UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-33808
SYMETRA FINANCIAL
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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20-0978027
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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777 108th Avenue NE, Suite 1200
Bellevue, Washington 98004
(Address of principal executive
offices, including zip code)
(425) 256-8000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.01 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past
90 days. Yes o No þ
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The registrant completed the initial public offering of its
common stock on January 27, 2010. Accordingly, there was no
public market for the registrants common stock before and
including June 30, 2009, the last business day of the
registrants most recently completed second fiscal quarter.
At March 1, 2010, there were 117,988,965 shares of
common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The information required to be furnished to Part III of
Form 10-K
is hereby incorporated by reference from the Registrants
definitive proxy statement relating to the Annual Meeting of
Shareholders to be held on May 12, 2010, which will be
filed with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after the year ended
December 31, 2009.
Forward-Looking
Statements
This Annual Report on
Form 10-K,
including Managements Discussion and Analysis of Financial
Condition and Results of Operations, contains statements, which
constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. All
statements, other than statements of current or historical facts
included or referenced in this report that address activities,
events or developments that we expect or anticipate will or may
occur in the future, are forward-looking statements. The words
will, believe, intend,
plan, expect, anticipate,
project, estimate, predict
and similar expressions also are intended to identify
forward-looking statements. These forward-looking statements
include, among others, statements with respect to Symetra
Financial Corporations:
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estimates or projections of revenues, net income (loss), net
income (loss) per share, adjusted operating income (loss),
adjusted operating income (loss) per share, market share or
other financial forecasts;
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trends in operations, financial performance and financial
condition;
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financial and operating targets or plans; and
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business and growth strategy.
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These statements are based on certain assumptions and analyses
made by Symetra in light of its experience and perception of
historical trends, current conditions and expected future
developments, as well as other factors believed to be
appropriate under the circumstances. Whether actual results and
developments will conform to Symetras expectations and
predictions is subject to a number of risks, uncertainties and
contingencies that could cause actual results to differ
materially from expectations, including, among others:
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general economic, market or business conditions, including
further economic downturns or other adverse conditions in the
global and domestic capital and credit markets;
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the availability of capital and financing;
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potential investment losses;
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the effects of fluctuations in interest rates;
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recorded reserves for future policy benefits and claims
subsequently proving to be inadequate or inaccurate;
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deviations from assumptions used in setting prices for insurance
and annuity products;
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market pricing and competitive trends related to insurance
products and services;
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changes in amortization of deferred policy acquisition costs;
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financial strength or credit ratings downgrades;
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the continued availability and cost of reinsurance coverage;
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changes in laws or regulations, or their interpretation,
including those that could increase Symetras business
costs and required capital levels;
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the ability of the issuers subsidiaries to pay dividends
to the issuer; and
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the risks that are described in Item 1A
Risk Factors in this report.
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Consequently, all of the forward-looking statements made in this
report are qualified by these cautionary statements, and there
can be no assurance that the actual results or developments
anticipated by Symetra will be realized or, even if
substantially realized, that they will have the expected
consequences to, or effects on, Symetra or its business or
operations. Symetra assumes no obligation to update publicly any
such forward-looking statements, whether as a result of new
information, future events or otherwise.
3
PART I
Overview
Our
Business
Unless the context otherwise requires, references in this Annual
Report on
Form 10-K
to Symetra refer to Symetra Financial Corporation on
a stand-alone, non-consolidated basis. References to
we, our, us and the
Company are to Symetra Financial Corporation together with
its subsidiaries.
We are a financial services company in the life insurance
industry, headquartered in Bellevue, Washington, focused on
profitable growth in select group health, retirement, life
insurance and employee benefits markets. 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). Our operations date back to 1957 and
many of our agency and distribution relationships have been in
place for decades.
On January 22, 2010, shares of our common stock began
trading on the New York Stock Exchange, or NYSE. On
January 27, 2010, we completed the initial public offering
of our common stock at an offering price of $12.00 per share.
The offering included 25,259,510 newly issued shares of common
stock sold by us and 9,700,490 existing shares of common stock
sold by selling stockholders. We received net proceeds from the
offering of approximately $282.5 million. We did not
receive any proceeds from the sale of shares by the selling
stockholders. See Item 5 Market for
Registrants Common Equity, Related Stockholder matters and
Issuer Purchases of Equity Securities for more information
about our initial public offering.
We distribute our array of annuity and insurance products
nationally through an extensive and diversified independent
distribution network. Our distributors include financial
institutions, employee benefits brokers, third party
administrators, specialty brokers, independent agents and
advisors. We believe that our multi-channel distribution network
allows us to access a broad share of the distributor and
consumer markets for insurance and financial services products.
We currently distribute our annuity and life insurance products
through approximately 17,000 independent agents, 25 key
financial institutions and 4,400 independent employee benefits
brokers. We continually add new distribution relationships to
expand the breadth of partners offering our products.
Our
Strategy
We believe we are well positioned to drive future growth and
enhance shareholder value by capitalizing on existing market
opportunities through the pursuit of the following strategies:
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Expand national distribution network. We have
a two-pronged approach to expanding product sales: working with
our existing distribution relationships and adding new
distribution partners. We believe that we are adept at designing
simple to understand, yet innovative products to meet the
changing demands of the market. By working closely with our
distributors, we are able to anticipate opportunities in the
marketplace and rapidly address them. Furthermore, by treating
our distributors as clients and providing them with outstanding
levels of service, we look to cultivate strong relationships,
which over the decades, have allowed us to build a powerful
national distribution network.
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Capitalize on increasing need for retirement savings and
income. Many individuals have experienced
significant declines in the value of their savings as a result
of recent market turmoil or have saved too little for
retirement. We expect greater demand for retirement savings
products that supplement social security. In particular, we
believe demand will continue to grow for products like immediate
annuities that offer income streams that cannot be outlived.
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Continue to provide simple to understand savings and
investment products. The recent equity and bond
market dislocation of the last two years shifted customer and
distributor demand
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toward simple to understand and predictable products. Customers
increasingly demand savings and income oriented products (such
as fixed annuities) that offer transparency and stable returns,
which are higher than returns on savings accounts.
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We believe that we have built a reputation as a writer of simple
to understand products that meet the needs of customers and our
distribution partners. We believe independent distributors
highly value our demonstrated ability to accept new business
during turbulent conditions while maintaining strong financial
performance.
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Maintain a strong balance sheet and effectively deploy
capital. We believe we are vigilant about
maintaining a strong balance sheet in all economic environments.
We believe our strong balance sheet will allow us to continue
growing our business. We intend to deploy our capital prudently
while maximizing our profitability and long-term growth in
stockholder value. Our capital management strategy is to
maintain financial strength through conservative and disciplined
risk management practices, capital efficient product design,
effective asset/liability management and opportunistic market
share growth in all our business segments. This approach will
enable us to remain flexible to allocate capital to
opportunities within our business segments that offer the
highest returns.
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Financial stability through a diverse mix of
business. We believe that our diverse mix of
businesses offers us a greater level of financial stability than
many of our similarly-sized competitors across business and
economic cycles. Given our lack of reliance on any particular
product or line of business, we are able to allocate resources
to markets with the highest potential returns at any given point
in time. By doing so, we are able to avoid certain markets when
they are experiencing heavy competition and related pricing
pressure without sacrificing our ability to grow revenues.
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Our
Segments
We manage our business through the following five segments, four
of which are operating:
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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.
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Retirement Services. We offer fixed and
variable deferred annuities, including tax sheltered annuities,
individual retirement accounts, or IRAs, and group annuities to
qualified retirement plans, including Section 401(k),
403(b) and 457 plans.
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Income Annuities. We offer single premium
immediate annuities, or SPIAs, to customers seeking a reliable
source of retirement income and structured settlement annuities
to fund third party personal injury settlements. In addition, we
offer funding services options to existing structured settlement
clients.
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Individual. We offer a wide array of term and
universal life insurance as well as bank-owned life insurance,
or BOLI.
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Other. This segment consists of unallocated
corporate income, composed primarily of investment income on
unallocated surplus, unallocated corporate expenses, interest
expense on debt, tax credits from our tax preferred affordable
housing investments, the results of small, non-insurance
businesses that are managed outside of our operating segments,
and inter-segment elimination entries.
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See Note 20 to the accompanying audited financial
statements for financial results of our segments, including our
operating revenues, for each of the last three fiscal years.
5
Group
Overview
We offer a full range of employment-based benefit products and
services targeted primarily at employers, unions and public
agencies with 50 to 5,000 employees. Groups products
include group medical stop-loss insurance sold to employer
self-funded health plans; limited benefit medical insurance for
employees not able to participate in a traditional health plan,
such as part-time, seasonal and temporary workers; group life,
accidental death and dismemberment insurance; and disability
income products. We purchase reinsurance coverage to limit our
exposure to losses from our group medical stop-loss, life and
short-term and long-term disability income products. In general,
we retain group medical stop-loss risk up to $1.0 million
per individual and reinsure the remainder with Reliastar Life
Insurance Company and White Mountains Re America. We reinsure
50% of our group life risk and cap our liability at
$0.5 million per individual. Our short-term and long-term
disability risk is 100% reinsured, except for the short-term
disability income product sold within limited benefit medical
plans, which is not reinsured.
We sell through several types of distributors within the Group
segment, including third party administrators, or TPAs, employee
benefits brokers, consultants and administrative services only,
or ASO, arrangements. ASOs are fully insured carriers that also
offer our group medical stop-loss insurance.
We work closely with employee benefits brokers, consultants and
employers to design benefit plans to meet the employers
particular requirements. Our customers primarily are small and
mid-size employers that require knowledgeable employee benefits
brokers, consultants and insurance company representatives to
understand their individual financial needs and employee
profiles, and to customize benefit plans that are appropriate
for them. We believe our extensive experience and expertise in
group medical stop-loss insurance, limited benefit medical
insurance, group life, accidental death and dismemberment
insurance and disability income products provide us with
opportunities to support close broker relationships and to
provide employers innovative and customer-centric benefit plans.
Products
Group
Medical Stop-Loss
Our group medical stop-loss insurance, our leading product in
the Group segment representing 90.6% of earned premiums in 2009,
is provided to employers that self-fund their employees
health claim costs. Such employers provide a health plan to
their employees and pay all claims and administrative costs. Our
product helps employers manage health expenses by reimbursing
specific claim amounts above a certain dollar deductible and by
reimbursing aggregate claims above a total dollar threshold.
Limited
Benefit Medical
Our limited benefit medical insurance is provided to employers
for health coverage to employees not otherwise eligible to
participate in traditional plans, such as part-time, seasonal
and temporary workers. The employer has a great deal of
flexibility in choosing benefits available to employees and
therefore managing total health costs incurred by the employer.
Life
Insurance, Accidental Death and Dismemberment
Our group term life insurance product provides benefits in the
event of an insured employees death. The death benefit can
be based upon an individuals earnings or occupation, or
can be fixed at a set dollar amount. Our products also include
optional accidental death and dismemberment coverage as a
supplement to our term life insurance policies. This coverage
provides benefits for an insured employees loss of life,
limb or sight as a result of accidental death or injury.
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Disability
Income Insurance
Our group long-term disability income coverage is designed to
cover the risk of employee loss of income during prolonged
periods of disability. Our group short-term disability income
coverage provides partial replacement of an insured
employees weekly earnings in the event of disability
resulting from an injury or illness. Benefits can be a set
dollar amount or based upon a percentage of earnings. We
reinsure 100% of the risk associated with this business.
Underwriting
and Pricing
Group insurance pricing reflects the employer groups
claims experience and risk characteristics. The employer
groups claims experience is reviewed at the time the
policy is issued and each renewal year thereafter, resulting in
ongoing adjustments to pricing. The key pricing and underwriting
criteria are medical cost trends, the employers selected
provider network discount structure, the employer groups
demographic composition, (including the age, gender and family
composition of the employer groups members), the
employers industry, geographic location, regional economic
trends, plan design and prior claims experience.
We face significant competition in the Group segment operations.
Our competitors include large and highly rated insurance
carriers, and many of them offer similar products and use
similar distribution channels. We strive to write and renew only
business that meets our return targets, but this discipline
sometimes leads to a negative impact on our market share.
However, we remain focused on profitability. Competition is
based primarily upon product pricing and features, compensation
and benefits structure and support offered.
Pricing in the medical stop-loss insurance market has proven to
be cyclical. Recently, we have seen generally disciplined
pricing in the medical stop-loss insurance market, which may
suggest a developing trend towards higher pricing for this
product line, based on our experience with previous pricing
cycles.
Retirement
Services
Overview
Our Retirement Services operation offers a full range of fixed
and variable deferred annuities in both the qualified and
non-qualified markets. Qualified contracts include IRAs, Roth
IRAs, tax-sheltered annuities (marketed to teachers and
not-for-profit
organizations) and Section 457 plans. We offer these
products to a broad range of consumers who want to accumulate
tax-deferred assets for retirement, desire a reliable source of
income during their retirement or seek to protect against
outliving their assets during retirement.
We offer our annuities primarily through financial institutions,
broker-dealers, independent agents and financial advisors.
The demand for fixed annuities has increased as consumers seek
the simple to understand, stable return offered by fixed annuity
products. We believe that demand for fixed annuity and other
investment products that help consumers supplement their social
security benefits with reliable retirement income will endure as
consumers rebuild and refocus on savings after the recent market
turmoil.
We offer a variety of simple variable annuity products that
position us to increase sales to consumers looking to maximize
after-tax returns over the long-term and have a tolerance for
some volatility in their underlying investments.
We believe that the small to mid-sized employer market place
will be an area of fixed and variable annuity sales growth as
more employers eliminate traditional pensions and offer defined
contribution plans with lower administrative costs. As employers
drive down employee costs, we believe they still want to offer
competitive retirement benefit plans as long as the
administrative costs are reasonable. Our products are designed
to allow employers to provide their employees with attractive
retirement investments for a relatively low cost. Once those
retirement plan customers decide to retire or rollover their
funds, we offer a suite of IRAs, Roth IRAs and other retirement
vehicles. It is our goal to capture and hold those customers by
offering products that address their evolving needs and
excellent service to our distribution partners and customers.
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Products
Fixed
Annuities
We offer fixed single premium and flexible premium deferred
annuities that provide for a premium payment at time of issue,
an accumulation period and an annuity payout period beginning at
some future date. Our most popular products are our Select and
Custom series that offer three-, five- and seven-year surrender
charge periods and a choice of one-, three-, five- or seven-year
interest rate lock periods. After the interest rate lock period,
the crediting rate is subject to change at our discretion
(subject to the minimum guaranteed rate) based upon competitive
factors, portfolio earnings rate, prevailing market rates and
product profitability. Our fixed annuity contracts are supported
by our general account, and the accrual of interest is generally
on a tax-deferred basis to the owner. The majority of our fixed
annuity contract owners retain their contracts through the
surrender penalty period. After one year in the annuity
contract, the contract owner may elect to take the accumulated
value of the annuity and convert it to a series of future
payments that are received over a selected period of time.
Our fixed annuity contracts permit the contract owners at any
time during the accumulation period to withdraw all or part of
the premium paid, plus the amount credited to their accounts,
subject to contract provisions such as surrender charges that
vary depending upon the terms of the product. The contracts
impose surrender charges that typically vary from 5.0% to 8.0%
of the amount withdrawn, starting in the year of contract issue
and decreasing to zero over a three to eight-year period.
Approximately $5.3 billion, or 70.3%, of the total account
value of our fixed annuities as of December 31, 2009, were
subject to surrender charges.
As market conditions change, we change the initial crediting
rate for newly issued fixed deferred annuities. We maintain the
initial crediting rate for a minimum period of either one year
or the initial guarantee period, whichever is longer.
Thereafter, we may adjust the crediting rate annually for any
given deposit. Most of our recently issued annuity contracts
have lifetime minimum guaranteed crediting rates between 1.0%
and 1.5%.
Our earnings from fixed annuities are based upon the spread
between the crediting rate on our fixed annuity contracts and
the returns we earn in our general account on our investment of
premiums, less acquisition and administrative expenses.
Variable
Annuities
We offer variable annuities that allow the contract owner to
make payments into a guaranteed-rate account and separate
accounts divided into subaccounts that invest in underlying
investment portfolios. Like a deferred fixed annuity, a deferred
variable annuity has an accumulation period and a payout period.
Although the fixed-rate account is credited with interest in a
manner similar to a fixed deferred annuity, there is no
guaranteed minimum rate of return for investments in the
subaccounts, and the contract owner bears the entire risk
associated with the performance of these subaccounts, subject to
the guaranteed minimum death benefit, or GMDB, or any other
benefit offered under the contract.
Similar to our fixed annuities, our variable annuity contracts
permit the contract owner to withdraw all or part of the
premiums paid, plus the amount credited to the contract
owners account, subject to contract terms such as
surrender charges. The cash surrender value of a variable
annuity contract depends upon the allocation of payments between
fixed and variable subaccounts, how long the contract has been
in force, and the investment performance of the variable
subaccounts to which the contract owner has allocated assets.
Variable annuities provide us with fee revenue in the form of
flat-fee charges, mortality and expense risk charges, and asset-
related administration charges. The mortality and expense risk
charge and asset related administration charge equal a
percentage of the contract owners assets in the separate
account and typically range from 1.0% to 1.6% per annum. In
addition, some contracts may offer the option for contract
owners to purchase additional features, such as GMDB, for
additional fees that are paid for through charges equal to a
percentage of the contract owners assets. The majority of
our GMDB risk on our individual variable annuities is reinsured.
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Our variable annuity strategy is to offer simple product designs
that emphasize long-term returns for the customer. We do not
offer the myriad of complex guaranteed living benefits found in
most of the products on the market. As a result, we are not a
significant writer of variable annuity business. Unlike some of
our competitors, we have not had to reprice our products to
charge for these features. Our Symetra Focus Variable Annuity
product is an example of our approach to the variable annuity
marketplace. Focus is one of the most cost-effective products on
the market. Because of the cost-effective design, Focus is one
of the few variable annuities available featuring index
investment options from Vanguard. The products low-cost
structure and investment options are designed to benefit
clients. The lower cost structure allows our clients to keep a
greater share of investment returns in their accounts as opposed
to paying fees for benefits that may not be needed. For clients
that seek an income solution from their variable product, we
offer standard annuitization features and a long-life benefit
that is funded over time. Our long-life benefit is unique in the
industry and works like a multi-premium immediate annuity, or
MPIA, with a deferred payment start date.
Historically, we have seen variable annuity sales decline during
and after equity market declines and volatility, but we expect
Focus to garner more sales as consumers gain more confidence in
the equity market and our competition continues to reduce
guaranteed living benefit options or increase the costs of these
benefits.
Retirement
Plans
We offer a wide range of annuities to fund employer-sponsored
retirement plans, which include 401(k) plans (including
traditional, Safe Harbor and SIMPLE profit sharing plans),
403(b) plans and Section 457 plans.
Underwriting
and Pricing
We price our products based upon our expected investment returns
and our expectations for mortality, longevity and the
probability that a policy or contract will remain in force from
one period to the next, referred to as persistency, for the
group of our contract owners as a whole, taking into account
mortality improvements in the general population and our
historical experience. We price deferred annuities by analyzing
longevity and persistency risk, volatility of expected earnings
on our assets under management, the risk profile of the product,
special reserving and capital requirements, and the expected
expenses we will incur.
Income
Annuities
Overview
We offer immediate annuities that guarantee a series of payments
that continue either for a certain number of years or for the
remainder of an annuitants life.
We also offer structured settlement contracts that provide an
alternative to a lump sum settlement, generally in a personal
injury lawsuit or workers compensation claim, and
typically are purchased by property and casualty insurance
companies for the benefit of an injured claimant. The structured
settlements provide scheduled payments over a fixed period or,
in the case of a life-contingent structured settlement, for the
life of the claimant, or a combination of fixed and life
contingent payments.
Products
Immediate
Annuities
In 2009, we experienced
year-over-year
increases in sales of our immediate annuities products. We
anticipate further increases in sales given the demographic
trend of greater numbers of people approaching retirement age
and their corresponding need for dependable retirement income,
which lasts their entire lives. We believe that we are one of
the most innovative designers of immediate annuity products.
According to Kehrer-LIMRA, we were the second largest seller of
immediate annuities through banks in 2009.
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Immediate annuities differ from deferred annuities in that they
provide for contractually guaranteed payments that generally
begin within one year of issue. Generally, the immediate
annuities available in the marketplace do not provide for
surrender or policy loans by the contractholder. We offer a
liquidity feature that allows the contractholder to withdraw
portions of the future payments. We also offer a feature that
allows benefits to be converted to a lump sum after death of the
annuitant. We recently introduced the Freedom Income product
that enables the customer to pick a payment start date several
years after contract purchase. This product is a cost effective
means of funding a future income stream.
Structured
Settlements
Structured settlement contracts provide an alternative to a lump
sum settlement, generally in a personal injury lawsuit or
workers compensation claim, which are typically purchased
by property and casualty insurance companies for the benefit of
an injured claimant. These structured settlements provide
scheduled payments over a fixed period or, in the case of a
life-contingent structured settlement, for the life of the
claimant, and may have a guaranteed minimum period of payments.
Structured settlement contracts also may provide for irregularly
scheduled payments to coincide with anticipated medical or other
claimant needs. These settlements offer tax-advantaged,
long-term financial security to the injured party and facilitate
claim settlement for the property and casualty insurance
carrier. Structured settlement contracts are long-term in
nature, guarantee a fixed benefit stream and generally do not
permit surrender or borrowing against the amounts outstanding
under the contract. In 2005, we introduced funding services to
clients with financial circumstances that may have changed from
the time they originally received a structured settlement. Our
initial funding service product provides an immediate lump sum
payment to replace future benefit payments and includes
coordinating the court approval process. In 2009, we expanded
the funding service product offerings to allow clients to
receive a lump sum and to change the timing of future benefit
payments. We believe that this product has been well received by
our clients and the courts.
Our current financial strength ratings limit our ability to
offer structured settlement contracts. If our principal life
insurance company subsidiary, Symetra Life Insurance Company,
receives an upgrade of its financial strength ratings from
A (Excellent) to A+ (Superior) from
A.M. Best, courts will be more willing to approve
structured settlement contract arrangements from us. Improving
this key rating will allow us to participate fully in this
market.
Underwriting
and Pricing
We price immediate annuities and structured settlements using
industry produced annuity mortality information, our mortality
experience and assumptions regarding continued improvement in
annuitant longevity, as well as assumptions regarding investment
yields at the time of issue and thereafter. Our structured
settlement contracts and traditional immediate annuities can be
underwritten in our medical department by medical doctors and
other trained medical personnel. If our medical department
determines the annuitant has a shorter or longer than standard
life expectancy, we can adjust our pricing to reflect that
information.
Our earnings from immediate annuities and structured settlement
annuities are driven by the spread on the returns we earn in our
general account on our investment of premiums and the interest
rate we used to determine the amount of income payments a client
receives at the time they purchase their annuity, less
acquisition and administrative expenses. Earnings increase or
decrease on these products depending upon our mortality
experience.
Individual
Overview
Life insurance provides protection against financial hardship
after the death of an insured by providing cash payments to the
beneficiaries of the policyholder. Single premium life and
universal life insurance products also provide an efficient way
for assets to be transferred to heirs. Our principal individual
life insurance product is term life, which provides life
insurance coverage with guaranteed level premiums for a
specified period of time with little or no buildup of cash value
that is payable upon lapse of the coverage. In
10
addition to term life insurance, we offer universal life
insurance products, which are designed to provide protection for
the entire life of the insured and may include a buildup of cash
value that can be used to meet the policyholders
particular financial needs during the policyholders
lifetime. We also sell BOLI to financial institutions seeking a
fixed yield investment that efficiently matches future employee
benefit liabilities.
We price our traditional insurance policies based primarily upon
our own historical experience in the underwriting risk
categories that we target. We target individuals in preferred
risk categories and offer them attractive products at
competitive prices in addition to targeting more standard risks.
Persons in preferred risk categories include healthier
individuals who generally have family histories that do not
present increased mortality risk. We also have significant
expertise in evaluating people with health problems and offer
appropriately priced coverage for people who meet our
underwriting criteria.
We offer our life insurance products primarily through three
distribution channels: independent agents and financial
advisors, financial institutions, and specialty agents for BOLI.
We believe there are opportunities to expand our sales through
each of these distribution channels.
Products
Term Life
Insurance
Our term life insurance policies provide a death benefit if the
insured dies while the coverage is in force. Term life policies
have little to no cash value buildup and therefore rarely have a
payment due if and when a policyholder decides to lapse the
policy. As of December 31, 2009, we had $180.7 million
of reserves associated with our term life and other traditional
life products.
Our primary term life insurance products have guaranteed level
premiums for initial terms of 10, 15, 20 or 30 years. After
the guaranteed period expires, premiums increase annually and
the policyholder has the option to continue under the current
policy by paying the increased premiums without demonstrating
insurability or qualifying for a new policy by submitting again
to the underwriting process. Coverage continues until the
insured reaches the policy expiration age or the policyholder
ceases to make premium payments or otherwise terminates the
policy, including potentially converting to a permanent plan of
insurance. The termination of coverage is called a lapse. For
newer policies, we seek to reduce lapses at the end of the
guaranteed period by gradually grading premiums to the attained
age scale of the insured over the five years following the
guaranteed period. After this phase-in period, premiums continue
to increase as the insured ages.
In 2009, we launched a new term insurance product designed
primarily for the mortgage term market. This product allows
customers to safeguard their home (often their most valuable
asset) in the event of death. This product includes an optional
return of premium feature allowing for the customer to pay
additional premiums for the comfort of knowing they will receive
back at a minimum what they paid in premiums.
We design and price our term insurance to limit the impact from
statutory reserves mandated by the valuation of life insurance
policies model regulation, also known in the insurance industry
as XXX deficiency reserves. We had $6.9 million of XXX
reserves as of December 31, 2009. Our product pricing is
not dependent on securitization of XXX deficiency reserves.
Universal
Life Insurance
Our universal life insurance policies provide policyholders with
lifetime death benefit coverage, the ability to accumulate
assets on a flexible, tax-deferred basis and the option to
access the cash value of the policy through a policy loan,
partial withdrawal or full surrender. Our universal life
products also allow policyholders to adjust the timing and
amount of premium payments. We credit premiums paid, less
certain expenses, to the policyholders account and from
that account deduct regular expense charges and certain risk
charges, known as cost of insurance charges, or COI, which
generally increase from year to year as the insured ages. Our
universal life insurance policies accumulate cash value that we
pay to the insured when the policy lapses or is surrendered.
Most of our universal life policies also include provisions for
surrender charges for early termination and partial withdrawals.
As of December 31, 2009, we had $679.2 million of
reserves associated with various universal life products.
11
We credit interest on policyholder account balances at a rate
determined by us, but not less than a contractually guaranteed
minimum. Our in force universal life insurance policies
generally have minimum guaranteed crediting rates ranging from
3.0% to 4.5% for the life of the policy.
We design and price our universal life insurance products to
limit the impact from statutory reserves mandated by the
valuation of life insurance policies model regulation, also
known in the insurance industry as AXXX deficiency reserves. We
had $17.8 million of AXXX reserves as of December 31,
2009. Our product pricing is not dependent on securitization of
AXXX deficiency reserves.
Bank-Owned
Life Insurance (BOLI)
Our life insurance business also includes $3.9 billion of
BOLI reserves, which represent universal life policies sold to
financial institutions. Many financial institutions have
purchased several billion dollars of BOLI as a means of
generating the cash flow needed to fund benefit liabilities. Our
fixed rate BOLI product is a highly stable, low-risk source of
financing that can offer net annual after-tax returns that are
generally higher than traditional bank investments. Over the
last few years some financial institutions bought variable BOLI
products, which we do not offer, and experienced significant
volatility and write-downs associated with those products. Our
book of BOLI business is 100% fixed.
Underwriting
and Pricing
We believe our rigorous underwriting and pricing practices are
significant drivers of the consistent profitability of our life
insurance business. Our fully underwritten term life insurance
is 50% to 90% reinsured, which limits mortality risk retained by
us. We set pricing assumptions for expected claims, lapses,
investment returns, expenses and customer demographics based on
our own relevant experience and other factors. Our strategy is
to price our products competitively for our target risk
categories and not necessarily to be equally competitive in all
categories.
Our fully underwritten policies place each insurable life
insurance applicant in one of eight primary risk categories,
depending upon current health, medical history and other
factors. Each of these eight categories has specific health
criteria, including the applicants history of using
nicotine products. We consider each life insurance application
individually and apply our guidelines to place each applicant in
the appropriate risk category, regardless of face value or net
amount at risk. We may decline an applicants request for
coverage if the applicants health or other risk factor
assessment is unacceptable to us. We do not delegate
underwriting decisions to independent sales intermediaries.
Instead, all underwriting decisions are made by our own
underwriting personnel or by our automated underwriting system.
We often share information with our reinsurers to gain their
insights on potential mortality and underwriting risks and to
benefit from their broad expertise. We use the information we
obtain from the reinsurers to help us develop effective
strategies to manage our underwriting risks. For specific
markets where fully underwritten products are not preferred by
the distributor, we have developed specially priced products to
support a simplified issue process. This process
enables us to reach applicants not called on by traditional
insurance agents. Simplified issue contracts are
typically generated via worksite sales to employees and sales to
retail bank customers. Insurance amounts are limited and
separate underwriting guidelines are applied for simplified
issue policies.
Other
Our Other segment consists primarily of unallocated surplus net
investment income, unallocated operating expenses including
interest expense on debt, tax credits from affordable housing
investments, the results of small, non-insurance businesses that
are managed outside of our operating segments and intersegment
elimination entries. In addition, beginning in the third quarter
of 2008, we include our net gains (losses) related to
investments in hedge and private equity funds in this segment,
reported through net investment income.
Distribution
We distribute our products through an extensive and diversified
distribution network. We believe access to a variety of
distribution channels enables us to respond effectively to
changing consumer needs and distribution trends. We compete with
other financial services companies to attract and retain
relationships in
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each of these channels. Some of the factors that lead to our
success in competing for sales through these channels include
amount of sales commissions and fees we pay, breadth of our
product offerings, our perceived stability and our financial
strength ratings, marketing and training we provide and
maintenance of key relationships with individuals at those
firms. We believe we have a well diversified multi-channel
distribution network to capture a broad share of the distributor
and consumer markets for insurance and financial services
products.
The following table sets forth our annualized first-year
premiums and deposits on new policies in our Group, Retirement
Services, Income Annuities and Individual segments:
Sales for
the Year Ended December 31, 2009
by Distribution Channel
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Segment
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Retirement
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Income
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Distribution Channel
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Group
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Services
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Annuities
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Individual
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(In millions)
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Financial institutions
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$
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$
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1,998.1
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$
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95.6
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$
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2.2
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Employee benefits brokers/ASOs/TPAs
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91.3
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Independent agents/BGAs
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230.3
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70.2
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8.3
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Structured settlements/BOLI
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86.0
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2.5
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Financial Institutions. We have agency
agreements with 25 key financial institutions, accounting for
approximately 19,000 agents and registered representatives in
all 50 states and the District of Columbia. We use
financial institutions to distribute a significant portion of
our fixed and variable annuities, as well as a growing portion
of our life insurance policies.
One financial institution, JPMorgan Chase & Co.,
accounted for 34.7% and 45.6% of our total sales for the years
ended December 31, 2009 and 2008, respectively, selling
primarily fixed annuity products. In September 2008, JPMorgan
Chase & Co. (which owns the Chase banking business)
acquired the banking operations of Washington Mutual, Inc. Prior
to that acquisition, Chase and Washington Mutual each
individually accounted for a significant portion of our total
sales. We do not believe that the acquisition has negatively
affected our distribution relationship with the combined
institution.
Under our two agreements with Chase Insurance Agency, Inc. (an
affiliate of JPMorgan Chase & Co.), Chase acts as a
writing agency in distributing certain of our annuity and life
insurance products and, with the consent of the policyowner,
also acts as servicing agent with regard to those products. In
exchange for these services, we pay commissions and service fees
to Chase on premiums paid to the Company and we pay trail
commissions, which are additional periodic commissions, to Chase
based on the value of the policies outstanding. These agreements
do not have a fixed term. With respect to future business, one
of the agreements is terminable by either party upon
30 days written notice to the other party and the
other agreement is terminable upon written notice.
Employee Benefits Brokers, Administrative Services Only (ASO)
carriers, Third Party Administrators (TPA). We
distribute our Group segment products through approximately
2,200 agencies in the employee benefits broker/ASO/TPA channel.
This distribution channel is also supported by approximately 30
of our employees located strategically across a nationwide
network of 14 regional offices.
Independent Agents, Brokerage General Agencies
(BGAs). We distribute life insurance and fixed
and deferred annuities through approximately 17,000 independent
agents located throughout the United States from approximately
10,200 different agencies. These independent agents market our
products and those of other insurance companies.
Structured Settlements. We distribute
structured settlements through approximately 570 settlement
consultants representing 86 agencies in 50 states and the
District of Columbia. We believe our ability to increase sales
of structured settlements will depend in part on our ability to
achieve a rating upgrade from A.M. Best.
13
Marketing
We promote and differentiate our products and services through
the breadth of our product offerings, technology services,
specialized support for our distributors and innovative
marketing programs to help distributors grow their business with
our products.
We have customized our marketing approach to promote our brand
to distributors of our products whom we believe have the most
influence in our customers purchasing decisions. We built
our brand among this constituency in three phases: an outreach
to our employees to understand and deliver on the brand, an
outreach to our independent producers in our sales channels and
a prudent consumer outreach. These programs include advertising
in trade and business periodicals, consumer advertising with a
modest budget leveraged by its ties to our producers, media
outreach to both trade and consumer periodicals and community
outreach, including partnering with distributors.
At the product level, we simplify the sales process so that the
recommendation to purchase our product is as easy and seamless
as possible. This is accomplished through our product
collateral, technology in the sales process and ease of service
after the sale.
We seek to build recognition of our brand and maintain strong
relationships with leading distributors by providing a high
level of specialized support, such as product training, sales
solutions, and products designed for targeted customers.
Reserves
Overview
We calculate and maintain reserves for estimated future benefit
payments to our policyholders and contractholders in accordance
with U.S. generally accepted accounting principles (GAAP).
We establish reserves at amounts that we expect to be sufficient
to satisfy our policy obligations. We release these reserves as
those future obligations are extinguished. The reserves we
establish necessarily reflect estimates and actuarial
assumptions with regard to our future experience. These
estimates and actuarial assumptions involve the exercise of
significant judgment. Our future financial results depend
significantly upon the extent to which our actual future
experience is consistent with the assumptions we have used in
pricing our products and determining our reserves. Many factors
can affect future experience, including economic and social
conditions, inflation, healthcare costs, changes in doctrines of
legal liability and damage awards in litigation. Therefore, we
cannot determine with complete precision the ultimate amounts we
will pay for actual future benefits or the timing of those
payments.
Individual
and Group Life Insurance and Group Health
Insurance
We establish reserves for life insurance policies based upon
generally recognized actuarial methods. We use mortality tables
in general use in the United States, modified where appropriate
to reflect relevant historical experience and our underwriting
practices. Persistency, expense and interest rate assumptions
are based upon relevant experience and expectations for future
development.
The liability for policy benefits for universal life insurance
and BOLI policies is equal to the balance that accrues to the
benefit of policyholders, including credited interest, plus any
amount needed to provide for additional benefits. We also
establish reserves for amounts that we have deducted from the
policyholders balance to compensate us for services to be
performed in future periods.
Our reserves for unpaid group life and health insurance claims,
including our stop-loss medical and other lines, are estimates
of the ultimate net cost of both reported losses that have not
yet been settled and incurred but as yet unreported losses.
Reserves for incurred but as yet unreported claims are based
upon historic incidence rates, severity rates, reporting delays
and any known events that we believe will materially affect
claim levels.
Reserves for long-term disability income claims are based upon
factors including recovery, mortality, expenses, Social Security
and other benefit offsets and interest rates. They represent the
actuarial present value
14
of benefits and associated expenses for current claims, reported
claims that have not yet completed and incurred claims that have
not yet been reported. Claims on long-term disability income
insurance policies consist of payments to be made periodically,
generally monthly, in accordance with the contractual terms of
the policy.
Retirement
Services and Income Annuities
For our investment contracts, which are primarily deferred
annuities, contractholder liabilities are equal to the
accumulated contract account values, which generally consist of
an accumulation of deposit payments, less withdrawals, plus
investment earnings and interest credited to the account, less
expense, mortality and product charges, if applicable. We also
maintain a separate reserve for any expected future payments in
excess of the account value due to the potential death of the
contractholder. The reserves were reset to fair value on the
date of the Acquisition.
Reserves for future policy benefits on our immediate fixed
annuity contracts are calculated based upon actuarial
assumptions regarding the interest to be earned on the assets
underlying the reserves and, if applicable, the annuitants
life expectancy.
Investments
In managing our investments, we are focused on disciplined
matching of our assets to our liabilities and preservation of
principal. Within this framework, we seek to generate
appropriate risk-adjusted returns through careful individual
security analysis. We seek to reduce and manage credit risk by
focusing on capital preservation, fundamental credit analysis,
value-oriented security selection and quick action as a
securitys outlook changes.
Other than our commercial mortgage portfolio, which is managed
by our internal commercial mortgage loan department, we have
contracted with professional investment advisors to invest our
assets. As of December 31, 2009, the majority of our
$18,553.7 million (amortized cost) fixed income portfolio
was managed by White Mountains Advisors LLC, or WM Advisors, and
our $218.5 million equity portfolio was managed by
Prospector Partners, LLC, or Prospector.
For each of our operating segments and for our unallocated
surplus, we separate our investments into one or more distinct
portfolios. Our investment strategy for each portfolio is based
on the expected cash flow characteristics of the portion of the
liabilities of the business segment associated with the
portfolio. The strategies are regularly monitored through a
review of portfolio metrics, such as effective duration, yield
curve sensitivity, convexity, liquidity, asset sector
concentration and credit quality.
In general, we purchase high quality assets to pursue the
following investment strategies for our operating segments:
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Group. We invest in short duration fixed
income corporate bonds and mortgaged backed securities.
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Retirement Services. We invest in short to
medium duration fixed income corporate bonds, mortgage backed
securities, commercial mortgage loans and a modest amount of
below investment grade bonds.
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Income Annuities. The Income Annuities segment
has liability payments that run well beyond 40 years. The
majority of the segments portfolio is invested in long
duration fixed income corporate bonds, mortgage-backed
securities and commercial mortgage loans. In addition, we invest
in equities to support a portion of the liability payments due
more than 30 years in the future.
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Individual. We invest in medium to long
duration fixed income corporate bonds, mortgage-backed
securities, commercial mortgage loans and a modest amount of
below investment grade bonds.
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Other. We invest in short to medium duration
fixed income assets.
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15
We are exposed to three primary sources of investment risk:
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Credit risk risk relating to the uncertainty
associated with the continued ability of a given obligor to make
timely payments of principal and interest;
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Interest rate and credit spread risk risk
relating to the market price
and/or cash
flow variability associated with changes in market yield curves
and credit spreads; and
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Equity risk risk relating to adverse
fluctuations in a particular common stock.
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Our ability to manage these risks while generating an
appropriate investment return is essential to our business and
our profitability.
We manage credit risk by analyzing issuers, transaction
structures and, for our commercial mortgage portfolio, real
estate properties. We use analytic techniques to monitor credit
risk. For example, we regularly measure the probability of
credit default and estimated loss in the event of such a
default, which provides us with early notification of worsening
credit. If an issuer downgrade causes our holdings of that
issuer to exceed our risk thresholds, we automatically undertake
a detailed review of the issuers credit. We also manage
credit risk through industry and issuer diversification, asset
allocation practices and personal recourse. For commercial
mortgage loans, we manage credit risk through geographic and
product-type diversification and asset allocation. We routinely
review different issuers and sectors and conduct more formal
quarterly portfolio reviews.
We mitigate interest rate and credit spread risk through
rigorous management of the relationship between the duration of
our assets and the duration of our liabilities, seeking to
minimize risk of loss in both rising and falling interest rate
and widening credit spread environments.
We mitigate equity risk by limiting the size of our equity
portfolio to correlate with our exposure to long duration
obligations in our Income Annuities segment and the ability of
our capital base to absorb downside volatility without creating
capital ratio stress
and/or
constraints on growth. We invest in relatively concentrated
positions in the United States and other developed markets. The
investments are identified using a
bottom-up
fundamental analysis and value oriented investment approach.
Reinsurance
We engage in the industry practice of reinsuring portions of our
insurance risk with reinsurance companies through both treaty
and facultative reinsurance agreements. We use reinsurance to
diversify our risks and manage loss exposures primarily in our
Group and Individual segments. The use of reinsurance permits us
to write policies in amounts larger than the risk we are willing
to retain.
We cede insurance primarily on a treaty basis, under which risks
are ceded to a reinsurer on specific books of business where the
underlying risks meet certain predetermined criteria. To a
lesser extent, we cede insurance risks on a facultative basis,
under which the reinsurers prior approval is required on
each risk reinsured. The use of reinsurance does not discharge
us, as the insurer, from liability on the insurance ceded. We,
as the insurer, are required to pay the full amount of our
insurance obligations even in circumstances where we are
entitled or able to receive payments from our reinsurer. The
principal reinsurers to which we cede risks have A.M. Best
financial strength ratings ranging from A+ to
A−.
16
We had reinsurance recoverables of $276.6 million and
$264.2 million as of December 31, 2009 and
December 31, 2008, respectively. The following table sets
forth our exposure to our principal reinsurers, including
reinsurance recoverables as of December 31, 2009, and the
A.M. Best ratings of those reinsurers as of that date:
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Reinsurance
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A.M. Best
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Recoverable
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Rating
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(In millions)
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RGA Reinsurance Company
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$
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102.4
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A
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+
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Transamerica Life Insurance Company
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72.8
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A
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UNUM Life Insurance Company of America (UNUM)
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47.4
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A
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−
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Lincoln National Life Insurance Company
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23.4
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A
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+
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In the table above, the reinsurance recoverables under our
agreements with RGA, UNUM and Lincoln represent our reinsurance
exposure to these parties under the reinsurance agreements. The
reinsurance recoverable under our agreement with Transamerica
represents the assets withheld for our share of the coinsurance
agreement.
Under most of our reinsurance agreements, we obtain reinsurance
to mitigate some or all of the risk of the policies we issue,
particularly the risk of substantial loss from death of an
individual or catastrophic loss, and in other cases where the
reinsurer offers a particular expertise. Some of these
agreements are coinsurance arrangements, whereby we only obtain
reinsurance for a portion of the risk, and retain the remainder.
In some cases, we instead act as a reinsurer (or coinsurer) of
another life insurance company.
The following is a brief summary of our reinsurance agreements
with the parties listed in the table above:
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RGA Reinsurance Company. Under our agreements
with RGA, RGA reinsures the risk of a large loss on term life
insurance and universal life insurance policies. These are
typically coinsurance or yearly renewable term arrangements,
whereby we cede 50% or more of the claims liability to RGA.
Reinsurance premiums are determined according to the amount
reinsured with RGA per policy. These agreements do not have a
fixed term. Either party can terminate these agreements with
respect to future business with 90 days written
notice to the other party.
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Transamerica Life Insurance Company. Under an
agreement with Transamerica, we act as their reinsurer with
respect to 28.6% of a BOLI policy. BOLI is life insurance
purchased by a bank to insure the lives of bank employees,
usually officers and other highly compensated employees. BOLI
policies are commonly used by banks to fund employee pension
plans and benefit plans. Transamerica invests the policy
premiums paid by the bank, and manages those investments subject
to the terms of the policy. We have assumed 28.6% of the claims
liability under this policy, and receive 28.6% of the proceeds
generated under the policy. The term of this agreement is
perpetual. We are only allowed to terminate this agreement in
the event Transamerica fails to pay amounts due to us under this
agreement or in the event of fraud, misrepresentation or breach
of this agreement by Transamerica.
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UNUM Life Insurance Company of America. We
cede all of our group long-term disability income, or LTD, and
short-term disability income, or STD, claims liability through a
reinsurance pool under agreements with the administrator of the
pool, Reliance Standard Life Insurance Company, or Reliance, as
Managing Agent for each participating reinsurer in the pool and
as a participating reinsurer in its own right. The pool of
reinsurers and their participation levels may change each
agreement year for new claims. Reliance has been the sole pool
participant for agreement years 2006 and later. UNUM maintained
the highest level of participation for agreement years prior to
2006. On an aggregate basis, UNUM currently reinsures the
substantial majority of existing group LTD and STD claims
liability. The premium rates are developed (on a
policy-by-policy
basis) by adding our expense load to the rate that the reinsurer
charges for their claims cost and their expenses. When premiums
are collected, we retain the portion that
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represents our expense load and send the remainder to the
reinsurer. These agreements do not have a fixed term. Either
party can terminate the agreement with respect to future
business by providing 90 days written notice to the
other.
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Lincoln National Life Insurance Company. Under
our agreements with Lincoln, we primarily cede claims liability
under 10-, 15- and
20-year term
life insurance policies to Lincoln. These are typically
coinsurance arrangements, whereby we cede 50% or more of the
claims liability to Lincoln. Reinsurance premiums are determined
in proportion to the amount reinsured with Lincoln per policy.
These agreements do not have a fixed term. Either party can
terminate these agreements with respect to future business upon
90 days written notice to the other party.
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Operations
and Technology
We have a dedicated team of service and support personnel, as
well as our outsourced provider Affiliated Computer Services, or
ACS, based in Dallas, Texas, which was acquired by Xerox Corp.
in February 2010, that deliver automation solutions to drive
competitive advantage, achieve earnings growth objectives and
control the cost of doing business. We mainly follow a
buy-versus-build approach in providing application and business
processing services that accelerate delivery and responsiveness.
We also develop proprietary software for competitive or economic
benefits.
Competition
We face significant competition for customers and distributors
from insurance and other non-insurance financial services
companies, such as banks, broker-dealers and asset managers, in
each of our businesses. Our competitors vary by product and
distribution channel; however, generally, our life and health
insurance products compete with similar products offered by
other large and highly rated insurers, and our retirement
services and income annuity products compete with those offered
by other financial services companies. Many of our insurance
products are underwritten annually, resulting in the risk that
purchasers may be able to obtain more favorable rates from these
competitors than if they were to renew coverage with us.
Competition in our operating business segments is based on a
number of factors, including:
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quality of service;
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product features;
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price;
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commissions;
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ability to purchase attractive assets;
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diversification of distribution;
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financial strength ratings;
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reputation; and
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name recognition.
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The relative importance of these factors depends on the
particular product and market. We believe that our competitive
advantages primarily stem from our distribution network, as well
as our strong financial position, diverse business mix, and
superior investment management.
Financial
Strength Ratings
Rating organizations continually review the financial
performance and condition of most insurers and provide financial
strength ratings based on a companys operating performance
and ability to meet obligations to policyholders. Ratings
provide both industry participants and insurance consumers
meaningful information on specific insurance companies and are
an important factor in establishing the competitive position of
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insurance companies. In addition, ratings are important to
maintaining public confidence in us and our ability to market
our products.
Symetra Financial Corporation and our principal life insurance
subsidiaries, Symetra Life Insurance Company and First Symetra
National Life Insurance Company of New York, are rated by
A.M. Best; Standard and Poors, or S&P;
Moodys and Fitch as follows as of December 31, 2009:
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A.M. Best
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S&P
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Moodys
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Fitch
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Financial Strength Ratings
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Symetra Life Insurance Company
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A
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A
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A3
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A+
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First Symetra National Life Insurance Company of New York
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A
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A
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NR*
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A+
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Issuer Credit/Default Ratings
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Symetra Financial Corporation
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bbb+
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BBB
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Baa3
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A−
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Symetra Life Insurance Company
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a+
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A
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NR*
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NR*
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First Symetra National Life Insurance Company of New York
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a+
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A
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NR*
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NR*
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* NR indicates not rated
A.M. Best states that its A (Excellent)
financial strength rating is assigned to those companies that
have, in its opinion, an excellent ability to meet their ongoing
obligations to policyholders. The A (Excellent) is
the third highest of 16 ratings assigned by A.M. Best,
which range from A++ to S.
A.M. Best describes its a issuer credit rating
for insurers as excellent, assigned to those
companies that have, in its opinion, a strong ability to meet
the terms of their ongoing senior financial obligations. Its
bbb issuer credit rating is described as
good, assigned to those companies that have, in its
opinion, an adequate ability to meet the terms of their
obligations but are more susceptible to changes in economic or
other conditions. A.M. Best issuer credit ratings range
from aaa (exceptional) to rs (regulatory
supervision/liquidation) and may be enhanced with a
+ (plus) or - (minus) to indicate
whether credit quality is near the top or bottom of a category.
Symetra Life Insurance Company and First Symetra National Life
Insurance Company of New Yorks Financial Size Category, or
FSC, rankings, as determined by A.M. Best, are both XIII,
the third highest of 15. A.M. Best indicates that the FSC
is designed to provide an indicator of the size of a company in
terms of its statutory surplus and related accounts.
Standard & Poors states that an insurer with a
financial strength rating of A (Strong) has strong
financial security characteristics that outweigh any
vulnerabilities, and is highly likely to have the ability to
meet financial commitments, but is somewhat more likely to be
affected by adverse business conditions than are insurers with
higher ratings. The A range is the third highest of
the four ratings ranges that meet these criteria, and also is
the third highest of nine financial strength ratings ranges
assigned by S&P, which range from AAA to
R. A plus (+) or minus (-) shows relative standing
in a rating category. Accordingly, the A rating is
the sixth highest of S&Ps 21 ratings categories.
S&P describes companies assigned an A issuer
credit rating as having a strong capacity to meet financial
commitments, but somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
higher-rated companies. Companies assigned a BBB
issuer credit rating have adequate capacity to meet financial
commitments, but adverse economic conditions are more likely to
lead to a weakened capacity to meet such commitments. S&P
issuer credit ratings range from AAA to
D, indicating default.
Moodys Investors Service states that insurance companies
rated A3 (Good) offer good financial security.
However, elements may be present that suggest a susceptibility
to impairment sometime in the future. The A range is
the third highest of nine financial strength rating ranges
assigned by Moodys which range from Aaa to
C. Numeric modifiers are used to refer to the
ranking within the group, with 1 being the highest
and 3 being the lowest. Accordingly, the
A3 rating is the seventh highest of Moodys 21
ratings
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categories. Moodys credit rating is assigned to our senior
debt. A rating of Baa is defined as subject to
moderate credit risk, considered medium-grade, and may possess
certain speculative characteristics.
Fitch states that insurance companies with a financial strength
rating of A+ (Strong) are viewed as possessing
strong capacity to meet policyholder and contract obligations.
Risk factors are moderate, and the impact of any adverse
business and economic factors is expected to be small. The
A rating category is the third highest of eight
financial strength categories, which range from AAA
to D. The symbol (+) or (-) may be appended to a
rating to indicate the relative position of a credit within a
rating category. These suffixes are not added to ratings in the
AAA category or to ratings below the CCC
category. Accordingly, the A+ rating is the fifth
highest of Fitchs 24 financial strength ratings
categories. Fitch describes its A− issuer
default rating as high credit quality, which denotes
an expectation of low default risk, but may be more vulnerable
to adverse business or economic conditions than higher ratings.
Fitch issuer default ratings range from AAA (highest
credit quality) to D (default).
A.M. Best, S&P, Moodys and Fitch review their
ratings periodically and we cannot assure you that we will
maintain our current ratings in the future. Other agencies may
rate Symetra or our insurance subsidiaries on a solicited or
unsolicited basis.
The A.M. Best, S&P, Moodys and Fitch ratings
included are not designed to be, and do not serve as, measures
of protection or valuation offered to investors. These ratings
should not be relied on with respect to making an investment in
our securities.
Regulation
Our insurance operations are subject to a wide variety of laws
and regulations. State insurance laws regulate most aspects of
our insurance businesses, and our insurance subsidiaries are
regulated by the insurance departments of the states in which
they are domiciled and licensed. Our insurance products and thus
our businesses also are affected by U.S. federal, state and
local tax laws. Insurance products that constitute
securities, such as variable annuities and variable
life insurance, also are subject to federal and state securities
laws and regulations. The Securities and Exchange Commission, or
SEC, the Financial Industry Regulatory Authority, or FINRA, and
state securities authorities regulate these products.
Our broker-dealers are subject to federal and state securities
and related laws. The SEC, FINRA and state securities
authorities are the principal regulators of these operations.
The purpose of the laws and regulations affecting our insurance
and securities businesses is primarily to protect our customers
and not our noteholders or stockholders. Many of the laws and
regulations to which we are subject are regularly re-examined,
and existing or future laws and regulations may become more
restrictive or otherwise adversely affect our operations.
In addition, insurance and securities regulatory authorities
increasingly make inquiries regarding compliance by us and our
subsidiaries with insurance, securities and other laws and
regulations regarding the conduct of our insurance and
securities businesses. We cooperate with such inquiries and take
corrective action when warranted.
Many of our customers and agents also operate in regulated
environments. Changes in the regulations that affect their
operations also may affect our business relationships with them
and their ability to purchase or to distribute our products.
Insurance
Regulation
Our insurance subsidiaries are licensed and regulated in all
states in which they conduct insurance business. The extent of
this regulation varies, but most states have laws and
regulations governing the financial condition of insurers,
including standards of solvency, types and concentration of
investments, establishment and maintenance of reserves, credit
for reinsurance and requirements of capital adequacy, and the
business conduct of insurers, including marketing and sales
practices and claims handling. In addition, statutes and
regulations usually require the licensing of insurers and their
agents, the approval of policy forms and related
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materials and the approval of rates for certain lines of
insurance. The types of insurance laws and regulations
applicable to us or our insurance subsidiaries are described
below.
Insurance
Holding Company Regulation
All states in which our insurance subsidiaries conduct insurance
business have enacted legislation that requires each insurance
company in a holding company system, except captive insurance
companies, to register with the insurance regulatory authority
of its state of domicile and to furnish that regulatory
authority financial and other information concerning the
operations of, and the interrelationships and transactions
among, companies within its holding company system that may
materially affect the operations, management or financial
condition of the insurers within the system. These laws and
regulations also regulate transactions between insurance
companies and their parents and affiliates. Generally, these
laws and regulations require that all transactions within a
holding company system between an insurer and its affiliates be
fair and reasonable and that the insurers statutory
surplus following any transaction with an affiliate be both
reasonable in relation to its outstanding liabilities and
adequate in relation to its financial needs. Statutory surplus
is the excess of admitted assets over statutory liabilities. For
certain types of agreements and transactions between an insurer
and its affiliates, these laws and regulations require prior
notification to, and non-disapproval or approval by, the
insurance regulatory authority of the insurers state of
domicile.
Policy
Forms
Our insurance subsidiaries policy forms are subject to
regulation in every state in which such subsidiaries are
licensed to transact insurance business. In most states, policy
forms must be filed prior to their use.
Dividend
Limitations
As a holding company with no significant business operations of
its own, Symetra depends on dividends or other distributions
from its subsidiaries as the principal source of cash to meet
its obligations, including the payment of interest on and
repayment of principal of any debt obligations and payment of
dividends to stockholders and stock repurchases. The payment of
dividends or other distributions to Symetra by its insurance
subsidiaries is regulated by the insurance laws and regulations
of their respective states of domicile. In the state of
Washington, the state of domicile of Symetras principal
insurance subsidiary, Symetra Life Insurance Company, an
insurance company subsidiary may not pay an
extraordinary dividend or distribution until
30 days after the insurance commissioner has received
sufficient notice of the intended payment and has not objected
or has approved the payment within the
30-day
period. An extraordinary dividend or distribution is
defined under Washington law as a dividend or distribution that,
together with other dividends and distributions made within the
preceding twelve months, exceeds the greater of:
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10% of the insurers statutory surplus as of the
immediately prior year end; or
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the statutory net gain from the insurers operations for
the prior year.
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State laws and regulations also prohibit an insurer from
declaring or paying a dividend except out of its statutory
surplus or require the insurer to obtain regulatory approval
before it may do so. In addition, insurance regulators may
prohibit the payment of ordinary dividends or other payments by
our insurance subsidiaries to Symetra (such as a payment under a
tax sharing agreement or for employee or other services) if they
determine that such payment could be adverse to our
policyholders or contractholders.
Market
Conduct Regulation
The laws and regulations of U.S. jurisdictions include
numerous provisions governing the marketplace activities of
insurers, including provisions governing the form and content of
disclosure to consumers, product illustrations, advertising,
product replacement, suitability, sales and underwriting
practices, complaint handling and claims handling. State
jurisdictions generally enforce these provisions through
periodic market conduct examinations.
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Statutory
Examinations
As part of their regulatory oversight process, state insurance
departments conduct periodic detailed examinations of the books,
records, accounts and business practices of insurers domiciled
in their jurisdictions. These examinations generally are
conducted in cooperation with the insurance departments of
several other states under guidelines promulgated by the
National Association of Insurance Commissioners, or NAIC. In the
three-year period ended December 31, 2009, we have not
received any material adverse findings resulting from any
insurance department examinations of our insurance subsidiaries.
Guaranty
Associations and Similar Arrangements
Most states require life insurers licensed to write insurance
within the state to participate in guaranty associations, which
are organized to pay contractual benefits owed pursuant to
insurance policies of insurers who become impaired or insolvent.
These associations levy assessments, up to prescribed limits, on
all member insurers in a particular state on the basis of the
proportionate share of the premiums written by member insurers
in the lines of business in which the impaired, insolvent or
failed insurer is engaged. Some states permit member insurers to
recover assessments paid through full or partial premium tax
offsets.
We had net aggregate assessments (refunds) levied against (or
received) by our insurance subsidiaries totaling
$(1.6) million, $0.1 million and $0.2 million for
the years ended December 31, 2009, 2008 and 2007,
respectively. Included in the net amount above are refunds
totaling $2.3 million received during the year ended
December 31, 2009, primarily from one state related to
assessments we paid prior to 1998. Although the amount and
timing of future assessments are not predictable, we have
established reserves for guaranty fund assessments that we
consider adequate for assessments with respect to insurers that
currently are subject to insolvency proceedings. On an annual
basis in the fourth quarter, the National Organization of Life
and Health Guaranty Associations provides information pertaining
to estimated future assessments for insolvencies payable by us
to various state guaranty fund associations. As a result, we
increased our estimated guaranty fund liability by
$4.6 million and increased the related premium tax offset
asset by $2.6 million as of December 31, 2009.
Change
of Control
The laws and regulations of the states in which our insurance
subsidiaries are domiciled require that a person obtain the
approval of the insurance commissioner of the insurance
companys jurisdiction of domicile prior to acquiring
control of the insurer. Generally, such laws provide that
control over an insurer is presumed to exist if any person,
directly or indirectly, owns, controls, holds with the power to
vote, or holds proxies representing 10% or more of the voting
securities of the insurer. In considering an application to
acquire control of an insurer, the insurance commissioner
generally will consider such factors as the experience,
competence and financial strength of the applicant, the
integrity of the applicants board of directors and
executive officers, the acquirors plans for the management
and operation of the insurer, and any anticompetitive results
that may arise from the acquisition. In addition, a person
seeking to acquire control of an insurance company is required
in some states to make filings prior to completing an
acquisition if the acquirer and the target insurance company and
their affiliates have sufficiently large market shares in
particular lines of insurance in those states. Approval of an
acquisition may not be required in these states, but the state
insurance departments could take action to impose conditions on
an acquisition that could delay or prevent its consummation.
These laws may discourage potential acquisition proposals and
may delay, deter or prevent a change of control involving us,
including through transactions, and in particular unsolicited
transactions, that some or all of our stockholders might
consider to be desirable.
Policy
and Contract Reserve Sufficiency Analysis
Under the laws and regulations of their states of domicile, our
life insurance subsidiaries are required to conduct annual
analyses of the sufficiency of their life and health insurance
and annuity statutory reserves. In addition, other jurisdictions
in which these subsidiaries are licensed may have certain
reserve requirements that differ from those of their domiciliary
jurisdictions. In each case, a qualified actuary must submit an
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opinion that states that the aggregate statutory reserves, when
considered in light of the assets held with respect to such
reserves, make good and sufficient provision for the associated
contractual obligations and related expenses of the insurer. If
such an opinion cannot be provided, the affected insurer must
set up additional reserves by moving funds from surplus. Our
life insurance subsidiaries submit these opinions annually to
applicable insurance regulatory authorities.
Surplus
and Capital Requirements
Insurance regulators have the discretionary authority, in
connection with the ongoing licensing of our insurance
subsidiaries, to limit or prohibit the ability of an insurer to
issue new policies if, in the regulators judgment, the
insurer is not maintaining a minimum amount of surplus or is in
hazardous financial condition. Insurance regulators may also
limit the ability of an insurer to issue new life insurance
policies and annuity contracts above an amount based upon the
face amount and premiums of policies of a similar type issued in
the prior year. We do not believe that the current or
anticipated levels of statutory surplus of our insurance
subsidiaries present a material risk that any such regulator
would limit the amount of new policies that our insurance
subsidiaries may issue.
Risk-based
Capital
The NAIC has established risk-based capital standards for life
insurance companies as well as a model act with the intention
that these standards be applied at the state level. The model
act provides that life insurance companies must submit an annual
risk-based capital report to state regulators reporting their
risk-based capital based upon four categories of risk: asset
risk, insurance risk, interest rate risk and business risk. For
each category, the capital requirement is determined by applying
factors to various asset, premium and reserve items, with the
factor being higher for those items with greater underlying risk
and lower for less risky items. The formula is intended to be
used by insurance regulators as an early warning tool to
identify possible weakly capitalized companies for purposes of
initiating further regulatory action.
If an insurers risk-based capital falls below specified
levels, the insurer would be subject to different degrees of
regulatory action depending upon the level. These actions range
from requiring the insurer to propose actions to correct the
capital deficiency to placing the insurer under regulatory
control. As of December 31, 2009, the risk-based capital of
each of our life insurance subsidiaries exceeded the level of
risk-based capital that would require any of them to take or
become subject to any corrective action. As of December 31,
2009, Symetra Life Insurance Company had a risk-based capital
ratio of 413%.
Statutory
Accounting Principles
Statutory accounting principles, or SAP, is a basis of
accounting developed by state insurance regulators to monitor
and regulate the solvency of insurance companies. In developing
SAP, insurance regulators were primarily concerned with assuring
an insurers ability to pay all its current and future
obligations to policyholders. As a result, statutory accounting
focuses on conservatively valuing the assets and liabilities of
insurers, generally in accordance with standards specified by
the insurers domiciliary state. Uniform statutory
accounting practices are established by the NAIC and generally
adopted by regulators in the various states. These accounting
principles and related regulations determine, among other
things, the amounts our insurance subsidiaries may pay to us as
dividends. The values for assets, liabilities and equity
reflected in financial statements prepared in accordance with
U.S. GAAP are usually different from those reflected in
financial statements prepared under SAP.
Regulation
of Investments
Each of our insurance subsidiaries is subject to laws and
regulations that require diversification of its investment
portfolio and limit the amount of investments in certain asset
categories, such as below investment grade fixed maturities,
real estate, equity investments and derivatives. Failure to
comply with these laws and regulations would cause investments
exceeding regulatory limitations to be treated as non-admitted
assets for purposes of measuring surplus, and, in some
instances, would require divestiture of such non-complying
23
investments. We believe the investments held by our insurance
subsidiaries comply with these laws and regulations.
Federal
Regulation
Our variable life insurance and variable annuity products
generally are securities within the meaning of
federal and state securities laws. As a result, they are
registered under the Securities Act of 1933 (or are exempt from
registration) and are subject to regulation by the SEC, FINRA
and state securities authorities. Federal and state securities
regulation similar to that discussed below under
Other Laws and Regulations
Securities Regulation affect investment advice, sales and
related activities with respect to these products.
Although the federal government does not comprehensively
regulate the business of insurance, federal legislation and
administrative policies in several other areas, including
taxation, privacy regulation, financial services regulation and
pension and welfare benefits regulation, can also significantly
affect the insurance industry.
From time to time, federal measures are proposed that may
significantly affect the insurance business, including direct
federal regulation of insurance through an optional federal
charter, enhanced federal oversight of insurance through a
Federal Insurance Office, comprehensive health care reform,
limitations on antitrust immunity, tax incentives for lifetime
annuity payouts, simplification bills affecting tax-advantaged
or tax exempt savings and retirement vehicles, and proposals to
modify or make permanent the estate tax repeal enacted in 2001.
We cannot predict whether these or other proposals will be
adopted, or what impact, if any, such proposals may have on our
business.
Changes
in Tax Laws
Congress, from time to time, considers legislation that could
make our products less attractive to consumers, including
legislation that would reduce or eliminate the benefits derived
from the tax advantages within life insurance and annuity
products.
In addition, changes in tax laws could increase our tax
liability or increase our reporting obligations. For example, in
February 2010, President Obama released additional information
about the tax proposals contained in his Fiscal Year 2011 Budget
(the Budget). There are several proposals included
in the Budget that are significant for life insurance companies.
Those proposals include modifying the dividends-received
deduction for life insurance company separate accounts;
requiring information reporting for private separate accounts of
life insurance companies; imposing new reporting requirements
and
transfer-for-value
rules on purchasers of certain life insurance contracts;
expanding the interest expense disallowance for corporate-owned
life insurance; requiring information reporting on payments to
corporations; and increasing information return penalties. These
proposals not only could increase our tax liabilities but also
could reduce the attractiveness of certain products we sell.
These proposals may not be enacted or may be modified by
Congress prior to enactment.
Furthermore, the federal estate tax has been repealed as of
2010. This extraordinary situation is currently scheduled to
last only during 2010, while in 2011 it reverts back to pre-2001
rules. This situation may or may not continue as Congress could
adopt legislation retroactively reinstating the estate tax. The
repeal of and continuing uncertainty regarding the federal
estate tax may adversely affect sales and surrenders of some of
our estate planning products.
Other
Laws and Regulations
Securities
Regulation
Certain of our subsidiaries and certain policies and contracts
offered by them are subject to various levels of regulation
under the federal securities laws administered by the SEC. One
of our subsidiaries is an investment advisor registered under
the Investment Advisers Act of 1940. Certain of its employees
are licensed as investment advisory representatives in the
states where those employees have clients. Some of our insurance
24
company separate accounts are registered under the Investment
Company Act of 1940. Some annuity contracts and insurance
policies issued by some of our subsidiaries are funded by
separate accounts, the interests in which are registered under
the Securities Act of 1933 and the Investment Company Act of
1940. Certain of our subsidiaries are registered and regulated
as broker-dealers under the Securities Exchange Act of 1934 and
are members of, and subject to regulation by, the FINRA, as well
as by various state and local regulators. The registered
representatives of our broker-dealers are also regulated by the
SEC and FINRA and are also subject to applicable state and local
laws.
These laws and regulations are primarily intended to protect
investors in the securities markets and generally grant
supervisory agencies broad administrative powers, including the
power to limit or restrict the conduct of business for failure
to comply with such laws and regulations. In such event, the
possible sanctions that may be imposed include suspension of
individual employees, suspension or limitation of sales of our
products, limitations on the activities in which the investment
adviser or broker-dealer may engage, suspension or revocation of
the investment adviser or broker-dealer registration, censure or
fines. We may also be subject to similar laws and regulations in
the states in which we provide investment advisory services,
offer the products described above, or conduct other
securities-related activities.
Certain of our subsidiaries also sponsor and manage investment
vehicles and issue annuities that rely on certain exemptions
from registration under the Investment Company Act of 1940 and
the Securities Act of 1933. Nevertheless, certain provisions of
the Investment Company Act of 1940 and the Securities Act of
1933 apply to these investment vehicles and the securities
issued by such vehicles. The Investment Company Act of 1940, the
Investment Advisers Act of 1940 and the Securities Act of 1933,
including the rules promulgated thereunder, are subject to
change which may affect our subsidiaries that sponsor and manage
such investment vehicles. Our costs may increase or we may exit
markets to the extent certain of our vehicles and annuities are
required to comply with increased regulation and liability under
the securities laws.
ERISA
and Internal Revenue Code Considerations
We provide certain products and services to certain employee
benefits plans that are subject to ERISA or the Internal Revenue
Code. As such, our activities are subject to the restrictions
imposed by ERISA and the Internal Revenue Code, including the
requirement under ERISA that fiduciaries must perform their
duties solely in the interests of ERISA plan participants and
beneficiaries and the requirement under ERISA and the Internal
Revenue Code that fiduciaries may not cause a covered plan to
engage in certain prohibited transactions with persons who have
certain relationships with respect to such plans. The applicable
provisions of ERISA and the Internal Revenue Code are subject to
enforcement by the U.S. Department of Labor, the IRS and
the Pension Benefit Guaranty Corporation.
USA
Patriot Act
The USA Patriot Act of 2001, or the Patriot Act, which was
renewed for an additional four years in 2006, contains
anti-money laundering and financial transparency laws and
mandates the implementation of various new regulations
applicable to broker-dealers and other financial services
companies including insurance companies. The Patriot Act seeks
to promote cooperation among financial institutions, regulators
and law enforcement entities in identifying parties that may be
involved in terrorism or money laundering. The increased
obligations of financial institutions to identify their
customers, watch for and report suspicious transactions, respond
to requests for information by regulatory authorities and law
enforcement agencies, and share information with other financial
institutions, require the implementation and maintenance of
internal practices, procedures and controls. We believe that we
have implemented, and that we maintain, appropriate internal
practices, procedures and controls to enable us to comply with
the provisions of the Patriot Act.
Privacy
of Consumer Information
U.S. federal and state laws and regulations require
financial institutions, including insurance companies, to
protect the security and confidentiality of consumer financial
information and to notify consumers about their policies and
practices relating to their collection and disclosure of
consumer information and their
25
policies relating to protecting the security and confidentiality
of that information. Similarly, federal and state laws and
regulations also govern the disclosure and security of consumer
health information. In particular, regulations promulgated by
the U.S. Department of Health and Human Services regulate
the disclosure and use of protected health information by health
insurers and others, the physical and procedural safeguards
employed to protect the security of that information and the
electronic transmission of such information. Congress and state
legislatures are expected to consider additional legislation
relating to privacy and other aspects of consumer information.
Employees
As of December 31, 2009, we had approximately
1,100 full-time and part-time employees. We believe our
employee relations are satisfactory. To the best of our
knowledge, none of our employees is subject to a collective
bargaining agreement.
Available
Information
Symetras annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports will be available free of charge
on Symetras website at www.symetra.com, as soon as
reasonably practicable after such material is electronically
filed with, or furnished to, the Securities and Exchange
Commission. Additionally, copies of Symetras annual report
will be made available, free of charge, upon written request.
Risks
Related to Our Business
Markets
in the United States and elsewhere have experienced extreme and
unprecedented volatility and disruption, with adverse
consequences to our liquidity, access to capital and cost of
capital. Market conditions such as we have experienced since the
second half of 2007 may significantly affect our ability to
meet liquidity needs, including capital that may be required by
our subsidiaries. We may seek additional debt or equity capital
but be unable to obtain such capital.
We need liquidity to pay our policyholder benefits, operating
expenses, interest on our debt and dividends on our capital
stock, and to pay down or replace certain debt obligations as
they mature. Without sufficient liquidity, we could be forced to
curtail our operations, and our business could suffer. The
principal sources of our liquidity are premiums earned on group
life, health and individual insurance products, annuity
considerations, deposit funds and cash flow from our investment
portfolio and assets, consisting mainly of cash or assets that
are generally readily convertible into cash. Sources of
liquidity in normal markets also include a variety of short- and
long-term instruments, including long-term debt and capital
securities.
Disruptions, uncertainty or volatility in the financial markets
may limit our access to capital required to operate our business
and maintain desired financial ratios. These market conditions
may limit our ability to access the capital necessary to grow
our business in a timely manner, replace capital withdrawn by
customers or raise new capital required by our subsidiaries as a
result of volatility in the markets. As a result, we may be
forced to delay raising capital, bear an unattractive cost of
capital or be unable to raise capital at any price, which could
decrease our profitability and significantly reduce our
financial flexibility. Actions we might take to access financing
may in turn cause rating agencies to reevaluate our ratings.
Future deterioration of our capital position at a time when we
are unable to access the long-term debt market could have a
material adverse effect on our liquidity. Our internal sources
of liquidity may prove to be insufficient.
Disruptions in the capital markets could adversely affect our
ability to access sources of liquidity, as well as threaten to
reduce our capital below a level that is consistent with our
existing objectives. If this occurs, we may need to:
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further access external sources of capital, including the debt
or equity markets;
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reduce or eliminate future stockholder dividends of our common
stock;
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utilize unused borrowings for general corporate purposes;
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undertake additional capital management activities, including
reinsurance transactions;
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limit or curtail sales of certain products
and/or
restructure existing products;
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undertake asset sales or internal asset transfers; and
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seek temporary or permanent changes to regulatory rules.
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Certain of these actions may require regulatory approval
and/or the
approval of counterparties which are outside of our control or
have economic costs associated with them.
We rely on our revolving credit facility as a potential source
of liquidity which could be critical in enabling us to meet our
obligations as they come due, particularly during periods when
alternative sources of liquidity are limited. Our ability to
borrow under this facility is conditioned on our satisfaction of
covenants and other requirements contained in the facility, see
Note 12 to the accompanying audited consolidated financial
statements. Our failure to satisfy these covenants and other
requirements would restrict our access to the facility when
needed and, consequently, could have a material adverse effect
on our financial condition and results of operations.
Difficult
conditions in the credit and equity markets, and in the economy
generally, have adversely affected and may continue to adversely
affect our business and results of operations.
Conditions in the global capital markets and the economy
generally, both in the United States and elsewhere around the
world, have adversely affected our results of operations. The
stress experienced by global capital markets that began in the
second half of 2007 continued and substantially increased during
the fourth quarter of 2008 and early 2009. While the latter half
of 2009 brought some turnaround in the capital markets, concerns
about the availability and cost of credit, inflation, the
U.S. mortgage market, the stability of banks and other
financial institutions, and a declining real estate market in
the United States continue and contribute to heightened market
volatility and dampen expectations for the economy and the
markets going forward. These factors, combined with declining
business and consumer confidence, increased unemployment and
volatile oil prices, precipitated a sustained recession.
In particular, the credit, financial and economic crisis has
had, or may have in the future, the following effects on our
business and results of operations:
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less supply of appropriate investments available for purchase to
support our liabilities, therefore leading to higher cash
balances yielding less than the credited rates to our customers.
During 2009, we carried higher cash balances, which have reduced
our net investment income, as discussed in
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Overview Current Outlook;
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significant losses in our investment portfolio, which have had
an adverse effect on our stockholders equity, statutory
capital and net income. Net realized investment losses before
taxes were $29.3 million through December 31, 2009 and
$158.0 million in 2008, as discussed in
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Investments;
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impairment of key business partners, including distribution
partners and reinsurers (for example, in 2008, one of our
largest distributors was acquired by another bank);
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reduced demand for certain financial and insurance products due
to financial hardships experienced by consumers and concern
about the stability of the financial services industry (for
example, industry variable annuity sales declined in late 2008
and early 2009);
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reduced demand for our insurance products and other related
products and services in our group employer health insurance as
employers have fewer employees requiring insurance coverage due
to rising unemployment levels;
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an elevated incidence of claims, lapses or surrenders of
policies, as some of our policyholders have chosen or may choose
to defer or stop paying insurance premiums altogether,
particularly in our Individual segment;
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increased scrutiny of our business and financial strength by
ratings agencies (including negative ratings actions),
regulators, agents who sell our products and other potential
business partners (for example, in 2009, we were downgraded by
Moodys and had our outlook changed to negative by
Standard & Poors); and
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increased utilization of health benefits by some insureds who
may anticipate unemployment or loss of benefits.
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In addition, general inflationary pressures may affect medical
costs, increasing the costs of paying claims.
Our
investment portfolio is subject to various risks that may
diminish the value of our invested assets, reduce investment
returns and erode capital.
The performance of our investment portfolio depends in part upon
the level of and changes in interest rates and credit spreads,
the overall performance of the economy, the creditworthiness of
the specific obligors included in our portfolio, equity prices,
liquidity and other factors, some of which are beyond our
control. These factors could materially affect our investment
results in any period and had an adverse impact on our
investment results in 2008 and 2009. In addition, given our
reliance on external investment advisors, we could also be
exposed to operational risks that may include, but are not
limited to, a failure to follow our investment guidelines,
technological and staffing deficiencies and inadequate disaster
recovery plans.
Interest
rate and credit spread risk
Fluctuations in interest rates and credit spreads can negatively
affect the returns on our fixed maturity and short-term
investments and can cause unrealized losses or reduce unrealized
gains in our investment portfolios. Interest rates and credit
spreads are highly sensitive to many factors, including
governmental monetary policies, general investor sentiment,
domestic and international economic and political conditions and
other factors beyond our control.
The fair value of the fixed maturities in our portfolio and the
investment income from these securities fluctuate depending on
general economic and market conditions. The fair value generally
increases or decreases in an inverse relationship with
fluctuations in interest rates and credit spreads, while net
investment income realized by us from future investments in
fixed maturity securities will generally increase or decrease in
step with interest rates and credit spreads. In addition, actual
net investment income or cash flows from investments that carry
prepayment risk, such as mortgage-backed and certain other
asset-backed securities, may differ from those anticipated at
the time of investment as a result of interest rate
fluctuations. In periods of declining interest rates, mortgage
prepayments generally increase and mortgage-backed securities,
commercial mortgage obligations and other bonds in our
investment portfolio are more likely to be prepaid or redeemed
as borrowers seek to borrow at lower interest rates, and we may
be required to reinvest those funds in lower interest-bearing
investments.
Because substantially all of our fixed maturities are classified
as
available-for-sale,
changes in the fair value of these securities as described above
are reflected as a component of comprehensive income. However,
U.S. GAAP does not require similar fair value accounting
treatment for the insurance liabilities that the fixed
maturities support. Therefore, changes in the fair value of our
fixed maturities caused by interest rate fluctuations are not
offset in whole or in part by similar adjustments to the fair
value of our insurance liabilities on the balance sheet.
28
In an attempt to mitigate these risks, we employ asset/liability
matching strategies to reduce the adverse effects of interest
rate volatility and to ensure that cash flows are available to
pay claims as they become due. Our asset/liability matching
strategies include:
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matching asset and liability cash flows;
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asset/liability duration management;
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structuring our fixed maturities and commercial mortgage loan
portfolios to limit the effects of prepayments; and
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consistent monitoring of, and making appropriate changes to, the
pricing of our products.
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However, because these strategies may fail to eliminate or
reduce the adverse effects of interest rate and credit spread
volatility, significant fluctuations in the level of interest
rates and credit spreads may have a material adverse effect on
our financial condition, results of operations and cash flows.
Credit
risk
From time to time, issuers of the fixed maturities that we own
may default on principal and interest payments. Defaults by
third parties in the payment or performance of their obligations
could reduce our investment income and realized investment gains
or result in realized investment losses. Further, the value of
any particular fixed maturity security is subject to impairment
based on the creditworthiness of a given issuer. Our fixed
maturities portfolio also includes below investment grade
securities, which generally provide higher expected returns but
present greater risk and can be less liquid than investment
grade securities. Further, an issuers inability to
refinance or pay off debt could cause certain of our
investment-grade maturities to present more significant credit
risk than when we first invested. In addition, private equity
buyouts could cause certain of our investment-grade fixed
maturities to present more significant credit risk than when we
first invested. As of December 31, 2009 and 2008, our fixed
maturities portfolio was $18.6 billion and
$14.9 billion, respectively. A significant increase in
defaults and impairments on our fixed maturities portfolio could
materially adversely affect our financial condition, results of
operations and cash flows. For the years ended December 31,
2009, 2008 and 2007, we had total impairments of
$86.5 million, $86.4 million and $16.2 million,
respectively. For further information on our fixed maturities
portfolio and credit-related impairments, see
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations Investments.
Issuers of the fixed maturities that we own may experience
threats and performance deterioration that trigger rating agency
downgrades. Although the issuers may not have defaulted on
principal and interest payments with respect to these
securities, we may be required by regulators and rating agencies
to hold more capital in support of these investments. We could
experience higher cost of capital and potential constraints on
our ability to grow our business and maintain our own ratings.
Liquidity
risk
Our investments in privately placed fixed maturities, mortgage
loans, policy loans and limited partnership interests, which
collectively represented 11% of total invested assets as of
December 31, 2009, are relatively illiquid as compared to
publicly traded fixed maturities and equities. If we require
significant amounts of cash on short notice in excess of our
normal cash requirements, we may have difficulty selling these
investments in a timely manner, be forced to sell them for less
than we otherwise would have been able to realize, or both.
A
downgrade or a potential downgrade in our financial strength
ratings could result in a loss of business.
Financial strength ratings, which various ratings organizations
publish as measures of an insurance companys ability to
meet contractholder and policyholder obligations, are important
to maintaining public confidence in our company and our
products, the ability to market our products and our competitive
position. Our principal life insurance company subsidiaries,
Symetra Life Insurance Company and First Symetra
29
National Life Insurance Company of New York, have financial
strength ratings of A (Excellent, third
highest of 16 ratings) with a stable outlook from
A.M. Best, A (Strong, sixth highest
of 21 ratings) with a negative outlook from Standard &
Poors, or S&P and A+ (Strong,
fifth highest of 24 ratings) with a negative outlook from Fitch.
Moodys Investors Service, Inc. rates Symetra Life
Insurance Company as A3 (Good, seventh
highest of 21 ratings) with a stable outlook. Moodys does
not rate First Symetra National Life Insurance Company of New
York.
A downgrade in our financial strength ratings, or the announced
potential for a downgrade, could have an adverse effect on our
financial condition, results of operations and cash flows in
several ways, including:
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reducing new sales of insurance products, annuities and other
investment products;
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limiting our ability to offer structured settlement products;
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increasing our cost of capital;
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adversely affecting our relationships with independent sales
intermediaries and our dedicated sales specialists;
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materially increasing the number or amount of policy surrenders
and withdrawals by contractholders and policyholders;
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requiring us to reduce prices for many of our products and
services to remain competitive; and
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adversely affecting our ability to obtain reinsurance or obtain
reasonable pricing on reinsurance.
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Defaults
or volatility of performance in our commercial mortgage loans
may adversely affect our profitability.
Our mortgage loans, which are collateralized by commercial
properties, are subject to default risk. The carrying value of
commercial mortgage loans is stated at outstanding principal
less a valuation allowance. Our allowance provides for the risk
of credit loss. The allowance includes a portfolio reserve for
probable incurred but not specifically identified losses and
loan specific reserves for non-performing loans. As of
December 31, 2008, no mortgage loans were considered
non-performing and only one mortgage loan was non-performing as
of December 31, 2009. The performance of our mortgage loan
portfolio, however, may decline in the future. In addition,
substantially all of our loans have balloon payment maturities.
An increase in the default rate of our mortgage loan
investments, caused by current or worsening economic conditions
or otherwise, could have a material adverse effect on our
business, results of operations and financial condition.
Further, any geographic concentration of our commercial mortgage
loans may have adverse effects on our loan portfolio and,
consequently, on our consolidated results of operations or
financial condition. While we seek to mitigate this risk by
having a broadly diversified portfolio, events or developments
that have a negative effect on any particular geographic region
or sector may have a greater adverse effect on our loan
portfolio. As of December 31, 2009, approximately 28.6% of
our commercial mortgage loans were located in California, 18.5%
were located in Washington and 10.4% were located in Texas.
For additional information on our mortgage loan portfolio, see
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations Investments Mortgage
Loans.
Gross
unrealized losses on fixed maturity and equity securities may be
realized or result in future impairments, resulting in a
reduction in our net income.
Fixed maturity and equity securities classified as
available-for-sale
are reported at their estimated fair value. Unrealized gains or
losses on
available-for-sale
securities are recognized as a component of AOCI and are,
therefore, excluded from net income. Our gross unrealized losses
on
available-for-sale
fixed maturity and equity securities as of December 31,
2009 were $626.4 million. The portion of the gross
unrealized losses for fixed maturity and equity securities where
the estimated fair value has declined and remained below
amortized cost or cost by 20% or more for six months or greater
was $245.4 million as of December 31, 2009. The
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accumulated change in estimated fair value of these
available-for-sale
securities is recognized in net income when the gain or loss is
realized upon the sale of the security or in the event that the
decline in estimated fair value is determined to be
other-than-temporary
and an impairment charge is taken. Realized losses or
impairments may have a material adverse affect on our net income
in a particular quarterly or annual period.
Fluctuations
in interest rates and interest rate spreads could adversely
affect our financial condition, results of operations and cash
flows.
Certain of our insurance and investment products, such as fixed
annuities and universal life insurance, are sensitive to
interest rate fluctuations and expose us to the risk that
falling interest rates will reduce the spread, or
the difference between the returns we earn on the investments
that support our obligations under these products and the
amounts that we must credit to policyholders and
contractholders. This risk is exacerbated due to the existence
of guaranteed minimum crediting rates established by our
contracts and regulatory authorities and restrictions on the
timing and frequency with which we can adjust our crediting
rates. Accordingly, falling interest rates could have an adverse
effect on our financial condition, results of operations and
cash flows. Additionally, we may see interest rate fluctuations
due to potential future inflation resulting from economic
stimulus spending.
Our interest rate spreads and associated investment margins
related to these spreads vary by product as follows:
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The interest rate spread on our Retirement Services
segments fixed deferred annuity products was 1.81%, 1.67%
and 1.68% for the years ended December 31, 2009, 2008 and
2007, respectively, which yielded investment margins of
$137.0 million, $89.8 million and $84.3 million,
respectively.
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The interest rate spread on our Income Annuities segments
products was 0.53%, 0.59% and 0.60% for the years ended
December 31, 2009, 2008 and 2007, respectively, which
yielded investment margins of $38.4 million,
$39.2 million and $43.0 million, respectively.
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The interest rate spread on our Individual segments
universal life insurance products was 1.20%, 1.14% and 1.23% for
the years ended December 31, 2009, 2008 and 2007,
respectively, which yielded investment margins of
$10.2 million, $10.2 million and $10.2 million,
respectively.
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During periods of rising interest rates, we may determine to
offer higher crediting rates on new sales of interest-sensitive
products and to increase crediting rates on existing in force
products, in each case in order to maintain or enhance product
competitiveness. In addition, periods of rising interest rates
may cause increased policy surrenders, withdrawals and requests
for policy loans as policyholders and contractholders allocate
their assets into higher yielding investments. Increases in
crediting rates, as well as surrenders and withdrawals, could
have an adverse effect on our financial condition, results of
operations and cash flows.
We calculate reserves for long-term disability income and life
waiver of premium claims using net present value calculations
based on the actual interest rates in effect at the time claims
are funded, as well as our expectations for future interest
rates. Waiver of premium refers to a provision in a life
insurance policy pursuant to which an insured with total
disability, which has lasted for a minimum specified period,
continues to receive life insurance coverage but no longer has
to pay premiums for the duration of the disability or for a
stated period. During periods of declining interest rates,
reserves for new claims are calculated using lower discount
rates, thereby increasing the net present value of those claims
and the required reserves. Further, if actual interest rates
used to establish reserves on open claims prove to be lower than
our original expectations, we would be required to increase such
reserves accordingly. As such, the increase in net present value
calculations caused by declines in interest rates could have an
adverse effect on our financial condition, results of operations
and cash flows.
Our term life insurance products also expose us to the risk of
interest rate fluctuations. The pricing and expected future
profitability of these products are based in part on expected
investment returns. Over time, term life insurance products
generally produce positive cash flows as customers pay periodic
premiums, which
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we invest as we receive them. Lower than expected interest rates
may reduce our ability to achieve our targeted investment
margins and may adversely affect our financial condition,
results of operations and cash flows.
Our
valuation of fixed maturity securities may include
methodologies, estimations and assumptions which are subject to
differing interpretations and could result in changes to
investment valuations that may materially adversely affect our
results of operations or financial condition.
Fixed maturities are reported at fair value on our consolidated
balance sheets and represent approximately 92% of our invested
assets. The accounting guidance regarding Fair Value
Measurements establishes a three-level hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value. The level in the fair value hierarchy is based on
the priority of the inputs to the respective valuation
technique. The fair value hierarchy gives the highest priority
to quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). As of December 31,
2009, approximately 94% and 6% of our fixed maturities were
categorized as Level 2 and Level 3 investments,
respectively. As of December 31, 2008, approximately 95%
and 5% of our fixed maturities were categorized as Level 2
and Level 3 investments, respectively. The determination of
estimated fair values by management is made at a specific point
in time, primarily by obtaining prices from our pricing
services, based on objectively verifiable, observable market
data. If such information about a security is unavailable, we
determine the fair value using internal pricing models that
typically utilize significant, unobservable market inputs or
inputs that are difficult to corroborate with observable market
data. The use of different methodologies and assumptions may
have a material effect on the estimated fair value amounts. For
additional information on our valuation methodology, see
Note 7 to the accompanying audited financial statements.
During periods of market disruption, including periods of
significantly rising or high interest rates, rapidly widening
credit spreads or illiquidity, it may be difficult to value
certain of our securities (for example, corporate private
placements) if trading becomes less frequent
and/or
market data becomes less observable. There may be certain asset
classes that were in active markets with significant observable
data that become illiquid due to the current financial
environment. In such cases, more securities may require more
subjectivity and management judgment. As such, valuations may
include inputs and assumptions that are less observable or
require greater estimation as well as valuation methods that
require greater estimation, which could result in values that
are different from the value at which the investments may be
ultimately sold. Further, rapidly changing and unprecedented
credit and equity market conditions could materially impact the
valuation of securities as reported within our audited
consolidated financial statements and the
period-to-period
changes in value could vary significantly. Decreases in value
will have a material adverse effect on our results of operations
or financial condition.
Downturns
and volatility in equity markets could adversely affect the
marketability of our products and our
profitability.
Significant downturns and volatility in equity markets could
have an adverse effect on our business in various ways. Market
downturns and volatility may discourage purchases of separate
account products, such as variable annuities and variable life
insurance, which have returns linked to the performance of the
equity markets and may cause some existing customers to withdraw
cash values or reduce investments in those products.
Downturns and volatility in equity markets can also have an
adverse effect on the revenues and returns from our separate
account products. Because these products depend on fees related
primarily to the value of assets under management, a decline in
the equity markets could reduce our revenues by reducing the
value of the investment assets we manage.
Further, investments in common stock or other equity-like
securities, which generally provide higher expected total
returns over the long term, present greater risk to preservation
of principal than do our fixed income investments. As of
December 31, 2009, less than two percent of our invested
assets were invested in securities whose changes in fair value
are typically highly correlated with changes in the equity
markets. The
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changes in fair value of certain of these securities, including
our investments in common stock, are recognized in net income
through net realized investment gains (losses), and a decline in
the equity markets could significantly impact net income.
If our
reserves for future policy benefits and claims are inadequate,
we would be required to increase our reserve
liabilities.
We calculate and maintain reserves for estimated future benefit
payments to our policyholders and contractholders in accordance
with U.S. GAAP. We release these reserves as those future
obligations are extinguished. The reserves we establish
necessarily reflect estimates and actuarial assumptions with
regard to our future experience. These estimates and actuarial
assumptions involve the exercise of significant judgment. Our
future financial results depend upon the extent to which our
actual future experience is consistent with the assumptions we
have used in pricing our products and determining our reserves.
Many factors can affect future experience, including economic,
political and social conditions, inflation, healthcare costs and
changes in doctrines of legal liability and damage awards in
litigation. Therefore, we cannot predict the ultimate amounts we
will pay for actual future benefits or the timing of those
payments.
We regularly monitor our reserves. If we conclude that our
reserves are insufficient to cover actual or expected policy and
contract benefits and claims payments, we would be required to
increase our reserves and incur income statement charges in the
period in which we make the determination, which could adversely
affect our financial condition and results of operations. There
were no significant adjustments to reserves due to inadequacy
during 2009, 2008 or 2007.
We may
face unanticipated losses if there are significant deviations
from our assumptions regarding the probabilities that our
insurance policies or annuity contracts will remain in force
from one period to the next or if morbidity and mortality rates
differ significantly from our pricing
expectations.
The prices and expected future profitability of our insurance
and annuity products are based in part upon expected patterns of
premiums, expenses and benefits, using a number of assumptions,
including those related to persistency, mortality and morbidity.
Persistency is the probability that a policy or contract will
remain in force from one period to the next. The effect of
persistency on profitability varies for different products. For
most of our products, actual persistency that is lower than our
assumptions could have an adverse impact on profitability,
especially in the early years of a policy or contract primarily
because we would be required to accelerate the amortization of
expenses we deferred in connection with the acquisition of the
policy or contract. In addition, we may need to sell investments
at a loss to fund withdrawals. For some of our life insurance
policies, actual persistency in later policy durations that is
higher than our persistency assumptions could have a negative
impact on profitability. If these policies remain in force
longer than we assumed, then we could be required to make
greater benefit payments than we had anticipated when we priced
these products.
In addition, we set prices for our insurance and certain annuity
products based upon expected claims and payment patterns, using
assumptions for, among other factors, morbidity rates and
mortality rates of our policyholders and contractholders. The
long-term profitability of these products depends upon how our
actual experience compares with our pricing assumptions. For
example, if morbidity rates are higher, or mortality rates are
lower, than our pricing assumptions, we could be required to
make greater payments under certain annuity contracts than we
had projected.
Because our assumptions are inherently uncertain, reserves for
future policy benefits and claims may prove to be inadequate if
actual experience is different from our assumptions. Although
certain of our products permit us to increase premiums or reduce
benefits during the life of the policy or contract, these
changes may not be sufficient to maintain profitability.
Moreover, many of our products either do not permit us to
increase premiums or reduce benefits or may limit those changes
during the life of the policy or contract. Therefore,
significant deviations in experience from our assumptions
regarding persistency and mortality and morbidity rates could
have an adverse effect on our financial condition, results of
operations and cash flows.
33
We may
be required to accelerate the amortization of deferred policy
acquisition costs, which would increase our expenses and reduce
profitability.
Deferred policy acquisition costs, or DAC, represent certain
costs which vary with and are primarily related to the sale and
issuance of our products and are deferred and amortized over the
estimated life of the related contracts. These costs include
commissions in excess of ultimate renewal commissions and
certain other sales incentives, solicitation and printing costs,
sales material and other costs, such as underwriting and
contract and policy issuance expenses. Under U.S. GAAP, DAC
is amortized through income over the lives of the underlying
contracts in relation to the anticipated recognition of premiums
or gross profits for most of our products.
Our amortization of DAC generally depends upon anticipated
profits from investments, surrender and other policy and
contract charges, mortality, morbidity and maintenance and
expense margins. Unfavorable experience with regard to expected
expenses, investment returns, mortality, morbidity, withdrawals
or lapses may cause us to increase the amortization of DAC,
resulting in higher expenses and lower profitability.
We regularly review our DAC asset balance to determine if it is
recoverable from future income. The portion of the DAC asset
balance deemed to be unrecoverable, if any, is charged to
expense in the period in which we make this determination. For
example, if we determine that we are unable to recover DAC from
profits over the life of a book of business of insurance
policies or annuity contracts, we would be required to recognize
the unrecoverable DAC amortization as a current-period expense.
As of December 31, 2009, we had $250.4 million of DAC.
Our amortization of DAC was $51.4 million during the year
ended December 31, 2009.
The
occurrence of natural disasters, disease pandemics, terrorism or
military actions could adversely affect our financial condition,
results of operations and cash flows.
Our financial condition and results of operations are at risk of
material adverse effects that could arise from catastrophic
mortality and morbidity due to natural disasters, including
floods, tornadoes, earthquakes and hurricanes, disease pandemics
(e.g., H1N1 virus), terrorism and military actions. Such events
could also lead to unexpected changes in persistency rates as
policyholders and contractholders who are affected by the
disaster may be unable to meet their contractual obligations,
such as payment of premiums on our insurance policies or
deposits into our investment products. The continued threat of
terrorism and ongoing military actions may cause significant
volatility in global financial markets, and a natural disaster
or a disease pandemic could trigger an economic downturn in the
areas directly or indirectly affected by the disaster. The
effectiveness of external parties, including governmental and
nongovernmental organizations, in combating the spread and
severity of a disease pandemic could have a material impact on
the losses experienced by us. Further, in our group health and
life insurance operations, a localized event that affects the
workplace of one or more of our customers could cause a
significant loss due to mortality or morbidity claims.
We
rely on reinsurance arrangements to help manage our business
risks, and failure to perform by the counterparties to our
reinsurance arrangements may expose us to risks we had sought to
mitigate.
We utilize reinsurance to mitigate our risks in various
circumstances. Reinsurance does not relieve us of our direct
liability to our policyholders, even when the reinsurer is
liable to us. Accordingly, we bear credit risk with respect to
our reinsurers. The total reinsurance recoverable amount due
from reinsurers was $276.6 million as of December 31,
2009. Our reinsurers may be unable or unwilling to pay the
reinsurance recoverable owed to us now or in the future or on a
timely basis. A reinsurers insolvency, inability or
unwillingness to make payments under the terms of its
reinsurance agreement with us could have an adverse effect on
our financial condition, results of operations and cash flows.
This has not occurred in 2009, 2008 or 2007.
Reinsurance
may not be available, affordable or adequate to protect us
against losses.
As part of our overall risk management strategy, we purchase
reinsurance for certain risks underwritten by our various
business segments. For example, we reinsure the mortality risk
in excess of $0.5 million for
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most of our individual life insurance policies. While
reinsurance agreements generally bind the reinsurer for the life
of the business reinsured at generally fixed pricing, market
conditions beyond our control determine the availability and
cost of the reinsurance protection for new business. In certain
circumstances, the price of reinsurance for business already
reinsured may also increase. Any decrease in the amount of
reinsurance will increase our risk of loss and any increase in
the cost of reinsurance will reduce our earnings. Accordingly,
we may be forced to incur additional expenses for reinsurance or
may not be able to obtain sufficient reinsurance on acceptable
terms, which could adversely affect our ability to write future
business or result in the assumption of more risk with respect
to those policies we issue.
The availability and cost of these reinsurance arrangements are
subject to market conditions that are beyond our control. As a
result, in the future, we may not be able to enter into
reinsurance arrangements on attractive terms, if at all.
We may
be unable to attract and retain independent sales intermediaries
and dedicated sales specialists.
We distribute our products through financial intermediaries,
independent producers and dedicated sales specialists. We
compete with other financial institutions to attract and retain
commercial relationships in each of these channels, and our
success in competing for sales through these sales
intermediaries depends upon factors such as:
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the amount of sales commissions and fees we pay;
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the breadth of our product offerings;
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the strength of our brand;
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our perceived stability and our financial strength ratings;
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the marketing and services we provide to them; and
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the strength of the relationships we maintain with individuals
at those firms.
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Our competitors may be effective in providing incentives to
existing and potential distribution partners to favor their
products or to reduce sales of our products. Our contracts with
our distribution partners generally allow either party to
terminate the relationship upon short notice. Our distribution
partners do not make minimum purchase commitments, and our
contracts do not prohibit our partners from offering products
that compete with ours. Accordingly, our distribution partners
may choose not to offer our products exclusively or at all, or
may choose to exert insufficient resources and attention to
selling our products.
Our future success is highly dependent on maintaining and
growing both existing and new distribution relationships. We may
have little or no contact with end customers of our products. As
a result, we have little to no brand awareness with end
customers which makes it more difficult to respond to evolving
customer needs, thereby increasing our reliance on our
distribution partners.
From time to time, due to competitive forces, we may experience
unusually high attrition in particular sales channels for
specific products. An inability to recruit productive
independent sales intermediaries and dedicated sales
specialists, or our inability to retain strong relationships
with the individual agents at our independent sales
intermediaries, could have an adverse effect on our financial
condition, results of operations and cash flows.
Consolidation
among distributors or potential distributors of our products may
adversely affect the profitability of our
business.
We distribute many of our products through financial
institutions such as banks and broker-dealers. As capital,
credit and equity markets continue to experience volatility,
bank and broker-dealer consolidation activity may increase and
negatively impact our sales, and such consolidation could
increase competition for access to distributors, result in
greater distribution expenses and impair our ability to market
our products to our current customer base or to expand our
customer base. As a result of recent consolidation in the
financial services industry, a single financial institution,
JPMorgan Chase & Co., accounted for 34.7% and 45.6% of
our
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total sales in 2009 and 2008, respectively, selling primarily
fixed annuity products. See Item 1
Business Distribution. If our
relationship with this financial institution were to
deteriorate, it is likely that we would experience a decline in
our sales of such products.
Intense
competition could adversely affect our ability to maintain or
increase our market share and profitability.
Our businesses are subject to intense competition. We believe
the principal competitive factors in the sale of our products
are product features, price, commission structure, marketing and
distribution arrangements, brand, reputation, financial strength
ratings and service. Many other companies actively compete for
sales in our retirement services, income annuity, individual and
group markets, including other major insurers, banks, other
financial institutions, mutual fund and asset management firms
and specialty providers.
In many of our product lines, we face competition from companies
that have greater market share or breadth of distribution, offer
a broader range of products, services or features, assume a
greater level of risk, have lower profitability expectations or
have higher financial strength ratings than we do. Many
competitors offer similar products and use similar distribution
channels. The substantial expansion of banks and insurance
companies distribution capacities and expansion of product
features in recent years have intensified pressure on margins
and production levels and have increased the level of
competition in many of our product lines.
Our
risk management policies and procedures may not be effective or
may leave us exposed to unidentified or unanticipated risk,
which could negatively affect our business.
Management of operational, legal and regulatory risks requires
effective policies and procedures to record, verify and report
on a large number of transactions and events. We have devoted
resources to develop our policies and procedures to mitigate
these risks and expect to continue to do so in the future. Even
so, these policies and procedures may not be fully effective to
mitigate all of these risks. Many of our methods for managing
these risks and exposures are based upon historical statistical
models and observed market behavior. As such, our methods may
not be able to predict all future exposures. These could be
significantly greater than our historical measures have
indicated. In addition, our distribution network consists of a
large number of third-party agents and requires the
implementation and oversight of policies and procedures to
ensure that we are not unduly subjected to reputational,
financial or other risks attributable to such third-party
agents. Other risk management methods depend upon the evaluation
of information regarding markets and clients, or other matters
that are publicly available or otherwise accessible to us. This
information may not always be accurate, complete,
up-to-date
or properly evaluated.
Changes
in accounting standards issued by the Financial Accounting
Standards Board or other
standard-setting
bodies may adversely affect our financial
statements.
Our financial statements are subject to the application of
U.S. GAAP, which are periodically revised
and/or
expanded by recognized authorities, including the Financial
Accounting Standards Board. On January 1, 2008, we adopted
accounting guidance for the fair value measurements, which,
among other things, defined fair value and established a
framework for measuring fair value. Determinations of fair
values are made at a specific point in time, based on available
market information and judgments about financial instruments,
including estimates of the timing, amounts of expected future
cash flows and the credit standing of the issuer. During periods
of market disruption, rapidly widening credit spreads or
illiquidity, it can be difficult to value certain types of
securities. As such, the value they were originally reported, or
later sold, at may differ materially from the valuations
determined as of the end of the applicable reporting period. In
addition, fluctuations in fair value during these periods can
create larger unrealized gains and losses than during normal
market conditions. Similarly, future accounting standards could
change the current accounting treatment that we apply to our
audited consolidated financial statements and such changes could
have an adverse effect on our reported financial condition and
results of operations.
36
The
failure to maintain effective and efficient information systems
could adversely affect our business.
Our business is dependent upon our ability to keep pace with
technological advances. Our ability to keep our systems fully
integrated with those of our clients is critical to the
operation of our business. Our failure to update our systems to
reflect technological advancements or to protect our systems may
adversely affect our relationships and ability to do business
with our clients.
In addition, our business depends significantly on effective
information systems, and we have many different information
systems for our various businesses. We have committed and will
continue to commit significant resources to develop, maintain
and enhance our existing information systems and develop new
information systems in order to keep pace with continuing
changes in information processing technology, evolving industry
and regulatory standards and changing customer preferences. Our
failure to maintain effective and efficient information systems
could have a material adverse effect on our financial condition
and results of operations. If we do not maintain adequate
systems, we could experience adverse consequences, including:
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inadequate information on which to base pricing, underwriting
and reserving decisions;
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inadequate information for accurate financial reporting;
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the loss of existing customers;
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difficulty in attracting new customers;
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customer, provider and agent disputes;
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regulatory compliance problems, such as failure to meet prompt
payment obligations;
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litigation exposure; or
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increases in administrative expenses.
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If we
are unable to maintain the availability of our systems and
safeguard the security of our data, our ability to conduct
business will likely be compromised, which may have a material
adverse effect on our financial condition, results of operations
and cash flows.
We use computer systems to store, retrieve, evaluate and use
customer and company data and information. Additionally, our
computer and information technology systems interface with and
rely upon third-party systems. Our business is highly dependent
on our ability, and the ability of our affiliates, to access
these systems to perform necessary business functions. This
includes providing insurance quotes, processing premium
payments, providing customer support, filing and paying claims
and making changes to existing policies. Systems outages or
outright failures would compromise our ability to perform these
functions in a timely manner. This could hurt our relationships
with our business partners and customers and harm our ability to
conduct business. In the event of a disaster such as a blackout,
a computer virus, an industrial accident, a natural catastrophe,
a terrorist attack or war, our systems may not be available to
our employees, customers or business partners for an extended
period of time. If our employees are able to report to work, yet
our systems or our data are destroyed or disabled, they may be
unable to perform their duties for an extended period of time.
Our systems could also be subject to similar disruptions due to
physical and electronic break-ins or other types of unauthorized
tampering with our systems. This may interrupt our business
operations and may have a material adverse effect on our
financial condition, results of operations and cash flows.
Failure
to protect our clients confidential information and
privacy could adversely affect our business.
A number of our businesses are subject to privacy regulations
and to confidentiality obligations. For example, the collection
and use of patient data in our Group segment is the subject of
national and state legislation, including the Health Insurance
Portability and Accountability Act of 1996, or HIPAA, and
certain of the activities conducted by our businesses are
subject to the privacy regulations of the Gramm-Leach-Bliley
Act. We also have contractual obligations to protect certain
confidential information we obtain from our existing vendors and
clients. These obligations generally include protecting such
confidential information in
37
the same manner and to the same extent as we protect our own
confidential information. The actions we take to protect such
confidential information vary by business segment and may
include, among other things:
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training and educating our employees regarding our obligations
relating to confidential information;
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actively monitoring our record retention plans and any changes
in state or federal privacy and compliance requirements;
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drafting appropriate contractual provisions into any contract
that raises proprietary and confidentiality issues;
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maintaining secure storage facilities for tangible
records; and
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limiting access to electronic information.
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In addition, we must develop, implement and maintain a
comprehensive written information security program with
appropriate administrative, technical and physical safeguards to
protect such confidential information. If we do not properly
comply with privacy regulations and protect confidential
information, we could experience adverse consequences, including
regulatory sanctions, such as penalties, fines and loss of
license, as well as loss of reputation and possible litigation.
Our
business could be interrupted or compromised if we experience
difficulties arising from outsourcing
relationships.
We outsource certain technology and business functions to third
parties, including a significant portion of our information
technology function, and expect to continue to do so in the
future. If we do not maintain an effective outsourcing strategy
or third party providers do not perform as contracted, we may
experience operational difficulties, increased costs and a loss
of business that could have a material adverse effect on our
consolidated results of operations.
Our
credit facility subjects us to restrictive covenants that impose
operating and financial restrictions on our operations and could
limit our ability to grow our business.
We entered into a $200.0 million revolving credit facility
on August 16, 2007. As of December 31, 2009, we had no
balance outstanding under this facility. In connection with this
facility, we have made covenants that may impose significant
operating and financial restrictions on us. These restrictions
limit the incurrence of additional indebtedness by our
subsidiaries, limit the ability of us and our subsidiaries to
create liens and impose certain other operating limitations.
These restrictions could limit our ability to obtain future
financing or take advantage of business opportunities.
Furthermore, our credit facility requires us and our insurance
subsidiaries to maintain specified financial ratios. Our ability
to comply with these ratios may be affected by events beyond our
control, including prevailing economic, financial and industry
conditions. If we are unable to comply with the covenants and
ratios in our credit facility, we may be deemed in default under
the facility, or we may be required to pay substantial fees or
penalties to the lenders to obtain a waiver of any such default.
Either development could have a material adverse effect on our
business.
We may
need additional capital in the future, which may not be
available to us on favorable terms. Raising additional capital
could dilute your ownership in the Company and may cause the
market price of our common stock to fall.
We may need to raise additional funds through public or private
debt or equity financings in order to:
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fund liquidity needs;
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refinance our senior notes or our Capital Efficient Notes
(CENts);
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satisfy letter of credit or guarantee bond requirements that may
be imposed by our clients or by regulators;
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acquire new businesses or invest in existing businesses;
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grow our business;
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otherwise respond to competitive pressures;
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maintain adequate risk-based capital; or
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maintain our target ratings from rating agencies.
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Any additional capital raised through the sale of equity will
dilute your ownership percentage in our company and may decrease
the market price of our common stock. Furthermore, the
securities may have rights, preferences and privileges that are
senior or otherwise superior to those of our common stock. Any
additional financing we may need may not be available on terms
favorable to us.
To be eligible for borrowing under our revolving credit
facility, we must not be in default of any payment obligations,
covenants or other requirements set forth in the facility, and
the representations and warranties that we make under the
facility must continue to be true in all material respects.
Accordingly, it is possible that we may not meet these
requirements in the future and may not be eligible to borrow
under our credit facility.
In connection with the CENts offering, we entered into a
covenant that may limit our ability to undertake certain
additional types of financing to repay or redeem the CENts.
As a
holding company, Symetra Financial Corporation depends on the
ability of its subsidiaries to transfer funds to it to meet its
obligations and pay dividends.
Symetra is a holding company for its insurance and financial
subsidiaries with no significant operations of its own. Its
principal sources of cash to meet its obligations and to pay
dividends consist of dividends from its subsidiaries and
permitted payments under tax sharing agreements with its
subsidiaries. State insurance regulatory authorities limit the
payment of dividends by insurance subsidiaries. Based on our
statutory results as of December 31, 2009, our insurance
subsidiaries may pay dividends to us of up to
$141.5 million in the aggregate during 2010 without
obtaining regulatory approval. Competitive pressures generally
require our insurance subsidiaries to maintain financial
strength ratings, which are partly based on maintaining certain
levels of capital. These restrictions and other regulatory
requirements, such as minimum required risk-based capital
ratios, affect the ability of our insurance subsidiaries to make
dividend payments. Limits on the ability of the insurance
subsidiaries to pay dividends could adversely affect our
liquidity, including our ability to pay dividends to
stockholders and service our debt.
There are a number of other factors that could affect our
ability to pay dividends, including the following:
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lack of availability of cash to pay dividends due to changes in
our operating cash flow, capital expenditure requirements,
working capital requirements and other cash needs;
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unexpected or increased operating or other expenses or changes
in the timing thereof;
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restrictions under Delaware law or other applicable law on the
amount of dividends that we may pay;
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a decision by our board of directors to modify or revoke its
policy to pay dividends; and
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the other risks described under Risk Factors.
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Significant
stockholders may be able to influence the direction of our
business.
Our principal stockholders, affiliates of White Mountains
Insurance Group, Ltd. and Berkshire Hathaway Inc., each
beneficially owned approximately 21.1% of our outstanding shares
of common stock as of March 1, 2010 (includes warrants
exercisable for 9,487,872 shares held by affiliates of each
of White Mountains Insurance Group, Ltd. and Berkshire Hathaway
Inc.). On matters that are brought to stockholders
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for their vote, they have the ability to significantly influence
all matters requiring stockholder approval, including the
nomination and election of directors and the determination of
the outcome of any corporate transaction or other matter
submitted to our stockholders for approval, including amendments
to our certificate of incorporation, potential mergers or
acquisitions, asset sales and other significant corporate
transactions. The interests of our principal stockholders may
not coincide with the interests of the other holders of our
common stock.
Our
internal control over financial reporting does not currently
meet the standards required by Section 404 of the
Sarbanes-Oxley Act of 2002, and failure to achieve and maintain
effective internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act could
have a material adverse effect on our business and stock
price.
We recently completed the initial public offering of our common
stock. As a privately held company, we were not required to
maintain internal control over financial reporting in a manner
that meets the standards of publicly traded companies required
by Section 404 of the Sarbanes-Oxley Act, standards that we
are required to meet in the course of preparing our audited
consolidated financial statements as of and for the year ended
December 31, 2010. Although we have documentation of our
internal controls, we do not fully test our compliance with
these controls in accordance with Section 404 of the
Sarbanes-Oxley Act. In connection with our 2009, 2008 and 2007
audits, no material weaknesses in our internal control over
financial reporting were identified.
If, as a newly public company, we are not able to implement the
requirements of Section 404 in a timely manner or with
adequate compliance, our independent registered public
accounting firm may not be able to attest to the adequacy of our
internal control over financial reporting in future periods. If
we are unable to maintain adequate internal control over
financial reporting, we may be unable to report our financial
information on a timely basis, may suffer adverse regulatory
consequences or violations of applicable stock exchange listing
rules and may breach the covenants under our revolving credit
facilities and our senior notes. There could also be a negative
reaction in the financial markets due to a loss of investor
confidence in us and the reliability of our financial
statements. Confidence in our financial statements is also
likely to suffer if we or our independent registered public
accounting firm report a material weakness in our internal
control over financial reporting. In addition, we will incur
incremental costs in order to improve our internal control over
financial reporting and comply with Section 404, including
increased auditing and legal fees and costs associated with
hiring additional accounting and administrative staff.
Risks
Related to Our Industry
Our
industry is highly regulated and changes in regulations
affecting our businesses may reduce our profitability and limit
our growth.
Our insurance businesses are heavily regulated and are subject
to a wide variety of laws and regulations in various
jurisdictions. State insurance laws regulate most aspects of our
insurance businesses and our insurance subsidiaries are
regulated by the insurance departments of the various states in
which they are domiciled and licensed.
State laws in the United States grant insurance regulatory
authorities broad administrative powers with respect to various
aspects of our insurance businesses, including:
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licensing companies and agents to transact business;
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calculating the value of assets to determine compliance with
statutory requirements;
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mandating certain insurance benefits;
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regulating certain premium rates;
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reviewing and approving policy forms;
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regulating unfair trade and claims practices, including the
imposition of restrictions on marketing and sales practices,
distribution arrangements and payment of inducements;
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establishing statutory capital and reserve requirements and
solvency standards;
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fixing maximum interest rates on insurance policy loans and
minimum rates for guaranteed crediting rates on life insurance
policies and annuity contracts;
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requiring regular market conduct examinations;
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approving changes in control of insurance companies;
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restricting the payment of dividends and other transactions
between affiliates; and
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regulating the types, amounts and valuation of investments.
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State insurance regulators and the National Association of
Insurance Commissioners, or NAIC, regularly re-examine existing
laws and regulations applicable to insurance companies and their
products. Changes in these laws and regulations, or in
interpretations thereof, are often made for the benefit of the
consumer at the expense of the insurer and thus could have an
adverse effect on our business.
Currently, the U.S. federal government does not regulate
directly the business of insurance. However, federal legislation
and administrative policies in several areas can significantly
and adversely affect insurance companies. These areas include
financial services regulation, securities regulation, pension
regulation, privacy, tort reform legislation and taxation. In
addition, various forms of direct federal regulation of
insurance have been proposed. These proposals include direct
federal regulation of insurance through an optional federal
charter and enhanced federal oversight through a Federal
Insurance Office. We cannot predict whether these or other
proposals will be adopted, or what impact, if any, such
proposals or, if enacted, such laws may have on our financial
condition, results of operations and cash flows.
Many of our customers and independent sales intermediaries also
operate in regulated environments. Changes in the regulations
that affect their operations also may affect our business
relationships with them and their ability to purchase or to
distribute our products.
Compliance with applicable laws and regulations is time
consuming and personnel-intensive, and changes in these laws and
regulations may materially increase our direct and indirect
compliance efforts and other expenses of doing business.
U.S. federal and state securities laws apply to investment
products that are also securities, including variable annuities
and variable life insurance policies. As a result, some of our
subsidiaries and the policies and contracts they offer are
subject to regulation under these federal and state securities
laws. Some of our insurance subsidiaries separate accounts
are registered as investment companies under the Investment
Company Act of 1940. Some subsidiaries are registered as
broker-dealers under the Securities Exchange Act of 1934, as
amended, or Exchange Act, and are members of, and subject to
regulation by, the Financial Industry Regulatory Authority, or
FINRA. In addition, one of our subsidiaries also is registered
as an investment adviser under the Investment Advisers Act of
1940.
Securities laws and regulations are primarily intended to ensure
the integrity of the financial markets and to protect investors
in the securities markets or investment advisory or brokerage
clients. These laws and regulations generally grant supervisory
agencies broad administrative powers, including the power to
limit or restrict the conduct of business for failure to comply
with those laws and regulations.
Legal
and regulatory investigations and actions are increasingly
common in the insurance business and may result in financial
losses and harm our reputation.
We face a significant risk of litigation and regulatory
investigations and actions in the ordinary course of operating
our businesses, including the risk of class action lawsuits. Our
pending legal and regulatory actions include proceedings
specific to us and others generally applicable to business
practices in the industries in which we operate. In our
insurance operations, we may become subject to class actions and
we are or may
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become subject to individual suits relating, among other things,
to sales or underwriting practices, payment of contingent or
other sales commissions, claims payments and procedures, product
design, disclosure, administration, additional premium charges
for premiums paid on a periodic basis, denial or delay of
benefits and breaches of fiduciary or other duties to customers.
Plaintiffs in class action and other lawsuits against us may
seek very large or indeterminate amounts, including punitive and
treble damages, which may remain unknown for substantial periods
of time.
For example, the mutual fund and insurance industry has been the
focus of increased scrutiny and class action lawsuits related to
revenue sharing practices by mutual funds with
service providers and others in offering mutual fund investments
in qualified retirement plans. The lawsuits allege that service
providers were involved in self-dealing and prohibited
transactions under the Employee Retirement Income Security Act,
or ERISA. The outcome of these lawsuits is unknown. We have not
been the subject of any inquiries or lawsuits regarding these
practices. In addition, annuity sales to seniors are coming
under increased scrutiny by FINRA and state insurance
regulators, and have been the source of industry litigation in
situations where annuity sales have allegedly been unsuitable
for the seniors financial needs.
We are also subject to various regulatory inquiries, such as
information requests, subpoenas, market conduct exams and books
and record examinations, from state and federal regulators and
other authorities which may result in fines, recommendations for
corrective action or other regulatory actions.
Current or future investigations and proceedings could have an
adverse effect on our business. A substantial legal liability or
a significant regulatory action against us could have an adverse
effect on our business. Moreover, even if we ultimately prevail
in the litigation, regulatory action or investigation, we could
suffer significant reputational harm, which could have an
adverse effect on our business. Increased regulatory scrutiny
and any resulting investigations or proceedings could result in
new legal actions or precedents and industry-wide regulations or
practices that could adversely affect our business.
Proposals
for national health care reform could have a material adverse
effect on the profitability or marketability of the health
insurance products that we sell.
In our Group segment, we sell group medical stop-loss insurance
and limited benefit employee health plans to employer groups.
Addressing the affordability and availability of health
insurance, including reducing the number of uninsured, is a
major initiative of President Obama and members of the
U.S. Congress, and proposals that would address these
issues are pending in the U.S. Congress and in many states.
The proposals vary, and include a public health plan and other
private health plans for individual and small business
customers, individual insurance mandates, potential tax
ramifications, including, among other things, a windfall profits
tax on health insurers, the expansion of eligibility under
existing Medicaid
and/or
Federal Employees Health Benefit Plan programs, minimum medical
benefit ratios for health plans, mandatory issuance of insurance
coverage, limitations on antitrust immunity and requirements
that would limit the ability of health plans and insurers to
vary premiums based on assessments of underlying risk. While
certain of these measures would adversely affect us, at this
time we cannot predict whether they will be enacted, and if
enacted, the extent of the impact of these proposals on our
business or results of operations. If any of these initiatives
ultimately becomes effective, it could have a material adverse
effect on the profitability or marketability of the health
insurance products and services we sell and on our financial
condition, results of operations and cash flows.
Medical
advances, such as genetic research and diagnostic imaging, and
related legislation could adversely affect the financial
performance of our life insurance and annuities
businesses.
Genetic research includes procedures focused on identifying key
genes that render an individual predisposed to specific diseases
such as particular types of cancer and other diseases. Other
medical advances, such as diagnostic imaging technologies, may
be used to detect the early onset of diseases such as cancer and
cardiovascular disease. We believe that if individuals learn
through medical advances that they are predisposed to particular
conditions that may reduce life longevity or require long-term
care, they will be more likely to purchase our life insurance
policies or not to permit existing polices to lapse. In
contrast, if individuals learn
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that they lack the genetic predisposition to develop the
conditions that reduce longevity, they will be less likely to
purchase our life insurance products but more likely to purchase
certain annuity products. In addition, such individuals that are
existing policyholders will be more likely to permit their
policies to lapse.
If we were to gain access to the same genetic or medical
information as our prospective policyholders and
contractholders, then we would be able to take this information
into account in pricing our life insurance policies and annuity
contracts. However, a growing body of law imposes limitations on
an insurers ability to use genetic information in
underwriting.
Medical advances also could lead to new forms of preventive
care. Preventive care could extend the life and improve the
overall health of individuals. If this were to occur, the
duration of payments under certain of our annuity products
likely would increase, thereby reducing net earnings in that
business.
Changes
in tax laws could make some of our products less attractive to
consumers and as a result have an adverse effect on our
business.
Congress, from time to time, considers legislation that could
make our products less attractive to consumers, including
legislation that would reduce or eliminate the benefits derived
from the tax deferred nature of life insurance and annuity
products.
In addition, changes in tax laws could increase our tax
liability or increase our reporting obligations. For example, in
May 2009, President Obama released additional information about
the tax proposals contained in his Fiscal Year 2010 Budget (the
Budget). There are several proposals included in the
Budget that are significant for life insurance companies. Those
proposals include: modifying the dividends-received deduction
for life insurance company separate accounts; requiring
information reporting for private separate accounts of life
insurance companies; imposing new reporting requirements and
transfer-for-value
rules on purchasers of certain life insurance contracts;
expanding the interest expense disallowance for corporate-owned
life insurance; requiring information reporting on payments to
corporations; and increasing information return penalties. These
proposals not only could increase our tax liabilities but also
could reduce the attractiveness of certain products we sell.
These proposals may not be enacted or may be modified by
Congress prior to enactment.
Furthermore, the federal estate tax, which has undergone a
gradual repeal since 2001 that will continue to be phased in
through 2010, is scheduled to revert to pre-2001 law as of
January 1, 2011. The repeal of and continuing uncertainty
regarding the federal estate tax may adversely affect sales and
surrenders of some of our estate planning products.
Failures
elsewhere in the insurance industry could obligate us to pay
assessments through guaranty associations.
When an insurance company becomes insolvent, guaranty
associations in each of the 50 states levy assessments upon
all companies licensed to write insurance in the relevant lines
of business in that state, and use the proceeds to pay claims of
policyholder residents of that state, up to the state-specific
limit of coverage. The total amount of the assessment is based
on the number of insured residents in each state, and each
companys assessment is based on its proportionate share of
premium volume in the relevant lines of business and could have
an adverse effect on our results of operations. The failure of a
large life, health or annuity insurer could trigger guaranty
association assessments which we would be obligated to pay.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
43
We lease our headquarters in Bellevue, Washington, which
consists of 221,000 square feet in the Symetra Financial
Center building and 72,000 square feet in the Key Center
building. Leases for both facilities expire in 2015 with
multiple options to renew. Our headquarters in Bellevue serves
as the primary location for operations of all of our business
segments. In addition to our headquarters, we lease 18 other
properties throughout the U.S. which comprise a total of
66,000 square feet.
We believe our properties are suitable and adequate for our
business as presently conducted.
|
|
Item 3.
|
Legal
Proceedings
|
We are regularly a party to litigation, arbitration proceedings
and governmental examinations in the ordinary course of our
business. While we cannot predict the outcome of any pending or
future litigation or examination, we do not believe that any
pending matter, individually or in the aggregate, will have a
material adverse effect on our business.
44
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Shares of our common stock began trading on the NYSE under the
symbol SYA on January 22, 2010. As a result, we
have not set forth quarterly information with respect to the
high and low prices for our common stock and the dividends
declared on our common stock for the two most recent fiscal
years. Prior to that time there was no public market for our
common stock. As of March 1, 2010, there were 52
stockholders of record of our common stock.
Dividend
Policy
We intend to pay quarterly cash dividends on our common stock at
an initial rate of approximately $0.05 per share. The
declaration and payment of dividends to holders of our common
stock will be at the discretion of our board of directors and
will depend on many factors, including our financial condition
and results of operations, liquidity requirements, market
opportunities, capital requirements of our subsidiaries, legal
requirements, regulatory constraints and other factors as our
board of directors deems relevant. Further, we are a holding
company with no significant business operations of our own and,
as a result, our ability to pay future dividends is, in part,
dependent upon receiving dividends from our subsidiaries.
Dividends on our common stock will also be paid to holders of
our outstanding warrants on a
one-to-one
basis.
For more information regarding our ability to pay dividends, see
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations Capital and Liquidity.
Use of
Proceeds from Initial Public Offering
On January 27, 2010, we completed the sale of
34,960,000 shares of common stock at an initial public
offering price of $12.00 per share pursuant to (i) a
Registration Statement on
Form S-1,
as amended (Reg.
No. 333-162344)
that was declared effective by the Securities and Exchange
Commission on January 21, 2010 and (ii) an immediately
effective Registration Statement on
Form S-1
(Reg.
No. 333-164464)
filed with the Securities and Exchange Commission on
January 21, 2010 pursuant to Rule 462(b) of the
Securities Act. Our initial public offering included 25,259,510
newly issued shares of common stock sold by us (the primary
offering) and 9,700,490 existing shares of common stock sold by
selling stockholders (the secondary offering). The
25,259,510 shares of common stock sold by us in the primary
offering included 4,560,000 shares covered by an
over-allotment option granted to the underwriters. Merrill
Lynch, Pierce, Fenner & Smith Incorporated,
J.P. Morgan Securities Inc., Goldman, Sachs & Co.
and Barclays Capital Inc. acted as joint book-running managers
for the offering and as representatives of the underwriters. The
offering commenced on January 21, 2010 and closed on
January 27, 2010. We received net proceeds from the
offering of approximately $282.5 million, reflecting the
gross proceeds of $303.1 million, net of underwriting fees
of $17.4 million and offering expenses of
$3.2 million. The selling stockholders received
approximately $109.7 million of net proceeds in the
offering, reflecting gross proceeds of $116.4 million net
of underwriting fees of approximately $6.7 million. We did
not receive any proceeds from the sale of shares by the selling
stockholders in the secondary offering.
During the period from the closing of the offering on
January 27, 2010 through the filing of this report, we have
used the proceeds from the offering to fund organic growth by
contributing $236.6 million to our subsidiaries.
Equity
Compensation Plans
On August 24, 2009, pursuant to our Equity Plan, our
President and Chief Executive Officer was granted
75,270 shares of restricted stock and our Executive Vice
President and Chief Financial Officer was granted
7,890 shares of restricted stock which will vest on
December 31, 2011, subject to their continued employment
through such date and the other terms and conditions of their
restricted stock agreements. For more information on these
restricted stock grants and the securities authorized for
issuance under our equity compensation plans, see
Item 12 Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters.
45
|
|
Item 6.
|
Selected
Financial Data
|
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, 2009, 2008
and 2007 and the consolidated balance sheet data as of
December 31, 2009 and 2008, except for the non-GAAP
financial measures, have been derived from our audited
consolidated financial statements included elsewhere herein. The
consolidated income statement data for the years ended
December 31, 2006 and 2005 and the consolidated balance
sheet data as of December 31, 2007, 2006 and 2005, except
for the non-GAAP financial measures, have been derived from the
our audited consolidated financial statements not included
herein. The selected financial data presented below should be
read in conjunction with Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our audited
consolidated financial statements and accompanying notes
included elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions, except per share data)
|
|
|
Consolidated Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other considerations
|
|
$
|
573.6
|
|
|
$
|
584.8
|
|
|
$
|
530.5
|
|
|
$
|
525.7
|
|
|
$
|
575.5
|
|
Net investment income
|
|
|
1,113.6
|
|
|
|
956.5
|
|
|
|
973.6
|
|
|
|
984.9
|
|
|
|
994.0
|
|
Other revenues
|
|
|
56.4
|
|
|
|
67.8
|
|
|
|
68.7
|
|
|
|
56.1
|
|
|
|
58.6
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(191.2
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
|
|
(25.7
|
)
|
|
|
(7.7
|
)
|
Less: portion of losses recognized in other comprehensive income
|
|
|
104.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(86.5
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
|
|
(25.7
|
)
|
|
|
(7.7
|
)
|
Other net realized investment gains (losses)
|
|
|
57.2
|
|
|
|
(71.6
|
)
|
|
|
33.0
|
|
|
|
27.4
|
|
|
|
21.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
(29.3
|
)
|
|
|
(158.0
|
)
|
|
|
16.8
|
|
|
|
1.7
|
|
|
|
14.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,714.3
|
|
|
|
1,451.1
|
|
|
|
1,589.6
|
|
|
|
1,568.4
|
|
|
|
1,642.2
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
350.5
|
|
|
|
348.5
|
|
|
|
267.1
|
|
|
|
264.3
|
|
|
|
327.4
|
|
Interest credited
|
|
|
846.8
|
|
|
|
766.1
|
|
|
|
752.3
|
|
|
|
765.9
|
|
|
|
810.9
|
|
Other underwriting and operating expenses
|
|
|
252.7
|
|
|
|
265.8
|
|
|
|
281.9
|
|
|
|
260.5
|
|
|
|
273.2
|
|
Interest expense
|
|
|
31.8
|
|
|
|
31.9
|
|
|
|
21.5
|
|
|
|
19.1
|
|
|
|
12.4
|
|
Amortization of deferred policy acquisition costs
|
|
|
51.4
|
|
|
|
25.8
|
|
|
|
18.0
|
|
|
|
14.6
|
|
|
|
11.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,533.2
|
|
|
|
1,438.1
|
|
|
|
1,340.8
|
|
|
|
1,324.4
|
|
|
|
1,435.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
181.1
|
|
|
|
13.0
|
|
|
|
248.8
|
|
|
|
244.0
|
|
|
|
206.4
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
6.7
|
|
|
|
23.8
|
|
|
|
62.8
|
|
|
|
92.4
|
|
|
|
22.2
|
|
Deferred
|
|
|
46.1
|
|
|
|
(32.9
|
)
|
|
|
18.7
|
|
|
|
(7.9
|
)
|
|
|
39.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
|
52.8
|
|
|
|
(9.1
|
)
|
|
|
81.5
|
|
|
|
84.5
|
|
|
|
61.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
128.3
|
|
|
|
22.1
|
|
|
|
167.3
|
|
|
|
159.5
|
|
|
|
144.5
|
|
Income from discontinued operations (net of taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
128.3
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
$
|
159.5
|
|
|
$
|
145.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.15
|
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
|
$
|
1.43
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.15
|
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
|
$
|
1.43
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
111.626
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.79
|
|
|
$
|
0.90
|
|
|
$
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions, except per share data)
|
|
|
Non-GAAP Financial Measure(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
147.9
|
|
|
$
|
122.9
|
|
|
$
|
154.9
|
|
|
$
|
159.8
|
|
|
$
|
133.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
128.3
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
$
|
159.5
|
|
|
$
|
145.5
|
|
Less: Net realized investment gains (losses) (net of taxes)(3)
|
|
|
(19.1
|
)
|
|
|
(102.7
|
)
|
|
|
10.9
|
|
|
|
1.1
|
|
|
|
9.2
|
|
Add: Net investment gains (losses) on FIA options (net of
taxes)(4)
|
|
|
0.5
|
|
|
|
(1.9
|
)
|
|
|
(1.5
|
)
|
|
|
1.4
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
147.9
|
|
|
$
|
122.9
|
|
|
$
|
154.9
|
|
|
$
|
159.8
|
|
|
$
|
133.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions, except per share data)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
20,183.1
|
|
|
$
|
16,252.5
|
|
|
$
|
16,905.0
|
|
|
$
|
17,305.3
|
|
|
$
|
18,332.8
|
|
Total assets
|
|
|
22,437.5
|
|
|
|
19,229.6
|
|
|
|
19,560.2
|
|
|
|
20,114.6
|
|
|
|
20,980.1
|
|
Total notes payable
|
|
|
448.9
|
|
|
|
448.8
|
|
|
|
448.6
|
|
|
|
298.7
|
|
|
|
300.0
|
|
Separate account assets
|
|
|
840.1
|
|
|
|
716.2
|
|
|
|
1,181.9
|
|
|
|
1,233.9
|
|
|
|
1,188.8
|
|
Accumulated other comprehensive income (loss) (net of taxes)
(AOCI)
|
|
|
(49.7
|
)
|
|
|
(1,052.6
|
)
|
|
|
(12.5
|
)
|
|
|
(0.5
|
)
|
|
|
136.6
|
|
Total stockholders equity
|
|
|
1,433.3
|
|
|
|
286.2
|
|
|
|
1,285.1
|
|
|
|
1,327.3
|
|
|
|
1,404.9
|
|
U.S. Statutory Financial Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and surplus
|
|
$
|
1,415.4
|
|
|
$
|
1,179.0
|
|
|
$
|
1,225.0
|
|
|
$
|
1,266.2
|
|
|
$
|
1,260.1
|
|
Asset valuation reserve (AVR)
|
|
|
120.5
|
|
|
|
113.7
|
|
|
|
176.0
|
|
|
|
158.4
|
|
|
|
140.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and surplus and AVR
|
|
$
|
1,535.9
|
|
|
$
|
1,292.7
|
|
|
$
|
1,401.0
|
|
|
$
|
1,424.6
|
|
|
$
|
1,401.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions, except per share data)
|
|
|
Book value per common share(5)
|
|
$
|
12.83
|
|
|
$
|
2.56
|
|
|
$
|
11.51
|
|
|
$
|
11.89
|
|
|
$
|
12.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures(6):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value
|
|
$
|
1,483.0
|
|
|
$
|
1,338.8
|
|
|
$
|
1,297.6
|
|
|
$
|
1,327.8
|
|
|
$
|
1,268.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
1,433.3
|
|
|
$
|
286.2
|
|
|
$
|
1,285.1
|
|
|
$
|
1,327.3
|
|
|
$
|
1,404.9
|
|
Less: AOCI
|
|
|
(49.7
|
)
|
|
|
(1,052.6
|
)
|
|
|
(12.5
|
)
|
|
|
(0.5
|
)
|
|
|
136.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value
|
|
$
|
1,483.0
|
|
|
$
|
1,338.8
|
|
|
$
|
1,297.6
|
|
|
$
|
1,327.8
|
|
|
$
|
1,268.3
|
|
Add: Assumed proceeds from exercise of warrants
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value, as converted
|
|
$
|
1,701.1
|
|
|
$
|
1,556.9
|
|
|
$
|
1,515.7
|
|
|
$
|
1,545.9
|
|
|
$
|
1,486.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value per common share(7)
|
|
$
|
15.99
|
|
|
$
|
14.45
|
|
|
$
|
14.01
|
|
|
$
|
14.33
|
|
|
$
|
13.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value per common share, as converted(8)
|
|
$
|
15.23
|
|
|
$
|
13.95
|
|
|
$
|
13.58
|
|
|
$
|
13.85
|
|
|
$
|
13.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Return on stockholders equity, ROE(9)
|
|
|
15.4
|
%
|
|
|
2.6
|
%
|
|
|
12.6
|
%
|
|
|
12.8
|
%
|
|
|
9.9
|
%
|
Average stockholders equity(10)
|
|
$
|
832.4
|
|
|
$
|
861.8
|
|
|
$
|
1,328.3
|
|
|
$
|
1,249.5
|
|
|
$
|
1,465.4
|
|
Non-GAAP Financial Measure(11):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating return on average equity, or ROAE
|
|
|
10.5
|
%
|
|
|
9.2
|
%
|
|
|
11.2
|
%
|
|
|
12.1
|
%
|
|
|
11.2
|
%
|
Average adjusted book value(10)
|
|
$
|
1,407.8
|
|
|
$
|
1,329.8
|
|
|
$
|
1,380.2
|
|
|
$
|
1,324.2
|
|
|
$
|
1,194.2
|
|
|
|
|
(1) |
|
Basic net income per common share includes all participating
securities, including warrants, using the two-class method.
Diluted net income per share includes the dilutive impact of
non-participating, unvested restricted stock awards, based on
the application of the treasury stock method, weighted for the
portion of the period they were outstanding. |
|
(2) |
|
For a definition and discussion of the uses and limitations of
this non-GAAP measure and other metrics used in our analysis,
see Item 7 Managements Discussion
and Analysis of Financial Condition and Results of
Operations Use of non-GAAP Financial
Measures. |
|
(3) |
|
Net realized investment gains (losses) are reported net of taxes
of $(10.2) million, $(55.3) million,
$5.9 million, $0.6 million and $4.9 million for
the twelve months ended December 31, 2009, 2008, 2007, 2006
and 2005, respectively. |
|
(4) |
|
Net investment gains (losses) on FIA options are reported net of
taxes of $0.3 million, $(1.0) million,
$(0.8) million, $0.8 million and $(1.5) million
for the twelve months ended December 31, 2009, 2008, 2007,
2006 and 2005, respectively. |
|
(5) |
|
Book value per common share is calculated based on
stockholders equity divided by outstanding common shares
and shares subject to outstanding warrants totaling 111,705,199,
as of December 31, 2009 and 111,622,039 as of
December 31, 2008, 2007, 2006 and 2005. |
|
(6) |
|
For a definition and discussion of the uses and limitations of
this non-GAAP measure and other metrics used in our analysis,
see Item 7 Managements Discussion
and Analysis of Financial Condition and Results of
Operations Use of non-GAAP Financial
Measures. Adjusted book value is calculated based on
stockholders equity less AOCI. |
|
(7) |
|
For a definition and discussion of the uses and limitations of
this non-GAAP measure and other metrics used in our analysis,
see Item 7 Managements Discussion
and Analysis of Financial Condition and Results of
Operations Use of non-GAAP Financial
Measures. Adjusted book value per common share is
calculated based on stockholders equity less AOCI, divided
by outstanding common shares, totaling 92,729,455 as of
December 31, 2009 and 92,646,295 as of December 31,
2008, 2007, 2006 and 2005. |
|
(8) |
|
For a definition and discussion of the uses and limitations of
this non-GAAP measure and other metrics used in our analysis,
see Item 7 Managements Discussion
and Analysis of Financial Condition and Results of
Operations Use of non-GAAP Financial
Measures. Adjusted book value per common share, as
converted, is calculated as adjusted book value plus the assumed
proceeds from the outstanding warrants, divided by the sum of
outstanding common shares and shares subject to outstanding
warrants, totaling 111,705,199 as of December 31, 2009 and
111,622,039 as of December 31, 2008, 2007, 2006 and 2005. |
|
(9) |
|
Return on stockholders equity is calculated as net income
divided by average stockholders equity. |
|
(10) |
|
Average stockholders equity is derived by averaging ending
stockholders equity for the most recent five quarters and
average adjusted book value is derived by averaging ending
adjusted book value for the most recent five quarters. |
|
(11) |
|
For a definition and discussion of the uses and limitations of
this non-GAAP measure and other metrics used in our analysis,
see Item 7 Managements Discussion
and Analysis of Financial Condition and Results of
Operations Use of non-GAAP Financial
Measures. Operating ROAE is calculated based on adjusted
operating income divided by average adjusted book value. The
numerator and denominator of this measure have been reconciled
to net income and stockholders equity, respectively, their
most comparable GAAP financial measures. |
48
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
You should read the following discussion in conjunction with
the audited consolidated financial statements and the
accompanying notes included in this report, as well as the
discussion under Item 6 Selected
Financial Data. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual
results may differ materially from those discussed in or implied
by any of the forward-looking statements as a result of various
factors, including but not limited to those listed under
Forward-Looking Statements and
Item 1A Risk Factors. Our fiscal
year ends on December 31 of each calendar year.
All amounts, except share and per share data, are in millions
unless otherwise stated.
Management considers certain non-GAAP financial measures,
including adjusted operating income (loss), adjusted book value,
adjusted book value per common share, adjusted book value per
common share, as converted, and operating ROAE to be useful to
investors in evaluating our financial performance and condition.
These measures have been reconciled to their most comparable
GAAP financial measures. For a definition of these non-GAAP
measures and other metrics used in our analysis, see
Use of non-GAAP Financial
Measures.
Overview
We are a financial services company in the life insurance
industry focused on profitable growth in selected group health,
retirement, life insurance and employee benefits markets. Our
operations date back to 1957 and many of our agency and
distribution relationships have been in place for decades. We
are headquartered in Bellevue, Washington and employ
approximately 1,100 people in 16 offices across the United
States, serving approximately 1.8 million customers.
On January 27, 2010, we completed an initial public
offering of our common stock at $12.00 per share. Of the
34,960,000 shares registered, 9,700,490 were registered on
behalf of existing stockholders. As a result of our initial
public offering, we received net proceeds of $282.5.
Our
Operations
We conduct our business through five segments, four of which are
operating:
|
|
|
|
|
Group. We offer medical stop-loss insurance,
limited benefit medical plans, group life insurance, accidental
death and dismemberment insurance and disability income
insurance mainly to employer groups of 50 to 5,000 individuals.
In addition to our insurance products, we offer managing general
underwriting services.
|
|
|
|
Retirement Services. We offer fixed and
variable deferred annuities, including tax sheltered annuities,
individual retirement accounts, or IRAs, and group annuities to
qualified retirement plans, including Section 401(k),
403(b) and 457 plans.
|
|
|
|
Income Annuities. We offer single premium
immediate annuities, or SPIAs, for customers seeking a reliable
source of retirement income and structured settlement annuities
to fund third-party personal injury settlements. In addition, we
offer funding services options to existing structured settlement
clients.
|
|
|
|
Individual. We offer a wide array of term and
universal life insurance as well as bank-owned life insurance,
or BOLI.
|
|
|
|
Other. This segment consists of unallocated
corporate income, composed primarily of investment income on
unallocated surplus, returns from our investments in limited
partnerships unallocated corporate expenses, interest expense on
debt, tax credits from our tax preferred affordable housing
investments, the results of small, non-insurance businesses that
are managed outside of our operating segments, and inter-segment
elimination entries.
|
49
Current
Outlook
During 2009, the capital and credit markets showed signs of
improvement following a period of extreme volatility and
disruption that affected equity market returns, interest rates,
liquidity, access to capital and the cost of capital. We expect
that a challenging business climate will persist for the
foreseeable future as the timing, magnitude and duration of an
economic recovery still remain uncertain. Tight liquidity in the
credit markets in 2008 and the first half of 2009 resulted in us
holding new cash inflows from sales in cash and cash equivalents
longer than anticipated as it was difficult to invest in
quality, higher income earning assets. Yields on cash and cash
equivalents are lower than our historical yields and our
investment income for the year has been less than expected,
especially in our Retirement Services segment. Although the
credit markets improved in the second half of 2009 we
experienced high demand for high quality investments making it
challenging to get cash invested. We expect this trend to
continue and could cause us to carry higher cash balances than
in normal market conditions.
We believe the economic environment during 2008 and 2009 also
created opportunities for us. During this time period we
concentrated on expanding the product lineups of our existing
distribution partners and developing new distribution
relationships. For example, we have seen significant increases
in sales of our fixed deferred annuity product and SPIA products
as consumers turned to investment products that provide fixed
returns.
To succeed in this environment, we expect to continue focusing
on our strategic objectives of capitalizing on favorable
demographic trends including the increasing need for retirement
savings and income and the growing demand for affordable health
insurance. We are also focused on expanding our distribution
network, and providing simple to understand savings and
investment products. However, the success of these and other
strategies may be affected by the factors discussed in
Item 1A− Risk Factors, and other factors
as discussed herein.
Critical
Accounting Policies and Estimates
The accounting policies discussed in this section are those that
we consider to be particularly critical to an understanding of
our 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. For all
of these policies, we caution that future events rarely develop
exactly as forecast, and our managements best estimates
may require adjustment.
Other-Than-Temporary
Impairments (OTTI)
One of the significant estimates related to
available-for-sale
securities is the evaluation of investments for OTTI. We analyze
investments that meet our impairment criteria to determine
whether the decline in value is
other-than-temporary.
The impairment review involves the investment management team,
including our portfolio asset managers. To make this
determination for each security, we consider both quantitative
and qualitative criteria including:
|
|
|
|
|
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;
|
|
|
|
changes in the financial condition of the securitys
underlying collateral;
|
|
|
|
any downgrades of the security by a rating agency;
|
|
|
|
any reduction or elimination of dividends or nonpayment of
scheduled interest payments; and
|
|
|
|
for fixed maturities, our intent to sell the security or whether
it is more likely than not that we will be required to sell the
security prior to recovery of its amortized cost considering any
regulatory developments and our liquidity needs.
|
50
Based on the analysis, we make a judgment as to whether the loss
is
other-than-temporary.
The amount of the loss recorded in our consolidated statements
of income is determined based on the accounting guidance in
effect during the period of the
other-than-temporary
determination. We adopted new accounting guidance for
impairments of our fixed maturities effective January 1,
2009. See Note 2 to the accompanying audited consolidated
financial statements.
Prior to January 1, 2009, under the then existing
accounting guidance, if the loss was determined to be
other-than-temporary,
we recorded an impairment charge equal to the difference between
the fair value and the amortized cost basis of the security
within net realized investment gains (losses) in our
consolidated statements of income in the period that we made the
determination. The fair value of the
other-than-temporarily
impaired investment became its new cost basis. We also recorded
an impairment charge if we did not have the intent
and/or the
ability to hold the security until the fair value was expected
to recover to amortized cost or until maturity, resulting in a
charge recorded for a security that may not have had credit
issues.
Effective January 1, 2009, we adopted new accounting
guidance for the recognition and disclosure of OTTI for our
fixed maturities. Our
available-for-sale
marketable equity securities consist primarily of nonredeemable
preferred stock, which are evaluated similarly to fixed
maturities. The adoption of the new accounting guidance required
that OTTI losses be separated into the amount representing the
decrease in cash flows expected to be collected (credit
loss), which is recognized in earnings, and the amount
related to all other factors (noncredit loss), which
is recognized in other comprehensive income (loss). In addition,
the new guidance replaces the requirement for management to
assert that we have the intent and ability to hold an impaired
fixed maturity security until recovery with the requirement that
management assert that it does not have the intent to sell the
security and that it is more likely than not that we will not be
required to sell the security before recovery of our amortized
cost basis. For securities we intend to sell or it is more
likely than not that we will be required to sell the security
before recovery, the impairment charge is equal to the
difference between the fair value and the amortized cost basis
of the security in the period of determination. In determining
our intent to sell a security or whether it is more likely than
not that we will be required to sell a security, we evaluate
facts and circumstances such as decisions to reposition our
security portfolio, sales of securities to meet cash flow needs
and sales of securities to capitalize on favorable pricing.
If we do not intend to sell a security, but believe we will not
recover all the securitys contractual cash flows, the
amortized cost is written down to our estimated recovery value
and recorded as a realized loss in our consolidated statements
of income, as this is determined to be a credit loss. The
remainder of the decline in fair value is recorded as OTTI on
fixed maturities not related to credit losses in OCI, as this is
determined to be a noncredit or recoverable loss. We determine
the estimated recovery values by using discounted cash flow
models that consider estimated cash flows under current and
expected future economic conditions with various assumptions
regarding the timing and amount of principal and interest
payments. The recovery value is based on our best estimate of
expected future cash flows discounted at the securitys
effective yield prior to impairment. Our best estimate of future
cash flows is based on assumptions, including various
performance indicators, such as historical default and recovery
rates, credit ratings, current delinquency rates and the
structure of the issuer/security. These assumptions require the
use of significant judgment and include the probability of
issuer default and estimates regarding timing and amount of
expected recoveries. In addition, projections of expected future
fixed maturity security cash flows may change based upon new
information regarding the performance of the issuer
and/or
underlying collateral. Future impairments may develop if actual
results underperform current cash flow modeling assumptions,
which may be the result of macroeconomic factors, changes in
assumptions used and specific deterioration in certain industry
sectors or company failures.
As a result of the adoption of the new OTTI accounting guidance,
we recorded a cumulative effect adjustment, resulting in an
increase of $15.7, net of tax, to retained earnings as of
January 1, 2009, with a corresponding decrease to AOCI, to
reclassify the noncredit portion of previously
other-than-temporarily
impaired fixed maturity securities. In addition, the amortized
cost basis of fixed maturities for which a noncredit OTTI loss
was previously recognized was increased by $24.1.
51
As of December 31, 2009 and 2008, the fair value of our
available-for-sale
securities that were below cost or amortized cost by 20% or more
was $656.9 and $2,495.5, respectively. The unrealized losses on
these securities were $273.8 and $1,176.1, respectively.
Assets
at Fair Value
We carry certain assets on our consolidated balance sheets at
fair value. Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants (an exit
price). The accounting guidance establishes a fair value
hierarchy that distinguishes between inputs based on market data
from independent sources (observable inputs) and a
reporting entitys internal assumptions based upon the best
information available when external market data is limited or
unavailable (unobservable inputs). The fair value
hierarchy prioritizes fair value measurements into three levels
based on the nature of the inputs. The level in the fair value
hierarchy within which the fair value measurement falls is
determined based on the lowest level input that is significant
to the fair value measurement. For further discussion of the
levels of the fair value hierarchy, see Note 7 to the
accompanying audited consolidated financial statements.
The availability of market observable information is the
principal factor in determining the level that our investments
are assigned in the fair value hierarchy. The following table
summarizes our assets carried at fair value and the respective
fair value hierarchy, based on input levels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Percent
|
|
|
Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
43.9
|
|
|
$
|
|
|
|
$
|
43.9
|
|
|
$
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
483.0
|
|
|
|
|
|
|
|
475.8
|
|
|
|
7.2
|
|
|
|
0.0
|
%
|
Foreign governments
|
|
|
27.4
|
|
|
|
|
|
|
|
27.4
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
12,548.6
|
|
|
|
|
|
|
|
11,657.4
|
|
|
|
891.2
|
|
|
|
4.5
|
|
Residential mortgage-backed securities
|
|
|
3,536.4
|
|
|
|
|
|
|
|
3,285.9
|
|
|
|
250.5
|
|
|
|
1.3
|
|
Commercial mortgage-backed securities
|
|
|
1,789.4
|
|
|
|
|
|
|
|
1,765.4
|
|
|
|
24.0
|
|
|
|
0.1
|
|
Other debt obligations
|
|
|
165.6
|
|
|
|
|
|
|
|
155.0
|
|
|
|
10.6
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale
|
|
|
18,594.3
|
|
|
|
|
|
|
|
17,410.8
|
|
|
|
1,183.5
|
|
|
|
6.0
|
|
Marketable equity securities,
available-for-sale
|
|
|
36.7
|
|
|
|
34.9
|
|
|
|
|
|
|
|
1.8
|
|
|
|
0.0
|
|
Marketable equity securities, trading
|
|
|
154.1
|
|
|
|
153.8
|
|
|
|
|
|
|
|
0.3
|
|
|
|
0.0
|
|
Investments in limited partnerships
|
|
|
24.7
|
|
|
|
|
|
|
|
|
|
|
|
24.7
|
|
|
|
0.2
|
|
Other invested assets
|
|
|
6.7
|
|
|
|
2.1
|
|
|
|
|
|
|
|
4.6
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, at fair value
|
|
|
18,816.5
|
|
|
|
190.8
|
|
|
|
17,410.8
|
|
|
|
1,214.9
|
|
|
|
6.2
|
|
Separate account assets
|
|
|
840.1
|
|
|
|
840.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets, at fair value
|
|
$
|
19,656.6
|
|
|
$
|
1,030.9
|
|
|
$
|
17,410.8
|
|
|
$
|
1,214.9
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
of Fixed Maturities
Fixed maturities include bonds, mortgage-backed securities and
redeemable preferred stock. We classify all fixed maturities as
available-for-sale
and carry them at fair value. We report net unrealized
investment gains and losses related to all of our
available-for-sale
securities, which is equal to the difference between the fair
value and the cost or amortized cost, in accumulated other
comprehensive income (loss) in stockholders equity. We
report net realized investment gains and losses in the
consolidated statements of income. These investments are subject
to impairment reviews to determine when a decline in fair value
is other-than temporary. See
Other-Than-Temporary
Impairments (OTTI) above.
52
We determine the fair value of fixed maturities primarily by
obtaining prices from third-party independent pricing services,
and we do not adjust their prices or obtain multiple prices for
these securities. As of December 31, 2009 and 2008, our
pricing services priced 93.6% and 95.1%, respectively, of our
fixed maturities. The third-party independent pricing services
we use have policies and processes to ensure that they are using
objectively verifiable, observable market data, including
documentation on the observable market inputs, by major security
type, used to determine the prices. Securities are priced using
evaluated pricing models that vary by asset class. The standard
inputs for security evaluations include benchmark yields,
reported trades, broker/dealer quotes, issuer spreads, two-sided
markets, benchmark securities, bids, offers and other reference
data, including market research publications. Because many fixed
income securities do not trade on a daily basis, evaluated
pricing models apply available information through processes
such as benchmark curves, benchmarking of like securities,
sector groupings and matrix pricing to prepare evaluations. In
addition, models are used to develop prepayment and interest
rate scenarios, which take into account market convention.
Our pricing services routinely review the inputs for the
securities they cover, including broker quotes, executed trades
and credit information, as applicable. We perform analyses on
the prices received from our pricing services to ensure that the
prices represent a reasonable estimate of fair value. We gain
assurance on the overall reasonableness and consistent
application of input assumption valuation methodologies, as well
as compliance with accounting standards for fair value
determination through various processes, including: evaluation
of pricing methodologies and inputs; analytical reviews of
changes in certain prices between reporting periods; and
back-testing of selected sales activity to determine whether
there are any significant differences between the market price
used to value the security prior to sale and the actual sales
price. Through our analysis, we have engaged our pricing
services in discussion regarding the valuation of a security;
however, it has not been our practice to adjust their prices.
If our pricing services determine that they do not have
sufficient objectively verifiable information about a security,
they will not provide a valuation for that security. In such
situations, we determine the securitys fair value using
internal pricing models that typically utilize significant,
unobservable market inputs or inputs that are difficult to
corroborate with observable market-based data.
As of December 31, 2009 and 2008, we had, $901.3, or 4.8%,
and $632.2, or 4.0%, respectively, of our fixed maturities
portfolio, was invested in private placement securities, which
are not actively traded. The fair values of these assets are
determined using a discounted cash flow approach. The valuation
model requires the use of inputs that are not market-observable
and involves significant judgment. The discount rate is based on
the current Treasury curve adjusted for credit and liquidity
factors. The appropriate illiquidity adjustment is estimated
based on illiquidity spreads observed in transactions involving
other similar securities. We consider this approach appropriate
for this asset class, which comprises 76.2% of our Level 3
fixed maturities.
We use our judgment in assigning our fixed maturities to a level
within the fair value hierarchy by determining whether the
market for a given security is active and if significant pricing
inputs are observable. We determine the existence of an active
market by assessing whether transactions occur with sufficient
frequency and volume to provide reliable pricing information, as
discussed below.
When we have significant observable market inputs, which is
generally the case when the security is priced by our pricing
services, it is classified as a Level 2 measurement. When
there is not sufficient observable market information and the
security is priced using internal pricing models, which is
generally the case for corporate private placements and other
securities our pricing services are unable to price, it is
classified as a Level 3 measurement. The inputs used to
measure the fair value of securities priced using internal
pricing models may fall into different levels of the fair value
hierarchy. It has been our experience that, in these situations,
the lowest level input that is significant to the determination
of fair value is a Level 3 input and thus, we typically
report securities valued using internal pricing models as
Level 3 measurements. In limited situations, private
placement securities are valued through the use of a single
broker quote because the security is very thinly traded. In such
situations, we consider the fair value a Level 3
measurement.
Fixed maturities categorized as Level 3 investments were
$1,183.5 and $674.3 as of December 31, 2009 and 2008,
respectively. The increase is primarily due to purchases near
the end of the third quarter of
53
$263.5 of residential mortgage-backed securities backed by
reverse mortgages, which is a new asset class for which we did
not have significant observable inputs; the purchase of $167.1
of private placement securities; and an increase in the fair
value of private placement securities of $118.7 due to the
tightening of credit spreads during 2009. As of
December 31, 2009 and 2008, we had net unrealized gains
(losses) of $25.2 and $(103.8), respectively, on our
Level 3 fixed maturities. For the year ended
December 31, 2009 and 2008, we reported net realized losses
of $5.6 and $12.1, respectively, on our Level 3 fixed
maturities.
We believe that the amount we may realize upon settlement or
maturity of our fixed maturities may differ significantly from
the estimated fair value of the security, as we do not actively
trade our fixed maturity portfolio. Our investment management
objective is to support the expected cash flows of our
liabilities and to produce stable returns over the long term. To
meet this objective, we typically hold our fixed maturities
until maturity or until market conditions are favorable for the
sale of such investments.
We estimate that a 1% increase in interest rates would cause the
fair value of our fixed maturity portfolio that is subject to
interest rate risk to decline by approximately
$1.00 billion and $0.81 billion, based on our
securities positions as of December 31, 2009 and 2008,
respectively (see Item 7A Quantitative
and Qualitative Disclosures about Market Risk
Sensitivity Analysis for further information).
Valuation
of Marketable Equity Securities
Marketable equity securities, trading consists of investments in
common stock. Marketable equity securities,
available-for-sale
primarily consists of investments in non-redeemable preferred
stock. Both consist primarily of investments in publicly traded
companies. The fair values of our marketable equity securities
are primarily based on quoted market prices in active markets
for identical assets. We classify the majority of these
securities as Level 1.
The impact of changes in the fair value of our trading portfolio
is recorded in net investment gains (losses) in the consolidated
statements of income. The impact of changes in the fair value of
our
available-for-sale
portfolio is recorded as an unrealized gain or loss in AOCI, a
separate component of equity. The
available-for-sale
marketable equity portfolio is subject to impairment reviews to
determine when a decline in fair value is
other-than-temporary.
See
Other-Than-Temporary
Impairments (OTTI) above.
We estimate that a 10% decline in market prices would cause the
fair value of our equity investments to decline by approximately
$23.2 and $21.4 as of December 31, 2009 and 2008,
respectively (see Item 7A Quantitative
and Qualitative Disclosures about Market Risk
Sensitivity Analysis for further information).
Deferred
Policy Acquisition Costs
We defer as assets certain costs, generally 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:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Group
|
|
$
|
3.2
|
|
|
$
|
3.3
|
|
Retirement Services
|
|
|
249.1
|
|
|
|
158.7
|
|
Income Annuities
|
|
|
22.4
|
|
|
|
14.5
|
|
Individual
|
|
|
51.0
|
|
|
|
43.0
|
|
|
|
|
|
|
|
|
|
|
Total unamortized balance at end of period
|
|
|
325.7
|
|
|
|
219.5
|
|
Accumulated effect of net unrealized (gains) losses
|
|
|
(75.3
|
)
|
|
|
28.0
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
250.4
|
|
|
$
|
247.5
|
|
|
|
|
|
|
|
|
|
|
In our Group segment, the DAC amortization period for medical
stop-loss policies is one year as these policies are repriced on
an annual basis.
54
In our Retirement Services, Income Annuities and Individual
segments, we amortize acquisition costs over the premium paying
period or over the lives of the policies in proportion to the
future estimated gross profits, or EGPs, of each of these
product lines, as follows:
|
|
|
|
|
Retirement Services. The DAC amortization
period is typically 20 years for the deferred annuities,
although most of the DAC amortization occurs within the first
10 years because the EGPs are highest during that period.
It is common for deferred annuity policies to lapse after the
surrender charge period expires.
|
|
|
|
Income Annuities. The DAC amortization period
for SPIAs, including structured settlement annuities, is the
benefit payment period. The benefit payment periods vary by
policy; however, nearly all benefits are paid within
80 years of contract issue.
|
|
|
|
Individual. The DAC amortization period
related to universal life policies is typically 25 years.
DAC amortization related to our term life insurance policies is
the premium paying period, which ranges from 10 to 30 years.
|
To determine the EGPs, we make assumptions as to lapse and
withdrawal rates, expenses, interest margins, mortality
experience, long-term equity market returns and investment
performance. Estimating future gross profits is a complex
process requiring considerable judgment and forecasting of
events well into the future.
Changes to assumptions can have a significant impact on DAC
amortization. In the event actual experience differs from our
assumptions or our future assumptions are revised, we adjust our
EGPs, which could result in a significant increase in
amortization expense. We true up our assumptions with actual
experience on a quarterly basis. For future assumptions we
complete a study and refine our estimates of future gross
profits annually during the third quarter. Upon completion of an
assumption study, we revise our assumptions to reflect our
current best estimate, thereby changing our estimate of
projected EGPs used in the DAC asset amortization models. The
following would generally cause an increase in DAC amortization
expense: increases to lapse and withdrawal rates in the current
period, increases to expected future lapse and withdrawal rates,
increases to future expected expense levels, increases to
interest margins in the current period, decreases to expected
future interest margins and decreases to current or expected
equity market returns. EGPs are adjusted quarterly to reflect
actual experience to date.
We regularly conduct DAC recoverability analyses. 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.
In connection with our recoverability analyses, we perform
sensitivity analyses on our two most significant DAC asset
balances, which currently consist of our Retirement Services
deferred annuity product and our Individual universal life
product DAC asset balances, to capture the effect that certain
key assumptions have on DAC asset balances. The sensitivity
tests are performed independently, without consideration for any
correlation among the key assumptions. The following depicts the
sensitivities for our deferred annuity, universal life and BOLI
DAC asset balances: if we changed our future lapse and
withdrawal rate assumptions by a factor of 10%, the effect on
the DAC asset balance is approximately $2.9; if we changed our
future expense assumptions by a factor of 10%, the effect on the
DAC asset balance is less than $0.2.
The DAC asset balance on the date of our Acquisition,
August 2, 2004, was reset to zero, in accordance with the
purchase method of accounting (referred to as PGAAP). Because of
this, quarterly updates to our DAC models to reflect actual
experience have led to immaterial changes in the DAC asset
balance and amortization, and the magnitude of the sensitivities
is currently relatively small. We expect the DAC asset balance
to grow as we continue to write new business, and as this
occurs, we would expect the sensitivities to grow accordingly.
In addition, depending on the amount and the type of new
business written in the future we may determine that other
assumptions may produce significant variations in our financial
results.
55
Funds
Held Under Deposit Contracts
Liabilities for fixed deferred annuity contracts and universal
life policies, including BOLI, are computed as deposits net of
withdrawals made by the policyholder, plus amounts credited
based on contract specifications, less contract fees and charges
assessed, plus any additional interest. The unamortized PGAAP
reserve, related to the Acquisition, is also included in this
balance. As of December 31, 2009, our funds held under
deposit contracts totaled $18.8 billion.
For SPIAs, including structured settlements, liabilities are
based on discounted amounts of estimated future benefits.
Contingent future benefits are discounted with best-estimate
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 for policies issued
subsequent to the Acquisition or based upon prevailing market
interest rates for policies in existence on the Acquisition
date. The interest rates within the pattern vary over time and
start with interest rates that prevailed at contract issue or on
the Acquisition date. As of December 31, 2009, the
weighted-average implied interest rate on the existing book of
business was 6.0% and is expected to grade to 6.7% during the
next 20 years.
Future
Policy Benefits
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 the insured while the policy is in
force. We derive mortality assumptions from both
company-specific and industry statistics. We discount future
benefits at interest rates that vary by year of policy issue,
are set initially at a rate consistent with portfolio rates at
the time of issue, and grade to a lower rate, such as the
statutory valuation interest rate, over time. Assumptions are
made at the time each policy is issued, and do not change over
time unless the liability amount is determined to be inadequate
to cover future policy benefits. 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.
We periodically compare our actual experience with our estimates
of actuarial liabilities for future policy benefits. To the
extent that actual policy benefits differ from the reserves
established for future policy benefits, such differences are
recorded in the consolidated statements of income in the period
in which the variances occur, which could result in a decrease
in profits, or possibly losses. 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.
Policy
and Contract Claims
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 reflected
in current operating results. If expected loss ratios increase
or expected claims paying completion patterns extend, the IBNR
amount increases.
Income
Taxes
The application of GAAP requires us to evaluate the
recoverability of our deferred tax assets and establish a
valuation allowance, if necessary, to reduce our deferred tax
assets to an amount that is more likely than not to be
realizable. Considerable judgment and the use of estimates are
required in determining whether a valuation allowance is
necessary, and if so, the amount of such allowance. In
evaluating the need for a valuation allowance, we consider many
factors, including: the nature and character of the deferred tax
assets and liabilities; future reversals of existing temporary
differences; operating income carry-backs or loss carry-
56
forwards and their expirations; and any tax planning strategies
we would employ to avoid a tax benefit expiring unused.
Our deferred tax assets are primarily related to unrealized
losses on investment securities, reserves, capitalization of
policy acquisition costs and investment impairments. As of
December 31, 2008 we had significant unrealized losses that
were attributable to volatility and disruption within the
capital markets. To assess the impact of this volatility, we
reviewed our invested assets supporting the liquidity
requirements of our insurance and investment product liabilities
to assess future reversals and the utilization of capital loss
carry-backs and carry-forwards related to our investment timing
differences. As of December 31, 2009, our unrealized losses
on investment securities improved to an overall net unrealized
gain.
Our analyses indicated we would be able to fully realize the
deferred tax assets as of December 31, 2009 and 2008, and
thus, no valuation allowances were necessary.
New
Accounting Standards
For a discussion of recently adopted and not yet adopted
accounting pronouncements, see Note 2 to the accompanying
audited financial statements.
Sources
of Revenues and Expenses
Our primary sources of revenues from our insurance operations
are premiums and net investment income. Our primary sources of
expenses from our insurance operations are policyholder benefits
and claims, interest credited to policyholder reserves and
account balances and general business and operating expenses,
net of DAC. We also generate net realized investment gains
(losses) on sales or impairment of our investments and changes
in fair value on our equity trading portfolio.
Each of our four operating segments maintains its own portfolio
of invested assets. The net investment income and realized
investment gains (losses) incurred 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. In addition, we allocate certain corporate
expenses to each operating segment using multiple factors
including employee headcount, allocated investments, account
values and time study results.
Revenues
Premiums
and other considerations
Premiums and other considerations consist primarily of premiums
from our group life and health and individual life insurance
products, and COI charges on our universal life insurance and
BOLI polices.
Net
investment income
Net investment income represents the income earned on our
investments, net of investment expenses, including gains or
losses on changes in the fair value on our investments in
limited partnerships, primarily private equity and hedge funds.
Other
revenues
Other revenues include mortality expense, surrender and other
administrative charges, revenues from our non-insurance
businesses and reinsurance allowance fees.
Net
realized investment gains (losses)
Net realized investment gains (losses) mainly consists of
realized gains (losses) from sales of our investments, realized
losses from investment impairments and changes in fair value on
our trading portfolio and FIA options.
57
Benefits
and Expenses
Policyholder
benefit and claims
Policyholder benefits and claims consist of benefits paid and
reserve activity on group life and health and individual life
products. In addition, we record, as a reduction of this
expense, PGAAP reserve amortization related to our fixed
deferred annuities and BOLI policies.
Interest
credited
Interest credited represents interest credited to policyholder
reserves and contractholder general account balances.
Other
underwriting and operating expenses
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 general operating costs.
Interest
expense
Interest expense primarily includes interest on corporate debt,
the impact of interest rate hedging activities and amortization
of debt issuance costs.
Amortization
of deferred policy acquisition costs
We defer as assets certain costs, generally 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.
Use of
non-GAAP Financial Measures
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. In addition, our management and board
of directors use these measures to gauge the historical
performance of our operations and for business planning
purposes. In the following paragraphs, we provide definitions of
these non-GAAP measures and explain how we believe investors
will find them useful, how we use them, what their limitations
are and how we compensate for such limitations.
Adjusted
Operating Income
Adjusted operating income is a non-GAAP measure of our
performance. Adjusted operating income consists of net income,
less after-tax net realized investment gains (losses), plus
after-tax net investment gains (losses) on our fixed income
annuity (FIA) options.
Net income is the most directly comparable GAAP measure to
adjusted operating income. Net income for any period presents
the results of our insurance operations, as well as our net
realized investment gains (losses). We consider investment
income generated by our invested assets to be part of the
results of our insurance operations because they are acquired
and generally held to maturity to generate income that we use to
meet our obligations. Conversely, we do not consider the
activities reported through net realized investment gains
(losses), with the exception of our FIA options, to be
reflective of the performance of our insurance operations, as
discussed below.
We believe investors find it useful to review a measure of the
results of our insurance operations separate from the gain and
loss activity attributable to most of our investment portfolio
because it assists an investor in determining whether our
insurance-related revenues, composed primarily of premiums and
other considerations and net investment income, have been
sufficient to generate operating earnings after meeting
58
our insurance-related obligations, composed primarily of claims
paid to policyholders and investment returns credited to
policyholder accounts, and other operating costs.
In presenting adjusted operating income, we are excluding
after-tax net realized investment gains (losses). Even though
these gains and losses recur in most periods, the timing and
amount are driven by investment decisions and external economic
developments unrelated to our management of the insurance and
underwriting aspects of our business. Thus, because our
insurance operations are not dependent on the following, we
exclude from adjusted operating income the following items which
are recorded in after-tax net realized investment gains (losses):
|
|
|
|
|
other-than-temporary
impairments (OTTI) related to
available-for-sale
securities, which depend on the timing and severity of market
credit cycles and management judgments regarding recoverability;
|
|
|
|
net gains (losses) on changes in fair value of our trading
securities, which depend on equity market performance and
broader market conditions; and
|
|
|
|
net realized gains (losses) on sales of securities, which are
subject to our discretion and influenced by market opportunities.
|
The one exception to the exclusion of realized investment gains
and losses is the gains (losses) on our FIA options in our
Retirement Services 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.
In addition to using adjusted operating income to evaluate our
insurance operations, our management and board of directors have
other uses for this measure, including managing our insurance
liabilities and assessing achievement of our financial plan. For
instance, we use adjusted operating income to help determine the
renewal interest rates we can afford to credit to policyholders.
We also develop a financial plan that includes our expectation
of adjusted operating income. We review our achievement of our
financial plan by understanding variances between actual and
planned adjusted operating income. We use this information to
make decisions on how to manage our consolidated insurance
operations, including making decisions regarding expense
budgets, product prices and the purchase of tax-advantaged
affordable housing limited partnerships.
Adjusted operating income is not a substitute for net income
determined in accordance with GAAP. The adjustments made to
derive adjusted operating income are important to understanding
our overall results from operations and, if evaluated without
proper context, adjusted operating income possesses material
limitations. As an example, we could produce a low level of net
income in a given period, despite strong operating performance,
if in that period we generate significant net realized losses
from our investment portfolio. We could also produce a high
level of net income in a given period, despite poor operating
performance, if in that period we generate significant net
realized gains from our investment portfolio. As an example of
another limitation of adjusted operating income, it does not
include the decrease in cash flows expected to be collected as a
result of credit loss OTTI. Further, it includes changes to net
investment income as a result of OTTI, which are not directly
related to our insurance operations, and does not adjust for any
negative impact to cash flows that we may experience in future
periods as a result of such changes in net investment income.
Therefore, our management and board of directors also separately
review net realized investment gains (losses) and analyses of
our net investment income, including impacts related to OTTI
writedowns, in connection with their review of our investment
portfolio. In addition, our management and board of directors
examine net income as part of their review of our overall
financial results. For a reconciliation of adjusted operating
income to net income, see Item 6 Selected
Financial Data on page 46.
59
Adjusted
Book Value, Adjusted Book Value per Common Share and Adjusted
Book Value per Common Share, as Converted
Adjusted
book value
Adjusted book value is a non-GAAP financial measure of our
financial condition. Adjusted book value consists of
stockholders equity, less accumulated other comprehensive
income (loss), or AOCI.
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.
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. These
fluctuations do not reflect any change in the cash flows we
expect to receive. As an example, an increase in the fair value
of our fixed maturities improved AOCI by $1,002.9, or 95%, from
December 31, 2008 to December 31, 2009, due to credit
market improvements and tightening of interest spreads. This
contributed to a related increase in stockholders equity
over the same period of $1,147.1, or 401%; however, this
increase did not impact our estimates regarding collection of
cash flows on the underlying fixed maturities.
We believe investors find it useful if we present them with a
financial measure that removes from stockholders equity
these temporary and unrealized changes in the fair values of our
investments, and the related effects on AOCI. By evaluating our
adjusted book value, an investor can 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
companys value has decreased.
In addition to using adjusted book value to evaluate our
financial condition, our management and board of directors have
other uses for this measure, including reviewing debt levels as
a percentage of adjusted book value to monitor compliance with
revolving credit facility covenants and helping to maintain and
improve our ratings from rating agencies. Our management also
compares adjusted book value to regulatory capital to assess our
ability to maintain regulatory capital ratios and ratings.
Finally, our board of directors uses adjusted book value as a
basis to measure the success of our company over historical
periods and reviews and ultimately approves managements
financial plans based on the projected growth in adjusted book
value.
Adjusted book value is not a substitute for stockholders
equity determined in accordance with GAAP and considering
adjusted book value on its own would present material
limitations to an analysis of our financial condition. For
example, AOCI may deteriorate due to higher interest rates,
credit spreads and issues specific to particular investments. By
not considering the size of gross unrealized losses within AOCI,
an investor may fail to appreciate the size of potential losses
or the amount of potential gains based on the fair value of our
fixed maturities. As a result, when evaluating our financial
condition, we compensate for these limitations by also
considering stockholders equity and the unrealized losses
on invested assets, which are provided in our investment
disclosures (see Investments for further
information).
Adjusted book value should not be considered a substitute for
stockholders equity. For a reconciliation of adjusted book
value to stockholders equity, see Item 6
Selected Financial Data on page 46.
Adjusted
book value per common share
Adjusted book value per common share is a non-GAAP financial
measure of our financial condition. Adjusted book value per
common share is calculated as adjusted book value, divided by
outstanding common
60
shares. This measure does not include the 18,975,744 shares
subject to outstanding warrants for all periods presented
because the warrant holders only participate in dividends and
would not be entitled to proceeds in the event of a liquidation
or winding down of our company should such event precede the
exercise of the outstanding warrants.
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 believe investors find it useful if we present them with
adjusted book value (discussed above), a financial measure that
removes AOCI from stockholders equity, and then translate
it into another measure, adjusted book value per common share,
that allows the investor to understand the value of its
investment on the adjusted book value basis. By evaluating this
measure, an investor will be able to assess its proportionate
stake in our adjusted book value as of the dates presented, and
the change in such measure over time, based on our practice of
holding our fixed maturities to maturity. In addition, this
measure allows an investor to understand the value of its
investment based on current shares outstanding because it
represents our future share count in the event that the
outstanding warrants are not exercised before they expire.
In addition to using adjusted book value to evaluate our
financial condition on a per common share basis, our management
and board of directors use this measure to assess the cost of
obtaining new equity capital and to compare the value and the
change in value over time of our common shares to that of our
peer companies. For example, our board of directors takes into
account the expected market price of our common shares relative
to adjusted book value per common share when considering raising
new equity capital.
Adjusted book value per common share is not a substitute for
book value per common share determined in accordance with GAAP
and only considering adjusted book value per common share on its
own would present material limitations similar to those
discussed above with respect to adjusted book value.
Adjusted book value per common share should not be considered a
substitute for book value per common share. For a reconciliation
of adjusted book value per common share to book value per common
share, see Item 6 Selected Financial
Data on page 46.
Adjusted
book value per common share, as converted
Adjusted book value per common share, as converted, is a
non-GAAP financial measure of our financial condition and gives
effect to the exercise of our outstanding warrants. Adjusted
book value per common share, as converted, is calculated as
adjusted book value plus the assumed proceeds from the warrants,
divided by the sum of outstanding common shares and shares
subject to outstanding warrants. Our shares issuable pursuant to
outstanding warrants were 18,975,744 for all periods presented.
Book value per common share is the most directly comparable GAAP
measure to adjusted book value per share, as converted. Book
value per common share is calculated as stockholders
equity divided by the sum of our common shares outstanding and
shares issuable pursuant to our outstanding warrants.
We believe investors find it useful if we present them with
adjusted book value (discussed above), a financial measure that
removes AOCI from stockholders equity and then translate
it into another measure, adjusted book value per common share,
as converted, which gives effect to the exercise of our
outstanding warrants. By evaluating this measure, an investor
will be able to assess its proportionate stake in our adjusted
book value for the periods presented, on a fully diluted basis.
We believe it is most meaningful for investors to compare this
measure to adjusted book value per common share as this will
allow the investor to understand the dilutive effect if the
warrant holders exercise our outstanding warrants.
As discussed above, our management and board of directors use
adjusted book value per common share to compare the value of a
share of our common stock to that of our peer companies, and
also to measure the cost of new equity capital. To further this
analysis, our management and board of directors also make these
comparisons and judgments after taking into account the
potential dilutive effect of the exercise of our outstanding
warrants.
61
Adjusted book value per common share, as converted, is not a
substitute for book value per common share determined in
accordance with GAAP and only considering adjusted book value
per common share, as converted, on its own would present
material limitations similar to those discussed above with
respect to adjusted book value.
Adjusted book value per common share, as converted, should not
be considered a substitute for book value per common share. For
a reconciliation of adjusted book value per common share, as
converted, to book value per common share, see
Item 6 Selected Financial Data on
page 46.
Operating
ROAE
Operating return on average equity, or operating ROAE, is a
non-GAAP measure of our performance. 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 adjusted book value for the
most recent five quarters.
Return on stockholders equity, or ROE, is the most
directly comparable GAAP measure. Return on stockholders
equity for the most recent four quarters is calculated as net
income for such period divided by the average stockholders
equity for the most recent five quarters.
As discussed above under Adjusted operating
income, 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, as discussed above under
Adjusted Book Value, Adjusted Book Value per
Common Share and Adjusted Book Value per Common Share, as
Converted, 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.
In addition to using operating ROAE to evaluate how effectively
our management uses funds invested in our company, our
management and board of directors have additional uses for
operating ROAE. These include comparing our operating ROAE to
those of our peer companies, comparing our operating ROAE
against our target return objectives, and determining if our
insurance and annuity products are priced to achieve our
long-term targets.
However, because operating ROAE excludes realized and unrealized
gains (losses) on our investment portfolio, it has material
limitations as a financial measure of performance and should not
be considered on its own. As an example, we could produce a high
operating ROAE in a given period, despite poor net income, if in
that period we generated significant net realized losses from
our investment portfolio. To compensate for such limitations, we
also consider ROE to assess financial performance and return on
total equity.
Operating ROAE should not be considered a substitute for ROE.
The numerator and denominator of operating ROAE have been
reconciled to net income and stockholders equity,
respectively, their most comparable GAAP financial measures, in
Item 6 Selected Financial Data on
page 46.
62
Results
of Operations
Total
Company
The following discussion should be read in conjunction with our
audited consolidated financial statements and the related notes
within the accompanying audited financial statements. 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.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Variance (%)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009 vs. 2008
|
|
|
2008 vs. 2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other considerations
|
|
$
|
573.6
|
|
|
$
|
584.8
|
|
|
$
|
530.5
|
|
|
|
(1.9
|
)%
|
|
|
10.2
|
%
|
Net investment income
|
|
|
1,113.6
|
|
|
|
956.5
|
|
|
|
973.6
|
|
|
|
16.4
|
|
|
|
(1.8
|
)
|
Other revenues
|
|
|
56.4
|
|
|
|
67.8
|
|
|
|
68.7
|
|
|
|
(16.8
|
)
|
|
|
(1.3
|
)
|
Net realized investment gains (losses)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(191.2
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
|
|
|
|
|
|
|
|
Less: portion of loss recognized in other comprehensive income
|
|
|
104.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(86.5
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
|
|
0.1
|
|
|
|
*
|
|
Other net realized investment gains (losses)
|
|
|
57.2
|
|
|
|
(71.6
|
)
|
|
|
33.0
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
(29.3
|
)
|
|
|
(158.0
|
)
|
|
|
16.8
|
|
|
|
81.5
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,714.3
|
|
|
|
1,451.1
|
|
|
|
1,589.6
|
|
|
|
18.1
|
|
|
|
(8.7
|
)
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
350.5
|
|
|
|
348.5
|
|
|
|
267.1
|
|
|
|
0.6
|
|
|
|
30.5
|
|
Interest credited
|
|
|
846.8
|
|
|
|
766.1
|
|
|
|
752.3
|
|
|
|
10.5
|
|
|
|
1.8
|
|
Other underwriting and operating expenses
|
|
|
252.7
|
|
|
|
265.8
|
|
|
|
281.9
|
|
|
|
(4.9
|
)
|
|
|
(5.7
|
)
|
Interest expense
|
|
|
31.8
|
|
|
|
31.9
|
|
|
|
21.5
|
|
|
|
(0.3
|
)
|
|
|
48.4
|
|
Amortization of deferred policy acquisition costs
|
|
|
51.4
|
|
|
|
25.8
|
|
|
|
18.0
|
|
|
|
99.2
|
|
|
|
43.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,533.2
|
|
|
|
1,438.1
|
|
|
|
1,340.8
|
|
|
|
6.6
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
181.1
|
|
|
|
13.0
|
|
|
|
248.8
|
|
|
|
*
|
|
|
|
(94.8
|
)
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
6.7
|
|
|
|
23.8
|
|
|
|
62.8
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
46.1
|
|
|
|
(32.9
|
)
|
|
|
18.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
|
52.8
|
|
|
|
(9.1
|
)
|
|
|
81.5
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
128.3
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
|
*
|
|
|
|
(86.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.15
|
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.15
|
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
111.626
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
147.9
|
|
|
$
|
122.9
|
|
|
$
|
154.9
|
|
|
|
20.3
|
%
|
|
|
(20.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
128.3
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
|
|
|
|
|
|
|
Less: Net realized investment gains (losses) (net of taxes)
|
|
|
(19.1
|
)
|
|
|
(102.7
|
)
|
|
|
10.9
|
|
|
|
|
|
|
|
|
|
Add: Net investment gains (losses) on FIA options (net of taxes)
|
|
|
0.5
|
|
|
|
(1.9
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
147.9
|
|
|
$
|
122.9
|
|
|
$
|
154.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
footnotes on following page
63
|
|
|
* |
|
Represents percentage variances that are not meaningful. |
|
(1) |
|
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. |
|
(2) |
|
Basic net income per common share includes all participating
securities, including warrants, using the two-class method.
Diluted net income per share includes the dilutive impact of
non-participating, unvested restricted stock awards, based on
the application of the treasury stock method, weighted for the
portion of the period they were outstanding. |
|
(3) |
|
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. |
Twelve
Months Ended December 31, 2009 Compared to the Twelve
Months Ended December 31, 2008
Summary
of Results
Net income increased $106.2 on an increase in adjusted operating
income and a reduction in net realized investment losses.
Adjusted operating income increased $25.0, which was driven
primarily by an increase in the investment margin (net
investment income less interest credited) in our Retirement
Services segment, increased returns on our investments in
limited partnerships, which produced gains of $8.9 in 2009,
compared to losses of $24.4 in 2008, and a decrease in other
underwriting and operating expenses. These favorable drivers
were partially offset by a decrease in our Group segments
underwriting margin (premiums less policyholder benefits and
claims) and an increase in DAC amortization.
Net realized investment losses decreased $128.7 on improved
performance of our equity portfolio, which yielded total returns
of 34.0%, as compared to (30.6)% in 2008, and outpaced the 2009
S&P 500 total return index of 26.5%. For further discussion
on our investment results and portfolio, including a discussion
of our impairment charges, refer to
Investments.
The provision (benefit) for income taxes increased $61.9
primarily due to higher income from operations before income
taxes in 2009, compared to 2008.
Further discussion of adjusted operating income drivers
described above:
Our Retirement Services 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. In
addition to the strong sales growth in our Retirement Services
segment, we also saw sales growth in our Income Annuities and
Individual segments.
Our other underwriting and operating expenses decreased $13.1 as
a result of an overall reduction in non-deferrable operating
expenses. We experienced a $4.0 decrease in payroll and employee
related expenses due to attrition and disciplined expense
management. In addition, the growth in sales resulted in an
increase in deferrable acquisition costs, especially in our
Individual segment. Increased Individual sales in 2009 resulted
in $2.8 of additional deferral in 2009 compared to 2008. In our
Group segment, commission expense, which is not deferred,
decreased $4.3, consistent with decreased premium. Also, in our
Group segment, the sale of our third party administrator
decreased expenses $3.4.
The $17.1 decrease in our Group segments underwriting
margin was driven by decreased premiums without a corresponding
decrease in claims. We experienced reduced premium as a result
of lower sales and renewals, which was primarily driven by
pricing increases in the medical stop-loss line as we focused on
pricing to achieve our target loss ratios. We also experienced
an increase in larger dollar claims in 2009 as compared to 2008.
The $25.6 increase in amortization of DAC is due primarily to an
increase in amortization of DAC in our Retirement Services
segment of $21.5 driven by a growing block of business and
corresponding DAC
64
asset, as sales grew year over year. In addition, our
amortization of DAC increased in Retirement Services as we
experienced increased investment margins as noted above.
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Summary
of Results
Net income decreased $145.2 due to a decrease in adjusted
operating income and a decrease in net realized investment gains
(losses). The decrease in adjusted operating income of $32.0 was
driven by decreased returns on our investments in limited
partnerships, which produced losses of $24.4 in 2008 compared to
gains of $7.0 in 2007, a decrease in our Group segments
underwriting margin and an increase in interest expense of $10.4
due to our CENTs debt offering in October 2007. These items were
mitigated by strong sales of fixed deferred annuities, which
drove an increase in our fixed annuities account value, a $5.9
increase in the investment margin related to these products and
a $16.1 decrease in other underwriting and operating expenses.
Net realized investment gains (losses) decreased $174.8 as
impairments increased from $16.2 to $86.4 and recorded net
losses on our trading portfolio of $64.5, resulting from
declining equity markets in 2008. Beginning in 2008, we elected
to record changes in fair value on equity securities in income,
which previously were reported as a component of other
comprehensive income (loss). For further discussion on our
investment portfolio, refer to
Investments.
The provision (benefit) for income taxes decreased $90.6 to a
$9.1 benefit from an $81.5 expense, primarily due to the
significant reduction in income from continuing operations and
an increase in affordable housing tax credits.
Further discussion of adjusted operating income drivers
described above:
The $25.1 decrease in our Group segments underwriting
margin was driven by higher paid medical stop-loss claims
applied to a larger book of business driven by strong sales
growth and renewals in 2008. We adjusted our pricing to grow our
block of business in 2008 leading to increased premium, as well
as an increase in the overall loss ratio.
Our investment margin increased $5.9 in our Retirement Services
segment as a result of a $1.3 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, especially during the second
half of 2008.
Our other underwriting and operating expenses decreased $16.1
mainly due to a $4.5 decrease in professional services expenses,
primarily IT related, and a reduction in general management
expenses which were primarily related to management bonuses. In
addition, strong 2008 sales resulted in an increase in
deferrable policy acquisition costs.
Segment
Operating Results
The results of operations and selected operating metrics for our
five segments, (Group, Retirement Services, Income Annuities,
Individual and Other), for the years ended December 31,
2009, 2008 and 2007 are set forth in the following respective
sections.
65
Group
The following table sets forth the results of operations
relating to our Group segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Variance (%)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009 vs. 2008
|
|
|
2008 vs. 2007
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other considerations
|
|
$
|
432.2
|
|
|
$
|
449.8
|
|
|
$
|
392.1
|
|
|
|
(3.9
|
)%
|
|
|
14.7
|
%
|
Net investment income
|
|
|
17.8
|
|
|
|
17.8
|
|
|
|
18.1
|
|
|
|
*
|
|
|
|
(1.7
|
)
|
Other revenues
|
|
|
14.9
|
|
|
|
19.0
|
|
|
|
15.2
|
|
|
|
(21.6
|
)
|
|
|
25.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
464.9
|
|
|
|
486.6
|
|
|
|
425.4
|
|
|
|
(4.5
|
)
|
|
|
14.4
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
295.4
|
|
|
|
295.9
|
|
|
|
213.1
|
|
|
|
(0.2
|
)
|
|
|
38.9
|
|
Other underwriting and operating expenses
|
|
|
106.2
|
|
|
|
115.7
|
|
|
|
112.3
|
|
|
|
(8.2
|
)
|
|
|
3.0
|
|
Amortization of deferred policy acquisition costs
|
|
|
7.9
|
|
|
|
8.1
|
|
|
|
8.4
|
|
|
|
(2.5
|
)
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
409.5
|
|
|
|
419.7
|
|
|
|
333.8
|
|
|
|
(2.4
|
)
|
|
|
25.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income
|
|
$
|
55.4
|
|
|
$
|
66.9
|
|
|
$
|
91.6
|
|
|
|
(17.2
|
)%
|
|
|
(27.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth selected historical operating
metrics relating to our Group segment as of, or for the years
ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Group loss ratio(1)
|
|
|
68.3
|
%
|
|
|
65.8
|
%
|
|
|
54.3
|
%
|
Expense ratio(2)
|
|
|
24.5
|
%
|
|
|
24.8
|
%
|
|
|
27.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio(3)
|
|
|
92.8
|
%
|
|
|
90.6
|
%
|
|
|
82.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical stop-loss loss ratio(4)
|
|
|
69.8
|
%
|
|
|
67.9
|
%
|
|
|
55.2
|
%
|
Total sales(5)
|
|
$
|
91.3
|
|
|
$
|
112.6
|
|
|
$
|
86.2
|
|
|
|
|
(1) |
|
Group loss ratio represents policyholder benefits and claims
divided by premiums earned. |
|
(2) |
|
Expense ratio is equal to other underwriting and operating
expenses of our insurance operations and amortization of DAC
divided by premiums earned. |
|
(3) |
|
Combined ratio is equal to the sum of the loss ratio and the
expense ratio. |
|
(4) |
|
Medical stop-loss loss ratio represents medical
stop-loss policyholder benefits and claims divided by medical
stop-loss premiums earned. |
|
(5) |
|
Total sales represents annualized first-year premiums. |
Twelve
Months Ended December 31, 2009 Compared to the Twelve
Months Ended December 31, 2008
Summary
of Results
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 2009
loss ratio increased to 68.3% from 65.8%, which exceeded our
target, while the expense ratio remained flat on a smaller block
of medical stop-loss business.
In addition to the drivers discussed above, we consider the
following information regarding operating revenues and benefits
and expenses useful in understanding our results.
66
Operating
Revenues
Premiums and other considerations decreased primarily due to a
$15.4 decrease in medical stop-loss premiums, as planned pricing
increases and disciplined underwriting in a competitive market
led to lower sales and renewals in 2009.
Other revenues decreased $4.1 primarily due to a reduction in
revenue from our third party administrator, which was sold in
the third quarter of 2009.
Benefits
and Expenses
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.
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Summary
of Results
Segment pre-tax adjusted operating income decreased $24.7 driven
by higher paid medical stop-loss claims as shown in the increase
in the medical stop-loss loss ratio, from 55.2% to
67.9%, applied to a larger block of business from strong sales
growth and renewals in 2008. In 2008, we pursued organic growth
in our block of stop-loss and generated more premiums but
experienced an increase in the actual loss ratio.
In addition to the drivers discussed above, we consider the
following information regarding operating revenues and benefits
and expenses useful in understanding our results.
Operating
Revenues
Premiums and other considerations increased primarily due to a
$58.4 increase in medical stop-loss premiums as a result of an
increase in new sales and strong renewals.
Other revenues increased $3.8 as MRM, our subsidiary acquired in
May 2007, generated revenues of $11.1 in 2008, compared to $6.4
in 2007. This increase was partially offset by a reduction in
revenues of $1.2 from our third party administrator.
Benefits
and Expenses
Policyholder benefit and claims increased $82.8 primarily due to
the larger block of business on increased sales and renewals,
and from the higher loss ratio described above.
Other underwriting and operating expenses increased primarily
due to a $3.4 increase in commission expense as a result of
strong sales in 2008. The overall expense ratio improved by 3.0%
in 2008 due to a larger block of medical stop-loss business and
disciplined expense management.
67
Retirement
Services
The following table sets forth the results of operations
relating to our Retirement Services segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Variance (%)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009 vs. 2008
|
|
|
2008 vs. 2007
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other considerations
|
|
$
|
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
|
*
|
|
|
|
*
|
|
Net investment income
|
|
|
388.0
|
|
|
|
261.1
|
|
|
|
244.3
|
|
|
|
48.6
|
%
|
|
|
6.9
|
%
|
Other revenues
|
|
|
16.8
|
|
|
|
20.2
|
|
|
|
24.5
|
|
|
|
(16.8
|
)
|
|
|
(17.6
|
)
|
Net investment gains (losses) on FIA options
|
|
|
0.8
|
|
|
|
(2.9
|
)
|
|
|
(2.3
|
)
|
|
|
*
|
|
|
|
26.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
405.6
|
|
|
|
278.5
|
|
|
|
266.5
|
|
|
|
45.6
|
|
|
|
4.5
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
(2.2
|
)
|
|
|
(6.8
|
)
|
|
|
(8.3
|
)
|
|
|
(67.6
|
)
|
|
|
(18.1
|
)
|
Interest credited
|
|
|
256.9
|
|
|
|
176.4
|
|
|
|
165.5
|
|
|
|
45.6
|
|
|
|
6.6
|
|
Other underwriting and operating expenses
|
|
|
55.9
|
|
|
|
57.4
|
|
|
|
69.1
|
|
|
|
(2.6
|
)
|
|
|
(16.9
|
)
|
Amortization of deferred policy acquisition costs
|
|
|
36.4
|
|
|
|
14.9
|
|
|
|
6.0
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
347.0
|
|
|
|
241.9
|
|
|
|
232.3
|
|
|
|
43.4
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income
|
|
$
|
58.6
|
|
|
$
|
36.6
|
|
|
$
|
34.2
|
|
|
|
60.1
|
%
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents percentage variances that are not meaningful. |
The following table sets forth selected historical operating
metrics relating to our Retirement Services segment as of, or
for the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Account values Fixed annuities
|
|
$
|
7,655.7
|
|
|
$
|
5,724.9
|
|
|
$
|
4,445.4
|
|
Account values Variable annuities
|
|
|
755.7
|
|
|
|
645.7
|
|
|
|
1,059.2
|
|
Interest spread on average account values(1)
|
|
|
1.81
|
%
|
|
|
1.67
|
%
|
|
|
1.68
|
%
|
Total sales(2)
|
|
$
|
2,228.4
|
|
|
$
|
1,766.5
|
|
|
$
|
692.3
|
|
|
|
|
(1) |
|
Interest spread is the difference between net investment yield
earned and the credited interest rate to policyholders. The
investment yield is the approximate yield on invested assets in
the general account attributed to the segment. The credited
interest rate is the approximate rate credited on policyholder
fixed account values within the segment. Interest credited is
subject to contractual terms, including minimum guarantees.
Interest spread tends to move gradually over time to reflect
market interest rate movements and may reflect actions by
management to respond to competitive pressures and profit
targets. |
|
(2) |
|
Total sales represent deposits for new policies. |
Twelve
Months Ended December 31, 2009 Compared to the Twelve
Months Ended December 31, 2008
Summary
of Results
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 (net investment income less interest
credited), partially offset by an increase in DAC amortization.
In addition to the drivers discussed above, we consider the
following information regarding operating revenues and benefits
and expenses useful in understanding our results.
68
Operating
Revenues
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. We expect future growth in
our investment yield as the credit markets have opened slightly,
allowing us to carry less cash.
Other revenues decreased primarily due to a $3.8 reduction in
fees on average variable account values. Although variable
annuities account values increased during 2009, the average
account value in 2008 was higher as the equity markets declined
during the second half of 2008, primarily in the fourth quarter.
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.
Benefits
and Expenses
Policyholder benefits and claims decreased $4.6 driven by a
reduced benefit from amortization of the PGAAP reserve, which
was fully amortized as of September 30, 2009, resulting in
only nine months of amortization in 2009 compared to
12 months in 2008.
Interest credited increased $80.5 primarily due to a 34%
increase in average account value as a result of increased sales
of fixed deferred annuity products. In addition, due to the
growth in the S&P 500 in 2009, compared to a loss in 2008,
the interest credited to contractholders of our FIA product
increased $5.9.
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.
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Summary
of Results
Segment pre-tax adjusted operating income increased $2.4
primarily from strong sales and higher persistency leading to a
growing block of business and growth of $5.9 in our investment
margin (net investment income less interest credited). Increased
sales also resulted in the full deferral of acquisition costs,
which contributed positively to lower operating expenses in
2008. Partially offsetting this was a $4.3 decrease in other
revenues from lower fees on variable annuities due to the
declines in the equity markets in 2008, and an increase in DAC
amortization.
In addition to the drivers discussed above, we consider the
following information regarding operating revenues and benefits
and expenses useful in understanding our results.
Operating
Revenues
Net investment income increased $16.8 primarily driven by a
positive volume variance of $17.0 as average invested assets
increased to $5.1 billion from $4.7 billion.
Benefits
and Expenses
Interest credited increased $10.9 primarily due to a $14.2
increase as a result of an increase in average fixed account
values driven by increased sales.
Other underwriting and operating expenses decreased $11.7. This
change was primarily driven by increased sales in 2008, which
resulted in full deferral of policy acquisition costs in 2008.
69
Amortization of DAC increased $8.9, which was primarily driven
by a growing book of business and corresponding DAC asset.
Income
Annuities
The following table sets forth the results of operations
relating to our Income Annuities segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Variance (%)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009 vs. 2008
|
|
|
2008 vs. 2007
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
422.4
|
|
|
$
|
423.4
|
|
|
$
|
439.3
|
|
|
|
(0.2
|
)%
|
|
|
(3.6
|
)%
|
Other revenues
|
|
|
0.5
|
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
(44.4
|
)
|
|
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
422.9
|
|
|
|
424.3
|
|
|
|
440.1
|
|
|
|
(0.3
|
)
|
|
|
(3.6
|
)
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited
|
|
|
357.9
|
|
|
|
364.5
|
|
|
|
371.5
|
|
|
|
(1.8
|
)
|
|
|
(1.9
|
)
|
Other underwriting and operating expenses
|
|
|
21.0
|
|
|
|
21.9
|
|
|
|
22.4
|
|
|
|
(4.1
|
)
|
|
|
(2.2
|
)
|
Amortization of deferred policy acquisition costs
|
|
|
1.6
|
|
|
|
1.4
|
|
|
|
1.1
|
|
|
|
14.3
|
|
|
|
27.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
380.5
|
|
|
|
387.8
|
|
|
|
395.0
|
|
|
|
(1.9
|
)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income
|
|
$
|
42.4
|
|
|
$
|
36.5
|
|
|
$
|
45.1
|
|
|
|
16.2
|
%
|
|
|
(19.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth selected historical operating
metrics relating to our Income Annuities segment as of, or for
the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Reserves(1)
|
|
$
|
6,726.3
|
|
|
$
|
6,761.2
|
|
|
$
|
6,895.4
|
|
Interest spread on reserves(2)
|
|
|
0.53
|
%
|
|
|
0.59
|
%
|
|
|
0.60
|
%
|
Mortality gains (losses)(3)
|
|
$
|
5.1
|
|
|
$
|
2.1
|
|
|
$
|
(0.1
|
)
|
Total sales(4)
|
|
|
251.8
|
|
|
|
140.8
|
|
|
|
140.2
|
|
|
|
|
(1) |
|
Reserves represent the present value of future income annuity
benefits and assumed expenses, discounted by the assumed
interest rate. This metric represents the amount of our in-force
book of business. |
|
(2) |
|
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. |
|
(3) |
|
Mortality gains (losses) represent the difference between actual
and expected reserves released on death of our life contingent
annuities. |
|
(4) |
|
Sales represent deposits for new policies. |
Twelve
Months Ended December 31, 2009 Compared to the Twelve
Months Ended December 31, 2008
Summary
of Results
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. We believe sales
will continue to increase in 2010.
70
In addition to the drivers discussed above, we consider the
following information regarding operating revenues and benefits
and expenses useful in understanding our results.
Operating
Revenues
Net investment income decreased $1.0. This was the result of a
$4.4 decrease due to lower average invested assets backing lower
reserves, partially offset by a $3.4 increase as yields rose to
6.06% from 6.01%. The increase in yields was primarily due to
changes in prepayment speeds on the underlying collateral of
certain mortgage-backed fixed maturities and 2008 losses on our
investments in limited partnerships, which were transferred
during the third quarter of 2008 from our Income Annuities
segment to our Other segment.
Benefits
and Expenses
Interest credited decreased $6.6, which was primarily due to a
$4.0 decrease in interest as a result of lower reserves in 2009,
consistent with the decrease in investment income, and $3.0 due
to an increase in mortality gains.
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Summary
of Results
Segment pre-tax adjusted operating income decreased $8.6
primarily due to lower investment yields driven by fair value
losses on our investments in limited partnerships, partially
offset by an increase in mortality gains.
In addition to the drivers discussed above, we consider the
following information regarding operating revenues and benefits
and expenses useful in understanding our results.
Operating
Revenues
Net investment income decreased $15.9, driven by a $9.5 decrease
due to yields declining to 6.01% from 6.15% and a $6.4 decrease
due to lower average invested assets backing lower reserves. The
decrease in yields was primarily due to a lower return on our
investments in limited partnerships, which are included in net
investment income. The losses on limited partnerships totaled
$1.8 in 2008 compared to gains of $7.0 in 2007. During the third
quarter of 2008, we transferred all investments in limited
partnerships held by our Income Annuities segment to our Other
segment.
Benefits
and Expenses
Interest credited decreased $7.0. This decrease primarily
related to a $4.1 decrease in interest as a result of lower
reserves as benefit payments exceeded new deposits, and $2.2 due
to an increase in mortality gains.
71
Individual
The following table sets forth the results of operations
relating to our Individual segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Variance (%)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009 vs. 2008
|
|
|
2008 vs. 2007
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and considerations
|
|
$
|
141.4
|
|
|
$
|
134.9
|
|
|
$
|
138.4
|
|
|
|
4.8
|
%
|
|
|
(2.5
|
)%
|
Net investment income
|
|
|
265.2
|
|
|
|
254.6
|
|
|
|
244.1
|
|
|
|
4.2
|
|
|
|
4.3
|
|
Other revenues
|
|
|
13.2
|
|
|
|
16.0
|
|
|
|
15.0
|
|
|
|
(17.5
|
)
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
419.8
|
|
|
|
405.5
|
|
|
|
397.5
|
|
|
|
3.5
|
|
|
|
2.0
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
57.3
|
|
|
|
59.4
|
|
|
|
62.3
|
|
|
|
(3.5
|
)
|
|
|
(4.7
|
)
|
Interest credited
|
|
|
235.3
|
|
|
|
227.7
|
|
|
|
216.3
|
|
|
|
3.3
|
|
|
|
5.3
|
|
Other underwriting and operating expenses
|
|
|
55.4
|
|
|
|
57.3
|
|
|
|
57.7
|
|
|
|
(3.3
|
)
|
|
|
(0.7
|
)
|
Amortization of deferred policy acquisition costs
|
|
|
5.5
|
|
|
|
1.4
|
|
|
|
2.5
|
|
|
|
*
|
|
|
|
(44.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
353.5
|
|
|
|
345.8
|
|
|
|
338.8
|
|
|
|
2.2
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income
|
|
$
|
66.3
|
|
|
$
|
59.7
|
|
|
$
|
58.7
|
|
|
|
11.1
|
%
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents percentage variances that are not meaningful. |
The following table sets forth selected historical operating
metrics relating to our Individual segment as of, or for the
years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Insurance in force(1)
|
|
$
|
50,030.3
|
|
|
$
|
51,313.5
|
|
|
$
|
52,055.6
|
|
Mortality ratio(2)
|
|
|
75.3
|
%
|
|
|
79.2
|
%
|
|
|
84.0
|
%
|
BOLI account value(3)
|
|
$
|
3,789.1
|
|
|
$
|
3,700.4
|
|
|
$
|
3,527.2
|
|
UL account value(3)
|
|
|
583.8
|
|
|
|
580.3
|
|
|
|
573.6
|
|
BOLI ROA(4)
|
|
|
1.08
|
%
|
|
|
1.13
|
%
|
|
|
1.13
|
%
|
UL interest spread(5)
|
|
|
1.20
|
%
|
|
|
1.14
|
%
|
|
|
1.23
|
%
|
Total sales, excluding BOLI(6)
|
|
$
|
10.5
|
|
|
$
|
7.2
|
|
|
$
|
8.5
|
|
BOLI sales(7)
|
|
|
2.5
|
|
|
|
2.9
|
|
|
|
4.6
|
|
|
|
|
(1) |
|
Insurance in force represents dollar face amounts of policies. |
|
(2) |
|
Mortality ratio represents actual mortality experience as a
percentage of industry mortality ratio benchmark. This benchmark
is an expected level of claims that is derived by applying our
current in force business to the Society of Actuaries
1990-95
Basic Select and Ultimate Mortality Table. |
|
(3) |
|
BOLI account value and UL account value represent our liability
to our policyholders. |
|
(4) |
|
BOLI ROA is a measure of the gross margin on our BOLI book of
business. This metric is calculated as the difference between
our BOLI revenue earnings rate and our BOLI policy benefits
rate. The revenue earnings rate is calculated as revenues
divided by average invested assets. The policy benefits rate is
calculated as total policy benefits divided by average account
value. The policy benefits used in this metric do not include
expenses. |
footnotes continued on following page
72
|
|
|
(5) |
|
UL interest spread is the difference between net investment
yield earned and the credited interest rate to policyholders.
The investment yield is the approximate yield on invested assets
in the general account attributed to the UL policies. The
credited interest rate is the approximate rate credited on UL
policyholder fixed account values. Interest credited to UL
policyholders account values is subject to contractual
terms, including minimum guarantees. Interest credited tends to
move gradually over time to reflect actions by management to
respond to competitive pressures and profit targets. The 2009
credited rate to policyholders has been adjusted to exclude an
adjustment related to a conversion to a new actuarial software
model. Without this adjustment the UL interest spread would have
been 2.13%. |
|
(6) |
|
Total sales, excluding BOLI represents annualized first year
premiums, with single premium sales measured as 10% of new
deposits. |
|
(7) |
|
BOLI sales represent 10% of new BOLI total deposits. |
Twelve
Months Ended December 31, 2009 Compared to the Twelve
Months Ended December 31, 2008
Summary
of Results
Segment pre-tax adjusted operating income increased $6.6
primarily driven by a $1.6 increase from improved underwriting
results from favorable mortality on all life insurance products
and a $1.8 increase in BOLI gross margin (BOLI revenues less
total BOLI benefits).
In addition to the drivers discussed above, we consider the
following information regarding operating revenues and benefits
and expenses useful in understanding our results.
Operating
Revenues
Premiums and other considerations increased $6.5 driven by the
annual increases in COI charges on the UL and BOLI blocks of
business due to the aging of the covered lives, and an increase
in premiums on our term products resulting from increased term
sales.
Net investment income increased $10.6 of which $7.4 was related
to an increase in average invested assets, which increased to
$4.9 billion from $4.8 billion due mainly to increases
in the BOLI account value. In addition, there was a positive
rate variance of $3.2 as yields increased to 5.39% from 5.33%.
Benefits
and Expenses
Policyholder benefits and claims decreased $2.1 primarily due to
strong underwriting results, as reflected in the reduced
mortality ratio, and a refinement of reserve assumptions as a
result of a conversion to a new actuarial reserve model. These
decreases were partially offset by higher BOLI claims.
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.
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Summary
of Results
Segment pre-tax adjusted operating income increased slightly due
to an increase in net investment income and favorable mortality,
partially offset by decreased premiums and an increase in
interest credited on our BOLI block of business.
In addition to the drivers discussed above, we consider the
following information regarding operating revenues and benefits
and expenses useful in understanding our results.
73
Operating
Revenues
Premiums and other considerations decreased $3.5 primarily due
to lower sales and adjustments associated with reinsured
policies that increased ceded premiums. This was partially
offset by an increase in BOLI COI charges related to new sales
and the aging of covered BOLI lives.
Net investment income increased $10.5 which was driven by a
$13.2 increase related to growth in the average invested assets,
which increased to $4.8 billion from $4.5 billion
mainly due to growth in BOLI account value. This increase was
partially offset by a negative rate variance of $2.7 as yields
decreased to 5.33% from 5.38%.
Benefits
and Expenses
Policyholder benefits and claims expense decreased $2.9, of
which $1.5 was due to ceded maintenance reserve credits in 2008
and improved mortality, which excludes BOLI experience. However,
this was offset by a decrease in the change in reserves
primarily related to a $2.5 adjustment from a refinement of our
reserve methodology in 2007 in connection with an actuarial
reserving software conversion. In addition, the benefit received
from PGAAP reserve amortization decreased $2.2.
Interest credited increased $11.4 primarily due to an increase
in our BOLI account values caused by new sales and strong
persistency, and a decrease in BOLI separate account claims,
which resulted in an increase in interest credited related to
BOLI separate account business.
Other
The following table sets forth the results of operations
relating to our Other segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Variance (%)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009 vs. 2008
|
|
|
2008 vs. 2007
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
20.2
|
|
|
$
|
(0.4
|
)
|
|
$
|
27.8
|
|
|
|
*
|
|
|
|
*
|
|
Other revenues
|
|
|
11.0
|
|
|
|
11.7
|
|
|
|
13.2
|
|
|
|
(6.0
|
)%
|
|
|
(11.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
31.2
|
|
|
|
11.3
|
|
|
|
41.0
|
|
|
|
*
|
|
|
|
*
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited
|
|
|
(3.3
|
)
|
|
|
(2.5
|
)
|
|
|
(1.0
|
)
|
|
|
32.0
|
|
|
|
*
|
|
Other underwriting and operating expenses
|
|
|
14.2
|
|
|
|
13.5
|
|
|
|
20.4
|
|
|
|
5.2
|
|
|
|
(33.8
|
)
|
Interest expense
|
|
|
31.8
|
|
|
|
31.9
|
|
|
|
21.5
|
|
|
|
(0.3
|
)
|
|
|
48.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
42.7
|
|
|
|
42.9
|
|
|
|
40.9
|
|
|
|
(0.5
|
)
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income (loss)
|
|
$
|
(11.5
|
)
|
|
$
|
(31.6
|
)
|
|
$
|
0.1
|
|
|
|
63.6
|
%
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
Months Ended December 31, 2009 Compared to the Twelve
Months Ended December 31, 2008
Summary
of Results
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.
74
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 2007
Summary
of Results
Segment pre-tax adjusted operating income (loss) decreased $31.7
primarily due to a decrease in investment yields to (0.08)% from
4.69%, driven by our investments in limited partnerships, and
additional interest expense incurred in connection with our
$150.0 CENts offering in the fourth quarter of 2007. This was
partially offset by a decrease in other underwriting and
operating expenses of which $3.0 related to costs of our
terminated IPO process during 2007 and a $1.4 decrease in
depreciation expense as certain significant assets became fully
depreciated.
Investments
Our investment portfolio is structured with the objective of
supporting the expected cash flows of our liabilities and to
produce stable returns over the long term. The composition of
our portfolio reflects our asset management philosophy of
protecting principal and receiving appropriate reward for credit
risk. Our investment portfolio mix as of December 31, 2009
consisted in large part of high quality fixed maturities and
commercial mortgage loans, as well as a smaller allocation of
high yield fixed maturities, marketable equity securities,
investments in limited partnerships (which includes affordable
housing, private equity and hedge funds) and other investments.
We believe that prudent levels of investments in marketable
equity securities within our investment portfolio offer enhanced
long term, after-tax total returns to support a portion of our
longest duration liabilities.
The following table presents the composition of our investment
portfolio:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of December 31,
|
|
Types of Investments
|
|
2009
|
|
|
2008
|
|
|
Fixed maturities,
available-for-sale:
|
|
|
|
|
|
|
|
|
Public
|
|
$
|
17,693.0
|
|
|
$
|
14,255.4
|
|
Private
|
|
|
901.3
|
|
|
|
632.2
|
|
Marketable equity securities,
available-for-sale(1)
|
|
|
36.7
|
|
|
|
38.1
|
|
Marketable equity securities, trading(2)
|
|
|
154.1
|
|
|
|
106.3
|
|
Mortgage loans, net
|
|
|
1,201.7
|
|
|
|
988.7
|
|
Policy loans
|
|
|
73.9
|
|
|
|
75.2
|
|
Investments in limited partnerships(3)
|
|
|
110.2
|
|
|
|
138.3
|
|
Other invested assets(4)
|
|
|
12.2
|
|
|
|
18.3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,183.1
|
|
|
$
|
16,252.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount primarily represents nonredeemable preferred stock. |
|
(2) |
|
Amount represents investments in common stock. |
|
(3) |
|
As of December 31, 2009 and 2008, these amounts included
$24.7 and $56.3, respectively, of investments in private equity
and hedge funds carried at fair value. The remaining balance is
comprised of investments in affordable housing projects and
state tax credit refunds, which are carried at amortized cost.
In 2009, we submitted liquidation notices to all of our hedge
fund partnerships. As of December 31, 2009, our remaining
investment in these hedge fund partnerships was $4.8. |
|
(4) |
|
As of December 31, 2009 and 2008, these amounts primarily
included investments in life settlements, S&P 500 Index
options and short term investments. |
The increase in invested assets in 2009 is primarily due to
portfolio growth generated by fixed deferred annuity sales of
$2.2 billion and a net increase in the fair value of our
fixed maturities driven by credit spreads tightening. As of
December 31, 2009, the fair value of our fixed maturities
increased $1,681.4 from a $1,640.8 net unrealized loss as
of December 31, 2008 to a $40.6 net unrealized gain as
of December 31, 2009.
75
Investment
Returns
Return on invested assets is an important element of our
financial results. During the second half of 2008, there were
significant declines and high volatility in equity markets, a
lack of liquidity in the credit markets and a widening of credit
spreads on fixed maturities. During the year ended
December 31, 2009, primarily in the second and third
quarters of 2009, the equity markets improved and credit spreads
tightened, which led to an increase in the fair value of our
investment portfolio.
The following table sets forth the income yield and investment
income, excluding realized investment gains (losses) for each
major investment category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Yield(1)
|
|
|
Amount
|
|
|
Yield(1)
|
|
|
Amount
|
|
|
Yield(1)
|
|
|
Amount
|
|
|
Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale
|
|
|
5.89
|
%
|
|
$
|
1,048.1
|
|
|
|
5.82
|
%
|
|
$
|
930.7
|
|
|
|
5.74
|
%
|
|
$
|
911.4
|
|
Marketable equity securities,
available-for-sale
|
|
|
6.43
|
|
|
|
3.4
|
|
|
|
6.44
|
|
|
|
3.4
|
|
|
|
3.79
|
|
|
|
5.8
|
|
Marketable equity securities, trading
|
|
|
1.60
|
|
|
|
2.5
|
|
|
|
2.06
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
6.35
|
|
|
|
67.4
|
|
|
|
6.49
|
|
|
|
59.4
|
|
|
|
6.18
|
|
|
|
50.0
|
|
Policy loans
|
|
|
5.90
|
|
|
|
4.4
|
|
|
|
5.89
|
|
|
|
4.5
|
|
|
|
6.07
|
|
|
|
4.7
|
|
Investments in limited partnerships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge funds and private equity funds
|
|
|
15.52
|
|
|
|
8.9
|
|
|
|
(28.98
|
)
|
|
|
(24.4
|
)
|
|
|
9.39
|
|
|
|
7.0
|
|
Affordable housing(2)
|
|
|
(8.42
|
)
|
|
|
(9.0
|
)
|
|
|
(12.24
|
)
|
|
|
(12.0
|
)
|
|
|
(8.81
|
)
|
|
|
(7.0
|
)
|
Other income producing assets(3)
|
|
|
1.53
|
|
|
|
7.5
|
|
|
|
2.69
|
|
|
|
11.5
|
|
|
|
6.27
|
|
|
|
20.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment income before investment expenses
|
|
|
5.72
|
|
|
|
1,133.2
|
|
|
|
5.49
|
|
|
|
975.8
|
|
|
|
5.71
|
|
|
|
992.8
|
|
Investment expenses
|
|
|
(0.10
|
)
|
|
|
(19.6
|
)
|
|
|
(0.11
|
)
|
|
|
(19.3
|
)
|
|
|
(0.11
|
)
|
|
|
(19.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
5.62
|
%
|
|
$
|
1,113.6
|
|
|
|
5.38
|
%
|
|
$
|
956.5
|
|
|
|
5.60
|
%
|
|
$
|
973.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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. |
|
(2) |
|
The negative yield from affordable housing investments is offset
by U.S. federal income tax benefits. The resulting impact to net
income was $3.7, $0.5 and $(0.1) for the years ended
December 31, 2009, 2008 and 2007, respectively. |
|
(3) |
|
Other income producing assets includes income from other
invested assets and cash and cash equivalents. |
The increase in our net investment yield from 5.38% in 2008 to
5.62% in 2009 is primarily due to increases in the fair value of
private equity and hedge funds, mainly a result of the equity
market recovery during 2009. In addition, starting in late 2008,
and continuing through 2009, we experienced strong growth in
deferred annuity sales. As a result, the yields on our fixed
maturities grew due to the cash inflows from these sales being
invested at higher rates.
The decrease in our net investment yield from 5.60% in 2007 to
5.38% in 2008 was primarily due to declines in the fair value of
private equity and hedge funds. This decrease is mainly a result
of equity market declines and volatility in the latter part of
2008. Yields on our fixed maturities grew due to sales of fixed
maturities in the latter part of 2008 and re-investment
opportunities at higher yields.
76
The following table sets forth the detail of our net realized
investment gains (losses) before taxes. As the following table
indicates, our net gains on trading securities significantly
increased in the year ended December 31, 2009 as compared
to net losses in 2008. This was the result of improved equity
market conditions during 2009 resulting in increases in the fair
value of our trading portfolio. Gross realized losses on sales
of fixed maturities for 2009 were driven by sales of downgraded
securities that no longer met certain investment objectives and
sales of securities that were previously impaired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Gross realized gains on sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
25.5
|
|
|
$
|
10.3
|
|
|
$
|
37.1
|
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
14.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized gains on sales
|
|
|
25.5
|
|
|
|
10.3
|
|
|
|
51.5
|
|
Gross realized losses on sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(23.3
|
)
|
|
|
(7.0
|
)
|
|
|
(15.1
|
)
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized losses on sales
|
|
|
(23.3
|
)
|
|
|
(7.0
|
)
|
|
|
(18.6
|
)
|
Impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Public fixed maturities(1)
|
|
|
(50.9
|
)
|
|
|
(31.9
|
)
|
|
|
|
|
Private fixed maturities
|
|
|
(6.9
|
)
|
|
|
(7.5
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit-related
|
|
|
(57.8
|
)
|
|
|
(39.4
|
)
|
|
|
(0.7
|
)
|
Other(2)
|
|
|
(28.7
|
)
|
|
|
(47.0
|
)
|
|
|
(15.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairments
|
|
|
(86.5
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
Net gains (losses) on trading securities(3)
|
|
|
36.4
|
|
|
|
(64.5
|
)
|
|
|
|
|
Other net investment gains (losses)(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other gross gains
|
|
|
32.1
|
|
|
|
14.0
|
|
|
|
11.6
|
|
Other gross losses
|
|
|
(13.5
|
)
|
|
|
(24.4
|
)
|
|
|
(11.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses) before taxes
|
|
$
|
(29.3
|
)
|
|
$
|
(158.0
|
)
|
|
$
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Public fixed maturities includes publicly traded securities and
highly marketable private placements for which there is an
actively traded market. |
|
(2) |
|
As a result of new accounting guidance, beginning
January 1, 2009, Other includes only those
impairments for which the Company had the intent to sell the
security prior to recovery. Prior to January 1, 2009, under
accounting guidance in effect at that time, Other
also included impairments for which we did not have the intent
and ability to hold the security to recovery. |
|
(3) |
|
As of January 1, 2008, changes in fair value related to
certain marketable equity securities are recognized in net
realized investment gains (losses) due to the election of the
fair value option. |
|
(4) |
|
This primarily consists of changes in fair value on derivatives
instruments, gains (losses) on calls and redemptions, and the
impact of net realized investment gains (losses) on DAC and
deferred sales inducements. |
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 audited
consolidated financial statements.
77
Impairments for the year ended December 31, 2009 were
$86.5, of which 66.8% were related to credit concerns of the
issuer and 33.2% were due to our intent to sell the security.
Furthermore, 77.7% of our total impairments were related to
below investment grade fixed maturities, which was a decrease
from 2008 when below investment grade securities represented
85.3%. We implemented new accounting guidance for impairments on
January 1, 2009 (see Critical Accounting
Policies and Estimates). Credit-related impairments
increased by $18.4 for the year ended December 31, 2009,
compared to the same period last year, primarily as a result of
increased credit concerns, especially related to issuers of
securities in our high-yield portfolio. The amount recognized as
credit-related impairments is determined by management as the
difference between a securitys estimated recovery value
and the amortized cost of the security.
The following table summarizes our largest aggregate losses from
impairments and our remaining holdings, if any, by each
issuers industry for the year ended December 31,
2009, segregated between structured and non-structured
securities, which represented 38.6% and 15.5%, respectively, of
the total impairments during this period. Impairments on
structured securities are presented separately and on an
individual security basis as the underlying collateral is not
directly related to the issuer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
As of December 31, 2009
|
|
|
|
2009
|
|
|
Cost or Amortized
|
|
|
Fair
|
|
Industry
|
|
Impairment
|
|
|
Cost(1)
|
|
|
Value
|
|
|
Non-structured securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other diversified financial services (public)
|
|
$
|
(14.4
|
)
|
|
$
|
23.1
|
|
|
$
|
23.4
|
|
Publishing (public)
|
|
|
(6.7
|
)
|
|
|
1.2
|
|
|
|
2.5
|
|
Broadcast and cable T.V. (public)
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
Specialty chemicals (public)
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
Paper packaging (private)
|
|
|
(3.9
|
)
|
|
|
4.0
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for non-structured securities
|
|
$
|
(33.4
|
)
|
|
$
|
28.3
|
|
|
$
|
30.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management and customer banks (public)
|
|
$
|
(4.6
|
)
|
|
$
|
26.5
|
|
|
$
|
28.5
|
|
Other diversified financial services (public)
|
|
|
(4.1
|
)
|
|
|
18.4
|
|
|
|
14.8
|
|
Consumer finance (public)
|
|
|
(1.7
|
)
|
|
|
14.6
|
|
|
|
11.4
|
|
Consumer finance (public)
|
|
|
(1.5
|
)
|
|
|
14.6
|
|
|
|
6.5
|
|
Other diversified financial services (public)
|
|
|
(1.5
|
)
|
|
|
11.6
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for structured securities
|
|
$
|
(13.4
|
)
|
|
$
|
85.7
|
|
|
$
|
69.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2009, the cost or amortized cost
represents our estimated recovery value, based on our discounted
cash flow analysis. |
78
Impairments for the year ended December 31, 2008 were
$86.4, of which 45.6% were related to credit concerns about the
issuer. Impairments increased by $70.2 from 2007 to 2008,
primarily due to credit issues, including bankruptcies and
corporate security defaults, and our belief that certain
investment declines were
other-than-temporary.
The following table summarizes our five largest aggregate losses
on impairments and our remaining holdings, if any, by each
issuers industry for the year ended December 31,
2008, which represented 47.0% of the total impairments during
this period. We had no significant losses on dispositions during
this period and no individually significant impairments on
structured securities for the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
As of December 31,
|
|
|
|
December 31,
|
|
|
2008
|
|
|
|
2008
|
|
|
Cost or Amortized
|
|
|
Fair
|
|
Industry
|
|
Impairment
|
|
|
Cost
|
|
|
Value
|
|
|
Non-structured securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper products (public)
|
|
$
|
(9.6
|
)
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
FNMA (public)
|
|
|
(8.0
|
)
|
|
|
0.4
|
|
|
|
0.1
|
|
Other diversified financial services (public)
|
|
|
(7.8
|
)
|
|
|
6.7
|
|
|
|
4.6
|
|
Commercial printing (public)
|
|
|
(7.8
|
)
|
|
|
0.2
|
|
|
|
0.2
|
|
Specialized finance (public)
|
|
|
(7.4
|
)
|
|
|
7.0
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for non-structured securities
|
|
$
|
(40.6
|
)
|
|
$
|
15.4
|
|
|
$
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Maturity Securities
Fixed maturities consist principally of publicly traded and
privately placed debt securities, and represented 92.1% and
91.6% of invested assets as of December 31, 2009 and 2008,
respectively.
The fair value of publicly traded and privately placed fixed
maturities represented 95.2% and 4.8%, respectively, of total
fixed maturities as of December 31, 2009. 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.
Fixed
Maturity Securities Credit Quality
The Securities Valuation Office, or SVO, of the NAIC, evaluates
the investments of insurers for regulatory reporting purposes
and assigns fixed maturities to one of the six categories called
NAIC Designations. NAIC designations of
1 or 2 include fixed maturities
considered investment grade, which generally include securities
rated BBB− or higher by Standard & Poors.
NAIC designations of 3 through 6 are
referred to as below investment grade, which generally include
securities rated BB+ or lower by Standard &
Poors. As a result of time lags between the funding of
investments, the finalization of legal documents and the
completion of the SVO filing process, the fixed maturities
portfolio generally includes securities that have not yet been
rated by the SVO as of each balance sheet date. Pending receipt
of SVO ratings, the categorization of these securities by NAIC
designation is based on the expected ratings indicated by
internal analysis. As of December 31, 2009 and 2008, 14
securities with an amortized cost of $99.1 and a fair value of
$101.9, and 39 securities with an amortized cost of $304.1 and a
fair value of $259.4, respectively, were categorized based on
expected NAIC designations, pending receipt of SVO ratings.
79
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 upon fair value
that each designation comprises:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
As of December 31, 2008
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
% of Total
|
|
|
Amortized
|
|
|
Fair
|
|
|
% of Total
|
|
NAIC
|
|
S&P Equivalent
|
|
Cost
|
|
|
Value
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Value
|
|
|
Fair Value
|
|
|
1
|
|
AAA, AA, A
|
|
$
|
10,917.3
|
|
|
$
|
11,031.3
|
|
|
|
59.3
|
%
|
|
$
|
9,028.3
|
|
|
$
|
8,566.3
|
|
|
|
57.5
|
%
|
2
|
|
BBB
|
|
|
6,471.3
|
|
|
|
6,530.9
|
|
|
|
35.1
|
|
|
|
6,385.1
|
|
|
|
5,553.8
|
|
|
|
37.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
17,388.6
|
|
|
|
17,562.2
|
|
|
|
94.4
|
|
|
|
15,413.4
|
|
|
|
14,120.1
|
|
|
|
94.8
|
|
3
|
|
BB
|
|
|
717.9
|
|
|
|
641.3
|
|
|
|
3.5
|
|
|
|
639.3
|
|
|
|
475.6
|
|
|
|
3.2
|
|
4
|
|
B
|
|
|
251.0
|
|
|
|
219.2
|
|
|
|
1.2
|
|
|
|
313.1
|
|
|
|
216.1
|
|
|
|
1.5
|
|
5
|
|
CCC & lower
|
|
|
128.0
|
|
|
|
113.5
|
|
|
|
0.6
|
|
|
|
158.6
|
|
|
|
73.1
|
|
|
|
0.5
|
|
6
|
|
In or near default
|
|
|
68.2
|
|
|
|
58.1
|
|
|
|
0.3
|
|
|
|
4.0
|
|
|
|
2.7
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total below investment grade
|
|
|
1,165.1
|
|
|
|
1,032.1
|
|
|
|
5.6
|
|
|
|
1,115.0
|
|
|
|
767.5
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
18,553.7
|
|
|
$
|
18,594.3
|
|
|
|
100.0
|
%
|
|
$
|
16,528.4
|
|
|
$
|
14,887.6
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, securities with an amortized cost
and fair value of $898.2 and $925.8, respectively, had no rating
from a nationally recognized securities rating agency. We
derived the equivalent S&P credit quality rating for these
securities based on the securities NAIC rating designation.
Below investment grade securities comprised 5.6% and 5.2% of our
fixed maturities portfolio as of December 31, 2009 and
2008, respectively. Nearly all of these securities were
corporate securities and most were purchased while classified as
below investment grade, as high yield investments.
As of December 31, 2009 and 2008, the gross unrealized
losses on below investment grade securities were $161.8 and
$352.0, respectively. For 2009, this included $38.8 of
non-credit related OTTI recorded in other comprehensive income
(OCI). For the year ended December 31, 2009, we recorded
$67.2 of OTTI in net realized investment losses related to below
investment grade fixed maturities based on their rating as of
December 31, 2009, of which $61.7 was related to corporate
securities. For the year ended December 31, 2008, we
recorded $73.7 of OTTI in net realized investment losses related
to below investment grade securities based on their rating as of
December 31, 2008, of which $65.7 was related to corporate
securities.
For securities where we recorded a credit-related OTTI, the
amortized cost as of December 31, 2009 in the table above
represents managements estimated recovery value, based on
our best estimate of discounted cash flows for the security.
Prior to 2009, securities we recorded as OTTI were written down
to their fair value, which became the securitys amortized
cost on the date of impairment. See Critical
Accounting Policies and Estimates, above, for a detailed
discussion of our impairment analysis accounting policy and
process. As of December 31, 2009, we did not have the
intent to sell these securities or consider it more likely than
not that we would be required to sell the securities prior to
recovery of their amortized cost. Furthermore, based upon our
cash flow modeling and the expected continuation of
contractually required principal and interest payments, we
considered these securities to be temporarily impaired as of
December 31, 2009.
We had securities with an NAIC 5 designation with a fair value
of $113.5 as of December 31, 2009. These securities had
gross unrealized losses of $19.9, of which $13.3 were related to
two issuers. The issuers of these securities are current on
their contractual payments and our analyses, including cash flow
analyses where appropriate, support the recoverability of
amortized cost.
We had securities with an NAIC 6 designation with a total fair
value of $58.1 as of December 31, 2009, which included net
unrealized losses of $10.1, comprised of gross unrealized losses
of $15.6 and gross unrealized gains of $5.5. Of these gross
unrealized losses, $13.0, or 83.3%, was from a single issuer.
This issuer is current on its contractual payments and our
analysis of the underlying credit and managements best
estimates of discounted future cash flows support the
recoverability of the amortized cost.
Certain of our fixed maturities are supported by guarantees from
monoline bond insurers. As of December 31, 2009, fixed
maturities with monoline guarantees had an amortized cost of
$599.7 and a fair value of $559.8, with gross unrealized losses
of $45.2. As of December 31, 2008, fixed maturities with
80
monoline guarantees had an amortized cost of $602.4 and a fair
value of $511.4, with gross unrealized losses of $98.8. The
majority of these securities were municipal bonds.
The credit ratings of our fixed maturities set forth in the
table above reflect, where applicable, the guarantees provided
by monoline bond insurers. As of December 31, 2009, $527.2,
or 94.2%, of the fair value of fixed maturities supported by
guarantees from monoline bond insurers had investment grade
credit ratings. Excluding the effect of the monoline insurance,
$525.2, or 93.8%, of the fair value of fixed maturities had
investment grade credit ratings.
The credit ratings of the monoline bond insurers have declined
over the last two years. Any further decline may lead to
declines in the ratings of certain of our fixed maturities.
Fixed
Maturity Securities and Unrealized Gains and Losses by Security
Sector
The following table sets forth the fair value of our fixed
maturities by sector, as well as the associated gross unrealized
gains and losses and the percentage of total fixed maturities
that each sector comprises as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
% of
|
|
|
Temporary
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Total Fair
|
|
|
Impairments
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Value
|
|
|
in AOCI(1)
|
|
|
Security Sector
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer discretionary
|
|
$
|
1,093.3
|
|
|
$
|
41.9
|
|
|
$
|
(29.6
|
)
|
|
$
|
1,105.6
|
|
|
|
5.9
|
%
|
|
$
|
(7.9
|
)
|
Consumer staples
|
|
|
1,736.6
|
|
|
|
84.7
|
|
|
|
(17.6
|
)
|
|
|
1,803.7
|
|
|
|
9.7
|
|
|
|
(1.4
|
)
|
Energy
|
|
|
651.4
|
|
|
|
28.3
|
|
|
|
(8.8
|
)
|
|
|
670.9
|
|
|
|
3.6
|
|
|
|
|
|
Financials
|
|
|
2,122.9
|
|
|
|
39.8
|
|
|
|
(193.2
|
)
|
|
|
1,969.5
|
|
|
|
10.6
|
|
|
|
(5.8
|
)
|
Health care
|
|
|
861.1
|
|
|
|
59.1
|
|
|
|
(4.1
|
)
|
|
|
916.1
|
|
|
|
4.9
|
|
|
|
(1.9
|
)
|
Industrials
|
|
|
2,091.7
|
|
|
|
92.6
|
|
|
|
(28.1
|
)
|
|
|
2,156.2
|
|
|
|
11.6
|
|
|
|
(1.4
|
)
|
Information technology
|
|
|
357.2
|
|
|
|
27.9
|
|
|
|
(0.3
|
)
|
|
|
384.8
|
|
|
|
2.1
|
|
|
|
|
|
Materials
|
|
|
1,111.7
|
|
|
|
39.1
|
|
|
|
(49.0
|
)
|
|
|
1,101.8
|
|
|
|
5.9
|
|
|
|
(12.7
|
)
|
Telecommunication services
|
|
|
583.4
|
|
|
|
21.3
|
|
|
|
(16.7
|
)
|
|
|
588.0
|
|
|
|
3.2
|
|
|
|
(1.2
|
)
|
Utilities
|
|
|
1,837.5
|
|
|
|
52.4
|
|
|
|
(46.3
|
)
|
|
|
1,843.6
|
|
|
|
9.9
|
|
|
|
(0.5
|
)
|
Other
|
|
|
8.0
|
|
|
|
0.4
|
|
|
|
|
|
|
|
8.4
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate securities
|
|
|
12,454.8
|
|
|
|
487.5
|
|
|
|
(393.7
|
)
|
|
|
12,548.6
|
|
|
|
67.5
|
|
|
|
(32.8
|
)
|
U.S. government and agencies
|
|
|
41.6
|
|
|
|
2.4
|
|
|
|
(0.1
|
)
|
|
|
43.9
|
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
State and political subdivisions
|
|
|
518.4
|
|
|
|
1.9
|
|
|
|
(37.3
|
)
|
|
|
483.0
|
|
|
|
2.6
|
|
|
|
(1.3
|
)
|
Foreign governments
|
|
|
26.7
|
|
|
|
0.8
|
|
|
|
(0.1
|
)
|
|
|
27.4
|
|
|
|
0.1
|
|
|
|
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
2,936.8
|
|
|
|
102.6
|
|
|
|
(6.7
|
)
|
|
|
3,032.7
|
|
|
|
16.3
|
|
|
|
|
|
Non-agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
449.8
|
|
|
|
0.6
|
|
|
|
(72.4
|
)
|
|
|
378.0
|
|
|
|
2.0
|
|
|
|
(31.7
|
)
|
Alt-A
|
|
|
145.3
|
|
|
|
2.1
|
|
|
|
(21.9
|
)
|
|
|
125.5
|
|
|
|
0.7
|
|
|
|
(8.2
|
)
|
Subprime
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage-backed securities
|
|
|
3,532.1
|
|
|
|
105.3
|
|
|
|
(101.0
|
)
|
|
|
3,536.4
|
|
|
|
19.0
|
|
|
|
(39.9
|
)
|
Commercial mortgage-backed securities
|
|
|
1,805.6
|
|
|
|
44.5
|
|
|
|
(60.7
|
)
|
|
|
1,789.4
|
|
|
|
9.7
|
|
|
|
(4.0
|
)
|
Other debt obligations
|
|
|
174.5
|
|
|
|
8.6
|
|
|
|
(17.5
|
)
|
|
|
165.6
|
|
|
|
0.9
|
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,553.7
|
|
|
$
|
651.0
|
|
|
$
|
(610.4
|
)
|
|
$
|
18,594.3
|
|
|
|
100.0
|
%
|
|
$
|
(81.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Effective January 1, 2009, we prospectively adopted new
OTTI accounting guidance, which changed the recognition and
measurement of OTTI for debt securities. See
Critical Accounting Policies and
Estimates, above. |
81
During the year ended December 31, 2009 we increased our
investments in corporate securities with cash generated from
sales, primarily fixed deferred annuities. We have purchased new
issues of investment grade corporate securities with a focus on
increasing yield while retaining quality.
Our fixed maturities holdings are diversified by industry and
issuer. The portfolio does not have significant exposure to any
single issuer. As of December 31, 2009 and 2008 the fair
value of our ten largest holdings of corporate securities was
$1,138.3 and $901.5, or approximately 9.1% and 9.7%,
respectively. The fair value of our largest exposure to a single
issuer of corporate securities was $141.9, or 1.1%, and $149.4,
or 1.6%, of our investments in corporate securities, as of
December 31, 2009 and 2008, respectively.
The following table sets forth the fair value of our fixed
maturities by sector as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
% of
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Total Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Value
|
|
|
Security Sector
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer discretionary
|
|
$
|
891.5
|
|
|
$
|
2.0
|
|
|
$
|
(153.6
|
)
|
|
$
|
739.9
|
|
|
|
5.0
|
%
|
Consumer staples
|
|
|
1,533.2
|
|
|
|
16.6
|
|
|
|
(111.7
|
)
|
|
|
1,438.1
|
|
|
|
9.7
|
|
Energy
|
|
|
414.5
|
|
|
|
9.9
|
|
|
|
(43.1
|
)
|
|
|
381.3
|
|
|
|
2.6
|
|
Financials
|
|
|
2,040.7
|
|
|
|
7.1
|
|
|
|
(403.8
|
)
|
|
|
1,644.0
|
|
|
|
11.0
|
|
Health care
|
|
|
548.8
|
|
|
|
17.1
|
|
|
|
(22.0
|
)
|
|
|
543.9
|
|
|
|
3.6
|
|
Industrials
|
|
|
1,523.7
|
|
|
|
16.6
|
|
|
|
(136.9
|
)
|
|
|
1,403.4
|
|
|
|
9.4
|
|
Information technology
|
|
|
300.6
|
|
|
|
1.3
|
|
|
|
(31.8
|
)
|
|
|
270.1
|
|
|
|
1.8
|
|
Materials
|
|
|
834.6
|
|
|
|
3.7
|
|
|
|
(152.7
|
)
|
|
|
685.6
|
|
|
|
4.6
|
|
Telecommunication services
|
|
|
619.7
|
|
|
|
5.2
|
|
|
|
(103.5
|
)
|
|
|
521.4
|
|
|
|
3.5
|
|
Utilities
|
|
|
1,829.9
|
|
|
|
23.7
|
|
|
|
(203.0
|
)
|
|
|
1,650.6
|
|
|
|
11.1
|
|
Other
|
|
|
26.9
|
|
|
|
1.9
|
|
|
|
(0.6
|
)
|
|
|
28.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate securities
|
|
|
10,564.1
|
|
|
|
105.1
|
|
|
|
(1,362.7
|
)
|
|
|
9,306.5
|
|
|
|
62.5
|
|
U.S. government and agencies
|
|
|
155.5
|
|
|
|
5.2
|
|
|
|
(3.9
|
)
|
|
|
156.8
|
|
|
|
1.1
|
|
State and political subdivisions
|
|
|
488.8
|
|
|
|
0.9
|
|
|
|
(64.8
|
)
|
|
|
424.9
|
|
|
|
2.8
|
|
Foreign governments
|
|
|
31.4
|
|
|
|
3.2
|
|
|
|
|
|
|
|
34.6
|
|
|
|
0.2
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
2,412.5
|
|
|
|
84.4
|
|
|
|
(0.2
|
)
|
|
|
2,496.7
|
|
|
|
16.8
|
|
Non-agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
570.9
|
|
|
|
0.2
|
|
|
|
(97.8
|
)
|
|
|
473.3
|
|
|
|
3.2
|
|
Alt-A
|
|
|
191.8
|
|
|
|
|
|
|
|
(36.3
|
)
|
|
|
155.5
|
|
|
|
1.0
|
|
Subprime
|
|
|
0.9
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
0.8
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage-backed securities
|
|
|
3,176.1
|
|
|
|
84.6
|
|
|
|
(134.4
|
)
|
|
|
3,126.3
|
|
|
|
21.0
|
|
Commercial mortgage-backed securities
|
|
|
1,912.7
|
|
|
|
17.5
|
|
|
|
(255.2
|
)
|
|
|
1,675.0
|
|
|
|
11.3
|
|
Other debt obligations
|
|
|
199.8
|
|
|
|
|
|
|
|
(36.3
|
)
|
|
|
163.5
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,528.4
|
|
|
$
|
216.5
|
|
|
$
|
(1,857.3
|
)
|
|
$
|
14,887.6
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Maturity Securities by Contractual Maturity Date
As of December 31, 2009, approximately 29% of our fixed
maturity portfolio was held in mortgaged-backed securities and
27% 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
82
segment, which can exceed a period of 30 years. As of
December 31, 2009 and 2008, approximately 82% and 66%,
respectively, of the gross unrealized losses on our investment
portfolio related to these longer duration assets, which are
more sensitive to interest rate fluctuations and credit spreads.
For more information, see Note 4 to the accompanying
audited consolidated financial statements.
Residential
Mortgage-Backed Securities (RMBS)
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.
The following table sets forth the fair value of the
Companys investment in agency, prime, Alt-A and subprime
RMBS and the percentage of total invested assets they represent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
Fair Value
|
|
|
Invested Assets
|
|
|
Fair Value
|
|
|
Invested Assets
|
|
|
Agency
|
|
$
|
3,032.7
|
|
|
|
15.0
|
%
|
|
$
|
2,496.7
|
|
|
|
15.4
|
%
|
Non-agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
378.0
|
|
|
|
1.9
|
|
|
|
473.3
|
|
|
|
2.9
|
|
Alt-A
|
|
|
125.5
|
|
|
|
0.6
|
|
|
|
155.5
|
|
|
|
1.0
|
|
Subprime
|
|
|
0.2
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal non-agency
|
|
|
503.7
|
|
|
|
2.5
|
|
|
|
629.6
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,536.4
|
|
|
|
17.5
|
%
|
|
$
|
3,126.3
|
|
|
|
19.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of our RMBS investments are AAA rated. As of
December 31, 2009, agency, which were all rated AAA,
represented 86% of our RMBS holdings. Of our non-agency RMBS,
75% were classified as prime at both December 31, 2009 and
2008. We classified 25% of non-agency securities as Alt-A as of
December 31, 2009 because we viewed each security to have
overall collateral credit quality between prime and subprime,
based on a review of the characteristics of their underlying
mortgage loan pools, such as credit scores and financial ratios.
The following table sets forth the amortized cost of our
non-agency RMBS by credit quality and year of origination
(vintage). There were eight securities totaling $78.2 that were
rated below investment grade by Moodys, S&P or Fitch,
while the others rated them investment grade.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
Highest Rating Agency Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB and
|
|
|
Amortized
|
|
|
December 31,
|
|
Vintage
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Below
|
|
|
Cost
|
|
|
2008
|
|
|
2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74.8
|
|
|
|
91.0
|
|
|
|
137.0
|
|
2006
|
|
|
0.4
|
|
|
|
4.8
|
|
|
|
19.4
|
|
|
|
30.2
|
|
|
|
122.2
|
|
|
|
177.0
|
|
|
|
269.3
|
|
2005
|
|
|
12.0
|
|
|
|
9.5
|
|
|
|
24.6
|
|
|
|
67.5
|
|
|
|
|
|
|
|
113.6
|
|
|
|
126.4
|
|
2004 & prior
|
|
|
198.0
|
|
|
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
213.7
|
|
|
|
230.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
226.6
|
|
|
$
|
29.3
|
|
|
$
|
44.0
|
|
|
$
|
97.7
|
|
|
$
|
197.7
|
|
|
$
|
595.3
|
|
|
$
|
763.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of cost
|
|
|
38.1
|
%
|
|
|
4.9
|
%
|
|
|
7.4
|
%
|
|
|
16.4
|
%
|
|
|
33.2
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
The following table sets forth the fair value of our non-agency
RMBS by credit quality and year of origination (vintage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
Highest Rating Agency Rating
|
|
|
Total as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB and
|
|
|
Total Fair
|
|
|
December 31,
|
|
Vintage
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Below
|
|
|
Value
|
|
|
2008
|
|
|
2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
14.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69.2
|
|
|
|
83.3
|
|
|
|
116.7
|
|
2006
|
|
|
0.4
|
|
|
|
4.6
|
|
|
|
18.7
|
|
|
|
26.6
|
|
|
|
92.8
|
|
|
|
143.1
|
|
|
|
220.3
|
|
2005
|
|
|
7.2
|
|
|
|
9.2
|
|
|
|
19.0
|
|
|
|
50.6
|
|
|
|
|
|
|
|
86.0
|
|
|
|
98.5
|
|
2004 & prior
|
|
|
179.1
|
|
|
|
11.5
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
191.3
|
|
|
|
194.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
200.8
|
|
|
$
|
25.3
|
|
|
$
|
37.7
|
|
|
$
|
77.2
|
|
|
$
|
162.7
|
|
|
$
|
503.7
|
|
|
$
|
629.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of fair value
|
|
|
39.9
|
%
|
|
|
5.0
|
%
|
|
|
7.5
|
%
|
|
|
15.3
|
%
|
|
|
32.3
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On a fair value basis at December 31, 2009, our Alt-A
portfolio was 88.2% fixed rate collateral and 11.8% hybrid
adjustable rate mortgages, or ARM, with no exposure to option
ARM mortgages. 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. Of the total Alt-A portfolio, $73.9, or
58.9%, had an S&P equivalent credit rating of AAA as of
December 31, 2009.
As of December 31, 2009, our Alt-A, prime and total
non-agency RMBS had an estimated weighted-average credit
enhancement of 14.4%, 8.4% 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, 2009 and 2008, 59.6% and 64.2%, respectively,
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.
Commercial
Mortgage-Backed Securities (CMBS)
The following table sets forth the fair value of our investment
in CMBS and the percentage of total invested assets they
represent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
Fair Value
|
|
|
Invested Assets
|
|
|
Fair Value
|
|
|
Invested Assets
|
|
|
Agency
|
|
$
|
425.6
|
|
|
|
2.1
|
%
|
|
$
|
434.9
|
|
|
|
2.7
|
%
|
Non-agency
|
|
|
1,363.8
|
|
|
|
6.8
|
|
|
|
1,240.1
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,789.4
|
|
|
|
8.9
|
%
|
|
$
|
1,675.0
|
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There have been disruptions in the CMBS market due to weakness
in commercial real estate market fundamentals and reduced
underwriting standards by some originators of commercial
mortgage loans within the more recent vintage years (2006 and
later). This has increased market belief that default rates will
increase, market liquidity and availability of capital will
decrease, and there will be an increase in spreads and the
repricing of risk. However, as discussed below, the quality of
our CMBS portfolio, which is predominately in the most senior
tranche of the structure type and has a weighted-average
estimated credit enhancement of 27.9% on the entire portfolio,
is significant in a deep commercial real estate downturn during
which expected losses increase substantially. As of
December 31, 2009, on an amortized cost basis, 98.1% of our
CMBS were rated AAA, 0.5% were rated AA or A, and 1.4% were
rated B and below.
84
The following table sets forth the amortized cost of our
non-agency CMBS by credit quality and year of origination
(vintage). There were twelve securities having a fair value of
$263.3 and an amortized cost of $293.9 that were rated A by
S&P, while Moodys
and/or Fitch
rated them AAA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
Highest Rating Agency Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB and
|
|
|
Amortized
|
|
|
December 31,
|
|
Vintage
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Below
|
|
|
Cost
|
|
|
2008
|
|
|
2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2008
|
|
|
66.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66.0
|
|
|
|
67.8
|
|
2007
|
|
|
469.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
|
|
471.0
|
|
|
|
504.4
|
|
2006
|
|
|
135.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.3
|
|
|
|
148.0
|
|
|
|
128.3
|
|
2005
|
|
|
311.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311.4
|
|
|
|
343.7
|
|
2004 & prior
|
|
|
372.0
|
|
|
|
1.0
|
|
|
|
7.2
|
|
|
|
|
|
|
|
11.7
|
|
|
|
391.9
|
|
|
|
445.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,354.8
|
|
|
$
|
1.0
|
|
|
$
|
7.2
|
|
|
$
|
|
|
|
$
|
25.3
|
|
|
$
|
1,388.3
|
|
|
$
|
1,490.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table set forth the fair value of our non-agency
CMBS by credit quality and year of origination (vintage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
Highest Rating Agency Rating
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB and
|
|
|
Total Fair
|
|
|
December 31,
|
|
Vintage
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Below
|
|
|
Value
|
|
|
2008
|
|
|
2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2008
|
|
|
59.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59.0
|
|
|
|
54.7
|
|
2007
|
|
|
457.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
|
|
458.4
|
|
|
|
400.8
|
|
2006
|
|
|
136.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.6
|
|
|
|
144.8
|
|
|
|
102.2
|
|
2005
|
|
|
311.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311.9
|
|
|
|
284.4
|
|
2004 & prior
|
|
|
374.4
|
|
|
|
1.0
|
|
|
|
5.9
|
|
|
|
|
|
|
|
8.4
|
|
|
|
389.7
|
|
|
|
398.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,338.6
|
|
|
$
|
1.0
|
|
|
$
|
5.9
|
|
|
$
|
|
|
|
$
|
18.3
|
|
|
$
|
1,363.8
|
|
|
$
|
1,240.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. CMBS securities have historically utilized a
senior/subordinate credit structure to allocate cash flows and
losses, which includes super-senior, mezzanine and junior AAA
tranches. The credit enhancement on the most senior tranche
(super-senior) is 30%. The mezzanine AAAs typically have 20%
credit enhancement and the junior AAAs generally have 14% credit
enhancement. Credit enhancement refers to the weighted-average
percentage of outstanding capital structure that is subordinate
in the priority of cash flows and absorbs losses first. Credit
enhancement does not include any equity interest or principal in
excess of outstanding debt. The super senior class has priority
over the mezzanine and junior classes to all principal and
interest cash flows and will not experience any loss of
principal until both the entire mezzanine and junior tranches
are written down to zero. We believe this additional credit
enhancement is significant in a deep real estate downturn during
which losses are expected to increase substantially.
85
The following tables set forth the amortized cost of our AAA
non-agency CMBS by type and year of origination (vintage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AAA
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Structures (2005 and Prior)
|
|
|
Securities at
|
|
|
|
Super Senior (Post 2004)
|
|
|
|
|
|
Other
|
|
|
|
|
|
Amortized
|
|
Vintage
|
|
Super Senior
|
|
|
Mezzanine
|
|
|
Junior
|
|
|
Other Senior
|
|
|
Subordinate
|
|
|
Other
|
|
|
Cost
|
|
|
2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2008
|
|
|
66.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66.0
|
|
2007
|
|
|
469.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
469.7
|
|
2006
|
|
|
135.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135.7
|
|
2005
|
|
|
147.4
|
|
|
|
31.1
|
|
|
|
|
|
|
|
132.8
|
|
|
|
|
|
|
|
|
|
|
|
311.3
|
|
2004 & prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310.6
|
|
|
|
42.1
|
|
|
|
19.4
|
|
|
|
372.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
818.8
|
|
|
$
|
31.1
|
|
|
$
|
|
|
|
$
|
443.4
|
|
|
$
|
42.1
|
|
|
$
|
19.4
|
|
|
$
|
1,354.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AAA
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Structures (2005 and Prior)
|
|
|
Securities at
|
|
|
|
Super Senior (Post 2004)
|
|
|
|
|
|
Other
|
|
|
|
|
|
Amortized
|
|
Vintage
|
|
Super Senior
|
|
|
Mezzanine
|
|
|
Junior
|
|
|
Other Senior
|
|
|
Subordinate
|
|
|
Other
|
|
|
Cost
|
|
|
2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2008
|
|
|
67.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67.8
|
|
2007
|
|
|
503.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
503.0
|
|
2006
|
|
|
116.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116.1
|
|
2005
|
|
|
163.6
|
|
|
|
32.6
|
|
|
|
|
|
|
|
135.2
|
|
|
|
|
|
|
|
12.3
|
|
|
|
343.7
|
|
2004 & prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349.1
|
|
|
|
58.6
|
|
|
|
25.8
|
|
|
|
433.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
850.5
|
|
|
$
|
32.6
|
|
|
$
|
|
|
|
$
|
484.3
|
|
|
$
|
58.6
|
|
|
$
|
38.1
|
|
|
$
|
1,464.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As the tables above indicate, our CMBS holdings are
predominately in the most senior tranche of the structure type.
As of December 31, 2009, on an amortized cost basis, 93.2%
of our AAA-rated CMBS were in the most senior tranche and our
CMBS holdings had a weighted-average estimated credit
enhancement of 27.9%. Adjusted to remove defeased loans, which
are loans whose cash flows have been replaced by
U.S. Treasury securities, the weighted-average credit
enhancement of our CMBS as of December 31, 2009 was 29.7%.
Asset-Backed
Securities
The following table provides the amortized cost and fair value
of our asset-backed securities, by underlying collateral type,
as of December 31, 2009 and December 31, 2008. Our
other asset-backed securities are presented as part of
other debt obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
As of December 31, 2008
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto
|
|
$
|
24.1
|
|
|
$
|
24.6
|
|
|
$
|
13.4
|
|
|
$
|
12.2
|
|
Credit cards
|
|
|
73.0
|
|
|
|
78.5
|
|
|
|
105.0
|
|
|
|
97.6
|
|
Franchise
|
|
|
|
|
|
|
|
|
|
|
17.6
|
|
|
|
13.0
|
|
Manufactured homes
|
|
|
19.2
|
|
|
|
15.6
|
|
|
|
20.8
|
|
|
|
13.6
|
|
Utility
|
|
|
10.9
|
|
|
|
11.7
|
|
|
|
16.4
|
|
|
|
15.8
|
|
Other
|
|
|
5.8
|
|
|
|
5.0
|
|
|
|
6.5
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other asset-backed securities
|
|
$
|
133.0
|
|
|
$
|
135.4
|
|
|
$
|
179.7
|
|
|
$
|
157.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
Return on
Equity-Like Investments
Prospector manages a portfolio of equity and equity-like
investments, including publicly traded common stock and
convertible securities. The following table compares our total
return to the benchmark S&P 500 Total Return Index for the
years ended December 31, 2009, 2008 and 2007. We believe
that these equity and equity-like investments are suitable for
funding certain long duration liabilities in our Income
Annuities segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Public equity
|
|
|
34.0
|
%
|
|
|
(30.6
|
)%
|
|
|
10.2
|
%
|
S&P 500 Total Return Index
|
|
|
26.5
|
|
|
|
(37.0
|
)
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference
|
|
|
7.5
|
%
|
|
|
6.4
|
%
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Loans
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 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 and include a PGAAP adjustment; however,
the tables below are reported excluding these items.
As of December 31, 2009 and 2008, 77.7% and 82.5%,
respectively, of our mortgage loans were under $5.0 and our
average loan balance was $1.9 and $1.7, respectively.
Composition
of Mortgage Loans
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. While we have begun to observe
some weakness in commercial real estate fundamentals, as of
December 31, 2009, we had only one non-performing loan in
our commercial mortgage loan portfolio. We have experienced no
other delinquencies or non-performing loans in the years since
the Acquisition.
The following table sets forth the carrying value of our
investments in commercial mortgage loans by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
As of December 31, 2008
|
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
$
|
346.0
|
|
|
|
28.6
|
%
|
|
$
|
265.3
|
|
|
|
26.8
|
%
|
Washington
|
|
|
222.9
|
|
|
|
18.5
|
|
|
|
211.2
|
|
|
|
21.3
|
|
Texas
|
|
|
125.6
|
|
|
|
10.4
|
|
|
|
101.2
|
|
|
|
10.2
|
|
Oregon
|
|
|
88.0
|
|
|
|
7.3
|
|
|
|
65.8
|
|
|
|
6.7
|
|
Colorado
|
|
|
44.5
|
|
|
|
3.7
|
|
|
|
46.8
|
|
|
|
4.7
|
|
Arizona
|
|
|
37.1
|
|
|
|
3.1
|
|
|
|
31.9
|
|
|
|
3.2
|
|
Minnesota
|
|
|
32.3
|
|
|
|
2.7
|
|
|
|
31.8
|
|
|
|
3.2
|
|
Other
|
|
|
310.5
|
|
|
|
25.7
|
|
|
|
235.5
|
|
|
|
23.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,206.9
|
|
|
|
100.0
|
%
|
|
$
|
989.5
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
The following table sets forth the carrying value of our
investments in commercial mortgage loans by property type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
As of December 31, 2008
|
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Property Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shopping Centers and Retail
|
|
$
|
472.9
|
|
|
|
39.2
|
%
|
|
$
|
390.7
|
|
|
|
39.5
|
%
|
Industrial
|
|
|
345.7
|
|
|
|
28.6
|
|
|
|
309.2
|
|
|
|
31.3
|
|
Office Buildings
|
|
|
339.2
|
|
|
|
28.1
|
|
|
|
248.3
|
|
|
|
25.1
|
|
Multi-Family
|
|
|
34.9
|
|
|
|
2.9
|
|
|
|
26.1
|
|
|
|
2.6
|
|
Other
|
|
|
14.2
|
|
|
|
1.2
|
|
|
|
15.2
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,206.9
|
|
|
|
100.0
|
%
|
|
$
|
989.5
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the
loan-to-value
ratios for our mortgage loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
December 31,
|
|
|
% of
|
|
|
December 31,
|
|
|
% of
|
|
Loan-to-Value Ratio
|
|
2009
|
|
|
Portfolio
|
|
|
2008
|
|
|
Portfolio
|
|
|
< or = 50%
|
|
$
|
484.2
|
|
|
|
40.1
|
%
|
|
$
|
472.7
|
|
|
|
47.8
|
%
|
51% - 60%
|
|
|
348.5
|
|
|
|
28.9
|
|
|
|
213.2
|
|
|
|
21.5
|
|
61% - 70%
|
|
|
195.8
|
|
|
|
16.2
|
|
|
|
197.0
|
|
|
|
19.9
|
|
71% - 75%
|
|
|
68.2
|
|
|
|
5.6
|
|
|
|
41.4
|
|
|
|
4.2
|
|
76% - 80%
|
|
|
17.7
|
|
|
|
1.5
|
|
|
|
24.9
|
|
|
|
2.5
|
|
81% - 100%
|
|
|
85.1
|
|
|
|
7.1
|
|
|
|
39.2
|
|
|
|
4.0
|
|
> 100%
|
|
|
7.4
|
|
|
|
0.6
|
|
|
|
1.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,206.9
|
|
|
|
100.0
|
%
|
|
$
|
989.5
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We use the
loan-to-value
ratio as our primary metric to assess the quality of our
mortgage loans. The
loan-to-value
ratio, which is expressed as a percentage, compares the amount
of the loan to the estimated fair value of the underlying
property collateralizing the loan. In the year of funding,
loan-to-value
ratios are calculated using independent appraisals performed by
Member of the Appraisal Institute, or MAI, designated
appraisers. Subsequent to the year of funding,
loan-to-value
ratios are updated annually using internal valuations based on
property income and market capitalization rates.
Loan-to-value
ratios greater than 100% indicate that the loan amount is
greater than the collateral value. A smaller
loan-to-value
ratio generally indicates a higher quality loan. As of
December 31, 2009 and 2008, our mortgage loan portfolio had
weighted-average
loan-to-value
ratios of 53.5% and 51.2%, respectively.
For loans originated in the year ended December 31, 2009,
44.8% had a
loan-to-value
ratio of 50% or less, and no loans had a
loan-to-value
ratio of more than 70%. For loans originated during the year
ended December 31, 2008, 35.3% had a
loan-to-value
ratio of 50% or less, and no loans had a
loan-to-value
ratio of more than 75%.
88
Maturity
Date of Mortgage Loans
The following table sets forth our mortgage loans by contractual
maturity date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
As of December 31, 2008
|
|
Years to Maturity
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Due in one year or less
|
|
$
|
2.4
|
|
|
|
0.2
|
%
|
|
$
|
5.0
|
|
|
|
0.5
|
%
|
Due after one year through five years
|
|
|
100.0
|
|
|
|
8.3
|
|
|
|
78.8
|
|
|
|
8.0
|
|
Due after five years through ten years
|
|
|
541.8
|
|
|
|
44.9
|
|
|
|
391.9
|
|
|
|
39.6
|
|
Due after ten years
|
|
|
562.7
|
|
|
|
46.6
|
|
|
|
513.8
|
|
|
|
51.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,206.9
|
|
|
|
100.0
|
%
|
|
$
|
989.5
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Loan Quality
Our allowance for losses on mortgage loans provides for the risk
of credit loss inherent in the lending process. The allowance
includes a portfolio reserve for probable incurred but not
specifically identified losses and specific reserves for
non-performing loans. We define non-performing loans as loans
for which it is probable that amounts due according to the terms
of the loan agreement will not be collected. The portfolio
reserve for incurred but not specifically identified losses
considers our past loan experience and the current credit
composition of the portfolio, and takes into consideration
market experience. We evaluate the allowance for losses on
mortgage loans as of each reporting period and record
adjustments when appropriate.
Our total allowance for losses on mortgage loans was $8.2 and
$5.0 as of December 31, 2009 and 2008, respectively. As of
December 31, 2009, our allowance included a specific
reserve of $2.2 related to one non-performing loan.
Investments
in Limited Partnerships Affordable Housing
Investments
We invest in tax-advantaged federal affordable housing
investments through limited liability partnerships. These
affordable housing investments are typically
15-year
investments that provide tax credits in years one through ten.
As of December 31, 2009, we were invested in seven limited
partnership interests related to the federal affordable housing
projects and other various state tax credit funds. These
investments are accounted for under the equity method and are
recorded at amortized cost in investments in limited
partnerships, with the present value of unfunded contributions
recorded in other liabilities.
Although these investments decrease our net investment income
over time on a pre-tax basis, they provide us with significant
tax benefits, which decrease our effective tax rate. The
following table sets forth the impact the amortization of our
investments and the related tax credits had on net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Amortization related to affordable housing investments, net of
tax benefit
|
|
$
|
(5.9
|
)
|
|
$
|
(7.8
|
)
|
|
$
|
(4.6
|
)
|
Affordable housing tax credits
|
|
|
9.6
|
|
|
|
8.3
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact to net income
|
|
$
|
3.7
|
|
|
$
|
0.5
|
|
|
$
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
The following table provides the future estimated impact to net
income:
|
|
|
|
|
|
|
Estimated
|
|
|
|
Impact to Net
|
|
|
|
Income
|
|
|
2010
|
|
$
|
5.0
|
|
2011
|
|
|
6.2
|
|
2012
|
|
|
6.5
|
|
2013 and beyond
|
|
|
9.3
|
|
|
|
|
|
|
Estimated impact to net income (net of taxes)
|
|
$
|
27.0
|
|
|
|
|
|
|
Liquidity
and Capital Resources
Symetra conducts all its operations through its operating
subsidiaries, and its liquidity requirements primarily have been
and will continue to be met by funds from these subsidiaries.
Dividends and permitted tax sharing payments from its
subsidiaries are Symetras principal sources of cash to pay
stockholder dividends and meet its obligations, including
payments of principal and interest on notes payable and tax
obligations. Subsequent to December 31, 2009, we completed
an initial public offering of our common stock and received net
proceeds of $282.5, which further enhanced our liquidity and
capital resources. We intend to pay quarterly cash dividends on
our common stock at a rate of approximately $0.05 per share. The
declaration and payment of future dividends to holders of our
common stock will be at the discretion of our board of directors.
Starting in late 2007, the global financial markets experienced
unprecedented disruption, adversely affecting the business
environment in general, as well as financial services companies
in particular. This disruption increased during the second half
of 2008, but showed signs of improvement during the second half
of 2009. In managing through these challenging market
conditions, we benefit from the strength of our management
philosophy, diversification of our business and strong financial
fundamentals. 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 by the following:
|
|
|
|
|
We continue to increase sales and recorded sales growth of 27.3%
for the year ended December 31, 2009 compared to 2008.
Strong sales have led to strong cash inflows on our deposit
contracts (annuities and universal life policies, including
BOLI) of $2,580.0 for the year ended December 31, 2009,
compared to $1,970.8 for the year ended December 31, 2008.
|
|
|
|
While certain lapses and surrenders occur in the normal course
of business, these lapses and surrenders have not deviated
materially from management expectations during the financial
crisis.
|
|
|
|
The amount of accumulated other comprehensive loss, net of
taxes, on our balance sheet decreased to $49.7 as of
December 31, 2009 from $1,052.6 as of December 31,
2008. The primary driver was an increase in the fair value of
our available-for-sale securities, due to the market showing
signs of stabilization during 2009 and credit spreads
tightening. We believe we are positioned to hold these
investments in an unrealized loss position to maturity because
of our mix of insurance products and our disciplined
asset/liability matching. We have $7.3 billion of illiquid
liabilities consisting of reserves for structured settlements
and SPIAs that cannot be surrendered, deferred annuities with
five-year payout provisions or market value adjustments (MVA),
traditional life insurance, and group life and health policies.
|
|
|
|
As of December 31, 2009, 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.
|
Liquidity
Requirements and Sources of Liquidity
The liquidity requirements of our insurance subsidiaries
principally relate to the liabilities associated with their
various insurance and investment products, operating costs and
expenses, the payment of dividends to the holding company, and
payment of income taxes. Liabilities arising from insurance and
investment
90
products include the payment of benefits, as well as cash
payments in connection with policy and contract surrenders and
withdrawals and policy loans. Historically, our insurance
subsidiaries have used cash flows from operations, cash flows
from invested assets and sales of investment securities to fund
their liquidity requirements.
In managing the liquidity of our insurance operations, we also
consider the risk of policyholder and contractholder withdrawals
of funds earlier than our assumptions when selecting assets to
support these contractual obligations. We use surrender charges
and other contract provisions to mitigate the extent, timing and
profitability impact of withdrawals of funds by customers from
annuity contracts and deposit liabilities. The following table
sets forth withdrawal characteristics of our general account
annuity reserves and deposit liabilities. This represents the
sum of funds held under deposit contracts and future policy
benefits, net of reinsurance recoverables, on the consolidated
balance sheets, excluding other policyholder related liabilities
of $177.0 and $185.1 as of December 31, 2009 and 2008,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
As of December 31, 2008
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
|
Illiquid Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured settlements & other SPIAs(1)
|
|
$
|
6,704.2
|
|
|
|
35.2
|
%
|
|
$
|
6,761.7
|
|
|
|
39.7
|
%
|
Deferred annuities with
5-year
payout provision or MVA(2)
|
|
|
381.0
|
|
|
|
2.0
|
%
|
|
|
397.5
|
|
|
|
2.4
|
%
|
Traditional insurance (net of reinsurance)(3)
|
|
|
184.9
|
|
|
|
1.0
|
%
|
|
|
186.7
|
|
|
|
1.1
|
%
|
Group health & life(3)
|
|
|
66.8
|
|
|
|
0.3
|
%
|
|
|
71.5
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total illiquid liabilities
|
|
|
7,336.9
|
|
|
|
38.5
|
%
|
|
|
7,417.4
|
|
|
|
43.6
|
%
|
Somewhat Liquid Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank-owned life insurance (BOLI)(4)
|
|
|
3,864.1
|
|
|
|
20.3
|
%
|
|
|
3,772.4
|
|
|
|
22.2
|
%
|
Deferred annuities with surrender charges > 5%
|
|
|
4,788.2
|
|
|
|
25.2
|
%
|
|
|
2,792.5
|
|
|
|
16.4
|
%
|
Universal life with surrender charges > 5%
|
|
|
151.8
|
|
|
|
0.8
|
%
|
|
|
139.1
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total somewhat liquid liabilities
|
|
|
8,804.1
|
|
|
|
46.3
|
%
|
|
|
6,704.0
|
|
|
|
39.4
|
%
|
Fully Liquid Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred annuities with surrender charges of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-5%
|
|
|
412.4
|
|
|
|
2.2
|
%
|
|
|
355.9
|
|
|
|
2.1
|
%
|
0-3%
|
|
|
87.6
|
|
|
|
0.4
|
%
|
|
|
39.9
|
|
|
|
0.2
|
%
|
No surrender charges(5)
|
|
|
1,955.7
|
|
|
|
10.3
|
%
|
|
|
2,056.3
|
|
|
|
12.1
|
%
|
Universal life and whole life with surrender charges < 5%
|
|
|
437.9
|
|
|
|
2.3
|
%
|
|
|
443.9
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fully liquid liabilities
|
|
|
2,893.6
|
|
|
|
15.2
|
%
|
|
|
2,896.0
|
|
|
|
17.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,034.6
|
|
|
|
100.0
|
%
|
|
$
|
17,017.4
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These contracts cannot be surrendered. The benefits are
specified in the contracts as fixed amounts to be paid over the
next several decades. |
|
(2) |
|
In a liquidity crisis situation, we could invoke the five-year
payout provision so that the contract value with interest is
paid out ratably over five years. |
|
(3) |
|
The surrender value on these contracts is generally zero. |
footnote continued on following page
91
|
|
|
(4) |
|
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 may not qualify for this tax-free treatment due to the
employment status of the original covered employees. |
|
(5) |
|
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. |
Liquid
Assets
Symetras insurance subsidiaries maintain 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, mortgage loans and marketable equity
securities. Shorter-term liabilities are matched with fixed
maturities that have short- and medium-term fixed maturities. In
addition, our insurance subsidiaries hold highly liquid, high
quality, shorter-term investment securities and other liquid
investment-grade fixed maturities and cash equivalents 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, 2009 and 2008,
our insurance subsidiaries had liquid assets of
$18.1 billion and $14.7 billion, respectively, of our
total liquid assets of $18.1 billion and
$14.9 billion, respectively. The portion of total company
liquid assets comprised of cash and cash equivalents and
short-term investments was $259.9 and $477.4 as of
December 31, 2009 and 2008, respectively.
We consider attributes of the various categories of liquid
assets (for example, type of asset and credit quality) in
evaluating the adequacy of our insurance operations
liquidity under a variety of stress scenarios. We believe that
the liquidity profile of our assets is sufficient to satisfy
current liquidity requirements, including under foreseeable
stress scenarios.
Given the size and liquidity profile of our investment
portfolio, we believe that claim experience varying from our
projections does not constitute a significant liquidity risk.
Our asset/liability management process takes into account the
expected maturity of investments and expected claim payments as
well as the specific nature and risk profile of the liabilities.
Historically, there has been no significant variation between
the expected maturities of our investments and the payment of
claims.
Capitalization
Our capital structure consists of notes payable and
stockholders equity. The following table summarizes our
capital structure as of the dates indicated:
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As of December 31,
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2009
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|
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2008
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|
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2007
|
|
|
Notes payable
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$
|
448.9
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|
$
|
448.8
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|
$
|
448.6
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Stockholders equity
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1,433.3
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|
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286.2
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|
|
1,285.1
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Total capital
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$
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1,882.2
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$
|
735.0
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$
|
1,733.7
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Our capitalization increased as of December 31, 2009, as
compared to December 31, 2008 due to an increase in
stockholders equity. This increase was driven by an
increase in AOCI and the generation of net income of $128.3.
AOCI improved primarily due to a reduction in net unrealized
losses on
available-for-sale
corporate securities.
Our capitalization decreased $998.7 as of December 31,
2008, as compared to December 31, 2007. Accumulated other
comprehensive loss increased by $1,040.1, primarily due to
decreases in net unrealized
92
losses of $1,021.0. The decrease in net unrealized losses was
concentrated in our corporate fixed securities due to credit
spreads widening and increased liquidity discounts during the
volatile markets in 2008.
As noted previously, subsequent to December 31, 2009 we
completed an initial public offering of our common stock and
received net proceeds of $282.5. We believe our capital levels
position us well to capitalize on organic growth as well as
pursue any potentially favorable acquisition opportunities.
Debt
The following table summarizes our debt instruments:
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Maximum Amount
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|
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Available as of
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Amount Outstanding as of
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Maturity
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December 31,
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December 31,
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December 31,
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December 31,
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Description
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Date
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2009
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2008
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2009
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2008
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Senior notes payable
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4/1/2016
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$
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300.0
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$
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300.0
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$
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300.0
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$
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300.0
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CENts
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10/15/2067
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150.0
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150.0
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150.0
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150.0
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Revolving credit facility:
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Bank of America, N.A.
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8/16/2012
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200.0
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200.0
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Total notes payable and revolving credit facility
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$
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650.0
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$
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650.0
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$
|
450.0
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|
$
|
450.0
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Notes
Payable
Senior
Notes Due 2016
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. Proceeds from the senior notes were used to pay
down the outstanding principal on a variable rate revolving line
of credit. Interest on the senior notes is payable semiannually
in arrears, beginning on October 2, 2006.
The senior notes do not contain any financial covenants or any
provisions restricting us from purchasing or redeeming capital
stock, paying dividends or entering into a highly leveraged
transaction, reorganization, restructuring, merger or similar
transaction. In addition, we are not required to repurchase,
redeem or modify the terms of any of the senior notes upon a
change of control or other event involving Symetra.
For a description of additional terms of this facility, see
Note 12 to the accompanying audited consolidated financial
statements.
Capital
Efficient Notes Due 2067
On October 10, 2007, we issued $150.0 aggregate principal
amount CENts with a scheduled maturity date of October 15,
2037 and, subject to certain limitations, with a final maturity
date of October 15, 2067. We issued the CENts at a discount
yielding $149.8. For the initial ten-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. We applied the net
proceeds from the issuance to pay a special cash dividend to
stockholders on October 19, 2007.
For a description of additional terms of this facility, see
Note 12 to the accompanying audited consolidated financial
statements.
93
Revolving
Credit Facility
Credit Facility. 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. On February 12, 2009, Bank of America,
N.A. issued a notice of default to Lehman Commercial Paper,
Inc., one of the lending institutions in the syndicate with a
commitment of $20.0, effectively limiting our ability to borrow
under the revolving credit facility to $180.0 at that time. On
October 7, 2009, Lehman Commercial Paper, Inc. assigned its
interest in our revolving credit facility to Barclays Bank PLC,
effectively restoring capacity in the facility to $200.0. 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.
For a description of additional terms of this facility, see
Note 12 to the accompanying audited consolidated financial
statements.
Securities
Lending
We participated in a securities lending program as a mechanism
for generating additional investment income, which we
discontinued in 2009. As of December 31, 2009, we had no
securities on loan, and had no securities lending collateral
under our control. For additional information, see Note 6
to the accompanying audited consolidated financial statements.
Dividends
and Regulatory Requirements
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, 2009, Symetra did not receive any dividends
from its insurance subsidiaries. Symetra received $100.0 and
$166.4 in dividends from its insurance subsidiaries in 2008 and
2007, respectively.
Based on our statutory results, as of December 31, 2009,
Symetras insurance subsidiaries may pay it dividends of up
to $141.5 during 2010 without needing to obtain regulatory
approval. To support the growing sales of our products and
maintain financial strength ratings, we target a risk-based
capital level of at least 350% in our life insurance company,
Symetra Life Insurance Company, and this may impact its ability
to make dividend payments. As of December 31, 2009, Symetra
Life Insurance Company had a risk-based capital ratio of 413%.
Cash
Flows
The following table sets forth a summary of our consolidated
cash flows for the years ended December 31, 2009, 2008 and
2007.
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Years Ended December 31,
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2009
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2008
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2007
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Net cash flows from operating activities
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$
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798.4
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$
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733.0
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$
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813.8
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Net cash flows from investing activities
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(2,142.3
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)
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(976.8
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)
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522.3
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Net cash flows from financing activities
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1,133.7
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457.9
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(1,335.4
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)
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Operating
Activities
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 including dividends and interest on our general
account investments, as well as the amounts and timing of cash
disbursed for our payment of policyholder benefits and claims,
underwriting and operating expenses and
94
income taxes. The following discussion highlights key drivers in
the level of cash flows generated from our operating activities:
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Years ended December 31, 2009 and
2008. Net cash provided by operating activities
for 2009 was $798.4, a $65.4 increase over 2008. This was
primarily driven by an increase in our invested assets resulting
in an increase in cash flows (interest receipts) on our
investments and a reduction in operating expenses due to
disciplined expense management and decreased federal income tax
payments. Decreased premiums and increased claims related to our
group medical stop-loss product partially offsets these
increases.
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Years ended December 31, 2008 and
2007. Net cash provided by operating activities
for the year ended December 31, 2008 was $733.0, an $80.8
decrease over the same period in 2007. This decrease was
primarily the result of an increase in cash paid to settle
policyholder benefits and claims related to our group medical
stop-loss products, and an increase in paid commissions related
to our deferred annuity products. In addition, interest payments
in 2008 increased compared to 2007 as a result of the CENts sold
in October 2007.
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Investing
Activities
Cash flows from our investing activities are primarily driven by
the amounts and timing of cash received from our sales of
investments and from maturities and calls of fixed maturity
securities, as well as the amounts and timing of cash disbursed
for our purchases of investments. The following discussion
highlights key drivers in the level of cash flows generated from
our investing activities:
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Years ended December 31, 2009 and
2008. Net cash used in investing activities for
the year ended December 31, 2009 was $2,142.3, a $1,165.5
increase over the same period in 2008. This increase was
primarily the result of higher purchases of fixed maturities, as
we deployed cash generated on increased sales of fixed deferred
annuities.
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|
Years ended December 31, 2008 and
2007. Net cash used in investing activities for
the year ended December 31, 2008 was $976.8, a $1,499.1
change from the same period in 2007, when net cash provided by
investing activities was $522.3. The change was primarily the
result of lower sales of fixed maturities due to decreased
withdrawals from certain of our products. In addition, we
originated $224.5 in new mortgage loans in 2008, an increase of
$74.5.
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Financing
Activities
Cash flows from our financing activities are primarily driven by
the amounts and timing of cash received from deposits into
certain life insurance and annuity policies and proceeds from
our issuances of debt, as well as the amounts and timing of cash
disbursed to fund withdrawals from certain life insurance and
annuity policies, repayments of debt and dividend distributions
to our stockholders. The following discussion highlights key
drivers in the level of cash flows generated from our financing
activities:
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|
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 referred to in investing activities
above.
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|
Years ended December 31, 2008 and
2007. Net cash provided by financing activities
for the year ended December 31, 2008 was $457.9, a $1,793.3
increase over the same period in 2007. This was primarily due to
a $1,150.8 increase in deposits and a $562.3 decrease in
withdrawals in 2008 over 2007. Sales of fixed deferred annuities
increased in 2008 as our distribution channel strategy matured.
Also, withdrawals decreased as products containing a surrender
charge free period passed the surrender charge free window. In
addition, in 2007, we received $149.8 in proceeds from our CENts
offering and paid $200.0 in stockholder dividends.
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95
Contractual
Obligations and Commitments
We enter into obligations with third parties in the ordinary
course of our operations. These obligations as of
December 31, 2009 are set forth in the table below.
However, we do not believe that our cash flow requirements can
be assessed based upon an analysis of these obligations as the
funding of these future cash obligations will be from future
cash flows from 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 income taxes and
payroll.
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Payments Due by Year
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2015 and
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|
Contractual Obligations
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Total
|
|
|
2010
|
|
|
2011-2012
|
|
|
2013-2014
|
|
|
thereafter
|
|
|
Insurance obligations(1)
|
|
$
|
38,013.5
|
|
|
$
|
2,086.7
|
|
|
$
|
4,139.3
|
|
|
$
|
3,480.2
|
|
|
$
|
28,307.3
|
|
Notes payable
|
|
|
450.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450.0
|
|
Interest on notes payable
|
|
|
219.0
|
|
|
|
30.8
|
|
|
|
61.7
|
|
|
|
61.7
|
|
|
|
64.8
|
|
Purchase obligations:
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|
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|
|
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|
|
|
|
|
|
|
|
|
Investments in limited partnerships(2)
|
|
|
72.2
|
|
|
|
68.1
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
Servicing fees(3)
|
|
|
51.0
|
|
|
|
11.3
|
|
|
|
22.7
|
|
|
|
17.0
|
|
|
|
|
|
Other(4)
|
|
|
11.6
|
|
|
|
6.5
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
Operating lease obligations(5)
|
|
|
39.5
|
|
|
|
7.4
|
|
|
|
14.2
|
|
|
|
13.9
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total
|
|
$
|
38,856.8
|
|
|
$
|
2,210.8
|
|
|
$
|
4,247.1
|
|
|
$
|
3,572.8
|
|
|
$
|
28,826.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
(1) |
|
Includes estimated claim and benefit, policy surrender,
reinsurance premiums and commission obligations on in force
insurance policies and deposit contracts. Estimated claim and
benefit obligations are based on mortality, morbidity and lapse
assumptions comparable with our historical experience. In
contrast to this table, our obligations recorded in our
consolidated balance sheets do not incorporate future credited
interest for deposit contracts or tabular interest for insurance
policies. Therefore, the estimated obligations for insurance
liabilities presented in this table significantly exceed the
liabilities recorded in reserves for future annuity and contract
benefits and the liability for policy and contract claims. Due
to the significance of the assumptions used, the amounts
presented could materially differ from actual results. We have
not included the variable separate account obligations as these
obligations are legally insulated from general account
obligations and will be fully funded by cash flows from separate
account assets. We expect to fund the obligations for insurance
liabilities from cash flows from general account investments and
future deposits and premiums. |
|
(2) |
|
We have investments in thirteen limited partnership interests
related to tax-advantaged affordable housing projects and
various state tax credit funds, and five private equity
partnerships. We will provide capital contributions to the five
private equity partnerships through 2013 with a remaining
committed amount of $33.3 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 15 to the accompanying audited
consolidated financial statements. Amounts recorded on the
balance sheet are included in other liabilities. |
|
(3) |
|
Includes contractual commitments for a service agreement to
outsource the majority of our information technology
infrastructure. For more information, see Note 15 to the
accompanying audited consolidated financial statements. |
|
(4) |
|
In connection with the acquisition of MRM in May 2007, we
committed to pay $14.0 to the selling stockholder over a period
of five years, including $10.2 that is contingent upon the
achievement of certain annual profitability targets. Also
includes unfunded mortgage loan commitments of $4.5, as of
December 31, 2009. |
|
(5) |
|
Includes minimum rental commitments on leases for office space,
commercial real estate and certain equipment. For more
information, see Note 15 to the accompanying audited
consolidated financial statements. |
96
Off-balance
Sheet Transactions
We do not have off-balance sheet transactions.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We are subject to potential fluctuations in earnings, cash flows
and the fair value of certain assets and liabilities due to
changes in market interest rates and equity prices.
We enter into market-sensitive instruments primarily for
purposes other than trading; namely, to support our insurance
liabilities.
Interest
Rate Risk
Our exposure to interest rate risk relates to the market price
and/or cash
flow variability associated with changes in market interest
rates.
An increase in market interest rates from current levels would
generally be a favorable development for us. If market interest
rates increase, we would expect to earn additional investment
income, to have increased annuity and universal life insurance
sales, and to limit the potential risk of margin erosion due to
minimum guaranteed crediting rates. However, an increase in
interest rates would also increase the unrealized net loss
position of the investment portfolio. In addition, if interest
rates rise quickly enough within a short time period, certain
lines of business that are interest sensitive are exposed to
lapses as policyholders seek higher yielding investments.
Our investment portfolios primarily consist of investment grade
fixed maturity securities, including public and privately-placed
corporate bonds, residential mortgage-backed securities and
commercial mortgage-backed securities. The carrying value of our
investment portfolio as of December 31, 2009 and 2008 was
$20.2 billion and $16.3 billion, respectively, of
which 92.1% in 2009 and 91.6% in 2008 was invested in fixed
maturities. The primary market risk to our investment portfolio
is interest rate risk associated with investments in fixed
maturity securities. The fair value of our fixed maturities
fluctuates depending on the interest rate environment. During
periods of declining interest rates, paydowns on mortgage-backed
securities and collateralized mortgage obligations increase and
we would generally be unable to reinvest the proceeds of such
prepayments at comparable yields. The weighted-average duration
of our fixed maturity portfolio was approximately 5.4 and
5.6 years as of December 31, 2009 and 2008,
respectively.
We manage our exposure to interest rate risk through asset
allocation limits, limiting the purchase of negatively convex
assets and asset/liability duration matching. Each line of
business has investment guidelines based on its specific
liability characteristics.
Equity
Risk
We are exposed to equity price risk on our common stock and
other equity holdings. In addition, asset fees calculated as a
percentage of the separate account assets are a source of
revenue to us. Gains and losses in the equity markets result in
corresponding increases and decreases in our separate account
assets and asset fee revenue.
In addition, a decrease in the value of separate account assets
may cause an increase in guaranteed minimum death benefit, or
GMDB, claims. However, most of our GMDB on individual variable
annuities are reinsured. In recent years, the supply of
reinsurance has dwindled and costs have risen. Therefore, we
have not obtained GMDB reinsurance on new sales.
We manage equity price risk on investment holdings through
industry and issuer diversification and asset allocation
techniques.
97
Derivative
Financial Instruments
We make minimal use of derivative financial instruments as part
of our risk management strategy. We use indexed call options to
manage our exposure to changes in the S&P 500 Index. Our
exposure is related to our closed FIA block of business, which
credits policyholders account values based on gains in the
S&P 500 Index.
In addition, in 2007 and 2006, we entered into interest rate
swaps, which qualified as cash flow hedges of the forecasted
issuance of the CENts and the senior notes to hedge our exposure
to interest rate fluctuations prior to the note issuances.
As a matter of policy, we have not, and do not intend to, engage
in derivative market-making, speculative derivative trading or
other speculative derivatives activities.
Sensitivity
Analysis
Sensitivity analysis measures the impact of hypothetical changes
in interest rates and other market rates or prices on the
profitability of market-sensitive financial instruments.
The following discussion about the potential effects of changes
in interest rates and equity market prices is based on so-called
shock-tests, which model the effects of interest
rate and equity market price shifts on our financial condition
and results of operations. Although we believe shock tests
provide the most meaningful analysis, they are constrained by
several factors, including the necessity to conduct the analysis
based on a single point in time and by their inability to
include the extraordinarily complex market reactions that
normally would arise from the market shifts modeled. Although
the following results of shock tests for changes in interest
rates and equity market prices may have some limited use as
benchmarks, they should not be viewed as forecasts. These
forward-looking disclosures also are selective in nature and
address only the potential impacts on our financial instruments.
They do not include a variety of other potential factors that
could affect our business as a result of these changes in
interest rates and equity market prices.
One means of assessing exposure of our fixed maturities
portfolio to interest rate changes is a duration-based analysis
that measures the potential changes in fair value resulting from
a hypothetical change in interest rates of 100 basis points
across all maturities. This is sometimes referred to as a
parallel shift in the yield curve. Our investment manager uses
Derivative Solutions, a fixed-income analytics tool, to model
and calculate the duration and convexity of our asset portfolio.
Under this model, with all other factors constant and assuming
no offsetting change in the fair value of our liabilities, we
estimated that such an increase in interest rates would cause
the fair value of our fixed maturities portfolio to decline by
approximately $1.00 billion and $0.81 billion, based
on our securities positions as of December 31, 2009 and
2008, respectively.
One means of assessing exposure to changes in equity market
prices is to estimate the potential changes in values of our
investments whose fair values are typically highly correlated
with the equity markets resulting from a hypothetical
broad-based decline in equity market prices of 10%. Using this
assumption, with all other factors constant, we estimate that
such a decline in equity market prices would cause the fair
value of our investment portfolio to decline by approximately
$23.2 and $21.4 as of December 31, 2009 and 2008,
respectively. In addition, fluctuations in equity market prices
affect our revenues and returns related to our variable annuity
and life products, which depend upon fees that are related
primarily to the fair value of the underlying assets.
98
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Audited Consolidated Financial Statements of Symetra
Financial Corporation
|
|
|
|
|
|
|
|
100
|
|
|
|
|
101
|
|
|
|
|
102
|
|
|
|
|
103
|
|
|
|
|
104
|
|
|
|
|
105
|
|
99
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Symetra Financial Corporation
We have audited the accompanying consolidated balance sheets of
Symetra Financial Corporation as of December 31, 2009 and
2008, and the related consolidated statements of income, changes
in stockholders equity, and cash flows for each of the
three years in the period ended December 31, 2009. Our
audits also included the financial statement schedules listed in
the Index at Item 15(a). These financial statements and
schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Symetra Financial Corporation at
December 31, 2009 and 2008, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2009, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 2 to the financial statements, in 2008
the Company changed its method of accounting for certain
marketable equity securities and limited partnership funds. As
discussed in Note 2 to the financial statements, in 2009
the Company changed its method of accounting for
other-than-temporary
impairments of fixed maturity securities.
Seattle, Washington
March 8, 2010
100
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions, except share and per share data)
|
|
|
ASSETS
|
Investments:
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value (cost: $18,553.7 and
$16,528.4, respectively)
|
|
$
|
18,594.3
|
|
|
$
|
14,887.6
|
|
Marketable equity securities, at fair value (cost: $52.6
and $52.5, respectively)
|
|
|
36.7
|
|
|
|
38.1
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
Marketable equity securities, at fair value (cost: $165.9
and $152.1, respectively)
|
|
|
154.1
|
|
|
|
106.3
|
|
Mortgage loans, net
|
|
|
1,201.7
|
|
|
|
988.7
|
|
Policy loans
|
|
|
73.9
|
|
|
|
75.2
|
|
Investments in limited partnerships (includes $24.7 and
$56.3 measured at fair value, respectively)
|
|
|
110.2
|
|
|
|
138.3
|
|
Other invested assets
|
|
|
12.2
|
|
|
|
18.3
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
20,183.1
|
|
|
|
16,252.5
|
|
Cash and cash equivalents
|
|
|
257.8
|
|
|
|
468.0
|
|
Accrued investment income
|
|
|
237.2
|
|
|
|
206.3
|
|
Accounts receivable and other receivables
|
|
|
70.1
|
|
|
|
61.7
|
|
Reinsurance recoverables
|
|
|
276.6
|
|
|
|
264.2
|
|
Deferred policy acquisition costs
|
|
|
250.4
|
|
|
|
247.5
|
|
Goodwill
|
|
|
26.3
|
|
|
|
24.3
|
|
Current income tax recoverable
|
|
|
20.2
|
|
|
|
21.1
|
|
Deferred income tax assets, net
|
|
|
191.2
|
|
|
|
785.8
|
|
Property, equipment, and leasehold improvements, net
|
|
|
14.9
|
|
|
|
18.9
|
|
Other assets
|
|
|
69.6
|
|
|
|
57.4
|
|
Securities lending collateral
|
|
|
|
|
|
|
105.7
|
|
Separate account assets
|
|
|
840.1
|
|
|
|
716.2
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
22,437.5
|
|
|
$
|
19,229.6
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Funds held under deposit contracts
|
|
$
|
18,816.7
|
|
|
$
|
16,810.4
|
|
Future policy benefits
|
|
|
394.9
|
|
|
|
392.1
|
|
Policy and contract claims
|
|
|
125.6
|
|
|
|
133.1
|
|
Unearned premiums
|
|
|
12.1
|
|
|
|
11.9
|
|
Other policyholders funds
|
|
|
113.8
|
|
|
|
117.3
|
|
Notes payable
|
|
|
448.9
|
|
|
|
448.8
|
|
Other liabilities
|
|
|
252.1
|
|
|
|
207.9
|
|
Securities lending payable
|
|
|
|
|
|
|
105.7
|
|
Separate account liabilities
|
|
|
840.1
|
|
|
|
716.2
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
21,004.2
|
|
|
|
18,943.4
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; none issued
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 750,000,000 shares
authorized; 92,729,455 and 92,646,295 shares issued
and outstanding as of December 31, 2009 and 2008,
respectively
|
|
|
0.9
|
|
|
|
0.9
|
|
Additional paid-in capital
|
|
|
1,165.7
|
|
|
|
1,165.5
|
|
Retained earnings
|
|
|
316.4
|
|
|
|
172.4
|
|
Accumulated other comprehensive loss, net of taxes
|
|
|
(49.7
|
)
|
|
|
(1,052.6
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,433.3
|
|
|
|
286.2
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
22,437.5
|
|
|
$
|
19,229.6
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
101
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other considerations
|
|
$
|
573.6
|
|
|
$
|
584.8
|
|
|
$
|
530.5
|
|
Net investment income
|
|
|
1,113.6
|
|
|
|
956.5
|
|
|
|
973.6
|
|
Other revenues
|
|
|
56.4
|
|
|
|
67.8
|
|
|
|
68.7
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(191.2
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
Less: portion of losses recognized in other comprehensive income
|
|
|
104.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(86.5
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
Other net realized investment gains (losses)
|
|
|
57.2
|
|
|
|
(71.6
|
)
|
|
|
33.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
(29.3
|
)
|
|
|
(158.0
|
)
|
|
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,714.3
|
|
|
|
1,451.1
|
|
|
|
1,589.6
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
350.5
|
|
|
|
348.5
|
|
|
|
267.1
|
|
Interest credited
|
|
|
846.8
|
|
|
|
766.1
|
|
|
|
752.3
|
|
Other underwriting and operating expenses
|
|
|
252.7
|
|
|
|
265.8
|
|
|
|
281.9
|
|
Interest expense
|
|
|
31.8
|
|
|
|
31.9
|
|
|
|
21.5
|
|
Amortization of deferred policy acquisition costs
|
|
|
51.4
|
|
|
|
25.8
|
|
|
|
18.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,533.2
|
|
|
|
1,438.1
|
|
|
|
1,340.8
|
|
Income from operations before income taxes
|
|
|
181.1
|
|
|
|
13.0
|
|
|
|
248.8
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
6.7
|
|
|
|
23.8
|
|
|
|
62.8
|
|
Deferred
|
|
|
46.1
|
|
|
|
(32.9
|
)
|
|
|
18.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
|
52.8
|
|
|
|
(9.1
|
)
|
|
|
81.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
128.3
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.15
|
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
Diluted
|
|
$
|
1.15
|
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
Diluted
|
|
|
111.626
|
|
|
|
111.622
|
|
|
|
111.622
|
|
Cash dividends declared per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.79
|
|
See accompanying notes.
102
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Balances at January 1, 2007
|
|
$
|
0.9
|
|
|
$
|
1,165.5
|
|
|
$
|
161.4
|
|
|
$
|
(0.5
|
)
|
|
$
|
1,327.3
|
|
Cumulative effect adjustment new accounting guidance
(net of taxes: $(1.3))
|
|
|
|
|
|
|
|
|
|
|
2.5
|
|
|
|
(2.5
|
)
|
|
|
|
|
Comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
167.3
|
|
|
|
|
|
|
|
167.3
|
|
Other comprehensive loss (net of taxes: $(5.1))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9.5
|
)
|
|
|
(9.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
(200.0
|
)
|
|
|
|
|
|
|
(200.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
$
|
0.9
|
|
|
$
|
1,165.5
|
|
|
$
|
131.2
|
|
|
$
|
(12.5
|
)
|
|
$
|
1,285.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2008
|
|
$
|
0.9
|
|
|
$
|
1,165.5
|
|
|
$
|
131.2
|
|
|
$
|
(12.5
|
)
|
|
$
|
1,285.1
|
|
Cumulative effect adjustment new accounting guidance
(net of taxes: $(10.3))
|
|
|
|
|
|
|
|
|
|
|
19.1
|
|
|
|
(19.1
|
)
|
|
|
|
|
Comprehensive loss, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
22.1
|
|
|
|
|
|
|
|
22.1
|
|
Other comprehensive loss (net of taxes: $(549.8))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,021.0
|
)
|
|
|
(1,021.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(998.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
$
|
0.9
|
|
|
$
|
1,165.5
|
|
|
$
|
172.4
|
|
|
$
|
(1,052.6
|
)
|
|
$
|
286.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2009
|
|
$
|
0.9
|
|
|
$
|
1,165.5
|
|
|
$
|
172.4
|
|
|
$
|
(1,052.6
|
)
|
|
$
|
286.2
|
|
Cumulative effect adjustment new accounting guidance
(net of taxes: $(8.4))
|
|
|
|
|
|
|
|
|
|
|
15.7
|
|
|
|
(15.7
|
)
|
|
|
|
|
Comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
128.3
|
|
|
|
|
|
|
|
128.3
|
|
Other comprehensive income (net of taxes: $548.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,018.6
|
|
|
|
1,018.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,146.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
$
|
0.9
|
|
|
$
|
1,165.7
|
|
|
$
|
316.4
|
|
|
$
|
(49.7
|
)
|
|
$
|
1,433.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
103
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
128.3
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment (gains) and losses
|
|
|
29.3
|
|
|
|
158.0
|
|
|
|
(16.8
|
)
|
Accretion and amortization of fixed maturity investments and
mortgage loans, net
|
|
|
25.2
|
|
|
|
36.4
|
|
|
|
58.3
|
|
Accrued interest on bonds
|
|
|
(36.7
|
)
|
|
|
(33.4
|
)
|
|
|
(38.5
|
)
|
Amortization and depreciation
|
|
|
14.3
|
|
|
|
14.6
|
|
|
|
13.6
|
|
Deferred income tax provision (benefit)
|
|
|
46.1
|
|
|
|
(32.9
|
)
|
|
|
18.7
|
|
Interest credited on deposit contracts
|
|
|
846.8
|
|
|
|
766.1
|
|
|
|
752.3
|
|
Mortality and expense charges and administrative fees
|
|
|
(100.2
|
)
|
|
|
(96.7
|
)
|
|
|
(94.1
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income
|
|
|
(30.9
|
)
|
|
|
(11.8
|
)
|
|
|
12.2
|
|
Deferred policy acquisition costs, net
|
|
|
(106.2
|
)
|
|
|
(89.6
|
)
|
|
|
(42.3
|
)
|
Other receivables
|
|
|
(18.3
|
)
|
|
|
(13.7
|
)
|
|
|
17.2
|
|
Future policy benefits
|
|
|
2.8
|
|
|
|
7.2
|
|
|
|
8.5
|
|
Policy and contract claims
|
|
|
(7.5
|
)
|
|
|
22.2
|
|
|
|
(8.6
|
)
|
Current income tax recoverable
|
|
|
0.8
|
|
|
|
(16.6
|
)
|
|
|
(7.1
|
)
|
Other assets and liabilities
|
|
|
6.6
|
|
|
|
1.2
|
|
|
|
(24.1
|
)
|
Other, net
|
|
|
(2.0
|
)
|
|
|
(0.1
|
)
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
670.1
|
|
|
|
710.9
|
|
|
|
646.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
798.4
|
|
|
|
733.0
|
|
|
|
813.8
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities and marketable equity securities
|
|
|
(4,014.7
|
)
|
|
|
(2,286.7
|
)
|
|
|
(2,646.3
|
)
|
Other invested assets and investments in limited partnerships
|
|
|
(36.2
|
)
|
|
|
(33.5
|
)
|
|
|
(62.6
|
)
|
Issuances of mortgage loans
|
|
|
(290.8
|
)
|
|
|
(224.5
|
)
|
|
|
(150.0
|
)
|
Issuances of policy loans
|
|
|
(18.0
|
)
|
|
|
(16.2
|
)
|
|
|
(17.8
|
)
|
Maturities, calls, paydowns, and other
|
|
|
1,312.8
|
|
|
|
922.0
|
|
|
|
974.8
|
|
Securities lending collateral returned, net
|
|
|
103.7
|
|
|
|
174.4
|
|
|
|
159.9
|
|
Acquisitions, net of cash received
|
|
|
(2.0
|
)
|
|
|
(9.2
|
)
|
|
|
(22.0
|
)
|
Sales of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities and marketable equity securities
|
|
|
660.1
|
|
|
|
371.8
|
|
|
|
2,123.8
|
|
Other invested assets and investments in limited partnerships
|
|
|
45.3
|
|
|
|
29.6
|
|
|
|
13.2
|
|
Repayments of mortgage loans
|
|
|
73.5
|
|
|
|
80.1
|
|
|
|
94.8
|
|
Repayments of policy loans
|
|
|
18.2
|
|
|
|
17.0
|
|
|
|
18.7
|
|
Purchases of property, equipment, and leasehold improvements
|
|
|
(1.2
|
)
|
|
|
(2.0
|
)
|
|
|
(2.2
|
)
|
Other, net
|
|
|
7.0
|
|
|
|
0.4
|
|
|
|
38.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(2,142.3
|
)
|
|
|
(976.8
|
)
|
|
|
522.3
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder account balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
2,580.0
|
|
|
$
|
1,970.8
|
|
|
$
|
820.0
|
|
Withdrawals
|
|
|
(1,353.6
|
)
|
|
|
(1,322.0
|
)
|
|
|
(1,884.3
|
)
|
Securities lending collateral paid, net
|
|
|
(103.7
|
)
|
|
|
(174.4
|
)
|
|
|
(159.9
|
)
|
Proceeds from notes payable
|
|
|
|
|
|
|
|
|
|
|
149.8
|
|
Dividend distributions
|
|
|
|
|
|
|
|
|
|
|
(200.0
|
)
|
Other, net
|
|
|
11.0
|
|
|
|
(16.5
|
)
|
|
|
(61.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,133.7
|
|
|
|
457.9
|
|
|
|
(1,335.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(210.2
|
)
|
|
|
214.1
|
|
|
|
0.7
|
|
Cash and cash equivalents at beginning of period
|
|
|
468.0
|
|
|
|
253.9
|
|
|
|
253.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
257.8
|
|
|
$
|
468.0
|
|
|
$
|
253.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
31.0
|
|
|
$
|
31.3
|
|
|
$
|
18.5
|
|
Income taxes
|
|
|
5.6
|
|
|
|
40.4
|
|
|
|
69.6
|
|
Non-cash transactions during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in limited partnerships and capital obligations
incurred
|
|
|
10.7
|
|
|
|
4.2
|
|
|
|
20.0
|
|
See accompanying notes.
104
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in millions, except per share data, unless
otherwise stated)
|
|
1.
|
Organization
and Description of Business
|
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 Companys 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.
On January 27, 2010, the Company completed the initial
public offering (IPO) of its common stock at an offering price
of $12.00 per share. The IPO included 25,259,510 newly issued
shares of common stock sold by the Company and 9,700,490
existing shares of common stock sold by selling stockholders.
Upon completion of the IPO, the Company had
117,988,965 shares of common stock outstanding. The Company
received net proceeds from the offering of approximately $282.5.
The Company did not receive any proceeds from the sale of shares
by the selling stockholders. In February 2010, Symetra Financial
Corporation contributed $236.6 of the IPO proceeds to its
subsidiaries. If the IPO had been effected on January 1,
2009, the pro forma basic and diluted net income per share would
have been $0.94 for the year ended December 31, 2009.
Common
and Preferred Stock
The Company has 750,000,000 authorized shares of common stock,
$0.01 par value per share, and 10,000,000 authorized shares
of preferred stock, $0.01 par value per share. The
Companys Board of Directors has the authority to designate
the preferred stock into series and to designate the voting
powers, preferences and other rights of the shares of each
series without further stockholder approval. The Company also
has warrants outstanding as of December 31, 2009, which are
recorded in total stockholders equity. The warrants are
exercisable at any time until August 2, 2014, to acquire
18,975,744 shares of common stock in the aggregate at an
exercise price of $11.49 per share.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation and Use of Estimates
The consolidated financial statements have been prepared in
conformity with U.S. generally accepted accounting
principles (GAAP), including the rules and regulations of the
Securities and Exchange Commission (SEC). The preparation of
financial statements in conformity with GAAP requires the
Company to make estimates and assumptions that may affect the
amounts reported in the audited consolidated financial
statements and accompanying notes.
The most significant estimates include those used to determine
the following: valuation of investments; the identification of
other-than-temporary
impairments (OTTI) of investments; the balance, recoverability
and amortization of deferred policy acquisition costs (DAC); the
liabilities for funds held under deposit contracts, future
policy benefits, and policy and contract claims; and the
recoverability of deferred tax assets. The recorded amounts
reflect managements best estimates, though actual results
could differ from those estimates. Management believes the
amounts provided are appropriate.
The consolidated financial statements include the accounts of
Symetra Financial and its subsidiaries that are wholly owned,
directly or indirectly. All significant intercompany
transactions and balances have been eliminated. Certain
reclassifications have been made to prior year financial
information to conform to the current period presentation.
105
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recognition
of Insurance Revenue and Related Benefits
Premiums from group life and health insurance products are
recognized as revenue when earned over the life of the policy.
The Company reports a liability for the portion of premiums
unearned on the consolidated balance sheets. Benefit claims are
charged to operations as incurred. These policies are
short-duration contracts.
Traditional individual life insurance products, primarily term
and whole life insurance products, are long-duration contracts
consisting principally of products with fixed and guaranteed
premiums and benefits. Premiums from these products are
recognized as revenue when due. Benefits and expenses are
associated with earned premiums to result in the recognition of
profits over the life of the policy. This association is
accomplished by the provision for future policy benefits and the
deferral and amortization of policy acquisition costs.
Deposits related to universal life-type, limited payment-type
and investment-type products are credited to policyholder
account balances and reflected as liabilities rather than as
premium income when received. Revenues from these contracts
consist of investment income on the policyholders fund
balances and amounts assessed during the period against
policyholders account balances for cost of insurance
charges, policy administration charges, and surrender charges.
The Company includes these cost of insurance charges in premiums
and other considerations. Policy administration charges and
surrender charges are included in other revenues in the
consolidated statements of income. Amounts that are charged to
operations include interest credited and benefit claims incurred
in excess of related policyholder account balances.
Variable product fees are charged to variable annuity and
variable life policyholders accounts based upon the daily
net assets of the policyholders account values and are
recognized as other revenues when charged. Mortality and expense
charges, policy administration charges, and surrender charges
are included in other revenues in the consolidated statements of
income.
Investments
Available-for-Sale
Securities
The Company classifies its investments in fixed maturities and
certain marketable equity securities as
available-for-sale
securities and carries them at fair value. Fixed maturities
include bonds, mortgage-backed securities and redeemable
preferred stock. Marketable equity securities primarily include
nonredeemable preferred stock.
The Company reports net unrealized investment gains (losses)
related to its
available-for-sale
securities in accumulated other comprehensive loss in
stockholders equity, net of related DAC and deferred
income taxes.
The Company reports interest and dividends earned in net
investment income. When the collectability of interest income
for fixed maturities is considered doubtful, any accrued but
uncollectible interest is reversed against investment income in
the current period. The Company then places the securities on
nonaccrual status, and they are not restored to accrual status
until all delinquent interest and principal are paid. For
mortgage-backed securities, the Company recognizes income using
a constant effective yield based on anticipated prepayments and
the estimated economic life of the securities. Quarterly, the
Company compares actual prepayments to anticipated prepayments
and recalculates the effective yield to reflect actual payments
to date plus anticipated future payments. The Company includes
any resulting adjustment in net investment income.
Trading
Securities
Prior to January 1, 2008, these investments were accounted
for as
available-for-sale
securities. On January 1, 2008, the Company adopted new
accounting guidance that allowed the Company to elect fair value
accounting for its investments in common stock. As a result, the
impact of changes in the fair value of the
106
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys trading portfolio is recorded in net realized
investment gains (losses) in the consolidated statements of
income. The Company reports dividends earned on trading
securities in net investment income.
Investment
Valuation and Sales
The Company uses quoted market prices or public market
information to determine the fair value of its investments when
such information is available. When such information is not
available, as in the case of securities that are not publicly
traded, the Company uses other valuation techniques. These
techniques include evaluating discounted cash flows, identifying
comparable securities with quoted market prices, and using
internally prepared valuations based on certain modeling and
pricing methods. The Companys investment portfolio as of
December 31, 2009 and 2008 included $901.3 and $632.2,
respectively, of fixed maturities that were not publicly traded.
Values for these securities were determined using these other
valuation techniques. See Note 7 for additional disclosures
about fair value measurements.
The cost of securities sold is determined by the
specific-identification method.
Other-Than-Temporary
Impairments
Investments are considered to be impaired when a decline in fair
value is judged to be
other-than-temporary.
The Companys 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
Companys process for identifying and recording OTTI.
Mortgage
Loans
The Company carries mortgage loans at outstanding principal
balances, less a valuation allowance. Loan origination fees and
expenses are deferred and amortized over the life of the loan.
Interest income, including amortization of deferred fees and
expenses, is recorded in net investment income.
The allowance for losses on mortgage loans provides for the risk
of credit losses inherent in the lending process. The allowance
includes a portfolio reserve for probable incurred but not
specifically identified losses and specific reserves for
non-performing loans. We define non-performing loans as a loan
for which it is probable that amounts due according to the terms
of the loan agreement will not be collected. As of
December 31, 2009, one loan was considered non-performing.
As of December 31, 2008, no loans were considered
non-performing. The portfolio reserve for probable incurred but
not specifically identified losses considers our past loan
experience and the current credit composition of the portfolio,
and takes into account market considerations. See Note 4
for a rollforward of the allowance for mortgage loan losses.
Policy
Loans
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
Investments in limited partnerships as of December 31,
2009, consisted of $85.5 of investments in affordable housing
projects and state tax credit funds recorded at amortized cost
and $24.7 of investments in private equity and hedge funds
recorded at fair value. The impact of changes in the fair value
of private equity and hedge funds is recorded in net investment
income in the consolidated statements of income. Prior to the
adoption of accounting guidance on January 1, 2008, private
equity and hedge funds where the Company had a 3% or greater
interest were accounted for under the equity method. Income
(loss) from those limited
107
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
partnerships was recorded in net investment income. See
Note 7 for discussion of fair value and impact from the
adoption of the fair value accounting guidance.
The Company has identified certain investments in limited
partnerships that meet the definition of a variable interest
entity (VIE). Based on the analyses of these interests, the
Company does not meet the definition of primary
beneficiary of any of these partnerships and therefore has
not consolidated these entities. The maximum exposure to loss as
a result of the Companys involvement in its VIEs was
$147.3 and $181.4 as of December 31, 2009 and 2008,
respectively. The maximum exposure to loss includes commitments
to provide future capital contributions as described in
Note 15.
Other
Invested Assets
The Company includes a note receivable in its other invested
assets, which is a loan to a third party agency. The
agencys equity at risk is not sufficient to finance its
activities, and it is therefore considered a VIE. The loan is
secured by the assets of the agency, and the majority of the
loan amount is personally guaranteed by the agencys equity
holders. The Company is not the primary beneficiary. The maximum
exposure to losses is limited to the carrying value of the note
receivable, which was $5.5 and $6.5 as of December 31, 2009
and 2008, respectively. This excludes the value of rights to the
assets of the agency and personal guarantees provided by the
equity holders.
Cash
and Cash Equivalents
Cash and cash equivalents consist of demand bank deposits and
short-term highly liquid investments with original maturities of
three months or less at the time of purchase. Cash equivalents
are reported at cost, which approximates fair value, and were
$244.4 and $441.6 as of December 31, 2009 and 2008,
respectively. As of December 31, 2009 and 2008, $223.8 and
$366.9 of total cash equivalents, respectively, were held at a
single highly rated financial institution.
Derivative
Financial Instruments
The Companys financial statement recognition of the change
in fair value of a derivative depends on the intended use of the
derivative and the extent to which it is effective as part of a
hedging transaction. Derivative financial instruments consist
primarily of S&P 500 index options and are included in
other invested assets at fair value on the Companys
consolidated balance sheets. See Note 5 for additional
discussion about the Companys derivative financial
instruments.
Reinsurance
The Company utilizes reinsurance agreements to manage its
exposure to potential losses. The Company reinsures all or a
portion of its risk to reinsurers for certain types of directly
written business. In addition, the Company reinsures through
pools to cover catastrophic losses. Accordingly, the future
policy benefit reserves and policy and contract claims
liabilities are reported gross of any related reinsurance
recoverables. The Company reports premiums, benefits, and
settlement expenses net of reinsurance ceded on the consolidated
statements of income. The Company accounts for reinsurance
premiums, commissions, expense reimbursements, benefits and
reserves related to reinsured business on bases consistent with
those used in accounting for the original policies issued and
the terms of the reinsurance contracts. The Company remains
liable to its policyholders to the extent that counterparties to
ceded reinsurance contracts do not meet their contractual
obligations.
Deferred
Policy Acquisition Costs
The Company defers as assets certain costs, principally
commissions, distribution costs and other underwriting costs,
that vary with and are primarily related to the production of
business. The Company limits
108
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deferrals to the lesser of the acquisition costs contained in
the Companys product pricing assumptions or actual costs
incurred.
The Company amortizes acquisition costs for deferred and
immediate annuity contracts and universal life insurance
policies over the lives of the contracts or policies in
proportion to the estimated future gross profits of each of
these product lines. In this estimation process, the Company
makes assumptions as to surrender rates, mortality experience,
maintenance expenses, and investment performance. Actual profits
can vary from the estimates and can thereby result in increases
or decreases to DAC amortization rates. For interest-sensitive
life products, the Company regularly evaluates its assumptions
and, when necessary, revises the estimated gross profits of
these contracts, resulting in adjustments to DAC amortization.
When such estimates are revised, they are recorded in current
earnings. The Company adjusts the unamortized balance of DAC for
the impact on estimated future gross profits as if net
unrealized investment gains and losses on securities had been
realized as of the balance sheet date. The Company includes the
impact of this adjustment, net of tax, in accumulated other
comprehensive loss in stockholders equity.
The Company amortizes acquisition costs for traditional
individual life insurance policies over the premium paying
period of the related policies, using assumptions consistent
with those used in computing policy benefit liabilities. The
Company amortizes acquisition costs for group medical policies
over the policy period of one year.
The Company conducts regular recoverability analyses for
deferred and immediate annuity contract, universal life
contract, and traditional life contract DAC asset balances. The
Company compares the current DAC asset balances with the
estimated present value of future profitability of the
underlying business. The DAC asset balances are considered
recoverable if the present value of future profits is greater
than the current DAC asset balance. As of December 31, 2009
and 2008, all of the DAC asset balances were considered
recoverable.
For some products, policyholders can elect to modify product
benefits, features, rights or coverage by exchanging a contract
for a new contract or by amendment, endorsement or rider to a
contract or by election of a feature or coverage within a
contract. These transactions are known as internal replacements.
If the modification substantially changes the contract, the
existing DAC is immediately written off through income and any
new deferrable costs associated with the replacement contract
are deferred. If the modification does not substantially change
the contract, the existing DAC is retained and amortized over
the life of the modified contract and any acquisition costs
associated with the related modification are expensed.
Goodwill
Goodwill is not amortized but is tested for impairment at least
annually using a fair value approach, which requires the use of
estimates and judgment. No goodwill impairment was recorded for
the years ended December 31, 2009, 2008 or 2007.
Property,
Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at
cost, less accumulated depreciation and amortization.
Depreciation is determined using the straight-line method over
the estimated useful lives of the assets. Estimated useful lives
generally range from one to ten years for leasehold improvements
and three to ten years for all other property and equipment.
Leasehold improvements are amortized over the shorter of their
economic useful lives or the term of the lease.
Leases
Certain operating leases of the Company provide for minimum
annual payments that change over the life of the lease. The
aggregate minimum annual payments are expensed on the
straight-line basis over the
109
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
minimum lease term. Rent holidays, rent incentives, and tenant
improvement allowances are amortized on the straight-line basis
over the initial term of the lease and any option period that is
reasonably assured.
Deferred
Sales Inducements
The Company offers sales inducements on certain deferred annuity
contracts. The inducement interest entitles the contractholder
to an incremental amount of interest to be credited to the
account value over a 12- to
60-month
period following the initial deposit, depending on the product.
The incremental interest causes the initial credited rate to be
higher than the contracts expected ongoing crediting rates
for periods after the inducement. Deferred sales inducements to
contractholders are reported as other assets and amortized into
interest credited using the same methodology and assumptions
used to amortize DAC. Deferred sales inducement balances are
subject to recoverability testing at the end of each reporting
period to ensure that capitalized amounts do not exceed the
present value of anticipated gross profits.
Separate
Account Assets and Liabilities
Separate account assets are reported at fair value and represent
segregated funds that are invested on behalf of the
Companys variable annuity, life, and universal life
policyholders. The assets of each separate account are legally
segregated and are not subject to claims that arise out of the
Companys other business activities. Investment risks
associated with market value changes are borne by the
policyholder, except to the extent of minimum guaranteed death
benefits (GMBD) made by the Company with respect to certain
accounts. Net investment income and realized investment gains
and losses accrue directly to the policyholders and are not
included in the Companys revenues. Separate account
liabilities primarily represent the policyholders account
balance in the separate account. Fees charged to policyholders
include mortality, policy administration, and surrender charges
and are included in other revenues.
For variable annuity contracts with GMDB, the Company
contractually guarantees total deposits, less any partial
withdrawals, in the event of death. The Company offers three
types of GMDB contracts consisting of return of premium and two
versions of ratchet, which are evaluated every fifth and eighth
year, respectively. The ratchet reset benefit is equal to the
immediately preceding GMDB or is stepped up to the
account value on the evaluation date, if higher. The Company
reinsures nearly all of the GMDB risk on its individual variable
annuity contracts. Therefore, the net GMDB liability balance is
not material.
Funds
Held Under Deposit Contracts
Liabilities for fixed deferred annuity contracts and universal
life policies, including bank-owned life insurance (BOLI), are
computed as deposits net of withdrawals made by the
policyholder, plus amounts credited based on contract
specifications, less contract fees and charges assessed, plus
any additional interest. For single premium immediate annuities
(SPIAs), including structured settlements, future benefits are
either fully guaranteed or are contingent on the survivorship of
the annuitant. Liabilities are based on discounted amounts of
estimated future benefits. Contingent future benefits are
discounted with current pricing mortality assumptions, which
include provisions for longer life spans over time. The interest
rate pattern used to calculate the reserves for SPIAs is set at
issue. The interest rates within the pattern vary over time and
start with interest rates that prevailed at the contract issue.
As of December 31, 2009, the weighted-average implied
interest rate on the existing book of business was 6.0% and is
expected to grade to 6.7% during the next 20 years.
Future
Policy Benefits
The Company computes liabilities for future policy benefits
under traditional individual life and group life insurance
policies on the level premium method, which uses a level premium
assumption to fund reserves. The Company selects the level
premiums so that the actuarial present value of future benefits
equals the actuarial present value of future premiums. The
Company sets the interest, mortality, and persistency
110
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assumptions in the year of issue and includes a provision for
adverse deviation. These liabilities are contingent upon the
death of the insured while the policy is in force. The Company
derives mortality assumptions from both company-specific and
industry statistics. The Company discounts future benefits at
interest rates that vary by year of policy issue, are set
initially at a rate consistent with portfolio rates at the time
of issue, and graded to a lower rate, such as the statutory
valuation interest rate, over time. Assumptions are set at the
time each product is introduced and are not updated for actual
experience unless the total product liability amount is
determined to be inadequate to cover future policy benefits. The
provision for adverse deviation is intended to provide coverage
for the risk that actual experience may be worse than locked-in
best-estimate assumptions.
Policy
and Contract Claims
Liabilities for policy and contract claims primarily represent
liabilities for claims under group medical coverages and are
established on the basis of reported losses (case basis method).
The Company also provides for claims incurred but not reported
(IBNR), based on expected loss ratios, claims paying completion
patterns, and historical experience. The Company reviews
estimates for reported but unpaid claims and IBNR quarterly. Any
necessary adjustments are reflected in current operating
results. If expected loss ratios increase or expected claims
paying completion patterns extend, the IBNR claim liability
increases.
Income
Taxes
Income taxes have been provided using the liability method. The
provision for income taxes has two components: amounts currently
payable or receivable and deferred income taxes. The deferred
income taxes are calculated as the difference between the book
and tax basis of the appropriate assets and liabilities and are
measured using enacted tax rates. Deferred tax assets are
recognized only to the extent that it is probable that future
tax profits will be available. A valuation allowance is
established where deferred tax assets cannot be recognized.
Adoption
of New Accounting Pronouncements
Accounting
Standards Codification
105-10
(formerly SFAS No. 168), FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles
In July 2009, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS)
No. 168 (ASC
105-10),
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles, which established
the FASB Accounting Standards Codification (Codification or ASC)
as the single source of authoritative GAAP recognized by the
FASB. The Codification was applicable to nongovernmental
entities for financial statements issued for interim and annual
periods ending after September 15, 2009. Rules and
interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants. The Codification superseded all existing non-SEC
accounting and reporting standards. All other non-grandfathered,
non-SEC accounting literature not included in the Codification
became non-authoritative.
Following the Codification, the FASB ceased issuance of new
guidance in the form of Statements, FASB Staff Positions or
Emerging Issues Task Force Abstracts. Instead, it issues
Accounting Standards Updates (ASUs), which serve to update the
Codification, provide background information about the guidance
and provide the basis for conclusions on the changes to the
Codification.
GAAP is not intended to be changed as a result of the
FASBs Codification project, but it does change the way the
guidance is organized and presented. The Company has implemented
the Codification in this report by referencing the Codification
topics where appropriate. References to the superseded standards
have been included for informational purposes.
111
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ASU
2009-12,
Investments in Certain Entities That Calculate Net Asset Value
per Share (or Its Equivalent)
In September 2009, the FASB issued ASU
2009-12,
Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent). This update amends ASC
820 to permit entities to estimate the fair value of certain
investments using the net asset value (NAV) per share as of the
measurement date, if the fair value of the investment is not
readily determinable. The guidance applies to investments in
entities that calculate NAV in accordance with guidance for
investment companies and requires increased disclosures for such
investments. The Company prospectively adopted this guidance on
October 1, 2009, and it did not have a material impact on
its audited consolidated financial statements.
ASC
320-10
(formerly FSP
SFAS 115-2
and
SFAS 124-2)
Other-than-Temporary
Impairments (OTTI)
In April 2009, the FASB issued FASB Staff Position (FSP)
SFAS 115-2
and
SFAS 124-2
(ASC
320-10),
Recognition and Presentation of
Other-than-Temporary
Impairments. This guidance amends OTTI guidance for fixed
maturities and modifies the OTTI presentation and disclosure
requirements for both fixed maturities and equity securities.
The FSP replaces the provision that management must positively
assert the intent and ability to hold a fixed maturity until
recovery in determining impairment, with the assertion that the
Company does not intend to sell or it is not
more-likely-than-not that the Company will be required to sell a
fixed maturity prior to recovery. In addition, if a credit loss
exists, it is recognized in earnings, whereas the portion due to
other factors is recognized in other comprehensive income
(loss). The Company elected to prospectively adopt the guidance
effective January 1, 2009, which resulted in an increase of
$15.7 (net of taxes of $8.4) to the opening balance of retained
earnings with a corresponding decrease to accumulated other
comprehensive loss to reclassify the noncredit portion of
previously impaired fixed maturities still held as of
January 1, 2009, for which the Company did not intend to
sell and it was not more likely than not that the Company would
be required to sell the security before recovery of its
amortized cost.
To determine the cumulative effect of adoption, the Company
compared the present value of cash flows expected to be received
as of January 1, 2009, to the amortized cost basis of the
fixed maturities. The discount rate used to calculate the
present value was the rate for each respective fixed maturity in
effect before recognizing any OTTI. The cumulative effect
adjustment increased the amortized cost of our fixed maturity
securities, primarily corporate securities, by $24.1.
ASC
820-10
(formerly SFAS No. 157), Fair Value
Measurements
SFAS No. 157 (ASC
825-10),
Fair Value Measurements defines fair value, establishes a
framework for measuring fair value, and expands disclosures
about fair value measurements. On January 1, 2008, the
Company elected the partial adoption of SFAS No. 157
under the provisions of FSP
FAS 157-2,
which allowed an entity to delay the application of
SFAS No. 157 until January 1, 2009 for certain
non-financial assets and liabilities, including fair value
measurements used in the impairment testing of goodwill and
eligible non-financial assets and liabilities acquired in a
business combination. The Company adopted the guidance for fair
value measurements for these non-financial assets and
liabilities on January 1, 2009. The adoption did not have a
material impact on the Companys audited consolidated
financial statements.
ASC
825-10
(formerly SFAS No. 159), Fair Value Option
On January 1, 2008, the Company prospectively adopted
SFAS No. 159 (ASC
825-10),
The Fair Value Option for Financial Assets and Financial
Liabilities. The Statement allows companies to make an
election, on an individual instrument basis, to report financial
assets and liabilities at fair value. The election must be made
at the inception of a transaction and may not be reversed. The
election may also be made for existing financial assets and
liabilities at the time of adoption. The Company elected the
fair value option for certain of its investments in common
stock, which are presented as trading securities, and its
investments in private equity and hedge funds, regardless of
ownership percentage, which are presented as investments in
limited partnerships. The Company recorded an adjustment to
increase retained earnings as of January 1, 2008
112
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and increase accumulated other comprehensive loss by $29.4, or
$19.1 net of taxes, to reclassify net unrealized gains as a
result of adoption. See Note 7 for additional disclosure
about the effects of this adoption and fair value measurements.
Accounting
Pronouncements Not Yet Adopted
ASC
810-10
(formerly SFAS No. 167), Amendments to FASB
Interpretation No. 46(R)
In June 2009, the FASB issued SFAS No. 167 (ASC
810-10),
Amendments to FASB Interpretation No. 46(R), which
provides guidance for determining whether an entity is a VIE,
which enterprise, if any has a controlling financial interest in
a VIE, and requires additional disclosures about involvement in
such entities. SFAS No. 167 changed the guidance for
determining the primary beneficiary of a VIE from a quantitative
analysis to a primarily qualitative analysis and requires
reassessment of this determination at each reporting period. The
Company prospectively adopted this guidance on January 1,
2010, and it will not change the Companys conclusions
regarding its VIEs.
ASU
2010-6,
Improving Disclosures about Fair Value Measurement
In January 2010, the FASB issued ASU
2010-06,
Fair Value Measurements and Disclosures (Topic
820) Improving Disclosures about Fair Value
Measurement. This update requires additional disclosures
about an entitys fair value measurements, including
information about gross transfers into and out of Levels 1
and 2 and information about activity for Level 3
measurements on a gross basis. It also clarifies the level of
disaggregation required for existing fair value disclosures. The
Company prospectively adopted this guidance on January 1,
2010 and will include the appropriate disclosures in its interim
and annual consolidated financial statements thereafter.
Basic earnings per share represents the amount of earnings for
the period available to each share of common stock outstanding
during the reporting period. Diluted earnings per share
represents the amount of earnings for the period available to
each share of common stock outstanding during the reporting
period adjusted for the potential issuance of common stock, if
dilutive.
The outstanding warrants, exercisable for 18,975,744 common
shares, are considered participating securities or potential
common stock securities that are included in weighted-average
common shares outstanding for purposes of computing basic
earnings per share using the two-class method. The warrants are
considered participating securities or potential common stock
securities because the terms of the agreements entitle the
holders to receive any dividends declared on the common stock
concurrently with the holders of outstanding shares of common
stock, on a
one-to-one
basis. In periods of net loss, none of the loss is allocated to
the outstanding warrants; therefore, the warrants are not
included in the basic or diluted earnings per share calculation
in such periods.
Restricted stock is included in the computation of diluted
earnings per share, based on application of the treasury stock
method, and weighted for the portion of the period they were
outstanding.
113
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents information relating to the
Companys calculations of basic and diluted earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions, except per share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported
|
|
$
|
128.3
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding basic
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
Add: Dilutive effect of restricted stock
|
|
|
0.004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding diluted
|
|
|
111.626
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.15
|
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
Diluted
|
|
$
|
1.15
|
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
The following tables summarize the Companys
available-for-sale
fixed maturities and marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
Temporary
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Impairments in
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
AOCI(1)
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
41.6
|
|
|
$
|
2.4
|
|
|
$
|
(0.1
|
)
|
|
$
|
43.9
|
|
|
$
|
(0.1
|
)
|
State and political subdivisions
|
|
|
518.4
|
|
|
|
1.9
|
|
|
|
(37.3
|
)
|
|
|
483.0
|
|
|
|
(1.3
|
)
|
Foreign governments
|
|
|
26.7
|
|
|
|
0.8
|
|
|
|
(0.1
|
)
|
|
|
27.4
|
|
|
|
|
|
Corporate securities
|
|
|
12,454.8
|
|
|
|
487.5
|
|
|
|
(393.7
|
)
|
|
|
12,548.6
|
|
|
|
(32.8
|
)
|
Residential mortgage-backed securities
|
|
|
3,532.1
|
|
|
|
105.3
|
|
|
|
(101.0
|
)
|
|
|
3,536.4
|
|
|
|
(39.9
|
)
|
Commercial mortgage-backed securities
|
|
|
1,805.6
|
|
|
|
44.5
|
|
|
|
(60.7
|
)
|
|
|
1,789.4
|
|
|
|
(4.0
|
)
|
Other debt obligations
|
|
|
174.5
|
|
|
|
8.6
|
|
|
|
(17.5
|
)
|
|
|
165.6
|
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
18,553.7
|
|
|
|
651.0
|
|
|
|
(610.4
|
)
|
|
|
18,594.3
|
|
|
|
(81.9
|
)
|
Marketable equity securities,
available-for-sale
|
|
|
52.6
|
|
|
|
0.1
|
|
|
|
(16.0
|
)
|
|
|
36.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,606.3
|
|
|
$
|
651.1
|
|
|
$
|
(626.4
|
)
|
|
$
|
18,631.0
|
|
|
$
|
(81.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the amount of cumulative non-credit OTTI losses
transferred to or recorded in accumulated other comprehensive
loss for securities that also had a credit-related impairment. |
114
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
155.5
|
|
|
$
|
5.2
|
|
|
$
|
(3.9
|
)
|
|
$
|
156.8
|
|
State and political subdivisions
|
|
|
488.8
|
|
|
|
0.9
|
|
|
|
(64.8
|
)
|
|
|
424.9
|
|
Foreign governments
|
|
|
31.4
|
|
|
|
3.2
|
|
|
|
|
|
|
|
34.6
|
|
Corporate securities
|
|
|
10,564.1
|
|
|
|
105.1
|
|
|
|
(1,362.7
|
)
|
|
|
9,306.5
|
|
Residential mortgage-backed securities
|
|
|
3,176.1
|
|
|
|
84.6
|
|
|
|
(134.4
|
)
|
|
|
3,126.3
|
|
Commercial mortgage-backed securities
|
|
|
1,912.7
|
|
|
|
17.5
|
|
|
|
(255.2
|
)
|
|
|
1,675.0
|
|
Other debt obligations
|
|
|
199.8
|
|
|
|
|
|
|
|
(36.3
|
)
|
|
|
163.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
16,528.4
|
|
|
|
216.5
|
|
|
|
(1,857.3
|
)
|
|
|
14,887.6
|
|
Marketable equity securities,
available-for-sale
|
|
|
52.5
|
|
|
|
|
|
|
|
(14.4
|
)
|
|
|
38.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,580.9
|
|
|
$
|
216.5
|
|
|
$
|
(1,871.7
|
)
|
|
$
|
14,925.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the U.S. government and agencies securities, agencies
comprised $23.7 and $132.1 of the fair value as of
December 31, 2009 and 2008, respectively. As of
December 31, 2009, these securities had gross unrealized
gains of $1.0 and gross unrealized losses of $(0.1). As of
December 31, 2008, these securities had gross unrealized
gains of $2.6 and gross unrealized losses of $(3.9).
At December 31, 2009 and 2008, the Company had $51.8 and
$50.5, respectively, of convertible fixed maturities recorded at
fair value.
115
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables summarize gross unrealized losses and fair
values of the Companys
available-for-sale
investments. For fixed maturities, gross unrealized losses
include the portion of OTTI recorded in accumulated other
comprehensive loss. The tables are aggregated by investment
category, and present separately those securities that have been
in a continuous unrealized loss position for less than twelve
months and for twelve months or more.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
2.2
|
|
|
$
|
(0.1
|
)
|
|
|
1
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
67.7
|
|
|
|
(1.9
|
)
|
|
|
18
|
|
|
|
299.7
|
|
|
|
(35.4
|
)
|
|
|
49
|
|
Foreign governments
|
|
|
1.2
|
|
|
|
(0.1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
1,404.0
|
|
|
|
(33.4
|
)
|
|
|
151
|
|
|
|
2,504.0
|
|
|
|
(360.3
|
)
|
|
|
291
|
|
Residential mortgage-backed securities
|
|
|
579.9
|
|
|
|
(9.4
|
)
|
|
|
30
|
|
|
|
404.6
|
|
|
|
(91.6
|
)
|
|
|
65
|
|
Commercial mortgage-backed securities
|
|
|
94.9
|
|
|
|
(1.4
|
)
|
|
|
11
|
|
|
|
622.8
|
|
|
|
(59.3
|
)
|
|
|
44
|
|
Other debt obligations
|
|
|
10.2
|
|
|
|
(0.1
|
)
|
|
|
2
|
|
|
|
28.2
|
|
|
|
(17.4
|
)
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
2,160.1
|
|
|
$
|
(46.4
|
)
|
|
|
214
|
|
|
$
|
3,859.3
|
|
|
$
|
(564.0
|
)
|
|
|
457
|
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36.3
|
|
|
|
(16.0
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,160.1
|
|
|
$
|
(46.4
|
)
|
|
|
214
|
|
|
$
|
3,895.6
|
|
|
$
|
(580.0
|
)
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
52.4
|
|
|
$
|
(3.9
|
)
|
|
|
3
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
305.0
|
|
|
|
(57.0
|
)
|
|
|
61
|
|
|
|
73.1
|
|
|
|
(7.8
|
)
|
|
|
14
|
|
Corporate securities
|
|
|
4,565.7
|
|
|
|
(484.2
|
)
|
|
|
695
|
|
|
|
2,789.7
|
|
|
|
(878.5
|
)
|
|
|
426
|
|
Residential mortgage-backed securities
|
|
|
536.0
|
|
|
|
(74.4
|
)
|
|
|
105
|
|
|
|
169.6
|
|
|
|
(60.0
|
)
|
|
|
41
|
|
Commercial mortgage-backed securities
|
|
|
694.3
|
|
|
|
(140.2
|
)
|
|
|
60
|
|
|
|
566.2
|
|
|
|
(115.0
|
)
|
|
|
48
|
|
Other debt obligations
|
|
|
127.1
|
|
|
|
(23.7
|
)
|
|
|
19
|
|
|
|
26.6
|
|
|
|
(12.6
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
6,280.5
|
|
|
$
|
(783.4
|
)
|
|
|
943
|
|
|
$
|
3,625.2
|
|
|
$
|
(1,073.9
|
)
|
|
|
534
|
|
Marketable equity securities,
available-for-sale
|
|
|
14.8
|
|
|
|
(11.2
|
)
|
|
|
3
|
|
|
|
23.3
|
|
|
|
(3.2
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,295.3
|
|
|
$
|
(794.6
|
)
|
|
|
946
|
|
|
$
|
3,648.5
|
|
|
$
|
(1,077.1
|
)
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 and 2008, the Company held
below-investment-grade fixed maturities, based on National
Association of Insurance Commissioners (NAIC) ratings, with fair
values of $1,032.1 and $767.5, respectively, and amortized costs
of $1,165.1 and $1,115.0, respectively. These holdings amounted
to 5.6%
116
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and 5.2% of the Companys investments in fixed maturities
at fair value as of December 31, 2009 and 2008,
respectively.
As of December 31, 2009 and 2008, the majority of the
Companys mortgage-backed securities were classified as
prime. Based on a review of the characteristics of their
underlying mortgage loan pools, such as credit scores and
financial ratios, the Company classified $125.5 and $155.5, of
mortgage-backed securities as Alt-A as of December 31, 2009
and 2008, respectively, as each has overall collateral credit
quality between prime and subprime. These securities represented
2.4% and 3.1%, respectively, of the fair value of total
mortgage-backed securities at December 31, 2009 and 2008.
Of the securities classified as Alt-A, 90.7% and 100% had an
NAIC rating of 1, and 58.9% and 100% had a Standard and
Poors (S&P) equivalent credit rating of AAA, based on
the highest credit agency rating, as of December 31, 2009
and 2008, respectively.
In addition, one security, with a fair value of approximately
$0.2 and $0.8 as of December 31, 2009 and 2008,
respectively, was classified as subprime. This subprime security
had an NAIC rating of 1 and 4 and an S&P equivalent credit
rating of AAA, based on the highest credit agency rating, as of
December 31, 2009 and 2008, respectively.
The Companys investments in other asset-backed securities,
which are included in other debt obligations, had fair values of
$135.4 and $157.2 as of December 31, 2009 and 2008,
respectively.
The following table summarizes the amortized cost and fair value
of fixed maturities as of December 31, 2009, by contractual
years to maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
One year or less
|
|
$
|
516.5
|
|
|
$
|
524.3
|
|
Over one year through five years
|
|
|
3,069.6
|
|
|
|
3,194.9
|
|
Over five years through ten years
|
|
|
4,272.1
|
|
|
|
4,435.1
|
|
Over ten years
|
|
|
5,183.3
|
|
|
|
4,948.6
|
|
Residential mortgage-backed securities
|
|
|
3,532.1
|
|
|
|
3,536.4
|
|
Commercial mortgage-backed securities
|
|
|
1,805.6
|
|
|
|
1,789.4
|
|
Other debt obligations
|
|
|
174.5
|
|
|
|
165.6
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
18,553.7
|
|
|
$
|
18,594.3
|
|
|
|
|
|
|
|
|
|
|
The carrying value of certain securities and cash on deposit
with state regulatory authorities was $10.1 and $10.6 at
December 31, 2009 and 2008, respectively.
As of December 31, 2009, financial institutions,
U.S. federal government, and industrials industries
represented 21.7%, 18.6% and 11.6%, respectively, of the
Companys investments in fixed maturity and marketable
equity securities at fair value.
As of December 31, 2008, financial institutions,
U.S. federal government, and utilities industries
represented 24.8%, 20.6% and 11.1%, respectively, of the
Companys investments in fixed maturity and marketable
equity securities at fair value.
117
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the Companys net investment
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Fixed maturities
|
|
$
|
1,048.1
|
|
|
$
|
930.7
|
|
|
$
|
911.4
|
|
Marketable equity securities,
available-for-sale
|
|
|
3.4
|
|
|
|
3.4
|
|
|
|
5.8
|
|
Marketable equity securities, trading
|
|
|
2.5
|
|
|
|
2.7
|
|
|
|
|
|
Mortgage loans
|
|
|
67.4
|
|
|
|
59.4
|
|
|
|
50.0
|
|
Policy loans
|
|
|
4.4
|
|
|
|
4.5
|
|
|
|
4.7
|
|
Investments in limited partnerships
|
|
|
(0.1
|
)
|
|
|
(36.4
|
)
|
|
|
|
|
Other
|
|
|
7.5
|
|
|
|
11.5
|
|
|
|
20.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
1,133.2
|
|
|
|
975.8
|
|
|
|
992.8
|
|
Investment expenses
|
|
|
(19.6
|
)
|
|
|
(19.3
|
)
|
|
|
(19.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
1,113.6
|
|
|
$
|
956.5
|
|
|
$
|
973.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of investments in fixed maturities that have not
produced income for the last twelve months was $65.6 and $6.5 at
December 31, 2009 and 2008, respectively. As of
December 31, 2009, one of the Companys mortgage loans
was classified as non-performing. All of the Companys
mortgage loans produced income during 2008 and 2007.
The following table summarizes the Companys net realized
investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Fixed maturities
|
|
$
|
(74.6
|
)
|
|
$
|
(94.2
|
)
|
|
$
|
7.9
|
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
10.5
|
|
Marketable equity securities, trading
|
|
|
36.4
|
|
|
|
(64.5
|
)
|
|
|
|
|
Other invested assets
|
|
|
(2.7
|
)
|
|
|
(5.2
|
)
|
|
|
(2.4
|
)
|
Deferred policy acquisition costs adjustment
|
|
|
11.6
|
|
|
|
5.9
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
$
|
(29.3
|
)
|
|
$
|
(158.0
|
)
|
|
$
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2009, the Company recorded OTTI charges in earnings on
fixed maturities totaling $86.5. The largest write-downs were
from investments in the diversified financial services industry,
totaling $27.2, or 31.4%; the publishing industry, totaling
$6.7, or 7.7%; and the consumer finance industry, totaling $6.2,
or 7.2%. During 2008, the Company recorded OTTI charges on fixed
maturities totaling $86.4. The largest write-downs were from
investments in the paper-related industry, totaling $14.2, or
16.4%; the diversified financial service industry, totaling
$8.4, or 9.7%; and FNMA U.S. federal government
securities, totaling $8.0, or 9.3%. During 2007, the Company
recorded OTTI charges of $16.2, primarily on investments in the
paper-related industry, totaling $7.6, or 46.9%, and in the
brewing industry, totaling $1.7, or 10.5%.
118
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides additional detail of net realized
investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Gross realized gains on sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
25.5
|
|
|
$
|
10.3
|
|
|
$
|
37.1
|
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
14.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized gains on sales
|
|
|
25.5
|
|
|
|
10.3
|
|
|
|
51.5
|
|
Gross realized losses on sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(23.3
|
)
|
|
|
(7.0
|
)
|
|
|
(15.1
|
)
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized losses on sales
|
|
|
(23.3
|
)
|
|
|
(7.0
|
)
|
|
|
(18.6
|
)
|
Impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(86.5
|
)
|
|
|
(86.4
|
)
|
|
|
(15.0
|
)
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairments
|
|
|
(86.5
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
Net gains (losses) on trading securities(1)
|
|
|
36.4
|
|
|
|
(64.5
|
)
|
|
|
|
|
Other, including gains (losses) on calls and redemptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
9.7
|
|
|
|
(11.1
|
)
|
|
|
0.9
|
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
Other
|
|
|
8.9
|
|
|
|
0.7
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
|
|
|
18.6
|
|
|
|
(10.4
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
$
|
(29.3
|
)
|
|
$
|
(158.0
|
)
|
|
$
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of January 1, 2008, changes in fair value related to
certain marketable equity securities are recognized in net
realized investment gains (losses) due to the Companys
election of the fair value option. Refer to Note 7. |
Net gains (losses) on trading securities includes $28.3 and
$(60.7) of gains (losses) on trading securities held as of
December 31, 2009 and 2008, respectively.
The following table summarizes the Companys allowance for
mortgage loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Allowance at beginning of period
|
|
$
|
5.0
|
|
|
$
|
4.2
|
|
|
$
|
4.0
|
|
Provision
|
|
|
3.2
|
|
|
|
0.8
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
8.2
|
|
|
$
|
5.0
|
|
|
$
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
This allowance relates to outstanding mortgage loan investments
of $1,209.9 and $993.7 at December 31, 2009 and 2008,
respectively. One loan was classified as non-performing as of
December 31, 2009, and a specific reserve of $2.2 was
established. All of the Companys mortgage loan investments
were in good standing as of December 31, 2008 and 2007.
As of December 31, 2009 and 2008, mortgage loans
constituted approximately 5.4% and 5.1% of total assets,
respectively. These loans are secured by first-mortgage liens on
income-producing commercial real estate, primarily in the
retail, industrial and office building sectors. The weighted
average
loan-to-value
(LTV) ratio, which is a loans carrying amount divided by
its appraised value at loan inception, was 49.4% and 54.7% for
loans funded during 2009 and 2008, respectively. The weighted
average LTV ratio for the Companys entire mortgage
portfolio was 53.5% and 51.2% as of December 31, 2009 and
2008, respectively. The majority of the properties are located
in the western United States, with 28.6% of the total in
California and 18.5% in Washington State. Individual loans
generally do not exceed $15.0.
Other-Than-Temporary
Impairments
Investments are considered to be impaired when a decline in fair
value is judged to be
other-than-temporary.
The Companys review of investment securities includes both
quantitative and qualitative criteria. Quantitative criteria
include the length of time and amount that each security is in
an unrealized loss position and, for fixed maturities, whether
expected future cash flows indicate a credit loss exists.
Securities for which cost or amortized cost exceeds fair value
are considered underwater. The Companys review of its
underwater fixed maturities and
available-for-sale
marketable equity securities for OTTI includes an analysis of
the gross unrealized losses by three categories of securities:
(i) securities where the estimated fair value has declined
and remained below cost or amortized cost by less than 20%,
(ii) securities where the estimated fair value has declined
and remained below cost or amortized cost by 20% or more for
less than six months and (iii) securities where the
estimated fair value has declined and remained below cost or
amortized cost by 20% or more for six months or longer. While
all securities are monitored for impairment, the Companys
experience indicates that the first category does not represent
a significant risk of impairment and, often, fair values recover
over time as the factors that caused the declines improve. In
times of economic turbulence, such as those of 2008 and 2009,
securities in category (ii) represent a significant risk.
Securities in category (iii) are always considered to
represent a significant risk. The Company performs a qualitative
analysis by issuer to identify securities in category
(i) that should be further evaluated for OTTI.
If the value of a security falls into category (ii) or
(iii), the Company analyzes the decrease in fair value to
determine whether it is an
other-than-temporary
decline in value. To make this determination for each security,
the Company considers, among other factors:
|
|
|
|
|
Extent and duration of the decline in fair value 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, earnings potential, or compliance with terms and
covenants of the security;
|
|
|
|
Changes in the financial condition of the securitys
underlying collateral;
|
|
|
|
Any downgrades of the security by a rating agency;
|
|
|
|
Any reduction or elimination of dividends or nonpayment of
scheduled interest payments;
|
|
|
|
Other indications that a credit loss has occurred; and
|
|
|
|
For fixed maturities, the Companys intent to sell the
security or whether it is more likely than not the Company will
be required to sell the security prior to recovery of its
amortized cost, considering any regulatory developments and the
Companys liquidity needs.
|
120
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Based on the analysis, the Company makes a judgment as to
whether the loss is
other-than-temporary.
The Companys
available-for-sale
marketable equity securities consist primarily of non-redeemable
preferred stock, which are evaluated similarly to fixed
maturities.
For underwater fixed maturities, if the Company intends to sell
a security or it is more-likely-than-not it will be required to
sell a security before recovery of amortized cost, an OTTI has
occurred and the amortized cost is written down to current fair
value, with a corresponding charge to net realized investment
gains (losses) in the consolidated statements of income. If the
Company does not intend to sell a security, but the present
value of the cash flows expected to be collected is less than
the amortized cost of the security (that is, a credit loss
exists), the Company concludes that an OTTI has occurred and the
amortized cost is written down to the discounted estimated
recovery value with a corresponding charge to net realized
investment gains (losses) in the consolidated statements of
income, as this is deemed the credit portion of the OTTI. The
remainder of the decline in fair value is recorded in other
comprehensive income (loss) in the consolidated statements of
stockholders equity, as this is considered the portion of
the impairment due to other, non-credit factors.
When assessing the Companys intent to sell a fixed
maturity or if it is more likely than not it will be required to
sell a fixed maturity before recovery of its cost basis, the
Company evaluates facts and circumstances including, but not
limited to, decisions to reposition its security portfolio,
sales of securities to meet cash flow needs and sales of
securities to capitalize on favorable pricing. In order to
determine the amount of the credit loss for a fixed maturity,
the Company calculates the recovery value by performing a
discounted cash flow analysis based on the current expectations
of future cash flows it expects to recover. The discount rate is
the effective interest rate implicit in the underlying fixed
maturity. The effective interest rate is the original yield for
corporate securities, current yield for mortgage backed
securities, or the coupon if the security was previously
impaired. See the discussion below for additional information on
the methodology and significant inputs, by security type, used
to determine the amount of a credit loss.
In periods subsequent to the recognition of an OTTI, the
security is accounted for as if it had been purchased on the
measurement date of the OTTI, with a par value equal to the
expected principal to be recovered. Therefore, for fixed
maturity securities, the revised discount or reduced premium is
reflected in net investment income over the contractual term of
the investment in a manner that produces a constant effective
yield.
Determination
of Credit Losses on Corporate Securities
To determine the recovery value of a corporate security, the
Company performs an analysis related to the underlying issuer
including, but not limited to, the following:
|
|
|
|
|
Fundamentals of the issuer to determine what the Company would
recover if the issuer were to file bankruptcy versus the price
at which the market is trading;
|
|
|
|
Fundamentals of the industry in which the issuer operates;
|
|
|
|
Earnings multiples for the given industry or sector of the
industry that the underlying issuer operates within, divided by
the outstanding debt to determine an expected recovery value of
the security in the case of a liquidation;
|
|
|
|
Expected cash flows of the issuer;
|
|
|
|
Expectations regarding defaults and recovery rates;
|
|
|
|
Changes to the rating of the security by a rating
agency; and
|
|
|
|
Additional market information.
|
121
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Determination
of Credit Losses on Mortgage-backed Securities
To determine the recovery value of a mortgage-backed security,
including residential, commercial and other asset-backed
securities, the Company performs an analysis related to the
underlying issuer including, but not limited to, the following:
|
|
|
|
|
Discounted cash flow analysis based on the current and future
cash flows the Company expects to recover;
|
|
|
|
Level of creditworthiness;
|
|
|
|
Delinquency ratios and
loan-to-value
ratios;
|
|
|
|
Average cumulative collateral loss, vintage year and level of
subordination;
|
|
|
|
Susceptibility to fair value fluctuations due to changes in the
interest rate environment;
|
|
|
|
Susceptibility to reinvestment risk in cases where market yields
are lower than the book yield earned;
|
|
|
|
Susceptibility to reinvestment risk in cases where market yields
are higher than the book yields earned and the Companys
expectation of the sale of such security; and
|
|
|
|
Susceptibility to variability of prepayments.
|
The following table presents the severity and duration of the
gross unrealized losses on the Companys underwater
available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwater by 20% or more
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 6 consecutive months
|
|
$
|
103.4
|
|
|
$
|
(28.4
|
)
|
|
$
|
2,150.7
|
|
|
$
|
(942.6
|
)
|
6 consecutive months or more
|
|
|
517.9
|
|
|
|
(229.5
|
)
|
|
|
330.6
|
|
|
|
(222.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwater by 20% or more
|
|
|
621.3
|
|
|
|
(257.9
|
)
|
|
|
2,481.3
|
|
|
|
(1,165.2
|
)
|
All other underwater fixed maturities
|
|
|
5,398.1
|
|
|
|
(352.5
|
)
|
|
|
7,424.4
|
|
|
|
(692.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwater fixed maturities
|
|
$
|
6,019.4
|
|
|
$
|
(610.4
|
)
|
|
$
|
9,905.7
|
|
|
$
|
(1,857.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwater by 20% or more
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 6 consecutive months
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14.2
|
|
|
$
|
(10.9
|
)
|
6 consecutive months or more
|
|
|
35.6
|
|
|
|
(15.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwater for by 20% or more
|
|
|
35.6
|
|
|
|
(15.9
|
)
|
|
|
14.2
|
|
|
|
(10.9
|
)
|
All other underwater marketable equity securities,
available-for-sale
|
|
|
0.7
|
|
|
|
(0.1
|
)
|
|
|
23.9
|
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwater marketable equity securities,
available-for-sale
|
|
$
|
36.3
|
|
|
$
|
(16.0
|
)
|
|
$
|
38.1
|
|
|
$
|
(14.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, $136.9, or 59.7%, of the
unrealized losses on fixed maturities in an unrealized loss
position by more than 20% for a period of six months or more
related to investment-grade securities. Unrealized losses on
investment-grade securities are principally related to changes
in interest rates or changes in the issuer and the
sector-related credit spreads since the securities were acquired.
122
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company reviewed its investments in fixed maturities with
unrealized losses at the end of 2009 in accordance with its
impairment policy. The Companys 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 Companys cash flow
modeling and expected continuation of contractually required
principal and interest payments.
As of December 31, 2009, the Company did not intend to sell
its underwater
available-for-sale
marketable equity securities, primarily consisting of
non-redeemable preferred stock, and it had the intent and
ability to hold them until recovery. Therefore, the Company
concluded that the declines in fair value of these securities
were temporary.
Prior to January 1, 2009, when a loss was determined to be
other-than-temporary,
the Company recorded an impairment charge equal to the
difference between the fair value and the amortized cost basis
of the security within net realized investment gains (losses) in
our consolidated statements of income. The fair value of the
other-than-temporarily
impaired investment became its new cost basis. The Company also
recorded an impairment charge if it did not have the intent
and/or the
ability to hold the security until the fair value was expected
to recover to amortized cost or until maturity, resulting in a
charge recorded for a security that may not have had credit
issues. As of December 31, 2008, the Company reviewed all
of its investments with unrealized losses in accordance with the
impairment policy and accounting guidance in effect at that
time. The Companys evaluation determined, after the
recognition of other than temporary impairments, that the
remaining declines in fair value were temporary and it had the
intent and ability to hold them to recovery.
Changes in the amount of credit-related OTTI recognized in net
income where the portion related to other factors was recognized
in other comprehensive income (loss) were as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2009
|
|
|
Balance, January 1, 2009
|
|
$
|
73.0
|
|
Increases recognized in the current period:
|
|
|
|
|
For which an OTTI was not previously recognized
|
|
|
37.2
|
|
For which an OTTI was previously recognized
|
|
|
20.6
|
|
Decreases attributable to:
|
|
|
|
|
Securities sold or paid down during the period
|
|
|
(38.0
|
)
|
Previously recognized credit losses on securities impaired
during the period due to a change in intent to sell(1)
|
|
|
(23.2
|
)
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
69.6
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents circumstances where the Company determined in the
current period that it intends to sell the security or it is
more likely than not that it will be required to sell the
security prior to recovery of its amortized cost. |
|
|
5.
|
Derivative
Financial Instruments
|
Derivatives are instruments whose values are derived from
underlying instruments, indices or rates; have a notional
amount; and can be net settled. This may include derivatives
that are embedded in financial instruments or in
certain existing assets or liabilities. The Company uses
derivative financial instruments, including options, as a means
of hedging exposure to equity price changes. In 2006 and 2007,
the Company used interest rate swaps to hedge exposure to
interest rate risk on anticipated transactions related to the
Companys notes payable.
123
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
S&P
500 Index Options
The Company has a closed block of fixed indexed annuity (FIA)
product that credits the policyholders accounts based on a
percentage of the gain in the S&P 500 Index. In connection
with this product, the Company has a hedging program with the
objective to hedge the exposure to changes in the S&P 500
Index. This program consists of buying S&P 500 Index
options. Although the Company uses index options to hedge the
equity return component of the FIA, the options do not qualify
as hedging instruments or for hedge accounting treatment.
Accordingly, the options are recorded at fair value as
free-standing derivative assets in other invested assets, with
the impact of changes in the options fair value recorded
in net realized investment gains (losses). The Company
recognized pre-tax gains (losses) on these options of $0.8,
$(2.9) and $(2.3) for the years ended December 31, 2009,
2008 and 2007, respectively.
The notional amount of the options purchased to hedge the
Companys 2009 exposure to changes in the S&P 500
Index was $20.0. These options had a fair value of $2.3 as of
December 31, 2008, and were settled on December 31,
2009. The notional amount of the options purchased in 2009 to
hedge the Companys 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.
|
|
6.
|
Securities
Lending Program
|
The Company participated in a securities lending program whereby
securities were loaned to third parties, primarily major
brokerage firms. Under this program, the Company maintained full
ownership rights to the securities on loan, and accordingly the
loaned securities were classified as investments in the
consolidated balance sheets.
The Company discontinued its securities lending activities in
2009 and, as of December 31, 2009, had no securities on
loan and no securities lending collateral under its control. As
of December 31, 2008, the securities loaned under the
program had an amortized cost of $117.1 and a fair value of
$102.8. Also as of December 31, 2008, the Company was
liable for securities lending collateral under its control of
$105.7. The fair value of that invested collateral was less than
the amounts required to be returned to the counterparty upon
return of the loaned securities by $2.3.
|
|
7.
|
Fair
Value of Financial Instruments
|
The Company determines the fair value of its financial
instruments based on the fair value hierarchy, which requires an
entity to maximize its use of observable inputs and minimize the
use of unobservable inputs when measuring fair value.
The Company has categorized its financial instruments, based on
the priority of the inputs to the valuation technique, into the
three-level hierarchy. The fair value hierarchy gives the
highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). The level
in the fair value hierarchy within which the fair value
measurement falls is determined based on the lowest-level input
that is significant to the fair value measurement. The
Companys financial assets recorded at fair value on the
consolidated balance sheets are categorized as follows:
|
|
|
|
|
Level 1 Unadjusted quoted prices in
active markets for identical instruments. Primarily consists of
financial instruments whose value is based on quoted market
prices, such as exchange-traded marketable equity securities,
and actively traded mutual fund investments.
|
|
|
|
Level 2 Quoted prices for similar
instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active and
model-derived valuations whose inputs are observable or whose
significant value drivers are observable.
|
|
|
|
|
|
This level includes those financial instruments that are valued
using industry-standard pricing methodologies, models or other
valuation methodologies. These models are primarily industry-
|
124
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
standard models that consider various inputs, such as interest
rate, credit spread and foreign exchange rates for the
underlying financial instruments. All significant inputs are
observable, derived from observable information in the
marketplace, or are supported by observable levels at which
transactions are executed in the market place. Financial
instruments in this category primarily include certain public
and private corporate fixed maturities, government or agency
securities, and certain mortgage-backed securities.
|
|
|
|
|
|
Level 3 Instruments whose significant
value drivers are unobservable. This comprises financial
instruments for which fair value is estimated based on
industry-standard pricing methodologies and internally developed
models utilizing significant inputs not based on or corroborated
by readily available market information. In limited
circumstances, this category may also utilize non-binding broker
quotes. This category primarily consists of certain less liquid
fixed maturities, including corporate private placement
securities, investments in private equity and hedge funds, and
trading securities where the Company cannot corroborate the
significant valuation inputs with market observable data.
|
The following table presents the financial instruments carried
at fair value under the valuation hierarchy, as described above,
for assets accounted for at fair value on a recurring basis. The
Company has no financial liabilities accounted for at fair value
on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Percent
|
|
|
Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
43.9
|
|
|
$
|
|
|
|
$
|
43.9
|
|
|
$
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
483.0
|
|
|
|
|
|
|
|
475.8
|
|
|
|
7.2
|
|
|
|
0.0
|
%
|
Foreign governments
|
|
|
27.4
|
|
|
|
|
|
|
|
27.4
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
12,548.6
|
|
|
|
|
|
|
|
11,657.4
|
|
|
|
891.2
|
|
|
|
4.5
|
|
Residential mortgage-backed securities
|
|
|
3,536.4
|
|
|
|
|
|
|
|
3,285.9
|
|
|
|
250.5
|
|
|
|
1.3
|
|
Commercial mortgage-backed securities
|
|
|
1,789.4
|
|
|
|
|
|
|
|
1,765.4
|
|
|
|
24.0
|
|
|
|
0.1
|
|
Other debt obligations
|
|
|
165.6
|
|
|
|
|
|
|
|
155.0
|
|
|
|
10.6
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale
|
|
|
18,594.3
|
|
|
|
|
|
|
|
17,410.8
|
|
|
|
1,183.5
|
|
|
|
6.0
|
|
Marketable equity securities,
available-for-sale
|
|
|
36.7
|
|
|
|
34.9
|
|
|
|
|
|
|
|
1.8
|
|
|
|
0.0
|
|
Marketable equity securities, trading
|
|
|
154.1
|
|
|
|
153.8
|
|
|
|
|
|
|
|
0.3
|
|
|
|
0.0
|
|
Investments in limited partnerships(1)
|
|
|
24.7
|
|
|
|
|
|
|
|
|
|
|
|
24.7
|
|
|
|
0.2
|
|
Other invested assets
|
|
|
6.7
|
|
|
|
2.1
|
|
|
|
|
|
|
|
4.6
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
18,816.5
|
|
|
|
190.8
|
|
|
|
17,410.8
|
|
|
|
1,214.9
|
|
|
|
6.2
|
|
Separate account assets
|
|
|
840.1
|
|
|
|
840.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,656.6
|
|
|
$
|
1,030.9
|
|
|
$
|
17,410.8
|
|
|
$
|
1,214.9
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 3 Percent
|
|
|
Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
156.8
|
|
|
$
|
|
|
|
$
|
156.8
|
|
|
$
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
424.9
|
|
|
|
|
|
|
|
418.6
|
|
|
|
6.3
|
|
|
|
0.0
|
%
|
Foreign governments
|
|
|
34.6
|
|
|
|
|
|
|
|
34.6
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
9,306.5
|
|
|
|
|
|
|
|
8,674.9
|
|
|
|
631.6
|
|
|
|
4.0
|
|
Residential mortgage-backed securities
|
|
|
3,126.3
|
|
|
|
|
|
|
|
3,126.3
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
|
1,675.0
|
|
|
|
|
|
|
|
1,650.6
|
|
|
|
24.4
|
|
|
|
0.2
|
|
Other debt obligations
|
|
|
163.5
|
|
|
|
|
|
|
|
151.5
|
|
|
|
12.0
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale
|
|
|
14,887.6
|
|
|
|
|
|
|
|
14,213.3
|
|
|
|
674.3
|
|
|
|
4.3
|
|
Marketable equity securities,
available-for-sale
|
|
|
38.1
|
|
|
|
38.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities, trading
|
|
|
106.3
|
|
|
|
106.1
|
|
|
|
|
|
|
|
0.2
|
|
|
|
0.0
|
|
Investments in limited partnerships(1)
|
|
|
56.3
|
|
|
|
|
|
|
|
|
|
|
|
56.3
|
|
|
|
0.4
|
|
Other invested assets
|
|
|
11.8
|
|
|
|
7.2
|
|
|
|
2.2
|
|
|
|
2.4
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
15,100.1
|
|
|
$
|
151.4
|
|
|
$
|
14,215.5
|
|
|
$
|
733.2
|
|
|
|
4.7
|
|
Separate account assets
|
|
|
716.2
|
|
|
|
716.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,816.3
|
|
|
$
|
867.6
|
|
|
$
|
14,215.5
|
|
|
$
|
733.2
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2009 and 2008, this amount included
investments in private equity and hedge funds. |
Fixed
Maturities
The vast majority of the Companys fixed maturities have
been classified as Level 2 measurements. To make this
assessment, the Company determines whether the market for a
security is active and if significant pricing inputs are
observable. The Company predominantly utilizes third party
independent pricing services to assist management in determining
the fair value of its fixed maturity securities. As of
December 31, 2009 and 2008, pricing services provided
prices for 93.6% and 95.1% of the Companys fixed
maturities, respectively. Prices received from the pricing
services are not adjusted and multiple prices for these
securities are not obtained. The pricing services provide prices
where observable inputs are available. The Companys
pricing services utilize evaluated pricing models that vary by
asset class. The standard inputs for security evaluations
include benchmark yields, reported trades, broker/dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids,
offers and other reference data, including market research
publications. Because many fixed maturities do not trade on a
daily basis, evaluated pricing applications apply available
information through processes, such as benchmark curves,
benchmarking of like securities, sector groupings and matrix
pricing, to prepare evaluations. In addition, the pricing
services use models and processes to develop prepayment and
interest rate scenarios. These models take into account market
convention. If sufficient objectively verifiable information
about a securitys valuation is not available, the pricing
services will not provide a valuation for the security until it
is able to obtain such information.
The Company performs analysis on the prices received from the
pricing services to ensure that the prices represent a
reasonable estimate of fair value and gains assurance on the
overall reasonableness and consistent application of input
assumptions, valuation methodologies and compliance with
accounting standards for fair value determination. This analysis
is performed through various processes including evaluation of
pricing methodologies and inputs, analytical reviews of certain
prices between reporting periods,
126
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and back-testing of selected sales activity to determine whether
there are any significant differences between the market price
used to value the security prior to sale and the actual sales
prices.
In situations where the Company is unable to obtain sufficient
market-observable information upon which to estimate the fair
value of a particular security, fair values are determined using
internal pricing models that typically utilize significant,
unobservable market inputs or inputs that are difficult to
corroborate with observable market data. When there is not
sufficient observable market information and the security is
priced using internal pricing models, which is generally the
case for private placement securities and other securities the
pricing services are unable to price, it is considered a
Level 3 measurement.
As of December 31, 2009 and 2008, the Company had $901.3,
or 4.8%, and $632.2, or 4.0%, of its fixed maturities invested
in private placement securities, respectively. The valuation of
certain private placement securities requires significant
judgment by management due to the absence of quoted market
prices, the inherent lack of liquidity and the long-term nature
of such assets. The fair values of these assets are determined
using a discounted cash flow approach. The valuation model
requires the use of inputs that are not market-observable and
involve significant judgment. The discount rate is based on the
current Treasury curve adjusted for credit and liquidity
factors. The appropriate illiquidity adjustment is estimated
based on illiquidity spreads observed in transactions involving
other similar securities. The use of significant unobservable
inputs in determining the fair value of the Companys
investments in private placement securities resulted in the
classification of $819.8, or 91.0%, and $583.2, or 92.2%, as
Level 3 measurements, as of December 31, 2009 and
2008, respectively.
Marketable
Equity Securities
Marketable equity securities are primarily investments in common
stock and certain nonredeemable preferred stocks and mutual fund
assets, which consist of investments in publicly traded
companies and actively traded mutual fund investments. The fair
values of the Companys marketable equity securities are
based on quoted market prices in active markets for identical
assets and are primarily classified as Level 1.
On January 1, 2008, the Company elected the fair value
option for the majority of its marketable equity securities,
comprised mostly of investments in common stock. Certain
nonredeemable preferred stocks continue to be reported as
available-for-sale.
Subsequent to making the election, investment gains and losses
on trading securities are reported in the consolidated
statements of income as net realized investment gains (losses).
The Company believes this results in reporting its investment
results for these securities on a basis that is more consistent
with managements operating principles, as the Company
considers unrealized gains (losses) on its common stock when
evaluating net income. Prior to the election, unrealized
investment gains and losses on
available-for-sale
common stock was reported net, after-tax, as a component of
other comprehensive income (loss).
Investments
in Limited Partnerships
Investments in limited partnerships recorded at fair value are
investments in private equity and hedge funds. On
January 1, 2008, the Company elected the fair value option
for its investments in private equity and hedge funds,
regardless of ownership percentage, to standardize the
accounting and reporting for these investments. Investments in
private equity and hedge funds with less than three percent
ownership were previously classified and accounted for as
available-for-sale
securities. Upon making the election, $21.1 in investments in
limited partnerships (with less than three percent ownership)
that was previously reported as
available-for-sale
marketable equity securities were reclassified to investments in
limited partnerships. For the years ended December 31, 2009
and 2008, changes in the fair value of private equity and hedge
funds were $6.1 and $(30.1), respectively. These changes in fair
value were reported in net investment income.
The fair value for the Companys investments in private
equity and hedge funds is based upon the Companys
proportionate interest in the underlying partnership or
funds net asset value (NAV), which is deemed to
approximate fair value. The Company is generally unable to
liquidate these investments during the
127
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
term of the partnership or fund, which range from five to twelve
years. As such, the Company classifies these securities as
Level 3 measurements.
Separate
Accounts
Separate account assets are primarily invested in mutual funds,
which are included in Level 1.
Other
Invested Assets
Other invested assets recorded at fair value primarily consist
of life settlement investments, S&P 500 Index options, and
short term investments. The carrying value of these assets
approximates fair value.
Rollforward
of Financial Instruments Measured at Fair Value on a Recurring
Basis Using Significant Unobservable Inputs
(Level 3)
The following table presents additional information about assets
measured at fair value on a recurring basis and for which we
have utilized significant unobservable inputs
(Level 3) to determine fair value between
January 1, 2009 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in
|
|
|
|
|
|
Included in:
|
|
|
|
|
|
|
|
|
|
Balance as
|
|
|
|
|
|
|
|
|
and/or
|
|
|
|
|
|
|
|
|
Other
|
|
|
Realized
|
|
|
Balance as of
|
|
|
|
of January 1,
|
|
|
|
|
|
|
|
|
(Out) of
|
|
|
|
|
|
Net
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
December 31,
|
|
|
|
2009
|
|
|
Purchases
|
|
|
Sales
|
|
|
Level 3(1)
|
|
|
Other(3)
|
|
|
Income(2)
|
|
|
Income
|
|
|
(Losses)(2)
|
|
|
2009
|
|
|
Types of Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
$
|
6.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(0.7
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.6
|
|
|
$
|
|
|
|
$
|
7.2
|
|
Corporate securities
|
|
|
631.6
|
|
|
|
184.8
|
|
|
|
(4.1
|
)
|
|
|
(14.3
|
)
|
|
|
(39.2
|
)
|
|
|
|
|
|
|
138.0
|
|
|
|
(5.6
|
)
|
|
|
891.2
|
|
Residential mortgage-backed securities
|
|
|
|
|
|
|
249.2
|
|
|
|
|
|
|
|
|
|
|
|
2.8
|
|
|
|
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
250.5
|
|
Commercial mortgage-backed securities
|
|
|
24.4
|
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
24.0
|
|
Other debt obligations
|
|
|
12.0
|
|
|
|
|
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
1.1
|
|
|
|
|
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale
|
|
|
674.3
|
|
|
|
434.0
|
|
|
|
(4.1
|
)
|
|
|
(15.0
|
)
|
|
|
(41.5
|
)
|
|
|
|
|
|
|
141.4
|
|
|
|
(5.6
|
)
|
|
|
1,183.5
|
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
1.8
|
|
Marketable equity securities, trading
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Investments in limited partnerships
|
|
|
56.3
|
|
|
|
4.8
|
|
|
|
(45.3
|
)
|
|
|
|
|
|
|
|
|
|
|
6.1
|
|
|
|
|
|
|
|
2.8
|
|
|
|
24.7
|
|
Other invested assets
|
|
|
2.4
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
(3.1
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
2.3
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3
|
|
$
|
733.2
|
|
|
$
|
442.2
|
|
|
$
|
(49.4
|
)
|
|
$
|
(9.7
|
)
|
|
$
|
(44.6
|
)
|
|
$
|
5.8
|
|
|
$
|
137.9
|
|
|
$
|
(0.5
|
)
|
|
$
|
1,214.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Transfers into and/or out of Level 3 are reported at the
value as of the beginning of the period in which the transfer
occurs. Gross transfers into Level 3 were $14.7 for the
year ended December 31, 2009. Gross transfers out of
Level 3 were $24.4 for the year ended December 31,
2009. |
|
(2) |
|
Realized and unrealized gains and losses for investments in
limited partnerships are included in net investment income. All
other realized and unrealized gains and losses are included in
net realized investment gains (losses). |
|
(3) |
|
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. |
128
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents additional information about assets
measured at fair value on a recurring basis and for which we
have utilized significant unobservable inputs
(Level 3) to determine fair value between
January 1, 2008 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in
|
|
|
|
|
|
Included in:
|
|
|
|
|
|
|
|
|
|
Balance as
|
|
|
|
|
|
|
|
|
and/or
|
|
|
|
|
|
|
|
|
Other
|
|
|
Realized
|
|
|
Balance as of
|
|
|
|
of January 1,
|
|
|
|
|
|
|
|
|
(Out) of
|
|
|
|
|
|
Net
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
December 31,
|
|
|
|
2008
|
|
|
Purchases
|
|
|
Sales
|
|
|
Level 3(1)
|
|
|
Other(3)
|
|
|
Income(2)
|
|
|
Loss
|
|
|
(Losses)(2)
|
|
|
2008
|
|
|
Types of Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
$
|
0.9
|
|
|
$
|
6.7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1.3
|
)
|
|
$
|
|
|
|
$
|
6.3
|
|
Corporate securities
|
|
|
632.4
|
|
|
|
86.0
|
|
|
|
(4.2
|
)
|
|
|
35.2
|
|
|
|
(16.7
|
)
|
|
|
|
|
|
|
(89.7
|
)
|
|
|
(11.4
|
)
|
|
|
631.6
|
|
Commercial mortgage-backed securities
|
|
|
49.6
|
|
|
|
|
|
|
|
|
|
|
|
(7.2
|
)
|
|
|
(14.2
|
)
|
|
|
|
|
|
|
(3.1
|
)
|
|
|
(0.7
|
)
|
|
|
24.4
|
|
Other debt obligations
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
22.3
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
(16.6
|
)
|
|
|
|
|
|
|
12.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale
|
|
|
690.3
|
|
|
|
92.7
|
|
|
|
(4.2
|
)
|
|
|
50.3
|
|
|
|
(32.0
|
)
|
|
|
|
|
|
|
(110.7
|
)
|
|
|
(12.1
|
)
|
|
|
674.3
|
|
Marketable equity securities, trading
|
|
|
0.5
|
|
|
|
1.1
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
Investments in limited partnerships
|
|
|
91.3
|
|
|
|
19.3
|
|
|
|
(29.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(30.1
|
)
|
|
|
|
|
|
|
5.7
|
|
|
|
56.3
|
|
Other invested assets
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
|
|
0.4
|
|
|
|
|
|
|
|
(4.8
|
)
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3
|
|
$
|
786.7
|
|
|
$
|
113.1
|
|
|
$
|
(34.5
|
)
|
|
$
|
50.3
|
|
|
$
|
(29.8
|
)
|
|
$
|
(30.7
|
)
|
|
$
|
(110.7
|
)
|
|
$
|
(11.2
|
)
|
|
$
|
733.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Transfers into and/or out of Level 3 are reported as the
value as of the beginning of the period in which the transfer
occurs Gross transfers into Level 3 were $64.4 for the year
ended December 31, 2008. Gross transfers out of
Level 3 were $14.1 for the year ended December 31,
2008. |
|
(2) |
|
Realized and unrealized gains and losses for investments in
limited partnerships are included in net investment income. All
other realized and unrealized gains and losses are included in
net realized investment gains (losses). |
|
(3) |
|
Other is comprised of transactions such as pay downs, calls,
amortization, and redemptions. |
129
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the carrying or reported values
and corresponding fair values of financial instruments subject
to fair value disclosure requirements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
18,594.3
|
|
|
$
|
18,594.3
|
|
|
$
|
14,887.6
|
|
|
$
|
14,887.6
|
|
Marketable equity securities,
available-for-sale
|
|
|
36.7
|
|
|
|
36.7
|
|
|
|
38.1
|
|
|
|
38.1
|
|
Marketable equity securities, trading
|
|
|
154.1
|
|
|
|
154.1
|
|
|
|
106.3
|
|
|
|
106.3
|
|
Mortgage loans
|
|
|
1,201.7
|
|
|
|
1,190.1
|
|
|
|
988.7
|
|
|
|
907.6
|
|
Investments in limited partnerships
|
|
|
110.2
|
|
|
|
114.6
|
|
|
|
138.3
|
|
|
|
140.2
|
|
Cash and cash equivalents
|
|
|
257.8
|
|
|
|
257.8
|
|
|
|
468.0
|
|
|
|
468.0
|
|
Securities lending collateral
|
|
|
|
|
|
|
|
|
|
|
105.7
|
|
|
|
105.7
|
|
Separate account assets
|
|
|
840.1
|
|
|
|
840.1
|
|
|
|
716.2
|
|
|
|
716.2
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds held under deposit contracts
|
|
|
13,936.5
|
|
|
|
14,066.0
|
|
|
|
11,987.9
|
|
|
|
10,972.2
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Efficient Notes (CENts)
|
|
|
149.8
|
|
|
|
118.5
|
|
|
|
149.8
|
|
|
|
64.0
|
|
Senior notes
|
|
|
299.1
|
|
|
|
276.8
|
|
|
|
299.0
|
|
|
|
268.1
|
|
Securities lending payable
|
|
|
|
|
|
|
|
|
|
|
105.7
|
|
|
|
105.7
|
|
Other
Financial Instruments
The fair values of the Companys mortgage loans are
determined by discounting the projected future cash flows using
the current rate at which the loans would be made to borrowers
with similar credit ratings and for the same maturities.
Investments in limited partnerships are comprised of private
equity and hedge funds and affordable housing projects and state
tax credit funds. Investments in limited partnerships associated
with private equity and hedge funds are carried at fair value
based on the NAV. Investments in limited partnerships associated
with affordable housing projects and state tax credit funds are
carried at amortized cost. Fair value is estimated based on the
discounted cash flows over the remaining life of the tax credits.
The Company reports funds held under deposit contracts related
to investment-type contracts at carrying value and estimates the
fair values of these contracts using an income approach based on
the present value of the discounted cash flows. Cash flows are
projected using best estimates for lapses, mortality and
expenses, and discounted at a risk-free rate plus a
nonperformance risk spread.
The fair values of the Companys notes payable are based on
quoted prices for similar instruments. The fair value
measurement assumes that liabilities are transferred to a market
participant of equal credit standing and without consideration
for any optional redemption feature.
The fair value of securities lending collateral is the cash and
non-cash collateral received by the custodian and held on the
Companys behalf, based on quoted prices for similar
instruments. The carrying amount of securities lending payable
approximates fair value.
The Company evaluates the financial condition of its reinsurers
to minimize its exposure to losses from reinsurer insolvencies.
The Company is not aware of any of its major reinsurers
currently experiencing material financial difficulties. The
Company analyzes reinsurance recoverables according to the
credit ratings
130
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of its reinsurers. Of the total amount due from reinsurers at
December 31, 2009 and 2008, 99.6% and 99.7% was with
reinsurers rated A- or higher by A.M. Best, respectively.
The Company had no reserve for uncollectible reinsurance in 2009
or 2008. None of the Companys reinsurance contracts
exclude certified terrorist acts.
For the individual life business, the Company has reinsurance
agreements that limit the maximum claim on a single individual
to $0.5. The reinsurance agreements vary by product and policy
issue year. Most of the reinsurance recoverable relates to
future policy benefits and is covered by coinsurance agreements
where the reinsurer reimburses the Company based on a
percentage, which ranges from 50% to 85%, as specified in the
reinsurance contracts.
The Company reinsures 100% of its group long-term and short-term
disability income business, except for short-term disability
income insurance sold within the limited benefit medical plan,
which is not reinsured. The reinsurer is responsible for paying
all claims.
Reinsurance recoverables are composed of the following amounts:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Life insurance and annuities
|
|
|
|
|
|
|
|
|
Reinsurance recoverables on:
|
|
|
|
|
|
|
|
|
Funds held under deposit contracts
|
|
$
|
77.9
|
|
|
$
|
75.1
|
|
Future policy benefits
|
|
|
131.6
|
|
|
|
121.4
|
|
Paid claims, expense allowance and premium tax recoverable
|
|
|
1.9
|
|
|
|
2.9
|
|
Policy and contract claims
|
|
|
6.4
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
Total life insurance and annuities
|
|
|
217.8
|
|
|
|
202.1
|
|
Accident and health insurance
|
|
|
|
|
|
|
|
|
Reinsurance recoverables on:
|
|
|
|
|
|
|
|
|
Future policy benefits
|
|
|
55.9
|
|
|
|
59.1
|
|
Paid claims, expense allowance and premium tax recoverable
|
|
|
0.8
|
|
|
|
0.6
|
|
Policy and contract claims
|
|
|
2.1
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
Total accident and health insurance
|
|
|
58.8
|
|
|
|
62.1
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance recoverables
|
|
$
|
276.6
|
|
|
$
|
264.2
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth net life insurance in force as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Direct life insurance in force
|
|
$
|
54,813.1
|
|
|
$
|
55,577.1
|
|
|
$
|
56,246.8
|
|
Amounts assumed from other companies
|
|
|
199.9
|
|
|
|
223.1
|
|
|
|
215.3
|
|
Amounts ceded to other companies
|
|
|
(24,245.9
|
)
|
|
|
(24,190.0
|
)
|
|
|
(23,799.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net life insurance in force
|
|
$
|
30,767.1
|
|
|
$
|
31,610.2
|
|
|
$
|
32,662.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of amount assumed to net
|
|
|
0.65
|
%
|
|
|
0.71
|
%
|
|
|
0.66
|
%
|
131
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effects of reinsurance on earned premiums are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Direct:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident and health premiums
|
|
$
|
437.4
|
|
|
$
|
456.3
|
|
|
$
|
395.8
|
|
Life insurance premiums
|
|
|
197.2
|
|
|
|
195.3
|
|
|
|
194.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
634.6
|
|
|
|
651.6
|
|
|
|
590.1
|
|
Assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident and health premiums
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
|
|
Life insurance premiums
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
0.6
|
|
|
|
0.8
|
|
|
|
0.2
|
|
Ceded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident and health premiums
|
|
|
(12.6
|
)
|
|
|
(13.6
|
)
|
|
|
(9.9
|
)
|
Life insurance premiums
|
|
|
(49.0
|
)
|
|
|
(54.0
|
)
|
|
|
(49.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(61.6
|
)
|
|
|
(67.6
|
)
|
|
|
(59.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums and other considerations
|
|
$
|
573.6
|
|
|
$
|
584.8
|
|
|
$
|
530.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of amount assumed to total premiums
|
|
|
0.10
|
%
|
|
|
0.14
|
%
|
|
|
0.04
|
%
|
Ceded reinsurance reduced policyholder benefits and claims by
$54.1, $54.3 and $51.4 for the years ended December 31,
2009, 2008 and 2007, respectively.
|
|
9.
|
Deferred
Policy Acquisition Costs
|
The following table provides a reconciliation of the beginning
and ending balance for deferred policy acquisition costs:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Unamortized balance at beginning of period
|
|
$
|
219.5
|
|
|
$
|
129.9
|
|
Deferral of acquisition costs
|
|
|
148.3
|
|
|
|
110.6
|
|
Adjustments related to investment losses
|
|
|
9.3
|
|
|
|
4.8
|
|
Amortization
|
|
|
(51.4
|
)
|
|
|
(25.8
|
)
|
|
|
|
|
|
|
|
|
|
Unamortized balance at end of period
|
|
|
325.7
|
|
|
|
219.5
|
|
Accumulated effect of net unrealized investment (gains) losses
|
|
|
(75.3
|
)
|
|
|
28.0
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
250.4
|
|
|
$
|
247.5
|
|
|
|
|
|
|
|
|
|
|
132
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Deferred
Sales Inducements
|
The following table provides a reconciliation of the beginning
and ending balance for deferred sales inducements, which are
included in other assets:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Unamortized balance at beginning of period
|
|
$
|
33.0
|
|
|
$
|
17.2
|
|
Capitalizations
|
|
|
42.5
|
|
|
|
17.3
|
|
Adjustments related to investment losses
|
|
|
2.4
|
|
|
|
1.0
|
|
Amortization
|
|
|
(10.3
|
)
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
Unamortized balance at end of period
|
|
|
67.6
|
|
|
|
33.0
|
|
Accumulated effect of net unrealized investment (gains) losses
|
|
|
(18.4
|
)
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
49.2
|
|
|
$
|
37.5
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Policy
and Contract Claims
|
The following table provides a reconciliation of the beginning
and ending reserve balances for policy and contract claims:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance as of January 1
|
|
$
|
133.1
|
|
|
$
|
110.9
|
|
|
$
|
119.5
|
|
Less: reinsurance recoverable
|
|
|
5.1
|
|
|
|
5.9
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of January 1
|
|
|
128.0
|
|
|
|
105.0
|
|
|
|
114.2
|
|
Incurred related to insured events of:
|
|
|
|
|
|
|
|
|
|
|
|
|
The current year
|
|
|
369.5
|
|
|
|
364.2
|
|
|
|
292.2
|
|
Prior years
|
|
|
(0.9
|
)
|
|
|
4.5
|
|
|
|
(7.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
368.6
|
|
|
|
368.7
|
|
|
|
285.2
|
|
Paid related to insured events of:
|
|
|
|
|
|
|
|
|
|
|
|
|
The current year
|
|
|
288.5
|
|
|
|
271.7
|
|
|
|
226.6
|
|
Prior years
|
|
|
91.0
|
|
|
|
74.0
|
|
|
|
67.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
379.5
|
|
|
|
345.7
|
|
|
|
294.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of December 31
|
|
|
117.1
|
|
|
|
128.0
|
|
|
|
105.0
|
|
Add: reinsurance recoverable
|
|
|
8.5
|
|
|
|
5.1
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
$
|
125.6
|
|
|
$
|
133.1
|
|
|
$
|
110.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses estimates in determining its liability for
policy and contract claims. These estimates are based on
historical claim payment patterns and expected loss ratios to
provide for the inherent variability in claim patterns and
severity. For the year ended December 31, 2009, the change
in prior year incurred claims was primarily due to favorable
changes in liability estimates for group medical stop-loss
claims offset by higher than expected paid claims for individual
life. For the year ended December 31, 2008, the change in
prior year incurred claims was primarily due to higher than
expected paid claims and unfavorable changes in liability
estimates, primarily in the Group segment. For the year ended
December 31, 2007, the change in prior year incurred claims
was primarily due to favorable changes in liability estimates
related to group medical stop-loss claims. This was partially
offset by
higher-than-expected
claims experience related to individual life insurance.
133
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
12.
|
Notes
Payable and Credit Facilities
|
Capital
Efficient Notes Due 2067
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%.
The Company is required to use commercially reasonable efforts
to sell enough qualifying capital securities to permit repayment
of the CENts at the scheduled maturity date or on each interest
payment date thereafter. Any remaining outstanding principal
amount will be due on October 15, 2067.
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.
The CENts are unsecured junior subordinated obligations. The
Company can redeem the CENts at its option, in whole or in part,
on October 15, 2017, and on each interest payment date
thereafter at a redemption price of 100% of the principal amount
being redeemed plus accrued but unpaid interest. The Company can
redeem the CENts at its option, prior to October 15, 2017,
in whole or in part, at a redemption price of 100% of the
principal amount being redeemed or, if greater, a make-whole
price, plus accrued and unpaid interest.
In connection with the offering of the CENts, the Company
entered into a replacement capital covenant for the
benefit of the holders of the $300.0 senior notes due
April 1, 2016 (see below). Under the terms of the
replacement capital covenant, the Company may not redeem or
repay the CENts prior to October 15, 2047 unless the
redemption or repayment is financed from the offering of
replacement capital securities, as specified in the covenant.
Senior
Notes Due 2016
On March 30, 2006, the Company issued $300.0 of
6.125% senior notes due on April 1, 2016, which were
issued at a discount yielding $298.7. Proceeds from the senior
notes were used to pay down the outstanding principal on a
revolving line of credit. Interest on the senior notes is
payable semi-annually in arrears, beginning on October 2,
2006. The effective interest rate on the senior notes is 6.11%.
The senior notes are unsecured senior obligations and are equal
in right of payment to all existing and future unsecured senior
indebtedness. These notes are redeemable, in whole or in part,
at the option of the Company at any time or from time to time at
a redemption price equal to the greater of: (1) 100% of the
aggregate principal amount of the notes to be redeemed or
(2) the sum of the present value of the remaining scheduled
payments of principal and interest on the senior notes,
discounted to the redemption date on a semi-annual basis at a
prevailing U.S. Treasury rate plus 25 basis points,
together in each case with accrued interest payments to the
redemption date.
Revolving
Credit Facility
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,
134
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
Companys material insurance subsidiaries must maintain a
risk-based capital ratio of at least 200%, measured at the end
of each year, and the Companys
debt-to-capitalization
ratio, excluding accumulated other comprehensive loss, may not
exceed 37.5%, measured at the end of each quarter. In addition,
the Company has agreed to other covenants restricting the
ability of its subsidiaries to incur additional indebtedness,
its ability to create liens, and its ability to change its
fiscal year and to enter into new lines of business, as well as
other customary affirmative covenants.
To be eligible for borrowing funds under this facility, the
representations and warranties that the Company made in the
credit agreement must continue to be true in all material
respects, and the Company must not be in default under the
facility, including failure to comply with the covenants
described above.
On February 12, 2009, Bank of America, N.A. issued a notice
of default to one of the lending institutions in the syndicate
with a commitment of $20.0, effectively limiting the
Companys ability to borrow under this facility to $180.0.
On October 7, 2009, the defaulted lending institution
assigned its interest to another lending institution,
effectively restoring capacity in the facility to $200.0.
As of December 31, 2009 and 2008, and during the years
ended December 31, 2009, 2008, and 2007, the Company had no
borrowings outstanding under this facility and was in compliance
with all covenants.
The Company files income tax returns in the U.S. federal
and various state jurisdictions. The Companys federal
income tax returns have been examined and closing agreements
have been executed with the Internal Revenue Service, or the
statute of limitations has expired for all tax periods through
December 31, 2003. The Internal Revenue Service is in the
process of auditing the Companys life insurance and
non-life insurance company returns for the tax year period
July 31, 2004, filed in consolidation with the
Companys former parent, Safeco Corporation. To date, no
significant issues or proposed adjustments have been raised by
the examiners. The Internal Revenue Service has also completed
an audit of the Companys life insurance company returns
for the years ended December 31, 2004 and 2005. The
non-life insurance company tax returns are currently not subject
to an Internal Revenue Service audit, and the statute of
limitations has expired for the tax years ended
December 31, 2004 and 2005. The Company is not currently
subject to any state income tax examinations.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income from operations before income taxes
|
|
$
|
181.1
|
|
|
|
|
|
|
$
|
13.0
|
|
|
|
|
|
|
$
|
248.8
|
|
|
|
|
|
Computed expected tax expense
|
|
|
63.4
|
|
|
|
35.0
|
%
|
|
|
4.5
|
|
|
|
35.0
|
%
|
|
|
87.1
|
|
|
|
35.0
|
%
|
Low income housing credits
|
|
|
(9.6
|
)
|
|
|
(5.3
|
)
|
|
|
(8.5
|
)
|
|
|
(65.4
|
)
|
|
|
(4.6
|
)
|
|
|
(1.8
|
)
|
Separate account dividend received deduction
|
|
|
(1.1
|
)
|
|
|
(0.6
|
)
|
|
|
(1.4
|
)
|
|
|
(10.8
|
)
|
|
|
(1.5
|
)
|
|
|
(0.6
|
)
|
Prior period adjustments
|
|
|
|
|
|
|
|
|
|
|
(2.9
|
)
|
|
|
(22.3
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
(0.8
|
)
|
|
|
(6.5
|
)
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
52.8
|
|
|
|
29.2
|
%
|
|
$
|
(9.1
|
)
|
|
|
(70.0
|
)%
|
|
$
|
81.5
|
|
|
|
32.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences that gave rise to the
deferred income tax assets and deferred income tax liabilities
were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Adjustment to life policy liabilities
|
|
$
|
458.7
|
|
|
$
|
398.8
|
|
Capitalization of policy acquisition costs
|
|
|
48.6
|
|
|
|
45.1
|
|
Goodwill
|
|
|
0.8
|
|
|
|
1.3
|
|
Intangibles
|
|
|
10.2
|
|
|
|
11.6
|
|
Investment impairments
|
|
|
46.7
|
|
|
|
35.0
|
|
Performance share plan
|
|
|
3.7
|
|
|
|
3.9
|
|
Other liabilities accruals
|
|
|
1.6
|
|
|
|
1.7
|
|
Unrealized losses on investment securities (net of DAC
adjustment: $26.4 and $(9.8), respectively)
|
|
|
26.7
|
|
|
|
566.8
|
|
Non-life net operating loss
|
|
|
4.6
|
|
|
|
1.0
|
|
Other
|
|
|
5.1
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
606.7
|
|
|
|
1,072.5
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
114.0
|
|
|
|
74.9
|
|
Securities basis adjustment
|
|
|
300.1
|
|
|
|
211.1
|
|
Other
|
|
|
1.4
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
415.5
|
|
|
|
286.7
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
191.2
|
|
|
$
|
785.8
|
|
|
|
|
|
|
|
|
|
|
The Companys deferred tax asset decreased significantly
from December 31, 2008 to December 31, 2009, due
almost entirely to the decrease in unrealized losses on
investment securities. The large unrealized losses as of
December 31, 2008 were attributable to the volatility and
disruption within the capital markets. The Company reviews its
deferred tax assets quarterly to determine whether there is a
need for a valuation allowance. For December 31, 2008, this
included a review of the Companys invested assets
supporting the liquidity requirements of its insurance and
investment product liabilities to assess future reversals and
utilization. The Companys analyses indicated that it would
be able to fully realize the deferred tax assets as of
December 31, 2009 and 2008, and thus no valuation
allowances were necessary.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance as of January 1
|
|
$
|
0.4
|
|
|
$
|
0.8
|
|
|
$
|
0.6
|
|
Additions based on tax positions related to the current year
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.2
|
|
Reductions for tax positions of prior years
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
$
|
0.5
|
|
|
$
|
0.4
|
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total balance of the unrecognized tax benefits above would
affect the effective tax rate if recognized. The Company does
not expect the total amount of unrecognized tax benefits for any
tax position to change significantly within the next twelve
months.
136
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company includes penalties and interest accrued related to
unrecognized tax benefits in the calculation of income tax
expense. For the years ended December 31, 2009, 2008, and
2007, amounts recognized for interest and penalties in the
consolidated statements of income were not material.
|
|
14.
|
Other
Comprehensive Income
|
The components of comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net income
|
|
$
|
128.3
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains and losses on
available-for-sale securities(1)
|
|
|
1,113.2
|
|
|
|
(1,142.9
|
)
|
|
|
6.9
|
|
Reclassification adjustment for net realized investment (gains)
losses included in net income(2)
|
|
|
24.9
|
|
|
|
103.2
|
|
|
|
(13.6
|
)
|
Adjustment for deferred policy acquisition costs and deferred
sales inducements valuation allowance(3)
|
|
|
(82.0
|
)
|
|
|
18.6
|
|
|
|
2.1
|
|
Other-than-temporary-impairments
on fixed maturities not related to credit losses(4)
|
|
|
(37.6
|
)
|
|
|
|
|
|
|
|
|
Terminated cash flow hedges(5)
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
1,018.6
|
|
|
|
(1,021.0
|
)
|
|
|
(9.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
1,146.9
|
|
|
$
|
(998.9
|
)
|
|
$
|
157.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of taxes of $599.5, $(615.3) and $3.7 for the years ended
December 31, 2009, 2008 and 2007, respectively. |
|
(2) |
|
Net of taxes of $13.4, $55.5 and $(7.3) for the years ended
December 31, 2009, 2008 and 2007, respectively. For the
year ended December 31, 2009, $30.5 (net of taxes of $16.4)
of the reclassification adjustment is related to losses
previously classified as
other-than-temporary
impairments not related to credit losses. |
|
(3) |
|
Net of taxes of $(44.2), $10.0, and $1.1 for the years ended
December 31, 2009, 2008 and 2007, respectively. |
|
(4) |
|
Net of taxes of $(20.2) for the year ended December 31,
2009. |
|
(5) |
|
Net of taxes of $0.0, $0.0, and $(2.6) for the years ended
December 31, 2009, 2008, and 2007, respectively. |
The components of accumulated other comprehensive loss are as
follows:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net unrealized gains (losses) on
available-for-sale
securities
|
|
$
|
102.0
|
|
|
$
|
(1,649.0
|
)
|
Other-than-temporary-impairments
on fixed maturities not related to credit losses
|
|
|
(81.9
|
)
|
|
|
|
|
Net unrealized losses on derivative financial instruments
|
|
|
(2.8
|
)
|
|
|
(2.9
|
)
|
Adjustment for deferred policy acquisition costs
|
|
|
(75.3
|
)
|
|
|
28.0
|
|
Adjustment for deferred sales inducements
|
|
|
(18.4
|
)
|
|
|
4.5
|
|
Deferred income taxes
|
|
|
26.7
|
|
|
|
566.8
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(49.7
|
)
|
|
$
|
(1,052.6
|
)
|
|
|
|
|
|
|
|
|
|
137
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
Commitments
and Contingencies
|
Guaranty
Fund Assessments
Under state insolvency and guaranty laws, insurers licensed to
do business in a state can be assessed or required to contribute
to state guaranty funds to cover policyholder losses resulting
from insurer insolvencies. Liabilities for guaranty funds are
not discounted or recorded net of premium taxes and are included
in other liabilities in the consolidated balance sheets. At
December 31, 2009, the Company had liabilities of $11.5 for
estimated guaranty fund assessments. The Company has a related
asset for premium tax offsets of $8.0. As of December 31,
2008, the Company had liabilities for estimated guaranty fund
assessments of $7.3, with a related asset for premium tax
offsets of $5.8. Premium tax offsets are available for a period
of five to twenty years.
Investments
in Limited Partnerships
At December 31, 2009, the Company was invested in 13
limited partnership interests related to affordable housing
projects and state tax credit funds, two of which were entered
into in 2009. The Company unconditionally committed to provide
capital contributions totaling approximately $117.1, of which
the remaining $38.9 is expected to be contributed over a period
of three years. These investments are accounted for under the
equity method and are recorded at amortized cost in investments
in limited partnerships, with the present value of unfunded
contributions recorded in other liabilities.
Capital contributions of $78.2 were paid as of December 31,
2009, with the remaining expected cash capital contributions as
follows:
|
|
|
|
|
|
|
Expected Capital
|
|
|
|
Contributions
|
|
|
2010
|
|
$
|
34.8
|
|
2011
|
|
|
2.2
|
|
2012
|
|
|
1.9
|
|
|
|
|
|
|
Total expected capital contributions
|
|
$
|
38.9
|
|
|
|
|
|
|
The Company has also committed to invest $52.5 in five private
equity funds. The Company will provide capital contributions to
the partnerships up to the committed amount at the discretion of
the general partners, subject to certain incremental
contribution limits. The remaining term of the capital
commitment ranges up to four years, ending in 2013. As of
December 31, 2009, the Company has remaining investment
commitments totaling $33.3 related to these partnerships.
Litigation
Because of the nature of the business, the Company is subject to
legal actions filed or threatened in the ordinary course of its
business operations. The Company does not expect that any such
litigation, pending or threatened, as of December 31, 2009,
will have a material adverse effect on its consolidated
financial condition, future operating results or liquidity.
Leases
The Company has office space, commercial real estate, and
certain equipment under leases that expire at various dates
through 2015. The Company accounts for these leases as operating
leases. Certain leases include renewal options.
138
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future minimum lease commitments, including cost escalation
clauses, for the next five years and thereafter are as follows:
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
2010
|
|
$
|
7.4
|
|
2011
|
|
|
7.1
|
|
2012
|
|
|
7.1
|
|
2013
|
|
|
7.0
|
|
2014
|
|
|
6.9
|
|
Thereafter
|
|
|
4.0
|
|
|
|
|
|
|
Total
|
|
$
|
39.5
|
|
|
|
|
|
|
The amount of rent expense was $7.9, $8.0, and $8.1 for the
years ended December 31, 2009, 2008 and 2007, respectively.
Other
Commitments
On August 1, 2009, the Company entered into a new service
agreement with a third party service provider to outsource the
majority of its information technology infrastructure,
effectively terminating the previous agreement with this vendor
which was scheduled to expire in July 2010. The initial term of
the new service agreement expires in July 2014, subject to early
termination in certain cases, with two one-year extensions at
the Companys election. Under the terms of the service
agreement, the Company agreed to pay an annual service fee
ranging from $10.6 to $11.4 for five years. The Company incurred
service fee expenses of $11.2, $11.8 and $12.8 for the years
ended December 31, 2009, 2008 and 2007, respectively.
At December 31, 2009 and 2008, unfunded mortgage loan
commitments were $4.5 and $9.0, respectively.
The Company had no other material commitments or contingencies
at December 31, 2009 and 2008.
|
|
16.
|
Employee
Benefit Plans
|
Defined
Contribution Plan
The Company sponsors a defined contribution plan for all
eligible employees that includes a matching contribution of 100%
of a participants contributions up to 6% of eligible
compensation. Defined contribution plan expense was $4.5, $4.5
and $4.2 for the years ended December 31, 2009, 2008, and
2007, respectively.
Performance
Share Plan
The Company has a performance share plan (the Performance
Share Plan) that provides incentives to selected
executives based on the long-term success of the Company. Awards
under the Performance Share Plan are typically made in the form
of performance shares with a three-year award period. The value
of each performance share is determined at the discretion of the
Companys Board of Directors, based on achievement of a
specified growth target, and is paid in cash. The expense
recorded for grants related to the Performance Share Plan was
$8.3, $6.0 and $9.4 for the years ended December 31, 2009,
2008, and 2007, respectively.
Equity
Plan and Employee Stock Purchase Plan
In October 2007, the Companys Board of Directors adopted,
and the Companys stockholders approved, the Equity Plan
and the Employee Stock Purchase Plan (or ESPP) and reserved
7,830,000 and 870,000 shares of common stock, respectively,
for issuance under these plans. In August 2009, the
Companys Board of Directors granted 83,160 shares of
restricted stock under the Equity Plan with an aggregate fair
139
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
market value of $1.1 and a
28-month
vesting period. As of December 31, 2009, no shares have
been issued under the ESPP.
Intracompany
Dividends
The Companys insurance subsidiaries are restricted by
state regulations as to the aggregate amount of dividends they
may pay in any consecutive
12-month
period without regulatory approval. Accordingly, based on
statutory limits as of December 31, 2008, the Company was
eligible to receive dividends from its insurance subsidiaries
during 2009 without obtaining regulatory approval as long as the
aggregate dividends paid over the twelve months preceding any
dividend payment date in 2009 did not exceed $117.9. The Company
received no dividends from its insurance subsidiaries during
2009. Based on state regulations as of December 31, 2009,
the Company is eligible to receive dividends from its insurance
subsidiaries during 2010 without obtaining regulatory approval
as long as the aggregate dividends paid over the 12 months
preceding any dividend payment date in 2010 do not exceed $141.5.
Dividends
to Stockholders
The Company paid no dividends to its stockholders and warrant
holders of record during the years ended December 31, 2009
and 2008. On October 19, 2007, the Company paid cash
dividends totaling $200.0, or $1.79 per share, to its
stockholders and warrant holders of record as of
October 12, 2007.
|
|
18.
|
Statutory-Basis
Information
|
The Companys 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.
The statutory net income (loss) for the Companys insurance
subsidiaries is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Statutory net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Symetra Life Insurance Company
|
|
$
|
43.1
|
|
|
$
|
36.7
|
|
|
$
|
134.1
|
|
First Symetra National Life Insurance Company of New York
|
|
|
(0.6
|
)
|
|
|
(2.2
|
)
|
|
|
2.4
|
|
Symetra National Life Insurance Company
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42.7
|
|
|
$
|
35.0
|
|
|
$
|
136.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and surplus for Symetra Life Insurance Company
was $1,415.4 and $1,179.0 for the years ended December 31,
2009 and 2008, respectively.
Life and health insurance companies are subject to certain
risk-based capital requirements as specified by the NAIC. Under
those requirements, the amount of capital and surplus maintained
by a life and health insurance company is to be determined based
on various risk factors related to it. At December 31, 2009
and 2008, Symetra Life Insurance Company and its subsidiaries
met the risk-based capital requirements.
The Company entered into an Investment Management Agreement on
March 14, 2004, with White Mountains Advisors, LLC (WMA), a
subsidiary of White Mountains Investment Group, Ltd. This
agreement,
140
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
as amended, provides for investment advisory services related to
the Companys invested assets and portfolio management
services. Expenses amounted to $14.0, $14.6, and $15.3 for the
years ended December 31, 2009, 2008 and 2007, respectively.
As of both December 31, 2009 and 2008, amounts due to WMA
were $3.5.
The Company offers a broad range of products and services that
include retirement, life insurance, group health and employee
benefits products. These operations are managed separately as
five reportable segments based on product groupings: Group,
Retirement Services, Income Annuities, Individual and Other.
The primary segment profitability measure that management uses
is segment pre-tax adjusted operating income (loss), which is
calculated by adjusting income (loss) before federal income
taxes to exclude net realized investment gains (losses), and for
the Retirement Services segment to include the net
investment gains (losses) on FIA options.
When evaluating segment pre-tax adjusted operating income (loss)
in the Retirement Services segment, management includes
the net investment gains (losses) from options related to an FIA
hedging program. This program consists of buying S&P 500
Index call options. The Company uses index options to hedge the
equity return component of FIA products. These options do not
qualify as hedge instruments or for hedge accounting treatment.
The net gains (losses) from the options are recorded in net
realized investment gains (losses). Since the interest incurred
on the Companys FIA products is included as a component of
interest credited, it is more meaningful to evaluate results
inclusive of the results of the hedge program.
|
|
|
|
|
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. Group also offers managing general underwriting
services.
|
|
|
|
Retirement Services. Retirement Services
offers fixed and variable deferred annuities, including
tax-sheltered annuities, IRAs and group annuities, to qualified
retirement plans, including Section 401(k) and 457 plans.
|
|
|
|
Income Annuities. Income Annuities offers
SPIAs for customers seeking a reliable source of retirement
income and structured settlement annuities to fund third party
personal injury settlements.
|
|
|
|
Individual. Individual offers a wide array of
term, universal and variable life insurance products, as well as
BOLI.
|
|
|
|
Other. This segment consists of unallocated
corporate income, composed primarily of investment income on
unallocated surplus, unallocated corporate expenses, interest
expense on debt, the results of small, noninsurance businesses
that are managed outside of the operating segments and
intersegment elimination entries. In addition, beginning in the
third quarter of 2008, the Company includes its net gains
(losses) related to investments in hedge and private equity
funds in this segment, reported through net investment income.
|
The accounting policies of the reportable segments are the same
as those described in the summary of significant accounting
policies (see Note 2).
The Company allocates capital and related investment income to
each segment using a risk-based capital formula.
141
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables present selected financial information by
segment and reconciles segment pre-tax adjusted operating income
(loss) to amounts reported in the consolidated statements of
income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Total
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other considerations
|
|
$
|
432.2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
141.4
|
|
|
$
|
|
|
|
$
|
573.6
|
|
Net investment income
|
|
|
17.8
|
|
|
|
388.0
|
|
|
|
422.4
|
|
|
|
265.2
|
|
|
|
20.2
|
|
|
|
1,113.6
|
|
Other revenues
|
|
|
14.9
|
|
|
|
16.8
|
|
|
|
0.5
|
|
|
|
13.2
|
|
|
|
11.0
|
|
|
|
56.4
|
|
Net investment gains on FIA options
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
464.9
|
|
|
|
405.6
|
|
|
|
422.9
|
|
|
|
419.8
|
|
|
|
31.2
|
|
|
|
1,744.4
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
295.4
|
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
57.3
|
|
|
|
|
|
|
|
350.5
|
|
Interest credited
|
|
|
|
|
|
|
256.9
|
|
|
|
357.9
|
|
|
|
235.3
|
|
|
|
(3.3
|
)
|
|
|
846.8
|
|
Other underwriting and operating expenses
|
|
|
106.2
|
|
|
|
55.9
|
|
|
|
21.0
|
|
|
|
55.4
|
|
|
|
14.2
|
|
|
|
252.7
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.8
|
|
|
|
31.8
|
|
Amortization of deferred policy acquisition costs
|
|
|
7.9
|
|
|
|
36.4
|
|
|
|
1.6
|
|
|
|
5.5
|
|
|
|
|
|
|
|
51.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
409.5
|
|
|
|
347.0
|
|
|
|
380.5
|
|
|
|
353.5
|
|
|
|
42.7
|
|
|
|
1,533.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income (loss)
|
|
$
|
55.4
|
|
|
$
|
58.6
|
|
|
$
|
42.4
|
|
|
$
|
66.3
|
|
|
$
|
(11.5
|
)
|
|
$
|
211.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
464.9
|
|
|
$
|
405.6
|
|
|
$
|
422.9
|
|
|
$
|
419.8
|
|
|
$
|
31.2
|
|
|
$
|
1,744.4
|
|
Add: Net realized investment gains (losses), excluding FIA
options
|
|
|
(3.8
|
)
|
|
|
(21.3
|
)
|
|
|
20.1
|
|
|
|
(14.1
|
)
|
|
|
(11.0
|
)
|
|
|
(30.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
461.1
|
|
|
|
384.3
|
|
|
|
443.0
|
|
|
|
405.7
|
|
|
|
20.2
|
|
|
|
1,714.3
|
|
Total benefits and expenses
|
|
|
409.5
|
|
|
|
347.0
|
|
|
|
380.5
|
|
|
|
353.5
|
|
|
|
42.7
|
|
|
|
1,533.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
51.6
|
|
|
$
|
37.3
|
|
|
$
|
62.5
|
|
|
$
|
52.2
|
|
|
$
|
(22.5
|
)
|
|
$
|
181.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
147.2
|
|
|
$
|
7,250.5
|
|
|
$
|
6,396.4
|
|
|
$
|
4,702.1
|
|
|
$
|
1,686.9
|
|
|
$
|
20,183.1
|
|
Deferred policy acquisition costs
|
|
|
3.2
|
|
|
|
174.8
|
|
|
|
22.4
|
|
|
|
50.0
|
|
|
|
|
|
|
|
250.4
|
|
Goodwill
|
|
|
26.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.3
|
|
Separate account assets
|
|
|
|
|
|
|
755.7
|
|
|
|
|
|
|
|
84.4
|
|
|
|
|
|
|
|
840.1
|
|
Total assets
|
|
|
272.6
|
|
|
|
8,433.0
|
|
|
|
6,625.7
|
|
|
|
5,176.1
|
|
|
|
1,930.1
|
|
|
|
22,437.5
|
|
Future policy benefits, losses, claims and loss expenses(1)
|
|
|
173.6
|
|
|
|
7,645.1
|
|
|
|
6,704.4
|
|
|
|
4,834.5
|
|
|
|
(20.4
|
)
|
|
|
19,337.2
|
|
Unearned premiums
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
10.3
|
|
|
|
|
|
|
|
12.1
|
|
Other policyholders funds
|
|
|
14.8
|
|
|
|
10.5
|
|
|
|
21.9
|
|
|
|
59.6
|
|
|
|
7.0
|
|
|
|
113.8
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
448.9
|
|
|
|
448.9
|
|
|
|
|
(1) |
|
This includes funds held under deposit contracts, future policy
benefits, and policy and contract claims. |
142
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Total
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other considerations
|
|
$
|
449.8
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
134.9
|
|
|
$
|
|
|
|
$
|
584.8
|
|
Net investment income (loss)
|
|
|
17.8
|
|
|
|
261.1
|
|
|
|
423.4
|
|
|
|
254.6
|
|
|
|
(0.4
|
)
|
|
|
956.5
|
|
Other revenues
|
|
|
19.0
|
|
|
|
20.2
|
|
|
|
0.9
|
|
|
|
16.0
|
|
|
|
11.7
|
|
|
|
67.8
|
|
Net investment losses on FIA options
|
|
|
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
486.6
|
|
|
|
278.5
|
|
|
|
424.3
|
|
|
|
405.5
|
|
|
|
11.3
|
|
|
|
1,606.2
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
295.9
|
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
59.4
|
|
|
|
|
|
|
|
348.5
|
|
Interest credited
|
|
|
|
|
|
|
176.4
|
|
|
|
364.5
|
|
|
|
227.7
|
|
|
|
(2.5
|
)
|
|
|
766.1
|
|
Other underwriting and operating expenses
|
|
|
115.7
|
|
|
|
57.4
|
|
|
|
21.9
|
|
|
|
57.3
|
|
|
|
13.5
|
|
|
|
265.8
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.9
|
|
|
|
31.9
|
|
Amortization of deferred policy acquisition costs
|
|
|
8.1
|
|
|
|
14.9
|
|
|
|
1.4
|
|
|
|
1.4
|
|
|
|
|
|
|
|
25.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
419.7
|
|
|
|
241.9
|
|
|
|
387.8
|
|
|
|
345.8
|
|
|
|
42.9
|
|
|
|
1,438.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income (loss)
|
|
$
|
66.9
|
|
|
$
|
36.6
|
|
|
$
|
36.5
|
|
|
$
|
59.7
|
|
|
$
|
(31.6
|
)
|
|
$
|
168.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
486.6
|
|
|
$
|
278.5
|
|
|
$
|
424.3
|
|
|
$
|
405.5
|
|
|
$
|
11.3
|
|
|
$
|
1,606.2
|
|
Add: Net realized investment losses, excluding FIA options
|
|
|
(0.1
|
)
|
|
|
(17.9
|
)
|
|
|
(99.6
|
)
|
|
|
(16.8
|
)
|
|
|
(20.7
|
)
|
|
|
(155.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
486.5
|
|
|
|
260.6
|
|
|
|
324.7
|
|
|
|
388.7
|
|
|
|
(9.4
|
)
|
|
|
1,451.1
|
|
Total benefits and expenses
|
|
|
419.7
|
|
|
|
241.9
|
|
|
|
387.8
|
|
|
|
345.8
|
|
|
|
42.9
|
|
|
|
1,438.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
66.8
|
|
|
$
|
18.7
|
|
|
$
|
(63.1
|
)
|
|
$
|
42.9
|
|
|
$
|
(52.3
|
)
|
|
$
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
161.5
|
|
|
$
|
4,636.6
|
|
|
$
|
5,865.6
|
|
|
$
|
4,129.2
|
|
|
$
|
1,459.6
|
|
|
$
|
16,252.5
|
|
Deferred policy acquisition costs
|
|
|
3.3
|
|
|
|
183.0
|
|
|
|
14.5
|
|
|
|
46.7
|
|
|
|
|
|
|
|
247.5
|
|
Goodwill
|
|
|
24.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.3
|
|
Separate account assets
|
|
|
|
|
|
|
645.7
|
|
|
|
|
|
|
|
70.5
|
|
|
|
|
|
|
|
716.2
|
|
Total assets
|
|
|
295.1
|
|
|
|
6,005.9
|
|
|
|
6,301.8
|
|
|
|
4,703.7
|
|
|
|
1,923.1
|
|
|
|
19,229.6
|
|
Future policy benefits, losses, claims and loss expenses(1)
|
|
|
192.1
|
|
|
|
5,661.0
|
|
|
|
6,756.4
|
|
|
|
4,737.5
|
|
|
|
(11.4
|
)
|
|
|
17,335.6
|
|
Unearned premiums
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
10.5
|
|
|
|
|
|
|
|
11.9
|
|
Other policyholders funds
|
|
|
10.0
|
|
|
|
63.8
|
|
|
|
4.9
|
|
|
|
30.7
|
|
|
|
7.9
|
|
|
|
117.3
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
448.8
|
|
|
|
448.8
|
|
|
|
|
(1) |
|
This includes funds held under deposit contracts, future policy
benefits, and policy and contract claims. |
143
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Total
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other considerations
|
|
$
|
392.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
138.4
|
|
|
$
|
|
|
|
$
|
530.5
|
|
Net investment income
|
|
|
18.1
|
|
|
|
244.3
|
|
|
|
439.3
|
|
|
|
244.1
|
|
|
|
27.8
|
|
|
|
973.6
|
|
Other revenues
|
|
|
15.2
|
|
|
|
24.5
|
|
|
|
0.8
|
|
|
|
15.0
|
|
|
|
13.2
|
|
|
|
68.7
|
|
Add: Net investment losses on FIA options
|
|
|
|
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
425.4
|
|
|
|
266.5
|
|
|
|
440.1
|
|
|
|
397.5
|
|
|
|
41.0
|
|
|
|
1,570.5
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
213.1
|
|
|
|
(8.3
|
)
|
|
|
|
|
|
|
62.3
|
|
|
|
|
|
|
|
267.1
|
|
Interest credited
|
|
|
|
|
|
|
165.5
|
|
|
|
371.5
|
|
|
|
216.3
|
|
|
|
(1.0
|
)
|
|
|
752.3
|
|
Other underwriting and operating expenses
|
|
|
112.3
|
|
|
|
69.1
|
|
|
|
22.4
|
|
|
|
57.7
|
|
|
|
20.4
|
|
|
|
281.9
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.5
|
|
|
|
21.5
|
|
Amortization of deferred policy acquisition costs
|
|
|
8.4
|
|
|
|
6.0
|
|
|
|
1.1
|
|
|
|
2.5
|
|
|
|
|
|
|
|
18.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
333.8
|
|
|
|
232.3
|
|
|
|
395.0
|
|
|
|
338.8
|
|
|
|
40.9
|
|
|
|
1,340.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income
|
|
$
|
91.6
|
|
|
$
|
34.2
|
|
|
$
|
45.1
|
|
|
$
|
58.7
|
|
|
$
|
0.1
|
|
|
$
|
229.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
425.4
|
|
|
$
|
266.5
|
|
|
$
|
440.1
|
|
|
$
|
397.5
|
|
|
$
|
41.0
|
|
|
$
|
1,570.5
|
|
Add: Net realized investment gains (losses), excluding FIA
options
|
|
|
(0.1
|
)
|
|
|
(7.5
|
)
|
|
|
23.0
|
|
|
|
(1.5
|
)
|
|
|
5.2
|
|
|
|
19.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
425.3
|
|
|
|
259.0
|
|
|
|
463.1
|
|
|
|
396.0
|
|
|
|
46.2
|
|
|
|
1,589.6
|
|
Total benefits and expenses
|
|
|
333.8
|
|
|
|
232.3
|
|
|
|
395.0
|
|
|
|
338.8
|
|
|
|
40.9
|
|
|
|
1,340.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
91.5
|
|
|
$
|
26.7
|
|
|
$
|
68.1
|
|
|
$
|
57.2
|
|
|
$
|
5.3
|
|
|
$
|
248.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
255.9
|
|
|
$
|
3,976.0
|
|
|
$
|
6,830.3
|
|
|
$
|
4,299.6
|
|
|
$
|
1,543.2
|
|
|
$
|
16,905.0
|
|
Deferred policy acquisition costs
|
|
|
3.5
|
|
|
|
84.3
|
|
|
|
10.9
|
|
|
|
34.2
|
|
|
|
|
|
|
|
132.9
|
|
Goodwill
|
|
|
22.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.3
|
|
Separate account assets
|
|
|
|
|
|
|
1,059.3
|
|
|
|
|
|
|
|
122.6
|
|
|
|
|
|
|
|
1,181.9
|
|
Total assets
|
|
|
385.3
|
|
|
|
5,337.0
|
|
|
|
7,132.5
|
|
|
|
4,818.9
|
|
|
|
1,886.5
|
|
|
|
19,560.2
|
|
Future policy benefits, losses, claims and loss expenses(1)
|
|
|
171.2
|
|
|
|
4,438.4
|
|
|
|
6,891.1
|
|
|
|
4,560.3
|
|
|
|
(3.2
|
)
|
|
|
16,057.8
|
|
Unearned premiums
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
9.9
|
|
|
|
|
|
|
|
11.5
|
|
Other policyholders funds
|
|
|
11.2
|
|
|
|
7.0
|
|
|
|
4.3
|
|
|
|
26.6
|
|
|
|
7.7
|
|
|
|
56.8
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
448.6
|
|
|
|
448.6
|
|
|
|
|
(1) |
|
This includes funds held under deposit contracts, future policy
benefits, and policy and contract claims. |
144
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
21.
|
Quarterly
Results of Operations (Unaudited)
|
The unaudited quarterly results of operations for years ended
December 31, 2009 and 2008 are summarized in the table
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In millions, except for per share data)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
378.8
|
|
|
$
|
443.3
|
|
|
$
|
451.7
|
|
|
$
|
440.5
|
|
Total benefits and expenses
|
|
|
371.6
|
|
|
|
377.1
|
|
|
|
389.5
|
|
|
|
395.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
7.2
|
|
|
|
66.2
|
|
|
|
62.2
|
|
|
|
45.5
|
|
Net income
|
|
|
5.1
|
|
|
|
47.0
|
|
|
|
44.1
|
|
|
|
32.1
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
$
|
0.42
|
|
|
$
|
0.40
|
|
|
$
|
0.29
|
|
Diluted
|
|
$
|
0.05
|
|
|
$
|
0.42
|
|
|
$
|
0.40
|
|
|
$
|
0.29
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
365.0
|
|
|
$
|
400.4
|
|
|
$
|
341.7
|
|
|
$
|
344.0
|
|
Total benefits and expenses
|
|
|
360.3
|
|
|
|
360.2
|
|
|
|
352.3
|
|
|
|
365.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before income taxes
|
|
|
4.7
|
|
|
|
40.2
|
|
|
|
(10.6
|
)
|
|
|
(21.3
|
)
|
Net income (loss)
|
|
|
3.3
|
|
|
|
28.5
|
|
|
|
(4.8
|
)
|
|
|
(4.9
|
)
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(1)
|
|
$
|
0.03
|
|
|
$
|
0.26
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
Diluted(1)
|
|
$
|
0.03
|
|
|
$
|
0.26
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
(1) |
|
Quarterly earnings per share amounts may not add to the full
year amounts due to share weighting, rounding, and, in periods
of quarterly net losses, the anti-dilutive effect of the
outstanding warrants and restricted shares. |
145
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We carried out an evaluation required by the 1934 Act,
under the supervision and with the participation of our
principal executive officer and principal financial officer, of
the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rule 13a
15(e) of the 1934 Act, as of December 31, 2009. Based
on this evaluation our principal executive officer and principal
financial officer concluded that, as of December 31, 2009,
our disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed
by us in the reports that we file or submit under the
1934 Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and
forms and to provide reasonable assurance that such information
is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required
disclosures.
Managements
Report on Internal Control Over Financial Reporting
Management of Symetra Financial Corporation is responsible for
establishing and maintaining adequate internal control over
financial reporting, as defined in Rule 13a
15(f) of the 1934 Act.
This annual report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of the
Companys registered public accounting firm due to rules
established by the SEC, which do not require these reports in
the Companys first
Form 10-K
filed with the SEC.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting during the fourth quarter ended December 31, 2009
that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Limitations
on Controls
Our disclosure controls and procedures and internal control over
financial reporting are designed to provide reasonable assurance
of achieving their objectives as specified above. Management
does not expect, however, that our disclosure controls and
procedures or our internal controls over financial reporting
will prevent or detect all error and fraud. Any control system,
no matter how well designed and operated, is based on certain
assumptions and can provide only reasonable, not absolute,
assurance that its objectives will be met. Further, no
evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the
Company have been detected.
|
|
Item 9B.
|
Other
Information
|
None.
146
PART III
|
|
Item 10.
|
Directors
Executive Officers and Corporate Governance
|
The information required by Item 10 is included in the
Companys definitive Proxy Statement, to be filed pursuant
to Regulation 14A of the Securities Exchange Act of 1934 in
connection with the Companys 2010 Annual Meeting of
Stockholders, under the captions Election of
Directors, Section 16(a) Beneficial Ownership
Reporting Compliance, and Code of Business
Conduct and is incorporated herein by reference.
|
|
Item 11.
|
Executive
Compensation
|
The information required by Item 11 is included in the
Companys definitive Proxy Statement, to be filed pursuant
to Regulation 14A of the Securities Exchange Act of 1934 in
connection with the Companys 2010 Annual Meeting of
Stockholders, under the caption Executive
Compensation and is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners
|
The information required by Item 12 is included in the
Companys definitive Proxy Statement, to be filed pursuant
to Regulation 14A of the Securities Exchange Act of 1934 in
connection with the Companys 2010 Annual Meeting of
Stockholders, under the captions Security Ownership of
Certain Beneficial Owners and Management and Equity
Compensation Plan Information and is incorporated herein
by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
The information required by Item 13 is included in the
Companys definitive Proxy Statement, to be filed pursuant
to Regulation 14A of the Securities Exchange Act of 1934 in
connection with the Companys 2010 Annual Meeting of
Stockholders, under the caption Certain Relationships and
Related Transactions and is incorporated herein by
reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by Item 14 is included in the
Companys definitive Proxy Statement, to be filed pursuant
to Regulation 14A of the Securities Exchange Act of 1934 in
connection with the Companys 2010 Annual Meeting of
Stockholders, under the caption Independent Auditor
and is incorporated herein by reference.
147
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) The following documents are filed as part of this
report:
1. Financial Statements: The information required herein
has been provided in Item 8 Financial
Statements and Supplementary Data.
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
Consolidated Balance Sheets As of December 31,
2009 and 2008 (page 101)
|
|
|
|
Consolidated Statements of Income Years ended
December 31, 2009, 2008 and 2007 (page 102)
|
|
|
|
Consolidated Statements of Changes in Stockholders
Equity Years ended December 31, 2009, 2008 and
2007 (page 103)
|
|
|
|
Consolidated Statements of Cash Flows Years ended
December 31, 2009, 2008 and 2007 (page 104)
|
|
|
|
Notes to Consolidated Financial Statements Years
ended December 31, 2009, 2008 and 2007 (pages 105 to 145)
|
2. Financial schedules required to be filed by Item 8
of this form, and by Item 15(d):
|
|
|
|
|
Schedule I Summary of Investments
Other Than Investments in Related Parties
|
|
|
|
Schedule II Condensed Financial Information of
Registrant (Parent Company Only)
|
We omit other schedules from this list and from this
Form 10-K
because they either are not applicable or the information is
included in our audited consolidated financial statements.
3. Exhibits Please refer to the
Exhibit Index on page 155.
148
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SYMETRA FINANCIAL CORPORATION
|
|
|
|
By:
|
/s/ Randall
H. Talbot
|
Name: Randall H. Talbot
|
|
|
|
Title:
|
President and Chief Executive Officer
|
Date: March 8, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
in the capacities indicated as of March 8, 2010.
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
|
|
|
|
/s/ Randall
H. Talbot*
Randall
H. Talbot
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ Margaret
A. Meister*
Margaret
A. Meister
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/ David
T. Foy*
David
T. Foy
|
|
(Director)
|
|
|
|
|
|
|
|
/s/ Lois
W. Grady*
Lois
W. Grady
|
|
(Director)
|
|
|
|
|
|
|
|
/s/ Sander
M. Levy*
Sander
M. Levy
|
|
(Director)
|
|
|
|
|
|
|
|
/s/ Robert
R. Lusardi*
Robert
R. Lusardi
|
|
(Director)
|
|
|
|
|
|
|
|
/s/ David
I. Schamis*
David
I. Schamis
|
|
(Director)
|
|
|
|
|
|
|
|
/s/ Lowndes
A. Smith*
Lowndes
A. Smith
|
|
(Director)
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ George
Pagos
George
C. Pagos,
Attorney-in-Fact*
|
|
|
|
|
149
Schedule I
Summary
of Investments Other Than Investments in Related
Parties
Year
Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
Amount as
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Shown in the
|
|
Type of Investment
|
|
Cost
|
|
|
Value
|
|
|
Balance Sheet
|
|
|
|
(In millions)
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies and authorities
|
|
$
|
41.6
|
|
|
$
|
43.9
|
|
|
$
|
43.9
|
|
States, municipalities and political subdivisions
|
|
|
519.3
|
|
|
|
483.7
|
|
|
|
483.7
|
|
Foreign governments
|
|
|
26.7
|
|
|
|
27.4
|
|
|
|
27.4
|
|
Public utilities(1)
|
|
|
1,757.2
|
|
|
|
1,758.8
|
|
|
|
1,758.8
|
|
Convertible bonds and bonds with warrants attached
|
|
|
47.1
|
|
|
|
51.8
|
|
|
|
51.8
|
|
All other corporate bonds(2)
|
|
|
10,516.6
|
|
|
|
10,587.5
|
|
|
|
10,587.5
|
|
Mortgage-backed securities(3)
|
|
|
5,488.4
|
|
|
|
5,481.1
|
|
|
|
5,481.1
|
|
Redeemable preferred stock
|
|
|
16.4
|
|
|
|
14.6
|
|
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
18,413.3
|
|
|
|
18,448.8
|
|
|
|
18,448.8
|
|
Marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities
|
|
|
17.3
|
|
|
|
15.0
|
|
|
|
15.0
|
|
Banks, trusts, and insurance companies(4)
|
|
|
14.2
|
|
|
|
13.8
|
|
|
|
13.8
|
|
Industrial, miscellaneous, and all other(5)
|
|
|
126.4
|
|
|
|
116.0
|
|
|
|
116.0
|
|
Nonredeemable preferred stock
|
|
|
51.9
|
|
|
|
36.1
|
|
|
|
36.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities
|
|
|
209.8
|
|
|
|
180.9
|
|
|
|
180.9
|
|
Mortgage loans(6)
|
|
|
1,206.9
|
|
|
|
1,190.1
|
|
|
|
1,201.7
|
|
Policy loans
|
|
|
73.9
|
|
|
|
73.9
|
|
|
|
73.9
|
|
Other investments
|
|
|
157.1
|
|
|
|
122.4
|
|
|
|
122.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
20,061.0
|
|
|
$
|
20,016.1
|
|
|
$
|
20,027.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amount shown in the consolidated balance sheet for total
fixed maturities differs from the cost and fair value presented
above, as the consolidated balance sheet includes affiliated
fixed maturities with a cost and fair value of $68.4 and $71.9,
respectively. |
|
(2) |
|
The amount shown in the consolidated balance sheet for total
fixed maturities differs from the cost and fair value presented
above, as the consolidated balance sheet includes affiliated
fixed maturities with a cost and fair value of $68.8 and $70.7,
respectively. |
|
(3) |
|
The amount shown in the consolidated balance sheet for total
fixed maturities differs from the cost and fair value presented
above, as the consolidated balance sheet includes affiliated
fixed maturities with a cost and fair value of $3.2 and $2.9,
respectively. |
|
(4) |
|
The amount shown in the consolidated balance sheet for total
marketable equity securities differs from the cost and fair
value presented above, as the consolidated balance sheet
includes affiliated marketable equity securities with a cost and
fair value of $4.3 and $4.8, respectively. |
|
(5) |
|
The amount shown in the consolidated balance sheet for total
marketable equity securities differs from the cost and fair
value presented above, as the consolidated balance sheet
includes affiliated marketable equity securities with a cost and
fair value of $4.4 and $5.1, respectively. |
|
(6) |
|
The amount shown in the consolidated balance sheet for mortgage
loans differs from the cost presented above, as the amount in
the consolidated balance sheet is presented net of an $8.2
allowance and includes a purchase accounting adjustment. |
150
Schedule II
Condensed Statements of Financial Position
(Parent Company Only)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions, except share and per share data)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and investments:
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
44.1
|
|
|
$
|
110.8
|
|
Investment in subsidiaries
|
|
|
1,782.1
|
|
|
|
533.0
|
|
Cash and cash equivalents
|
|
|
16.4
|
|
|
|
60.8
|
|
|
|
|
|
|
|
|
|
|
Total cash and investments
|
|
|
1,842.6
|
|
|
|
704.6
|
|
Current and deferred income tax receivables
|
|
|
21.4
|
|
|
|
20.4
|
|
Receivables due from affiliates
|
|
|
39.9
|
|
|
|
24.8
|
|
Other assets
|
|
|
17.0
|
|
|
|
21.1
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,920.9
|
|
|
$
|
770.9
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
448.9
|
|
|
$
|
448.8
|
|
Other liabilities
|
|
|
38.7
|
|
|
|
35.9
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
487.6
|
|
|
|
484.7
|
|
Common stock, par value $0.01 per share, 750,000,000 shares
authorized and 92,729,455 and 92,646,295 shares issued and
outstanding as of December 31, 2009 and 2008
|
|
|
0.9
|
|
|
|
0.9
|
|
Additional
paid-in-capital
|
|
|
1,165.7
|
|
|
|
1,165.5
|
|
Retained earnings
|
|
|
316.4
|
|
|
|
172.4
|
|
Accumulated other comprehensive loss
|
|
|
(49.7
|
)
|
|
|
(1,052.6
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,433.3
|
|
|
|
286.2
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,920.9
|
|
|
$
|
770.9
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
151
Schedule II (Continued)
Condensed
Statements of Income
(Parent
Company Only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Symetra Life Insurance Company
|
|
$
|
|
|
|
$
|
100.0
|
|
|
$
|
166.4
|
|
Other subsidiaries
|
|
|
14.1
|
|
|
|
15.7
|
|
|
|
5.7
|
|
Net investment income (loss)
|
|
|
10.5
|
|
|
|
(14.8
|
)
|
|
|
3.3
|
|
Net realized investment gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(0.3
|
)
|
|
|
(8.0
|
)
|
|
|
(0.4
|
)
|
Other net realized investment gains (losses)
|
|
|
0.1
|
|
|
|
(4.3
|
)
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
(0.2
|
)
|
|
|
(12.3
|
)
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
24.4
|
|
|
|
88.6
|
|
|
|
182.2
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
31.8
|
|
|
|
31.9
|
|
|
|
21.5
|
|
Operating expenses
|
|
|
1.4
|
|
|
|
0.8
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
33.2
|
|
|
|
32.7
|
|
|
|
25.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before income taxes
|
|
|
(8.8
|
)
|
|
|
55.9
|
|
|
|
157.0
|
|
Income tax benefit
|
|
|
(8.3
|
)
|
|
|
(22.6
|
)
|
|
|
(5.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in undistributed net income (loss)
of subsidiaries
|
|
|
(0.5
|
)
|
|
|
78.5
|
|
|
|
162.0
|
|
Equity in undistributed net income (loss) of subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Symetra Life Insurance Company
|
|
|
131.4
|
|
|
|
(52.3
|
)
|
|
|
1.1
|
|
Other subsidiaries
|
|
|
(2.6
|
)
|
|
|
(4.1
|
)
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity in undistributed net income (loss) of subsidiaries
|
|
|
128.8
|
|
|
|
(56.4
|
)
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
128.3
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
152
Schedule II (Continued)
Condensed
Statements of Cash Flows
(Parent
Company Only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
128.3
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income (loss) of subsidiaries
|
|
|
(128.8
|
)
|
|
|
56.4
|
|
|
|
(5.3
|
)
|
Net realized investment (gains) losses
|
|
|
0.2
|
|
|
|
12.3
|
|
|
|
(6.8
|
)
|
Changes in accrued items and other adjustments, net
|
|
|
(23.1
|
)
|
|
|
2.5
|
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(151.7
|
)
|
|
|
71.2
|
|
|
|
(16.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(23.4
|
)
|
|
|
93.3
|
|
|
|
151.1
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(78.6
|
)
|
|
|
(173.6
|
)
|
|
|
(91.9
|
)
|
Sales of investments
|
|
|
48.8
|
|
|
|
150.7
|
|
|
|
33.3
|
|
Maturities, calls, paydowns and other
|
|
|
10.8
|
|
|
|
18.9
|
|
|
|
6.0
|
|
Acquisitions, net of cash received
|
|
|
(2.0
|
)
|
|
|
(2.0
|
)
|
|
|
(22.4
|
)
|
Other, net
|
|
|
|
|
|
|
0.2
|
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(21.0
|
)
|
|
|
(5.8
|
)
|
|
|
(64.9
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributions
|
|
|
|
|
|
|
(65.1
|
)
|
|
|
|
|
Dividend distributions
|
|
|
|
|
|
|
|
|
|
|
(200.0
|
)
|
Proceeds from note payable
|
|
|
|
|
|
|
|
|
|
|
149.8
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
(10.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
|
|
|
|
(65.1
|
)
|
|
|
(60.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(44.4
|
)
|
|
|
22.4
|
|
|
|
25.6
|
|
Cash and cash equivalents at beginning of period
|
|
|
60.8
|
|
|
|
38.4
|
|
|
|
12.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
16.4
|
|
|
$
|
60.8
|
|
|
$
|
38.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
31.0
|
|
|
$
|
31.3
|
|
|
$
|
18.5
|
|
See accompanying notes.
153
Schedule II (Continued)
Notes to Condensed Financial Statements
(Parent Company Only)
(In millions)
|
|
1.
|
Organization
and Presentation
|
The accompanying financial statements comprise a condensed
presentation of financial position, results of operations and
cash flows of Symetra Financial Corporation (the
Company) on a separate-company basis. These condensed
financial statements do not include the accounts of the
Companys wholly owned subsidiaries, but instead include
the Companys investment in those subsidiaries, stated at
amounts that are substantially equal to the Companys
equity in the subsidiaries net assets. Therefore, the
accompanying financial statements are not those of the primary
reporting entity.
Additional information about accounting policies pertaining to
investments and other significant areas, the Companys
notes payable, and commitments and contingencies are as set
forth in Notes 2, 12, and 15, respectively, to the audited
consolidated financial statements of the Company.
The Company received cash dividends of $14.1, $115.7, and $172.1
from its subsidiaries for the years ended December 31,
2009, 2008, and 2007, respectively.
154
Exhibit Index
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Symetra
Financial Corporation (incorporated by reference to
Exhibit 3.1 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
3
|
.2
|
|
Form of Bylaws of Symetra Financial Corporation (incorporated by
reference to Exhibit 3.2 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
4
|
.1
|
|
Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 of Amendment No. 3 to
Form S-1
(Registration
No. 333-162344)
filed on December 12, 2009)
|
|
4
|
.2
|
|
Fiscal Agency Agreement between Symetra Financial Corporation
and U.S. Bank dated March 30, 2006 (incorporated by
reference to Exhibit 4.2 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
4
|
.3
|
|
Warrant Certificate General Reinsurance Corporation,
dated October 26, 2007 (incorporated by reference to
Exhibit 4.3 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
4
|
.4
|
|
Warrant Certificate White Mountains Re (NL) B.V.,
dated July 24, 2008 (incorporated by reference to
Exhibit 4.4 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
4
|
.5
|
|
Credit Agreement among Symetra Financial Corporation, the
lenders party thereto and Bank of America, N.A., as
administrative agent, dated as of August 16, 2007
(including Assignment and Assumption by and between Lehman
Commercial Paper, Inc. and Barclays Bank PLC dated as of
October 7, 2009) (incorporated by reference to
Exhibit 4.5 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
4
|
.6
|
|
Purchase Agreement between Symetra Financial Corporation and the
purchasers listed therein, dated October 4, 2007
(incorporated by reference to Exhibit 4.6 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
4
|
.7
|
|
Indenture between Symetra Financial Corporation and U.S. Bank
National Association, as trustee, dated as of October 10,
2007 (incorporated by reference to Exhibit 4.7 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
9
|
.1
|
|
Shareholders Agreement among Occum Acquisition Corp. and
the persons listed on the signature pages thereto, dated as of
March 8, 2004 (incorporated by reference to
Exhibit 9.1 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
9
|
.2
|
|
Shareholders Agreement among Occum Acquisition Corp. and
the persons listed on the signature pages thereto, dated as of
March 19, 2004 (incorporated by reference to
Exhibit 9.2 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
9
|
.3
|
|
Shareholders Agreement among Occum Acquisition Corp. and
the persons listed on the signature pages thereto, dated as of
April 16, 2004 (incorporated by reference to
Exhibit 9.3 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
10
|
.1
|
|
Master Services Agreement between Affiliated Computer Services,
Inc. and Symetra Life Insurance Company, dated August 1,
2009 (incorporated by reference to Exhibit 10.1 of
Amendment No. 1 to
Form S-1
(Registration
No. 333-162344)
filed on October 26, 2009)
|
|
10
|
.2
|
|
Coinsurance Reinsurance Agreement dated as of January 1,
1998 (the RGA Agreement) between Safeco Life
Insurance Company and RGA Reinsurance Company (including the two
Amendments to the RGA Agreement dated as of June 19, 2002,
Amendment to the RGA Agreement dated as of September 23,
2002 and Addendum to the RGA Agreement dated as of
August 12, 2003) (incorporated by reference to
Exhibit 10.2 of Amendment No. 1 to
Form S-1
(Registration
No. 333-162344)
filed on October 26, 2009)
|
|
10
|
.3
|
|
Group Short Term Disability Reinsurance Agreement dated as of
January 1, 1999 (the Short Term Agreement)
between Safeco Life Insurance Company and Reliance Standard Life
Insurance Company, doing business as Custom Disability
Solutions, successor to Duncanson & Holt Services,
Inc. (including Amendment No. 1 to the Short Term Agreement
dated as of July 1, 2006 and Amendment No. 2 to the
Short Term Agreement dated as of December 8, 2006)
(incorporated by reference to Exhibit 10.3 of Amendment
No. 2 to
Form S-1
(Registration
No. 333-162344)
filed on November 10, 2009)
|
155
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.4
|
|
Group Long Term Disability Reinsurance Agreement dated as of
January 1, 1999 (the Long Term Agreement)
between Safeco Life Insurance Company and Reliance Standard Life
Insurance Company, doing business as Custom Disability
Solutions, successor to Duncanson & Holt Services,
Inc. (including Amendment No. 1 to the Long Term Agreement
dated as of January 1, 2000, Amendment to the Long Term
Agreement dated as of January 1, 2006, Amendment No. 3
to the Long Term Agreement dated as of July 1, 2006,
Amendment No. 4 to the Long Term Agreement dated as of
December 8, 2006 and Amendment No. 5 to the Long Term
Agreement dated as of September 1, 2008) (incorporated by
reference to Exhibit 10.4 of Amendment No. 2 to
Form S-1
(Registration
No. 333-162344)
filed on November 10, 2009)
|
|
10
|
.5
|
|
Coinsurance Agreement dated as of August 24, 2001 between
Safeco Life Insurance Company and The Lincoln National Life
Insurance Company (incorporated by reference to
Exhibit 10.5 of Amendment No. 1 to
Form S-1
(Registration
No. 333-162344)
filed on October 26, 2009)
|
|
10
|
.6
|
|
Coinsurance Funds Withheld Reinsurance Agreement dated as of
December 1, 2001 between Safeco Life Insurance Company and
Transamerica Insurance Company (incorporated by reference to
Exhibit 10.6 of Amendment No. 1 to
Form S-1
(Registration
No. 333-162344)
filed on October 26, 2009)
|
|
10
|
.7
|
|
Investment Management Agreement between White Mountains Advisors
LLC and Occum Acquisition Corp., dated as of March 14, 2004
(including Amendment to Investment Management Agreement dated as
of September 30, 2004, Amendment No. 2 to the
Investment Management Agreement dated as of August 1, 2005,
Amendment No. 3 to the Investment Management Agreement
dated as of October 1, 2005 and Amendment No. 4 to the
Investment Management Agreement dated as of March 9, 2007)
(incorporated by reference to Exhibit 10.7 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
10
|
.8
|
|
Agency Agreement dated as of March 10, 2006 among Symetra
Life Insurance Company, WM Financial Services, Inc. and WMFS
Insurance Services, Inc. (including Addendum to the Agency
Agreement dated as of February 22, 2007, Amendment to the
Agency Agreement dated as of March 26, 2007, Amendment to
the Agency Agreement dated as of July 17, 2007, Amendment
to the Agency Agreement dated as of December 18, 2007,
Amendment to the Agency Agreement dated as of September 15,
2008, Amendment to the Agency Agreement dated as of
September 23, 2008, Addendum to the Agency Agreement dated
as of September 23, 2008, Assignment of Agency Agreement
between Symetra Life Insurance Company and WaMu Investments,
Inc. (formerly WM Financial Services, Inc.) dated as of
May 2, 2009 among Symetra Life Insurance Company, WaMu
Investments, Inc. (formerly WM Financial Services, Inc.), WMFS
Insurance Services, Inc. and Chase Insurance Agency, Inc. and
Amendment to the Agency Agreement dated as of May 2, 2009)
(incorporated by reference to Exhibit 10.8 of Amendment
No. 1 to
Form S-1
(Registration
No. 333-162344)
filed on October 26, 2009)
|
|
10
|
.9
|
|
Agency Agreement dated as of September 26, 2006 among
Symetra Life Insurance Company and Chase Insurance Agency, Inc.
(including Addendum to the Agency Agreement dated as of
May 15, 2007 and Addendum to the Agency Agreement dated as
of March 21, 2008) (incorporated by reference to
Exhibit 10.9 of Amendment No. 1 to
Form S-1
(Registration
No. 333-162344)
filed on October 26, 2009)
|
|
10
|
.10
|
|
Symetra Financial Corporation Performance Share Plan
2006-2008
(incorporated by reference to Exhibit 10.10 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
10
|
.11
|
|
Symetra Financial Corporation Performance Share Plan
2007-2009
(incorporated by reference to Exhibit 10.11 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
10
|
.12
|
|
Symetra Financial Corporation Performance Share Plan
2008-2010
(incorporated by reference to Exhibit 10.12 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
10
|
.13
|
|
Symetra Financial Corporation Performance Share Plan
2009-2011
(incorporated by reference to Exhibit 10.13 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
10
|
.14
|
|
Annual Incentive Bonus Plan (incorporated by reference to
Exhibit 10.14 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
156
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.15
|
|
2008 Sales Incentive Plan for Pat McCormick (incorporated by
reference to Exhibit 10.15 of Amendment No. 1 to
Form S-1
(Registration
No. 333-162344)
filed on October 26, 2009)
|
|
10
|
.16
|
|
Symetra Financial Corporation Equity Plan (incorporated by
reference to Exhibit 10.16 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
10
|
.17
|
|
Symetra Financial Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.17 of
Form S-1
(Registration
No. 333-162344)
filed on October 5, 2009)
|
|
10
|
.18
|
|
2009 Sales Incentive Plan for Pat McCormick (incorporated by
reference to Exhibit 10.18 of Amendment No. 1 to
Form S-1
(Registration
No. 333-162344)
filed on October 26, 2009)
|
|
10
|
.19
|
|
Form of Restricted Stock Agreement (incorporated by reference to
Exhibit 10.19 of Amendment No. 2 to
Form S-1
(Registration
No. 333-162344)
filed on November 10, 2009)
|
|
10
|
.20
|
|
Form of Director and Officer Indemnification Agreement
(incorporated by reference to Exhibit 10.20 of Amendment
No. 3 to
Form S-1
(Registration
No. 333-162344)
filed on December 12, 2009)
|
|
14
|
.1
|
|
Code of Business Conduct*
|
|
21
|
.1
|
|
Subsidiaries of Symetra Financial Corporation (incorporated by
reference to Exhibit 21.1 of Amendment No. 4 to
Form S-1
(Registration
No. 333-162344)
filed on January 6, 2010)
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm*
|
|
24
|
.1
|
|
Power of Attorney (included on signature page to this
Form 10-K)
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
and
Rule 15d-14(a)
of the Securities Exchange Act, as amended*
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
and
Rule 15d-14(a)
of the Securities Exchange Act, as amended*
|
|
32
|
.1
|
|
Certification of Chief Executive Officer Pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002*
|
|
32
|
.2
|
|
Certification of Chief Financial Officer Pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002*
|
|
|
|
|
|
Confidential treatment has been granted for certain portions
which are omitted in the copy of the exhibit electronically
filed with the SEC. The omitted information has been filed
separately with the SEC pursuant to our application for
confidential treatment. |
|
* |
|
Filed herewith |
157