The following selected financial data, except for non-GAAP financial measures, have been derived from our audited consolidated financial statements. The consolidated income statement data for the years ended December 31, 2014, 2013 and 2012 and the consolidated balance sheet data as of December 31, 2014 and 2013, except for the non-GAAP financial measures, have been derived from our consolidated financial statements included in Item 8. The consolidated income statement data for the years ended December 31, 2011 and 2010 and the consolidated balance sheet data as of December 31, 2012, 2011 and 2010, except for the non-GAAP financial measures, have been derived from the consolidated financial statements included in previous filings.
We are a financial services company in the life insurance industry providing employment-based benefits, annuities and life insurance through a national network of benefits consultants, financial institutions, broker-dealers and independent agents and advisers. Our operations date back to 1957 and many of our distribution relationships have been in place for decades.
Income Annuities. We offer SPIAs to customers seeking a reliable source of retirement income or protection against outliving their assets during retirement. We also service our block of structured settlement policies and offer funding services options to existing structured settlement clients.
Individual Life. We offer individual life insurance products, such as term and universal life insurance. We also offer institutional products, including BOLI and variable COLI.
Net income for 2014 increased to $254.4, from $220.7 in 2013, driven by higher pretax operating income, an increase in net realized gains, and a lower effective tax rate due to benefits from our tax credit investments. Significant developments include the following:
Benefits Division: Our loss ratio for the year ended December 31, 2014 was 61.5%, which was better than our 2013 loss ratio of 66.5% and below our target range.
Individual Life Division: Expanded distribution relationships in the BGA market have resulted in stronger sales, primarily of our universal life products. Sales of individual life products increased to $38.0 for the year, compared to $18.6 for 2013. Additionally, we implemented financing to more effectively manage reserves and capital related to our universal life products with secondary guarantees.
Capital actions: We deployed a total of $237.6 in share buybacks and dividends during the year. This includes a special cash dividend of $1.30 per common share, for a total payout of $150.7, funded by the proceeds of the senior notes.
We are focused on increasing net income, growing our business and improving our operating ROAE over time. To advance these objectives in 2015, our business priorities for the year are outlined below.
Our goal is to effectively deploy capital while maintaining our financial strength ratings. We believe we have adequate capital to support strong organic growth through sales of fully-priced products, which remains our top priority for capital deployment. Our capital priorities remain the same:
Refer to Item 1 - "Business" for further discussion of these strategies. Our success may be affected by the factors discussed in Item 1A - "Risk Factors" and other factors as discussed herein.
Our results and ability to execute on our strategies are influenced by a range of economic and other factors. Economic factors include interest rates, consumer spending, business investment, government spending, the volatility and strength of capital markets, investor and consumer confidence, and levels of inflation. We continually monitor developments that affect our business, including:
Our investment yields have also been challenged by the interest rate environment in recent years. We are mitigating these effects by investing in commercial mortgage loans that we originate and through modest
In response to lower investment yields, we continue to manage new and renewal crediting rates on our fixed annuities and universal life policies. However, the crediting rates that we set are influenced by periodic guarantees, contractual minimums, and competitive pressures, among other factors.
Competitive pressures: We operate in a highly competitive marketplace for customers and distributors in each of our businesses. Our competitors include insurance and other non-insurance financial services companies, such as banks, broker-dealers and asset managers. Refer to Item 1 - "Business - Competition" for further discussion of the competitive environment. Current trends include:
We believe that PPACA is affecting the competitive landscape of the market for employee benefits, and we are seeing increased competition in our medical stop-loss line of business. Employers are exploring self-funding options, which is attracting attention from other market participants, including major health insurers.
We are working to increase our brand recognition among our distributors and customers. To help achieve this goal, we have invested in a nationwide campaign aligned with premier sports brands across multiple media platforms.
We are facing increased competition from other lenders in the origination of commercial mortgage loans. This puts downward pressure on new loan origination yields. We continue to originate loans with a smaller average principal amount than most life insurance companies while maintaining our underwriting standards.
Represents percentage variances that are not meaningful or are explained through the discussion of other variances.
Represents a non-GAAP measure. For a definition of this measure, see - "Use of non-GAAP Financial Measures."
Pre-tax adjusted operating income increased $14.5 from the year ended December 31, 2013. Contributions from our Benefits and Deferred Annuities segments improved significantly, while we experienced declines in our Income Annuities, Individual Life, and Other segments. Segment results, discussed further for each segment below, include net prepayment-related income of $34.9, which consisted of $55.1 of net investment income from investment prepayments (primarily bond make-whole payments in our Deferred Annuities segment), less $20.2 of related DAC and DSI amortization. This was flat with last year, as net prepayment-related income contributed $34.9 to pre-tax adjusted operating income for the year ended December 31, 2013.
The provision for income taxes decreased by $7.9 from 2013. The effective tax rate declined to 15.2% for the year ended December 31, 2014 from 19.5% for the same period in 2013 due primarily to increased benefits from our tax credit investments.
Net income increased $15.3 primarily as a result of higher pre-tax adjusted operating income, discussed further below, and a decrease in the provision for income taxes due to a lower effective tax rate. Pre-tax adjusted operating income increased $4.5 from the year ended December 31, 2012.
Segment results, discussed further below, include prepayment-related investment income of $34.9, which consisted of $50.0 of net investment income related to investment prepayments (primarily bond make-whole payments from investments in our Deferred Annuities segments), less $15.1 of related DAC and DSI amortization. In 2012, prepayment-related income, net of related amortization, contributed $22.2 to pre-tax adjusted operating income.
The provision for income taxes decreased by $11.3 from 2012. The effective tax rate declined to 19.5% for the year ended December 31, 2013 from 24.0% for the same period in 2012 due primarily to increased benefits from tax credit investments.
Policyholder benefits and claims decreased $27.5 primarily due to lower claims frequency and severity in medical stop-loss and favorable claims reserve development. During 2013, we experienced higher than expected claims frequency related to business written in January of that year, and we established reserves in 2013 for estimated incurred but not reported claims based on this experience. In 2014, actual claims were lower than expected and reserves for this block were released. This favorable claims development, primarily related to medical stop-loss, resulted in a lower loss ratio and reduced our benefits expense by $24.9 in 2014. The decrease was partially offset by higher group life and DI claims primarily due to growth in this line of business.
Segment pre-tax adjusted operating income decreased $6.3, primarily the result of a higher loss ratio and increased operating expenses. The loss ratio increased to 66.5% for the year ended December 31, 2013, compared to 65.1% for the same period in 2012.
Premiums increased $22.6 driven by growth of our group life and DI business and strong sales of post-January 2012 policies in our medical stop-loss line.
The $8.0 increase in other underwriting and operating expenses was mainly driven by expenses to support the expansion of our group life and DI business.
Sales for the year ended December 31, 2013 totaled $130.9, compared to sales of $159.3 for the same period in 2012. Medical stop-loss sales declined $36.4, reflecting our pricing discipline in a competitive market. This was partially offset by a $12.1 increase in group life and DI sales as we focused on expanding our presence in this market.
FIA base interest spread is the FIA interest spread adjusted to exclude items that can vary significantly from period to period due to a number of factors and, therefore, may contribute to results that are not indicative of the underlying trends. This is primarily the impact of asset prepayments, such as bond make-whole premiums and the MBS prepayment speed adjustment, and the impact of reserve adjustments on interest credited.
Segment pre-tax adjusted operating income increased $21.8, primarily driven by a $25.8 increase in the FIA interest margin from higher account values.
Segment pre-tax adjusted operating income increased $4.6, primarily driven by higher investment income from prepayment-related activity and earnings on higher FIA account values. Prepayment-related income was $20.0, net of related amortization, in 2013, compared to $11.9 in 2012. This was partially offset by lower base spreads on our traditional fixed deferred annuity business, as reinvestment of prepayment-related proceeds at lower yields put pressure on our spreads during the year. Additionally, we had higher non-deferrable distribution expenses related to increased FIA sales.
In addition, we consider the following information useful in understanding our results.
Net investment income increased $18.1, driven by $34.7 of prepayment-related income received in 2013, compared to $14.4 received in 2012, and an increase in invested assets due to higher account values. This was partially offset by lower portfolio yields as a result of lower yields on fixed maturity purchases and commercial mortgage loan originations, and reinvestment of proceeds from higher yielding assets at lower yields.
Unlocking from prepayment-related income and the impact of annual unlocking drove the increase in DAC amortization.
Other underwriting and operating expenses increased $6.3, primarily due to increased non-deferrable distribution expenses associated with higher FIA sales.
Base interest spread is the interest spread adjusted to exclude items that can vary significantly from period to period due to a number of factors and, therefore, may contribute to yields that are not indicative of the underlying trends. This is primarily the impact of asset prepayments, such as bond make-whole premiums, income on alternative investments, and the MBS prepayment speed adjustment.
The long-duration reserves are calculated as the present value of future income annuity benefits and assumed expenses payable in 25 years and beyond, discounted for mortality and interest. The discount rate and implied credited rate utilized to calculate implied interest credited is equal to the ultimate 20-year implied rate, which is updated annually.
Realized gain (losses) are not included in operating revenues and include changes in the fair value of equities classified as trading.
Segment pre-tax adjusted operating income decreased $16.4, primarily the result of a lower interest margin from lower investment yields, lower mortality gains, and mark-to-market losses on alternative investments.
Segment pre-tax adjusted operating income decreased $12.7, the result of a decrease in the interest margin on lower reserves and lower mortality gains. Mortality gains were $8.1 for the year ended December 31, 2013, compared to gains of $12.9 for 2012.
Policy fees, contract charges, and other decreased $4.2, driven by lower fee revenue from sales of third-party structured settlements. The sales agreement with the third party was terminated effective January 1, 2013.
Annualized mortality rate is defined as annualized individual claims divided by insurance in force which represents dollar face amounts of policies without adjustment for reinsurance.
UL base interest spread excludes SPL and is UL interest spread adjusted to exclude items that can vary significantly from period to period due to a number of factors and, therefore, may contribute to results that are not indicative of underlying trends. This is primarily the impact of asset prepayments, such as bond make-whole premiums net of related bonus interest amortization, the MBS prepayment speed adjustment and reserve adjustments.
BOLI base ROA is BOLI ROA adjusted to exclude items that can vary significantly from period to period due to a number of factors and, therefore, may contribute to yields that are not indicative of the underlying trends. This is primarily the impact of asset prepayments, such as bond make-whole premiums, the MBS prepayment speed adjustment, and reserve adjustments.
The BOLI PGAAP (purchase accounting) reserve was amortized as a decrease to policyholder benefits according to the pattern of profitability of the book of business of policies in force at the purchase accounting date, August 2, 2004. This reserve was amortized to $0 over a 10 year period ending August 2014. This represents the reduction of policyholder benefits expense related to the change in this reserve.
Segment pre-tax adjusted operating income decreased $9.6, primarily driven by higher operating expenses to support increasing production levels and growth initiatives.
Net investment income increased $2.6 primarily due to higher average invested assets partially offset by lower overall yields.
Sales of individual life products increased to $38.0 for 2014, compared to $18.6 in 2013, led by higher sales of our UL product with secondary guarantees, as we deepened our existing BGA relationships and expanded our distribution network in this market.
Net investment income decreased $4.0, due primarily to lower yields on asset purchases over the past year. This was partially offset by an increase in average invested assets, mainly due to growth in BOLI account values, and an increase in prepayment-related income. Prepayment-related income totaled $6.3 in 2013, compared to $3.5 in 2012.
Sales of individual life products increased to $18.6 for 2013, compared to $9.1 in 2012. An expanded BGA distribution network contributed to higher sales of our UL product with secondary guarantees, which were partially offset by lower sales of SPL policies.
Our Other segment reported pre-tax adjusted operating losses of $22.5 for 2014 compared with losses of $15.5 for 2013. This was driven by a $5.7 reduction in net investment income, primarily due to higher amortization of our tax credit investments. This was partially offset by $4.7 in higher returns on alternative investments, which are marked to market. Interest expense also increased following the issuance of $250.0 in senior notes in the third quarter 2014.
The Other segment reported pre-tax adjusted operating losses of $15.5 for 2013, compared with losses of $26.1 in 2012. This improvement was due to higher net investment income, primarily from higher average invested assets, and decreased operating expenses, including lower costs associated with the exploration of acquisition opportunities. In addition, we sold a
broker-dealer subsidiary during the fourth quarter of 2013, which decreased operating revenues and other underwriting and operating expenses.
Invested assets increased $2,733.2 during the year ended December 31, 2014 primarily due to portfolio growth generated by sales in the Retirement division and a net increase in unrealized gains on our fixed maturities. As of December 31, 2014 and 2013, we had net unrealized gains of $1.73 billion and $1.08 billion, respectively, on our fixed maturity portfolio. The increase in unrealized gains was driven by a decrease in interest rates. For example, the benchmark 10-year U.S. Treasury rates decreased from 3.04% as of December 31, 2013 to 2.17% as of December 31, 2014.
The negative impact from the tax credit investments is offset by U.S. federal income tax benefits. The total impact to net income was $27.9, $23.5 and $17.0 for the years ended December 31, 2014, 2013 and 2012, respectively. For further discussion, see "- Investments in Limited Partnerships - Tax Credit Investments."
Other income producing assets includes other invested assets and cash and cash equivalents.
For the year ended December 31, 2014, net investment income increased compared to the same period in 2013, driven by higher average invested assets and an increase in prepayment income, partially offset by lower portfolio yields.
For the year ended December 31, 2013, net investment income increased slightly compared to the same period in 2012, driven by an increase in prepayment income and an increase in average invested assets, partially offset by lower portfolio yields. Prepayment-related activities generated income of $50.0, or 19 bps of yield, in the year ended December 31, 2013, compared to $24.7, or 10 bps of yield, in the same period in 2012. These prepayment-related activities were on securities with an amortized cost of $627.3 and $256.0 for the year ended December 31, 2013 and 2012, respectively. We believe investment income in 2013 was impacted by reinvesting prepayment proceeds in 2012 at lower rates.
For the year ended December 31, 2013, we originated loans at a spread over U.S. Treasuries of approximately 290 bps, compared with an approximate 345 bps spread over U.S. Treasuries for the year ended December 31, 2012. Spreads to U.S. Treasuries tightened throughout 2013, primarily due to increased competition for loans that meet our size, duration and underwriting standards. Additionally, U.S. Treasury rates were low throughout 2012 and 2013, which has led to a decline in our overall mortgage loan portfolio yield.
The following table sets forth the detail of our net realized gains (losses) before taxes:
Represents the change in fair value of index options purchased to economically hedge our block of FIA business sold during the late 1990s (the "old block"), which has an account value of $36.3 as of December 31, 2014. This change in fair value is included in pre-tax adjusted operating income for our Deferred Annuities segment.
This primarily consists of gains (losses) on calls and redemptions, impairments of tax credit investments, changes in fair value of convertible bonds, the impact of net realized gains (losses) on DAC and DSI, and changes in fair value of derivatives not related to FIA.
For the year ended December 31, 2014, our portfolio produced net realized gains of $42.4, as compared to gains of $35.6 for the same period in 2013. The increase was primarily due to net realized gains related to sales of fixed maturities for the year ended December 31, 2014 compared to net realized losses for the same period in 2013, as well as decreased impairments. These were partially offset by net losses on bonds called during the year ended December 31, 2014 and lower net gains on our equity trading portfolio. We purchased U.S. Treasury securities for cash management purposes, which improved in value in 2014 due to changes in interest rates. As a result, we recorded net gains on sales of these securities, which are included in our net realized gains on sales of fixed maturities during the year ended December 31, 2014.
For the year ended December 31, 2013, our portfolio produced net realized gains of $35.6, as compared to $31.1 for the same period in 2012. The increase in net realized gains was driven by improved results on our equity investments and lower impairments. This was partially offset by net losses on sales of fixed maturities during the year ended December 31, 2013 compared to net gains on sales of fixed maturities during the year ended December 31, 2012. During 2013, we purchased U.S. Treasury securities for cash management purposes, which declined in value due to changes in interest rates. As a result, we recorded net losses on sales of these securities, which are included in our net realized losses on sales of fixed maturities during the year ended December 31, 2013. During 2012 we realized net gains related to the strategic sale of lower-yielding RMBS.
Impairments for the year ended December 31, 2013 decreased $10.7 from the same period in 2012. Credit impairments for the year ended December 31, 2012 were higher than in 2013 due to three large impairments.
After the recognition of OTTI, 22.8% and 36.8% of the gross unrealized losses on our investment portfolio as of December 31, 2014 and 2013, respectively, were related to securities due after ten years and our mortgage-backed securities. The fair value of these longer-duration securities fluctuate more significantly with changes in interest rates and credit spreads, and we believe they will recover over time. Refer to Note 4 to the accompanying consolidated financial statements for a table summarizing the amortized cost and fair value of fixed maturities by contractual years to maturity as of December 31, 2014.
The following table presents our fixed maturities by NAIC designation and S&P equivalent credit ratings, as well as the percentage of total fixed maturities, based on fair value, that each designation comprises:
In response to declining crude oil prices in recent months, spreads in the energy sector have widened and prices for these fixed maturities have fallen. This has primarily impacted our high-yield securities in this sector, which as of December 31, 2014, had a fair value of $119.5 with gross unrealized losses of $20.3. We considered the impact that the current environment has on securities in this sector while performing our regular impairment process. For the year ended December 31, 2014, we recognized $8.9 of impairment losses on our fixed maturities in the energy sector, on securities with remaining amortized cost of $138.8. The majority of our impairment losses related to our intent to sell these high-yield securities.
As of December 31, 2014, our investments in U.S. government and agency securities increased by $65.5, to $409.9 from $344.4 as of December 31, 2013. These securities are generally purchased as part of our cash management and asset-liability matching strategies to obtain higher yields and match liability durations on incoming cash flows until investments with adequate spreads are found. Our holdings of these securities will fluctuate from quarter to quarter based on sales volume and timing of cash deployment. In addition, these holdings may fluctuate to support collateral needs for our derivatives program.
As of December 31, 2014 and 2013, the fair value of our exposure to foreign fixed maturities was 15.8% and 15.0%, respectively, of our total fixed maturities portfolio. Our gross unrealized losses on these securities decreased to $21.8 as of December 31, 2014, compared to $55.6 as of 2013, primarily due to falling interest rates. The fair value of our total exposure to Ireland, Italy, Portugal, and Spain was $77.6 and $37.6 as of December 31, 2014 and 2013, respectively. We have no exposure to any issuers in Greece, Russia or Ukraine.
As of December 31, 2014 and 2013, the fair value of our holdings from our ten largest issuers of foreign securities was $1,087.3 and $1,100.0, or 4.3% and 4.7%, respectively, of the fixed maturities portfolio. All of the holdings of our ten largest
As of December 31, 2014, our Alt-A portfolio was collateralized with 95.7% fixed rate mortgages and 4.3% hybrid adjustable rate mortgages (ARMs) with no exposure to option ARMs. Generally, fixed rate mortgages have had better credit performance than ARMs, with lower delinquencies and defaults on the underlying collateral.
As of December 31, 2014 and 2013, 67.9% and 59.8%, respectively, of the fair value of our non-agency 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 following table sets forth the total fair value, and amortized cost of our non-agency CMBS by credit quality and vintage.
As of December 31, 2014 and 2013, 72.4% and 71.6%, respectively, of our mortgage loans had an outstanding balance under $5.0.
We use the LTV ratio and DSCR as our primary metrics to assess mortgage loan quality. These factors are also considered in evaluation of our allowance for mortgage loan losses. For further discussion of the allowance for mortgage loan losses, see Note 5 to our consolidated financial statements. As of December 31, 2014, one loan, with an outstanding principal balance of $1.5, was considered nonperforming.
The following table sets forth the carrying value and weighted-average LTV ratios for our mortgage loan portfolio by year of origination:
As of December 31, 2014, loans with an aggregate carrying value of $104.2 had a DSCR of less than 1.00. The average outstanding principal balance of these loans was $1.6 with a weighted average LTV of 71.8%.
The following table sets forth our investments in mortgage loans by contractual maturity date:
Prior to their contractual maturity, some of our mortgage loans have one or more specified rate resetting windows during which the loan typically can be prepaid without a fee. During these windows, we expect that a portion of these loans will either be reset or refinanced at market terms, given the current interest rate environment. These loan features are considered in our asset-liability management, and we align our expected mortgage loan cash inflows and duration with the amount and timing of liability cash outflows.
Additionally, our loan terms usually allow borrowers to prepay their mortgage loan prior to the stated maturity or outside specified rate resetting windows. Prepayments are driven by factors specific to the activities of our borrowers as well as the interest rate environment. However, the vast majority of our mortgage loans contain yield maintenance prepayment provisions that we believe mitigate such prepayments. For the years ended December 31, 2014 and 2013, we received principal related to prepayments totaling $134.9 and $89.4, respectively, which generated prepayment-related investment income of $9.6 and $4.1, respectively.
We invest in limited partnership interests related to tax credit investments. Although these investments decrease our net investment income on a pre-tax basis, they provide us with significant tax benefits, which decrease our effective tax rate. As of December 31, 2014 and 2013, our tax credit investments had a carrying value of $238.4 and $265.1, respectively.
We actively manage our liquidity in light of changing market, economic and business conditions, and we believe that our liquidity levels are more than adequate to cover our exposures, as evidenced in the discussion below.
Symetra’s insurance company subsidiaries have investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as certain life insurance policies and structured settlement annuities, are matched with investments having similar estimated lives such as long-term fixed maturities, commercial mortgage loans and marketable equity securities. Shorter-term liabilities are matched with shorter-term fixed maturities. In addition, our insurance company subsidiaries hold sufficient levels of highly liquid, high quality assets to fund anticipated operating expenses, surrenders and withdrawals.
We define liquid assets to include cash, cash equivalents, short-term investments, publicly traded fixed maturities and public equity securities. As of December 31, 2014 and 2013, our insurance company subsidiaries had liquid assets of $24.94 billion and $23.17 billion, respectively, and Symetra had liquid assets of $316.8 and $162.6, respectively. The portion of our total liquid assets consisting of cash and cash equivalents and short-term investments was $159.4 and $76.6 as of December 31, 2014 and 2013, respectively.
The table below sets forth liquidity characteristics of our general account policyholder liabilities, composed of annuity reserves, deposit liabilities and policy and contract claim liabilities, net of reinsurance recoverables:
The biggest deterrent to surrender is the taxation on the gain within these contracts, which includes a 10% non-deductible penalty tax. Banks can exchange certain of these contracts with other carriers, tax-free. However, a significant portion of this business does not qualify for this tax-free treatment due to the employment status of the original covered employees and charges may be applicable.
Given the current interest rate environment, we do not expect significant changes in the persistency of this business.
In 2013, Symetra's board of directors authorized a stock repurchase program for up to 16,000,000 shares, and we repurchased 6,952,266 shares in 2013. During the year ended December 31, 2014, we repurchased 2,101,037 shares under this program for a total of $41.2, and a total of 6,946,697 shares remain available for repurchase under the program. Symetra has funded and plans to continue to fund this program mainly through dividends from its subsidiaries. Refer to Item 5 - "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" for further information about the repurchase program.
The payment of dividends and other distributions to Symetra by its insurance company subsidiaries is subject to insurance laws and regulations. In general, dividends in excess of prescribed limits are deemed "extraordinary" and require regulatory approval. During the year ended December 31, 2014, Symetra received cash dividends of $125.0, respectively, from its insurance company subsidiaries, including $45.0 related to a dividend declared in December 2013 and paid in January 2014. Based on our statutory results for the year ended December 31, 2014, Symetra’s insurance company subsidiaries may pay dividends of up to $207.8 during 2015 without needing to obtain regulatory approval.
On March 30, 2006, we issued $300.0 of 6.125% senior notes due April 1, 2016, which were issued at a discount yielding $298.7. Interest on the senior notes is payable semiannually.
The following table sets forth a summary of our consolidated cash flows for the dates indicated:
Years Ended December 31, 2013 compared with 2012. Net cash provided by operating activities for the year ended December 31, 2013 increased $8.4 over 2012. This increase was primarily the result of timing differences in the settlement of federal income tax liabilities, and higher net investment income, including bond make-whole premiums from asset prepayments. The increased cash inflows were partially offset by higher commission and distribution-related payments associated with strong fixed deferred annuity sales.
Years Ended December 31, 2013 compared with 2012. Net cash used in investing activities for the year ended increased $801.7 over 2012. This was primarily the result of an increase in purchases of fixed maturities as a result of increased FIA deposits, partially offset by higher sales of equity securities due to the liquidation of our mutual funds and lower mortgage loan originations.
Cash flows from our financing activities are primarily driven by the amount and timing of cash received from deposits into certain life insurance and annuity policies and proceeds from the issuance of debt, as well as the amount and timing of cash disbursed to fund withdrawals from certain life insurance and annuity policies, dividend distributions to our common stockholders and stock repurchase activity. The following discussion highlights key drivers in the level of cash flows from our financing activities:
We enter into obligations with third parties in the ordinary course of our operations. The estimated cash payments related to these obligations as of December 31, 2014 are set forth in the table below. These estimates are based on management’s expectations and assumptions, which are necessarily subjective. Actual cash out flows in future periods will vary, possibly materially. Further, we do not believe that our current cash flow requirements can be assessed based upon an analysis of these obligations, as the funding of some or most of these future cash obligations will be from future cash flows from maturities of invested assets, premiums, deposits, fees and investment income that are not reflected in the table below. In addition, our operations involve significant expenditures that are not based upon commitments, including expenditures for payroll and income taxes.
We have investments in limited partnership interests related to tax credit investments and alternative investments. We will provide capital contributions to our alternative investments at the discretion of the general partner, with a remaining committed amount of $13.7. Since the timing of payment is uncertain, the unfunded amount has been included in the payment due in less than one year. Scheduled future contributions related to our tax credit investments are included on the balance sheets in "other liabilities."
We have derivative instruments with off-balance-sheet risks whose notional or contractual amounts exceed their fair value. For further information on our derivative instruments, see Note 6 in the consolidated financial statements. We also have commitments or off-balance sheet arrangements primarily related to unfunded mortgage loans, leases, and our revolving credit facility. For further information on these items, see Note 14 and Note 12 in the consolidated financial statements.
Our financial instruments primarily consist of our investment portfolio. Invested assets account for $30.63 billion or 92.8% of our total assets, and $26.20 billion of our investments are carried 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. GAAP 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 measurements into three levels based on the nature of the inputs, and entities are required to maximize the use of observable inputs when available. Level 1 valuation requires no management judgment, Level 2 requires some, and Level 3 requires significant management judgment. For further discussion of the levels, see Note 7 to the consolidated financial statements. As of December 31, 2014, 5.7% of our investments carried at fair value were classified as Level 1, 93.5% were classified as Level 2, and 0.8% were classified as Level 3. We use judgment in assigning our investments to a level within the hierarchy by determining whether significant pricing inputs are observable and if the market for a given security is active, while also taking into consideration the lowest level input that is significant to the valuation.
We determine the fair value of fixed maturities primarily by obtaining prices from third-party independent pricing services, which priced 96.0% and 96.6% of our fixed maturities as of December 31, 2014 and 2013, respectively. The pricing services we use have policies and processes to ensure that they are using objectively verifiable, observable market data, including documentation by major security type on the observable market inputs used to determine the prices. Securities are priced using evaluated pricing models that vary by asset class. Our pricing services routinely review the inputs for the securities they cover; however, they do not provide an independent auditor’s report on controls over valuation. If our pricing services determine that they do not have sufficient objectively verifiable information about a security, they will not provide a valuation for that security, and its fair value is determined using internal pricing models.
We analyze the prices received from our pricing services to ensure they represent a reasonable estimate of fair value, including analytical reviews of prices between reporting periods. As appropriate, we engage our pricing services in discussion regarding the valuation of a security; however, it has not been our practice to adjust their prices. We also perform procedures to gain assurance on the overall reasonableness and consistent use of inputs, valuation methodologies and compliance with fair value accounting standards. This includes an annual review of pricing methodologies and inputs by asset class and performing periodic due diligence procedures, including quarterly deep-dive analyses, monthly price fluctuation analyses, and corroboration of prices by obtaining secondary pricing quotes for selected securities. Based upon our procedures, we believe that the values provided by our pricing services are appropriate measurements of fair value and determined in accordance with GAAP using observable inputs.
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. Accordingly, the amount we may realize upon settlement or maturity of our fixed maturities in the future may differ from the estimated fair value of the security at the reporting date.
Our equity index options are also classified as Level 2 measurements. These instruments are carried at fair value, with changes in fair value reported in realized gains (losses) on the consolidated statements of income. The fair value of equity index options are determined internally using the Black-Scholes option pricing model. Prices for our index options are most sensitive to changes in the risk free rates and implied volatility inputs used. To obtain further assurance over the reasonableness of the resulting fair value, we compare our price to the price provided by our independent counterparties and investigate any deviations greater than 30 basis points of the notional amount of the option. Based upon our procedures, we believe that the values are appropriate measurements of fair value and determined in accordance with GAAP and as a result, the majority of our equity index options are classified as Level 2.
In addition to our investment-related financial instruments, our FIA products contain embedded derivatives that are measured at fair value on a recurring basis. Changes in the fair value are reported in realized gains (losses) on the consolidated statements of income. The fair value of the embedded derivative is calculated internally and reflects the excess of the projected benefits based on the indexed fund value over the projected benefits based on the guaranteed fund value. The excess benefits are projected using best estimates for surrenders, mortality and indexed fund interest, and discounted at a risk-free rate plus a spread for nonperformance and policyholder behavior risk. The valuation is most sensitive to the indexed fund interest assumption. Because the estimates utilize significant unobservable inputs, we classify the embedded derivative as a Level 3 measurement.
Certain costs associated with our wholesaler distribution model are not considered directly related to contract acquisition under the accounting standards, and we are therefore not able to defer significant portions of distribution costs related to our sales efforts.
We offer sales incentives, known as inducements, primarily on certain deferred annuity contracts. These inducements entitle the contract holder to an incremental amount of credited interest over a specified 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. This incremental interest is deferred and amortized into interest credited in the consolidated statements of income over the life of the contract. As of December 31, 2014, we had gross unamortized DSI of $136.7, of which $135.7 relates to the Deferred Annuities segment.
We develop an estimate of EGPs at policy issuance, and review our experience at each valuation date. As actual experience emerges, the gross profits may vary from those expected either in magnitude or timing, in which case a true-up to actual occurs. Generally, actual experience that results in higher income, compared to the assumptions in our models, will be partially offset by higher DAC and DSI amortization. The following table identifies scenarios that would generally cause higher income and therefore and increase in amortization:
DAC and DSI balances are also adjusted quarterly to reflect the impact of realized gains (losses) during the period. These adjustments are recognized in net realized gains (losses) in the consolidated statements of income.
Annually during the third quarter, or more frequently if needed, we complete an assumption study and, as deemed appropriate by management, revise estimates of future EGPs. This is often referred to as "unlocking" the amortization models. We also revise projected EGPs during the year if a significant transaction or trend is identified that warrants such a revision. The following table identifies changes to future assumptions that would generally cause an unfavorable impact of unlocking recorded in current period income:
Excluding the impact related to prepayments discussed below, for the years ended December 31, 2014 and 2013, we recorded net pre-tax adjustments that increased amortization by $0.2 and $2.6, respectively, related to annual DAC unlocking. For the year ended December 31, 2014, we recorded a net pre-tax DSI unlocking adjustment that decreased amortization by $1.0, while the adjustment in 2013 increased DSI amortization by $0.7.
In recent years, prepayment-related income received, primarily from make-whole provisions on fixed maturities, has significantly increased net investment income in the periods received, and we have recorded incremental DAC and DSI amortization related to this income. In addition, the expected future impact of reinvesting prepayment proceeds at lower prevailing interest rates was also analyzed and, where applicable, DAC and DSI amortization due to unlocking was recorded in the period the prepayment occurred. For the years ended December 31, 2014 and 2013, we recorded additional amortization from prepayment-related income totaling $10.9 and $8.3, respectively, for DAC and $9.3 and $6.8, respectively, for DSI.
We adjust the unamortized DAC and DSI balances for the accumulated effect of net unrealized gains or losses on investments, which is recorded net of taxes in AOCI. This adjustment reflects the impact on estimated future gross profits as if the unrealized gains and losses had been realized as of the balance sheet date. Currently, our available-for-sale portfolio is in a net unrealized gain position, primarily due to the current interest rate environment, and the corresponding adjustment decreases our DAC and DSI balances and AOCI.
sales inducement costs plus interest. As of December 31, 2014, the maximum DSI adjustment would be $158.8, net of taxes of $85.5.
Reserves are liabilities representing estimates of future amounts that will come due to or on behalf of our policyholders. The reserves reported in our consolidated financial statements require significant management judgment based on multiple actuarial assumptions, including mortality and morbidity tables, interest, persistency, expected loss-ratio, expected claim completion, and other assumptions.
We compute liabilities for future policy benefits under traditional individual life and group life insurance policies using 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. Establishing adequate reserves for our obligations to contract holders requires assumptions to be made regarding mortality and morbidity. We set the interest, mortality and persistency assumptions in the year of issue and include provisions for adverse deviations. The provisions for adverse deviations are intended to provide coverage for the risk that actual experience may be worse than locked-in best-estimate assumptions.
The assumptions on which reserves are based are intended to represent an estimation of experience for the period that policy benefits are payable. The key experience assumptions include mortality rates, policy persistency and interest rates. If actual experience is better than or equal to the assumptions, then reserves should be adequate to provide for future benefits and expenses. If experience is worse than the assumptions, additional reserves may be required. This would result in a charge to our net income during the period the increase in reserves occurred. No revisions to assumptions within the future policy benefits liabilities have been necessary, and therefore we have not experienced any significant impact in our financial results due to changes in assumptions.
Liabilities for policy and contract claims primarily represent reserves for claims incurred but not reported (IBNR) under our medical stop-loss and life insurance policies. To arrive at the IBNR reserve for our medical stop-loss policies, we consider historical completion rates, which is the time from the insured event to the reporting and payment of the claim, and actual loss ratios, placing more significance on most recent experience. The reserve is subject to management judgment and may be adjusted as deemed appropriate. We also reserve for specific claims that are pending payment, which generally does not require management judgment.
Our primary sources of revenues from our insurance operations are premiums, net investment income and policy fees and contract charges. We also generate net realized gains (losses), primarily on sales or impairment of our investments, and changes in fair value on our equity trading portfolio and derivative financial instruments. Our primary sources of expenses from our insurance operations are policyholder benefits and claims, interest credited to policyholder reserves and account balances, DAC
amortization, and general business and operating expenses, net of DAC deferrals. These items are discussed in further detail below.
Certain tables and related disclosures in this report include non-GAAP financial measures. We believe these measures provide useful information to investors in evaluating our financial performance or condition. The non-GAAP financial measures discussed below are not substitutes for their most directly comparable GAAP measures. The adjustments made to derive these non-GAAP measures are important to understanding our overall results of operations and financial position and, if evaluated without proper context, these non-GAAP measures possess material limitations. Therefore, our management and board of directors also separately review the items excluded from or added to the most directly comparable GAAP measures to arrive at these non-GAAP measures. In addition, management and our board of directors also analyze each of the comparable GAAP measures in connection with their review of our results of operations and financial position.
Many of the non-GAAP measures, including adjusted book value, adjusted book value per common share and operating ROAE 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.
In the following paragraphs, we provide definitions of our non-GAAP measures. For a reconciliation of these non-GAAP measures to their most directly comparable GAAP measures, see Item 6 - "Selected Financial Data."
Adjusted operating income consists of net income, excluding certain net realized gains (losses). Excluded realized gains (losses) are associated with investment sales or disposals, other-than-temporary investment impairments, changes in the fair value of mark-to-market investments and derivative investments (except for certain S&P 500 options, described below), and changes in the fair value of embedded derivatives related to our FIA products, as well as the DAC and DSI impacts related to these items.
We believe investors find it useful to review a measure of the results of our insurance operations separate from most of the gain and loss activity attributable to our investment portfolio because it assists an investor in determining whether our insurance-related revenues, composed primarily of premiums, net investment income and policy fees, contract charges and other, have been sufficient to generate operating earnings after meeting our insurance-related obligations, composed primarily of claims paid to policyholders, investment returns credited to policyholder accounts, and other operating costs.
Pre-tax adjusted operating income is adjusted operating income on a pre-tax basis. It also represents the cumulative total of segment pre-tax adjusted operating income, which at the segment level is a GAAP measure. Income from operations before income taxes is the most directly comparable GAAP measure to pre-tax adjusted operating income. In presenting pre-tax adjusted operating income, we are excluding certain pre-tax net realized gains (losses) as described above.
Adjusted operating income per common share - basic, and adjusted operating income per common share - diluted, consist of adjusted operating income divided by the GAAP-basis weighted average basic and diluted shares outstanding, respectively. Net income per common share - basic, and net income per common share - diluted, are the most directly comparable GAAP measures. 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 warrants in the periods they were outstanding.
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 movement of interest rates and credit spreads and the impact of credit market conditions.
Operating return on average equity, or operating ROAE, consists of adjusted operating income for the most recent four quarters, divided by average adjusted book value, both of which are non-GAAP measures as described above. We measure average adjusted book value by averaging ending adjusted book value for the most recent five quarters.
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 2013 and 2012
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Symetra Financial Corporation’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2015 expressed an unqualified opinion thereon.
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP), including the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that may affect the amounts reported in the consolidated financial statements and accompanying notes. 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.
The most significant estimates include those used to determine the following: valuation of investments carried at fair value; the balance, recoverability and amortization of deferred policy acquisition costs (DAC) and deferred sales inducements (DSI); and the liabilities for funds held under deposit contracts, future policy benefits, and policy and contract claims. The recorded amounts reflect management’s best estimates, though actual results could differ from those estimates.
The Company’s group insurance policies, which include medical stop-loss, limited benefit medical, and group life and DI, are short duration contracts. Premiums from these products are recognized as revenue when earned over the life of the policy. Policyholder claims are charged to operations as incurred.
Revenues from UL insurance and investment type products consist of net investment income on the policyholders’ fund balances, and amounts assessed during the period for cost of insurance, policy administration, and surrender charges. The Company includes the amounts assessed in policy fees, contract charges, and other in the consolidated statements of income. Expenses that are charged to operations for these products include interest credited and claims incurred in excess of related policyholder account balances.
Separate account balances primarily relate to the Company's variable annuity, variable life, and variable COLI products. Separate account assets are reported at fair value and represent funds that are invested on behalf of the Company’s variable product policyholders. The assets of each separate account are legally segregated and are not subject to claims that arise out of the Company’s other business activities. Investment risks associated with market value changes are borne by the policyholder, except to the extent of guaranteed minimum death benefits (GMDB) made by the Company with respect to certain accounts. Net investment income and realized gains and losses accrue directly to the policyholders and are not included in the Company’s revenues. Separate account liabilities represent the policyholder’s account balance in the separate account. Fees charged to policyholders reduce the account value and the Company includes these fees as revenue in the consolidated statements of income.
For variable annuity contracts with GMDB, the Company contractually guarantees death benefits that may exceed the policyholder's account balance. The Company reinsures nearly all of the GMDB risk on its variable annuity contracts.
For SPIAs, including structured settlements, liabilities are based on discounted amounts of estimated future benefits. Future benefits are either fully guaranteed or are contingent on the survivorship of the annuitant. Contingent future benefits are discounted with pricing mortality assumptions, which include provisions for longer life spans over time. The interest rate pattern used to calculate the reserves for SPIAs is set at issue. The interest rates within the pattern vary over time and start with interest rates that prevailed at contract issue. As of December 31, 2014, the weighted-average implied interest rate on the existing book of business was 5.62% and is expected to grade to 6.35% during the next 20 years.
Funds held under deposit contracts also include a liability for the embedded derivative related to the Company's fixed indexed annuity (FIA) policies, which is recorded at fair value. See Note 7 for further discussion of the valuation of the embedded derivative.
Policy loans are carried at unpaid principal balances. Policy loans are not granted for amounts in excess of the accumulated cash surrender value of the policy or contract.
The limited partnerships that the Company invests in meet the definition of a VIE. Because the Company, as a limited partner, lacks the ability to direct the activities of any of these partnerships, it is not considered the primary beneficiary and therefore has not consolidated them. The maximum exposure to loss in these VIEs was $327.1 and $316.4 as of December 31, 2014 and 2013, respectively. The maximum exposure to loss includes unconditional commitments to provide future capital contributions.
The following table includes significant accounting policies that are described in other notes to the financial statements, including the number of the note.
Participating securities are those for which the instrument 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. These securities include restricted stock issued to the Company's employees, as well as the Company's warrants, which were previously exercisable for 18,975,744 common shares. The warrants were held by wholly-owned subsidiaries of White Mountains Insurance Group, Ltd. and Berkshire Hathaway, Inc., both related parties, and were net-share settled on June 20, 2013. Participating securities are included in basic and diluted earnings per share based on the application of the two-class method, for the portion of the period for which the securities were outstanding. Refer to Note 9 for discussion of these instruments.
The Company is invested in common stock and, beginning in 2014, exchange-traded funds (ETFs), which are classified as trading. Changes in the fair value of the Company’s trading portfolio are recorded in net realized gains (losses) in the consolidated statements of income. Dividends earned on trading securities are reported in net investment income.
The following tables summarize the Company’s available-for-sale fixed maturities and marketable equity securities.
Based on National Association of Insurance Commissioners (NAIC) ratings as of December 31, 2014 and December 31, 2013, the Company held below-investment-grade fixed maturities with fair values of $1,126.6 and $1,267.5, respectively, and amortized costs of $1,111.9 and $1,229.7, respectively. These holdings amounted to 4.4% and 5.5% of the Company’s investments in fixed maturities at fair value as of December 31, 2014 and December 31, 2013, respectively.
This includes net gains (losses) on calls and redemptions, and changes in the fair value of the Company’s convertible securities.
This includes net gains (losses) on derivatives not designated for hedge accounting and other instruments including an embedded derivative related to the Company’s fixed indexed annuity (FIA) product and other instruments.
While all securities are monitored for impairment, the Company’s experience indicates that, under normal market conditions, securities for which the cost or amortized cost exceeds fair value by less than 20% do not typically represent a significant risk of impairment and, often, fair values recover over time as the factors that caused the declines improve. If the estimated fair value has declined and remained below cost or amortized cost by 20% or more for at least six months, the Company further analyzes the decrease in fair value to determine whether it is an other-than-temporary decline. To make this determination for each security, the Company considers, among other factors:
The largest write-downs recorded through net realized gains (losses) on fixed maturities were related to investments in the following sectors:
Impairments on U.S. Federal Government securities are due to the Company's intent to sell.
The Company reviewed its available-for-sale fixed maturities with unrealized losses as of December 31, 2014 and 2013 in accordance with its impairment policy and determined, after the recognition of OTTI, that the remaining declines in fair value were temporary. The Company did not intend to sell its underwater securities, and it was not more likely than not that the Company will be required to sell the securities before recovery of cost or amortized cost, which may be maturity. This conclusion is supported by the Company’s spread analyses, cash flow modeling and expected continuation of contractually required principal and interest payments.
As of December 31, 2014, there were $0.2 of gross unrealized losses related to available-for-sale marketable equity securities with a total fair value of $0.7 that were underwater by 20% or more. There were no such securities underwater by 20% or more as of December 31, 2013. As of December 31, 2014 and 2013, the Company has evaluated the near-term prospects of its available-for-sale equity securities with unrealized losses in relation to the severity and duration of the impairment. Based on that evaluation, the Company concluded that it had the ability and intent to hold these investments until a recovery of fair value.
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. 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.
When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its fair value are recorded as a component of OCI and reclassified into net income in the same period during which the hedged transaction affects net income. Any hedge ineffectiveness is recorded in the consolidated statements of income within net realized gains (losses). If a derivative instrument does not qualify, or is not designated for hedge accounting, the changes in its fair value are recorded in the consolidated statements of income within net realized gains (losses).
The Company also issues fixed indexed annuity contracts that contain embedded derivatives, which are recorded at fair value in funds held under deposit contracts in the consolidated balance sheets.
The Company uses call options, mainly based on the S&P 500, as part of its equity market risk management strategy. The Company offers a FIA contract that permits the contract holder to allocate all or a portion of their account value to an equity market component, where interest credited to the contract is linked to index performance, subject to caps set by the Company. The contract holders may elect to rebalance index options at renewal dates, typically annually. As of each renewal date, the Company has the opportunity to re-price the indexed component by establishing cap rates, subject to minimum guarantees. The Company transacts in call options that are correlated to the portfolio allocation decisions of the contract holders, such that the Company is economically hedged with respect to equity returns for the current interest term. These derivatives are not designated for hedge accounting.
The index-based crediting feature in these contracts is an embedded derivative instrument that is bifurcated from the host contract for measurement purposes, because it possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract. The embedded derivative, which is reported with the host instrument as funds held under deposit contracts in the consolidated balance sheets, is carried at fair value with changes in fair value recognized in net realized gains (losses).
The Company uses foreign currency swaps and forwards as part of its foreign currency risk management strategy, to reduce risks from changes in currency exchange rates with respect to the Company's investments denominated in foreign currencies. In a foreign currency swap transaction, the Company agrees with other parties to exchange, at specified intervals, one currency for another at a specified rate of exchange. Generally, the notional amount of each currency is exchanged at the maturity of the currency swap by each party. These derivatives qualify and are designated as cash flow hedges, and accumulated gains (losses) are reclassified into income when interest and principal payments on the underlying foreign bonds are received.
The Company uses interest rate swaps as part of its interest rate risk management strategy. In an interest rate swap, the Company agrees with other parties to exchange, at specified intervals, the difference between floating-rate and fixed-rate interest amounts calculated by reference to an agreed upon notional principal amount. The Company primarily uses interest rate swaps to synthetically convert variable rate fixed maturities to fixed rate securities. These derivatives qualify and are designated as cash flow hedges, and accumulated gains (losses) are reclassified into income when interest payments on the underlying bonds are received.
See Note 9 for amounts reclassified out of AOCI into net income for the years ended December 31, 2014, 2013 and 2012. The Company expects to reclassify net gains of $6.4 from AOCI into net income in the next 12 months, which includes both discontinued hedges and periodic settlements of active hedges. Actual amounts may vary from this estimate as a result of market conditions.
The following table shows the effect of derivatives not designated as hedges in the consolidated statements of income, which is recorded in net realized gains (losses):
The carrying value of this balance excludes $6,388.7 of liabilities related to insurance contracts and embedded derivatives.
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, 2014 and 2013, respectively, pricing services provided prices for 96.0% and 96.6% of the Company’s fixed maturities.
As of December 31, 2014 and 2013, the fair value of the Company’s corporate securities classified as Level 2 measurements was $19,120.9 and $17,324.4, respectively. The following table presents additional information about the composition of the Level 2 corporate securities:
As of December 31, 2014 and 2013, $770.6, or 4.0%, and $523.5, or 3.0%, respectively, of Level 2 corporate securities were privately placed. These securities were valued using a matrix pricing approach. The significant inputs to the measurement are the base credit spread, treasury yield and expected future cash flows of the security, which are all observable inputs. The base spread is determined based on trades of similar publicly-traded securities, and the expected future cash flows are based on the contractual terms of the security. The valuation approach also incorporates an illiquidity spread, determined based on premiums demanded by investors for privately placed securities. The illiquidity spread is an unobservable input, which ranges from 0 to 60 basis points and is based on the credit quality of the security. The illiquidity spread does not significantly impact the resulting valuation and thus management does not believe it prohibits Level 2 classification.
As of December 31, 2014 and 2013, the fair value of the Company’s residential mortgage-backed securities (RMBS) classified as Level 2 measurements was $2,921.4 and $2,755.8, respectively. These securities were primarily fixed-rate, with a weighted-average coupon rate of 4.18% and 4.39% as of December 31, 2014 and 2013, respectively.
Level 2 RMBS securities are priced by pricing services that utilize evaluated pricing models. Because many RMBS 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. The significant observable 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. 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.
Level 2 CMBS securities are priced by pricing services that utilize evaluated pricing models. Because many CMBS 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. The significant observable inputs for security evaluations include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, new issues, monthly payment information and other reference data, including market research publications.
The following table presents additional information about the composition of the underlying collateral of Level 2 non-agency CMBS securities:
Marketable equity securities are investments in common stock (mainly in publicly traded companies), ETFs, and certain nonredeemable preferred stocks. When the fair values of the Company’s marketable equity securities are based on quoted market prices in active markets for identical assets, they are classified as Level 1 measurements. The fair values of nonredeemable preferred stocks are determined by pricing services utilizing evaluated pricing models and are classified as a Level 2 measurement. These valuations are created based on benchmark curves using industry standard inputs and exchange prices of underlying securities and common stock of the same issuer.
Investments in limited partnerships recorded at fair value relate to the Company's alternative investments. The fair value is approximated based upon the Company’s proportionate interest in the underlying partnership or fund’s net asset values (NAV). The Company is generally unable to liquidate these investments during the remaining term of the partnership or fund, which range from three to thirteen years. As such, the Company classifies these securities as a Level 3 measurement.
Embedded derivatives relate to the Company’s FIA product, which credits interest to the policyholder’s account balance based on increases in selected indexes, primarily the S&P 500. See Note 6 for further discussion of the embedded derivative. The fair value reflects the excess of the projected benefits based on the indexed fund value over the projected benefits based on the guaranteed fund value. The excess benefits are projected using best estimates for surrenders, mortality and indexed fund interest, and discounted at a risk-free rate plus a spread for nonperformance and policyholder behavior risk. Because the estimates utilize significant unobservable inputs, the Company classifies the embedded derivatives as a Level 3 measurement.
The fair value of the Company’s mortgage loans are 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. Because these estimates utilize significant unobservable inputs, mortgage loans are classified as a Level 3 measurement.
The fair values of funds held under deposit contracts related to investment-type contracts are estimated based on the present value of the discounted cash flows. Cash flows were projected using best estimates for lapses, mortality and expenses,
and discounted at a risk-free rate plus a spread for nonperformance and policyholder behavior risk. Because these estimates utilize significant unobservable inputs, the Company classifies funds held under deposit contracts as a Level 3 measurement.
The following tables present additional information about financial instruments measured at fair value on a recurring basis and for which the Company has utilized significant unobservable inputs (Level 3) to determine fair value for the years ended December 31, 2014 and 2013:
The Company amortizes deferred 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. The Company makes assumptions as to lapse rates, mortality experience, maintenance expenses, crediting rates, and investment performance. Actual profits can vary from the estimates and can thereby result in increases or decreases to DAC amortization. The Company regularly evaluates its assumptions and, when necessary, revises the estimated gross profits of these contracts, resulting in assumption and experience unlocking adjustments to DAC amortization. When such estimates are revised, the impact is recorded in the consolidated statements of income.
The Company conducts regular recoverability analyses for its DAC asset balances associated with deferred and immediate annuity, universal life, traditional life, and group life and DI 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, 2014 and 2013, all of the DAC asset balances were considered recoverable.
The following tables summarize the components of AOCI and the adjustments to OCI for amounts reclassified from AOCI into net income for the years ended December 31, 2014, 2013 and 2012:
Other comprehensive income (loss) before reclassifications is net of taxes of $212.0, $(0.8), $(9.4), $13.4 and $215.2, respectively, for the year ended December 31, 2014, net of taxes of $(481.1), $(0.9), $59.2, $(9.4) and $(432.2), respectively, for the year ended December 31, 2013, and net of taxes of $201.1, $(2.8), $(24.4), $(0.1) and $173.8, respectively, for the year ended December 31, 2012.
On February 1, 2013, the Company’s board of directors authorized the repurchase, at management’s discretion, of up to 10,000,000 shares of the Company’s outstanding common stock. The authorization was increased to 16,000,000 shares on May 21, 2013. The Company has repurchased 9,053,303 shares under the program as of December 31, 2014. This includes 6,089,999 shares purchased on May 17, 2013 from a related party in a privately negotiated transaction for a total of $81.8.
The Stock Purchase Plan allows eligible employees to purchase shares of the Company’s common stock at a 15% discount from the market price. A total of 870,000 shares are authorized for issuance under this plan. As of December 31, 2014, 328,593 shares are available for future issuance under the Stock Purchase Plan.
During 2014, 2013 and 2012, the Company granted performance units to various members of management under the Equity Plan. The value of each performance unit is determined at the discretion of the Company’s board of directors based on the success of the Company over a three-year period. These are accounted for as liability awards, as the Company intends or is required to settle such awards in cash. The Company recognized $8.0, $6.4 and $4.7 in expense related to performance units granted under the Equity Plan for the years ended December 31, 2014, 2013 and 2012, respectively.
The Company evaluates the financial condition of its reinsurers to monitor its exposure to losses from reinsurer insolvencies. As of December 31, 2014, $116.3 or 35.4%, of the reinsurance recoverable was related to one reinsurer. The Company analyzes reinsurance recoverables according to the credit ratings and financial health of its reinsurers and is not aware of its major reinsurers currently experiencing financial difficulties. Of the total amount due from reinsurers as of both December 31, 2014 and 2013, 99.5% were with reinsurers rated A- or higher by A.M. Best. The Company had no write-offs or reserve for uncollectible reinsurance in 2014, 2013 or 2012.
Ceded reinsurance reduced policyholder benefits and claims by $75.8, $65.2 and $63.9 for the years ended December 31, 2014, 2013 and 2012, respectively.
For the year ended December 31, 2014, the change in prior year incurred claims was primarily due to favorable claims experience for medical stop-loss. The Company experienced higher than expected claims frequency and severity during 2013 and established its year-end reserves for estimated IBNR based on this experience. The related 2014 claims experience was lower than expected, and the Company released a portion of the reserves. For the year ended December 31, 2013, the change in prior year incurred claims was primarily due to favorable claims experience for medical stop-loss, offset by higher than expected claims on the Company's BOLI product. For the year ended December 31, 2012, the change in prior year incurred claims was primarily due to favorable claims experience for medical stop-loss, primarily related to the business the Company assumed in July 2011.
indebtedness of the Company, including its senior notes due 2016 and revolving credit facility. The notes are senior in right of payment to the Company's capital efficient notes (CENts).
Effective August 28, 2014, concurrently with entry into the unsecured revolving credit agreement referenced above, the Company terminated its prior $300.0 credit agreement, dated December 14, 2011, which was set to mature on December 14, 2015. At termination, the Company had no borrowings outstanding under the credit agreement and was in compliance with all covenants.
On December 12, 2014, the Company’s primary insurance subsidiary, Symetra Life Insurance Company, and its newly formed, indirect wholly owned subsidiary, Symetra Reinsurance Corporation (SRC), entered into a 25-year transaction to finance certain non-economic statutory reserves related to a block of universal life insurance policies with secondary guarantees issued by Symetra Life Insurance Company. As part of this transaction, SRC issued a surplus note with no initial principal
Differences between income taxes computed by applying the U.S. federal income tax rate of 35% to income from operations before income taxes and the provision for income taxes were as follows:
The Company has office space and certain equipment under leases that expire at various dates through 2025, subject to certain renewal options. The Company accounts for these leases as operating leases.
As of December 31, 2014 and 2013, unfunded mortgage loan commitments were $50.7 and $50.5, respectively. The Company had no other material commitments or contingencies as of December 31, 2014 and 2013.
Because of the nature of its 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, 2014, will have a material adverse effect on its consolidated financial condition, future operating results or liquidity.
The Company’s insurance company subsidiaries are restricted by state regulations as to the aggregate amount of dividends they may pay to their parent company in any consecutive 12-month period without regulatory approval. The aggregate amount of dividends for the current year is determined based on prior year’s statutory limits. Accordingly, Symetra Financial Corporation was eligible to receive dividends from its directly owned insurance company subsidiary, Symetra Life Insurance Company, during 2014 without obtaining regulatory approval, as long as the aggregate dividends paid over 12 months did not exceed $187.0. The total amount of dividends declared to Symetra Financial Corporation by Symetra Life Insurance Company during 2014 was $80.0. In addition, Symetra Financial Corporation received a $45.0 dividend from Symetra Life Insurance Company in January 2014 that was declared in December 2013. Based on state regulations as of December 31, 2014, Symetra Financial Corporation is eligible to receive dividends from Symetra Life Insurance Company during 2015 without obtaining regulatory approval as long as the aggregate dividends paid over the 12 months preceding any dividend payment date in 2015 do not exceed $207.8.
Symetra Financial Corporation declared and paid dividends of $1.70 per share during 2014. The total declared and paid dividends included a special dividend of $1.30 per common share for a total payout of $150.7, declared on October 24, 2014. There are no regulatory restrictions on the ability of Symetra Financial Corporation to pay dividends. The declaration and payment of future dividends on common stock will be at the discretion of the Company’s board of directors and will be dependent on, and may be limited by, many factors including the receipt of dividends from the Company’s insurance company
subsidiaries, the capital requirements of the Company’s insurance company subsidiaries, the Company’s financial condition and operating results, compliance with covenants of the Company’s revolving credit facility, the Company’s credit and financial strength ratings, and such other factors as the board of directors deems relevant.
Symetra Life Insurance Company’s surplus includes the balances of its three wholly owned subsidiaries, First Symetra National Life Insurance Company of New York, Symetra National Life Insurance Company and Symetra Reinsurance Corporation.
Each of the insurance company subsidiaries’ state of domicile imposes minimum risk-based capital (RBC) requirements that were developed by the NAIC. The formulas for determining the amount of RBC specify various weighting factors that are applied to the financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of total adjusted capital, as defined by the NAIC, to company action level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified correction action. As of December 31, 2014 each of the Company’s insurance company subsidiaries exceeded the minimum company action level RBC requirements and maintained risk-based capital ratios in excess of 470% of the company action level. The Company’s insurance company subsidiaries’ minimum statutory capital and surplus necessary to satisfy company action level regulatory requirements in the aggregate was $501.3 at December 31, 2014, of which 95.8% was attributable to Symetra Life Insurance Company.
The Company had an investment management agreement 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 20,048,879 shares of the Company’s common stock. This agreement, as amended, provided for investment advisory services related to the Company’s invested assets and portfolio management services. Expenses amounted to $19.0, $16.9 and $16.0 for the years ended December 31, 2014, 2013 and 2012, respectively. As of December 31, 2014 and 2013, amounts due to WMA were $5.1 and $4.3, respectively.
Income Annuities. Income Annuities offers SPIAs to customers seeking a reliable source of retirement income or to protect against outliving their assets during retirement. In addition, Income Annuities services a block of structured settlement policies sold to fund third party personal injury settlements. Income Annuities also offers funding services options to existing structured settlement clients.
Other. This segment consists of unallocated corporate income, which primarily includes investment income on unallocated surplus, unallocated corporate expenses, interest expense on debt, earnings related to limited partnership interests, the results of small, non-insurance businesses that are managed outside of the divisions, and inter-segment elimination entries.
The unaudited quarterly results of operations for years ended December 31, 2014 and 2013 are summarized in the table below.