par value per share, and 10.000 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, 2010, which are recorded in total stockholders’ equity. The warrants are exercisable at any time until August 2, 2014, to acquire 18.976 shares of common stock at an exercise price of $11.49 per share and can be net-share settled at the option of the warrant holder.
The audited 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 for it to conform to the current period presentation. For the years ended December 31, 2009 and 2008, this included reclassifications of $103.5 and $98.7, respectively, related to cost of insurance charges on universal life-type (UL) contracts. These amounts were reclassified from premium revenues to policy fees, contract charges and other revenues on the consolidated statements of income. These reclassifications did not change
Traditional individual life insurance products, including term and whole life insurance products, are long-duration contracts, and the associated premiums and benefits are fixed and guaranteed. Premiums from these products are recognized as revenue and considered earned when due. As premiums are earned, the Company establishes a reserve for future policy benefits associated with those premiums, resulting in the recognition of profits over the life of the policy.
The Company classifies its investments in fixed maturities and certain marketable equity securities as available-for-sale and carries them at fair value. Fixed maturities include bonds, mortgage-backed securities and redeemable preferred stock. Marketable equity securities classified as available-for-sale primarily include nonredeemable preferred stock.
prepayments and recalculates the effective yield to reflect actual payments plus anticipated future payments. The Company includes any resulting adjustment in net investment income.
Investments are considered to be impaired when a decline in fair value below a security’s amortized cost 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 Company carries its mortgage loans at outstanding principal balances, adjusted for unamortized deferred fees and costs, net of an allowance for loan losses. Loan origination fees and costs 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. See Note 6 for further discussion of the Company’s allowance for loan losses.
Policy loans are carried at unpaid principal balances. Policy loans are secured and are not granted for amounts in excess of the accumulated cash surrender value of the policy or contract.
Investments in limited partnerships consist of investments in limited partnerships that operate affordable housing projects and state tax credit funds (collectively, “tax credit investments”). These
investments are accounted for under the equity method and recorded at amortized cost, with amortization recorded in net investment income. The present value of any unfunded commitments related to these investments is recorded in other liabilities.
Cash and cash equivalents consist of demand bank deposits and short-term highly liquid investments with maturities of three months or less at the time of purchase. Cash equivalents are reported at cost, which approximates fair value, and were $261.0 and $244.4 as of December 31, 2010 and 2009, respectively. As of December 31, 2010 and 2009, cash equivalents of $257.9 and $223.8, respectively, were held at a single highly rated financial institution.
The Company amortizes acquisition costs for deferred 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. To do this, 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 AOCI.
The Company amortizes acquisition costs for immediate annuities using a constant yield approach.
The Company conducts regular recoverability analyses for DAC asset balances associated with deferred and immediate annuity contracts, universal life contracts, and traditional life contracts. 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, 2010 and 2009, all of the DAC asset balances were considered recoverable.
For some products, policyholders can elect to modify product benefits, features, rights or coverage by exchanging a contract for a new contract; 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 original contract, the DAC is immediately written off through income and any eligible costs associated with the replacement contract are deferred. If the modification does not substantially change the contract, the DAC is retained and amortized over the life of the modified contract and any acquisition costs associated with the related modification are expensed.
Goodwill is not amortized but is tested for impairment at least annually. No impairment was recorded for the years ended December 31, 2010, 2009 or 2008.
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.
Company discounts future benefits at interest rates that vary by year of policy issue. These rates are initially set to be consistent with portfolio rates at the time of issue, and are 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.
In July 2010, the FASB issued ASU 2010-20, Receivables (ASC Topic 310)-Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This guidance increases required disclosure about financing receivables, including credit risk exposures and the allowance for credit losses; however, it does not change how credit losses are measured or recognized. It requires, on a disaggregated basis, new disclosures regarding allowances for credit losses, the credit quality of financing receivables, and loan impairments. The Company adopted this guidance as of December 31, 2010, for its financing receivables, primarily investments in mortgage loans. See Note 6 for the Company’s disclosures related to mortgage loans.
In June 2009, the Financial Accounting Standards Board (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 variable interest entity (VIE); assessing which enterprise, if any, has a controlling financial interest in a VIE; and providing additional disclosures about involvement with such entities. This guidance changes the basis 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 adopted this guidance on January 1, 2010, and it did not change the Company’s previous conclusions regarding its VIEs, which consist primarily of investments in limited partnerships.
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 cumulative effect adjustment increased the amortized cost of our fixed maturity securities, primarily corporate securities, by $24.1.
In October 2010, the FASB issued ASU 2010-26, Financial Services-Insurance (Topic 944)-Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This guidance limits the amounts of deferrable acquisition costs to those incremental costs directly related to the successful acquisition of an insurance contract and clarifies which costs are included in that definition. Additionally, advertising costs must meet existing GAAP guidance for capitalization of advertising costs to be deferred under ASC 944. The guidance is effective for fiscal years beginning after December 15, 2011. Retrospective application, as well as early adoption, are permitted, but not required. The Company will adopt this guidance on January 1, 2012 and is evaluating the method and impact of adopting this guidance.
The Company has issued equity instruments to employees that are included in the computation of earnings per share, weighted for the portion of the period the shares were outstanding. These instruments include restricted stock, stock options and shares issued under the employee stock purchase plan. Refer to Note 15 for discussion of these plans.
Certain of the restricted shares are considered participating securities because the holders are entitled 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. Participating restricted stock is included in basic and diluted earnings per share based on the application of the two-class method. Non-participating restricted stock is included in diluted earnings per share based on the application of the treasury stock method. Estimated shares to be issued
The following tables summarize the Company’s available-for-sale fixed maturities and marketable equity securities. The OTTI in AOCI represent the amount of cumulative non-credit OTTI losses transferred to, or recorded in, AOCI for securities that also have a credit-related impairment.
As of December 31, 2010 and 2009, the Company had $83.0 and $51.8, respectively, of convertible fixed maturities recorded at fair value.
Based on the National Association of Insurance Commissioners (NAIC) ratings, as of December 31, 2010 and 2009, the Company held below-investment-grade fixed maturities with fair values of $1,257.5 and $1,032.1, respectively, and amortized costs of $1,321.2 and $1,165.1, respectively. These holdings amounted to 5.9% and 5.6% of the Company’s investments in fixed maturities at fair value as of December 31, 2010 and 2009, respectively.
The following table summarizes the amortized cost and fair value of fixed maturities as of December 31, 2010, 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.
The fair value of investments in fixed maturities that have not produced income for the last twelve months was $5.5 and $65.6 at December 31, 2010 and 2009, respectively.
To determine the recovery value, credit loss or intent to sell for 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, credit loss or intent to sell for a structured security, including residential mortgage-, commercial mortgage- 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 future cash flows the Company expects to recover;
The following table presents the severity and duration of the gross unrealized losses on the Company’s underwater available-for-sale securities, after the recognition of OTTI:
The Company reviewed its investments in fixed maturities with unrealized losses at the end of 2010 and 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, 2010 and 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.
The notional amount of the options purchased to hedge the Company’s 2010 exposure to changes in the S&P 500 Index was $30.0. These options had a fair value of $1.8 as of December 31, 2009, and were settled on December 31, 2010. The notional amount of the options purchased in 2010 to hedge the Company’s 2011 exposure to changes in the S&P 500 Index was $35.0. These options had a fair value of $1.8 as of December 31, 2010.
The Company originates and manages a portfolio of mortgage loans which are secured by first-mortgage liens on income-producing commercial real estate, primarily in the retail, industrial and office building sectors. All loans are underwritten consistently using standards based on loan-to-value (LTV) ratios and debt-service coverage ratios (DSCR) as well as detailed market, property and borrower analyses. The Company’s mortgage loan portfolio is considered a single portfolio segment and class of financing receivable, which is consistent with how the Company assesses and monitors the risk and performance of the portfolio. A large majority of these loans have personal guarantees and all loans are inspected and evaluated annually. The Company’s mortgage loan portfolio is diversified by geographic region, loan size and scheduled maturities. As of December 31, 2010, 31.0% of our commercial mortgage loans were located in California, 15.7% were located in Washington and 9.8% were located in Texas. Individual loans generally do not exceed $15.0.
Medium Risk Loans-Loans that have an LTV ratio of less than 65% but a DSCR below 1.50, or loans with an LTV ratio between 65% and 80%, and a DSCR of greater than 1.50.
Higher Risk Loans-All loans with an LTV ratio greater than 80%, or loans which have an LTV ratio between 65% and 80%, and a DSCR of less than 1.50.
Other includes the allowance for loan losses, deferred fees and costs, and a 2004 purchase accounting adjustment.
and third party data for expected losses on loans with similar LTV ratios and DSCRs. For existing loans the Company’s LTV ratios and DSCRs are updated each year between June 1 and September 30.
Specific reserves are established for non-performing loans, which are those loans that are more than 90 days past due on payment or for which the Company considers it probable that amounts due according to the terms of the loan agreement will not be collected. The following table summarizes the Company’s allowance for mortgage loan losses:
Level 1-Unadjusted quoted prices in active markets for identical instruments. This level primarily consists of exchange-traded marketable equity securities and actively traded mutual fund investments.
The Company performs an analysis on the prices received from the pricing services to ensure they represent a reasonable estimate of fair value and to gain 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 evaluation of pricing methodologies and inputs, analytical reviews of certain prices between reporting periods and back-testing of selected sales activity to determine whether there were significant differences between the market price used to value the security prior to sale and the actual sales price. Based upon this analysis, the Company has not adjusted prices obtained from the pricing services and multiple prices for these securities are not obtained.
In situations where the Company is unable to obtain sufficient market-observable information to estimate the fair value of a security, the security’s fair value is determined using internal pricing models. These models typically utilize significant, unobservable market inputs or inputs that are difficult to corroborate with observable market data, and the resulting value is considered a Level 3 measurement. This is generally the case for private placement securities and other securities the pricing services are unable to price.
As of December 31, 2010 and 2009, the Company had $892.9, or 4.2%, and $901.3, or 4.8%, 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 use of significant unobservable inputs in determining the fair value of the Company’s investments in private placement securities resulted in the classification of $815.4, or 91.3%, and $819.8, or 91.0%, as Level 3 measurements, as of December 31, 2010 and 2009, respectively.
Corporate securities classified as Level 2 measurements are priced by independent pricing services, who utilize evaluated pricing models. The significant 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 corporate securities 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.
As of December 31, 2010, 94.7% of the Level 3 corporate securities were privately placed securities. These securities were issued by entities primarily in the industrial sector, 21.6%, the financial sector, 21.2%, and the consumer discretionary sector, 15.9%.
The valuation of these privately placed Level 3 corporate securities requires significant judgment due to the absence of quoted market prices, the inherent lack of liquidity and the duration of such assets. The fair
As of December 31, 2010 and 2009, the fair value of the Company’s residential mortgage-backed securities (RMBS) classified as Level 2 measurements was $3,801.6 and $3,285.9, respectively. These securities were primarily fixed-rate, with a weighted-average coupon rate of 5.13% and 5.36% as of December 31, 2010 and 2009, respectively.
Level 2 RMBS securities are priced by independent pricing services, who utilize evaluated pricing models. The significant 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 RMBS 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. The pricing services monitor market indicators, industry and economic events, and their models take into account market convention.
As of December 31, 2010 and 2009, the fair value of the Company’s commercial mortgage-backed securities (CMBS) classified as Level 2 measurements was $1,868.2 and $1,765.4, respectively. These were primarily non-agency securities, which comprised 68.3% and 76.8% of Level 2 CMBS as of December 31, 2010 and 2009, respectively. The non-agency CMBS had an estimated weighted-average credit enhancement of 28.5% and 27.8% as of December 31, 2010 and 2009, respectively, and 94.3% and 92.4%, respectively, were in the most senior tranche.
Other is comprised of transactions such as pay downs, calls, amortization, and redemptions. For corporate securities, this consists primarily of redemptions, of which $20.0 is related to a single security.
Realized and unrealized gains and losses for investments in limited partnerships are included in net investment income.
Cash and cash equivalents are reported at cost, which approximates fair value.
The fair values of the Company’s mortgage loans were measured 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.
The Company estimates the fair values of funds held under deposit contracts related to investment-type contracts using an income approach, based on the present value of discounted cash flows. Cash flows were projected using best estimates for lapses, mortality and expenses, and discounted at a risk-free rate plus a nonperformance risk spread. The carrying value of this balance excludes $5,487.1 and $4,880.2 of liabilities related to insurance contracts as of December 31, 2010 and 2009, respectively.
The effect of reinsurance on premiums and policy fees, contract charges, and other was as follows:
Percentage of amount assumed to total premiums and other amounts assessed to policyholders
The following table provides a reconciliation of the beginning and ending balance for deferred policy acquisition costs:
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, 2010, the change in prior year incurred claims was primarily due to unfavorable changes in liability estimates for group medical stop-loss claims, offset by lower than expected individual life claims. 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 partially 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 for group medical stop-loss.
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%, including the impact of a related terminated cash flow hedge.
Subject to certain conditions, the Company has the right, on one or more occasions, to defer the payment of interest on the CENts during any period up to ten years without giving rise to an event of default. The Company will not be required to settle deferred interest, subject to certain conditions, until it has deferred interest for five consecutive years or, if earlier, made a payment of current interest during a deferral period. Deferred interest will accumulate additional interest at an annual rate equal to the annual interest rate then applicable to the CENts.
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. 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%, including the impact of a related terminated cash flow hedge.
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, 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.
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 AOCI, 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.
As of December 31, 2010 and 2009, and during the years ended December 31, 2010, 2009, and 2008, the Company had no borrowings outstanding under this facility and was in compliance with all covenants.
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, 2006. Other than an exam by the State of Florida, the Company is not currently subject to any state income tax exams.
Unrealized losses on investment securities (net of DAC adjustment: $0 and $26.4, respectively)
Unrealized gains on investment securities (net of DAC adjustment: $48.1 and $0, respectively)
Included in the 2010 deferred tax assets were gross federal net operating loss carry-forwards attributable to the non-life companies in the amount of $24.9, due to expire under current law during 2029 and 2030. The Company is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. Based on an analysis of the Company’s tax position, management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to enable the Company to utilize all of its deferred tax assets. Accordingly, no valuation allowance for deferred tax assets has been established as of December 31, 2010 and 2009.
Adjustment for deferred policy acquisition costs and deferred sales inducements valuation allowance (3)
Net of taxes of $2.0 and $(20.2) for the years ended December 31, 2010 and 2009, respectively.
The following table provides a reconciliation of changes in outstanding shares of common stock:
Represents shares repurchased during the fourth quarter of 2010 to satisfy employee income tax withholding, pursuant to the Company’s Equity Plan.
Stock-based compensation expense for restricted shares, which is recognized in other underwriting and operating expenses on the consolidated statements of income, was $2.0 and $0.2 for the years ended December 31, 2010 and 2009, respectively. This included compensation expense of $1.2 for the year ended December 31, 2010, related to the modification and accelerated vesting of certain restricted shares. The related income tax benefit for the years ended December 31, 2010 and 2009 was $0.7 and $0.1, respectively.
As of December 31, 2010, unrecognized compensation cost for restricted stock was $1.7 and is expected to be recognized over the weighted average of 2.0 years.
The Company measures compensation cost for stock awards at fair value on the grant date and recognizes such cost, net of estimated forfeitures, over the requisite service period (generally seven years). Stock options are valued using the Black-Scholes valuation model. Stock-based compensation expense for stock options was $0.5 for the year ended December 31, 2010, and the related tax benefit was $0.2. The Company did not issue stock options during 2009, 2008 or prior.
The expected term of stock options is the period that options are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve over the expected term of the option that is in effect at the grant date. The dividend yield is calculated based on historical dividends. Expected volatility is calculated based on daily historical prices and implied volatility.
As of December 31, 2010, 2.950 options were outstanding, none of which were exercisable. Outstanding options have a remaining contractual term of 7.5 years and no intrinsic value as of December 31, 2010. As of December 31, 2010, unrecognized compensation cost for stock options was $7.2 and is expected to be recognized over the next 6.5 years.
The Company’s Stock Purchase Plan is a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code. Under the plan, eligible employees may purchase shares of the Company’s stock on quarterly purchase dates at an amount equal to 85% of the closing market price of the common stock.
Compensation cost for employees is recognized for each three-month period between purchase dates, and is equal to the fair value of the discount received on the purchase of shares. During the year ended December 31, 2010, 0.033 shares were purchased under the plan. Compensation cost recognized for employees under the Company’s Stock Purchase Plan for the year ended December 31, 2010 was $0.1. The Company did not issue any shares pursuant to the Stock Purchase Plan in 2009 or 2008.
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, 2010, will have a material adverse effect on its consolidated financial condition, future operating results or liquidity.
As of December 31, 2010 and 2009, unfunded mortgage loan commitments were $39.2 and $4.5, respectively. The Company had no other material commitments or contingencies as of December 31, 2010 and 2009.
The Company sponsors a defined contribution 401(k) plan for all eligible employees that includes a matching contribution of 100% of a participant’s contributions up to 6% of eligible compensation. The expense for the matching contributions was $4.8, $4.5 and $4.5 for the years ended December 31, 2010, 2009, and 2008, respectively.
The Company has a performance share plan program (the “Performance Share Plan”) that provides incentives to selected members of management based on the long-term success of the Company. Awards under the Performance Share Plan have been made in the form of performance shares. 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 over a three-year period, and is paid in cash. The expense recorded for awards under the Performance Share Plan was $(4.3), $8.3 and $6.0 for the years ended December 31, 2010, 2009, and 2008, respectively. Due to management turnover during 2010, the Company reduced its Performance Share Plan accrual to reflect forfeitures from management turnover and recorded a net benefit. The Company also incurred related severance expenses of $5.4 during the year ended December 31, 2010.
Under the Equity Plan, the Company has the ability to issue various types of awards, including restricted stock, stock options, stock appreciation rights, restricted stock units, performance shares, performance units and other types of awards at the discretion of the Board of Directors. During 2010, the Company granted 0.072 performance units to various members of management under the Equity Plan. The Company also granted restricted stock and stock options as discussed in Note 15.
The Company’s insurance subsidiaries are required to prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the insurance department of the state of domicile. Statutory accounting practices primarily differ from GAAP by charging policy acquisition costs to expense as incurred and establishing future policy benefit liabilities using different actuarial assumptions, as well as valuing investments and certain assets and accounting for deferred taxes on a different basis.
Statutory capital and surplus for Symetra Life Insurance Company was $1,752.3 and $1,415.4 for the years ended December 31, 2010 and 2009, respectively.
The Company entered into an Investment Management Agreement on March 14, 2004, with White Mountains Advisors, LLC (WMA), a subsidiary of White Mountains Insurance Group, Ltd. White Mountains Insurance Group, Ltd. is a related party who beneficially owns 26.888 shares of the Company’s common stock, including warrants exercisable for 9.488 shares. This agreement, as amended, provides for investment advisory services related to the Company’s invested assets and portfolio management services. Expenses amounted to $14.1, $14.0, and $14.6 for the years ended December 31, 2010, 2009 and 2008, respectively. As of December 31, 2010 and 2009, amounts due to WMA were $3.4, and $3.5, respectively.
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 Deferred Annuities’ segment to include the net investment gains (losses) on FIA options.
When evaluating segment pre-tax adjusted operating income (loss) in the Deferred Annuities’ 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 to hedge the equity return component of FIA products. These options do not qualify as hedge instruments or for hedge accounting treatment, and 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 this hedge program.
Group. Group offers 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 insurance products Group offers managing general underwriting, or MGU, services.
Life. Life offers a wide array of individual products such as term and universal life insurance including single premium life insurance, as well as BOLI.
This includes funds held under deposit contracts, future policy benefits, and policy and contract claims.
On February 9, 2011, the Company declared a dividend of $0.05 per common share, for a total of $6.9 to shareholders and warrant holders of record as of February 22, 2011. The dividend was paid by March 9, 2011.