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,
2010
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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 þ No o
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. o
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)
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 aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant as of June 30, 2010 was
approximately $1.0 billion, based on the closing price of
$12.00 per share of the Common Stock on the New York Stock
Exchange on June 30, 2010.
As of March 11, 2011, the registrant has 118,532,700 common
voting shares outstanding, with a par value of $0.01 per share.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of 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
Stockholders to be held on May 11, 2011, which will be
filed with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after the year ended
December 31, 2010.
Unless the context otherwise requires, references in this
Annual Report on
Form 10-K
to we, our, us and the
Company are to Symetra Financial Corporation together with
its subsidiaries. References to Symetra refer to
Symetra Financial Corporation on a stand-alone, non-consolidated
basis.
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 our:
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estimates or projections of revenues, net income, net income per
share, adjusted operating income, adjusted operating income 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, including prospective products,
services and distribution partners.
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These statements are based on certain assumptions and analyses
made by us in light of our 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 our 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 and a prolonged
low interest rate environment;
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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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continued viability of certain products under various economic
and other conditions;
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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 our business costs and
required capital levels;
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the ability of Symetras subsidiaries to pay dividends to
Symetra;
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the ability of the new executive leadership team to successfully
implement business strategies;
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the effects of implementation of the Patient Protection and
Affordable Care Act (PPACA);
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the effects of implementation of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (the Dodd Frank
Act); and
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the risks that are described in Item 1ARisk
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 us will be realized or, even if substantially
realized, that they will have the expected consequences to, or
effects on, our business or operations. We assume no obligation
to update publicly any such forward-looking statements, whether
as a result of new information, future events or otherwise.
4
PART I
Overview
Our
Business
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 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. 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 nationally distribute our array of annuity and insurance
products through an extensive and diversified independent
distribution network. Our distributors include financial
institutions, employee benefits brokers, third party
administrators, specialty brokers, brokerage general agents,
independent agents and advisors. We believe that our
distribution network allows us to access a broad share of the
consumer markets for insurance and financial services products.
We currently distribute our annuity and life insurance products
through approximately 17,000 independent agents, 24 key
financial institutions and 4,600 independent employee benefits
brokers. We continually add new distribution relationships to
expand the breadth of partners offering our products.
Our
Segments
We manage our business through three divisions composed of four
operating segments and one non-operating segment:
Group
Division
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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
Division
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Deferred Annuities. We offer fixed and
variable deferred annuities to consumers who want to accumulate
tax-deferred assets for retirement.
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Income Annuities. We offer single premium
immediate annuities, or SPIAs, to customers seeking a reliable
source of retirement income or to protect against outliving
their assets during retirement, 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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Life
Division
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Life. We offer a wide array of individual
products such as term and universal life insurance, including
single premium life insurance, as well as bank-owned life
insurance, or BOLI.
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Other
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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, earnings related to our limited partnership
interests, the results of small, non-insurance businesses that
are managed outside of our divisions, and inter-segment
elimination entries.
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See Note 21 to the Consolidated Financial Statements for
financial results of our segments, including our operating
revenues, for each of the last three fiscal years.
Our
Strategies
We believe we are well positioned to enhance shareholder value
through the pursuit of the following strategies focused on
growth and diversification of our business:
Group
Division:
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Sustain our solid underwriting track record in medical
stop-loss insurance. We believe we are considered
a market leader in medical stop-loss because of the relatively
large size of our block of business and our track-record of
profitability. We plan to continue to focus on managing the loss
ratio results to be within our long-term target range, while
pursuing growth when the marketplace allows us to achieve our
target pricing.
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Expand our group life product to mid-sized
businesses. We announced in January 2011 our
initiative to significantly expand our presence in the group
life marketplace by leveraging our strong relationships with
employee benefit brokers to deliver an enhanced suite of group
life and disability income insurance products and solutions to
mid-sized businesses.
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Retirement
Division:
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Drive profitable growth by selling annuities through large
financial institutions and broker-dealers. We
have a two-pronged approach to expanding product sales
consisting of deepening our existing distribution relationships
and adding new distribution partners and contract holders. We
believe that we are adept at developing annuity products that
align with the needs of our key distribution partners.
Furthermore, by treating our distributors as clients and
providing them with first-rate levels of service, we look to
cultivate strong relationships, and continue expanding our
national distribution network.
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Diversifying into fixed indexed annuities and evaluating
other less interest sensitive products. We intend
to release a new fixed indexed annuity product in the second
quarter of 2011 with distribution focused in the financial
institution channel, where we have a strong presence, and the
broker-dealer channel. In addition, we are exploring
enhancements of our registered products as an opportunity to
diversify our credit and interest rate risk. We believe these
products could help expand our distribution footprint in the
broker-dealer channel.
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Life
Division:
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Broaden portfolio of life insurance products and expand into
new distribution markets. We intend to continue
to leverage our relationships with large financial institutions
to sell single premium life insurance. In addition, we plan to
develop new life insurance products for the brokerage general
agent marketplace. We further plan to capitalize on our
expertise in BOLI and expand into the company owned life
insurance, or COLI, marketplace.
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Corporate:
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Effectively deploy capital to maximize long-term shareholder
value. We believe our capital management strategy
enables us to remain flexible and allocate capital to
opportunities that offer the highest returns. Our first priority
is organic growth of the Company through increased sales of
existing, refreshed and new products. This involves investing in
our infrastructure to support product development and other
divisional strategies. As a result, we expect to carry excess
capital in 2011 as we invest in our future. We expect our
results to show traction from our growth initiatives in the
later part of 2011. We also believe our capital levels can
support an acquisition of up to approximately $400 million
that would complement our growth and diversification strategies.
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Maintain a strong balance sheet. We intend to
continue to be vigilant about maintaining a strong balance
sheet. We believe a strong balance sheet will allow us to
continue growing our business in all economic environments. Our
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 divisions.
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Financial stability through a diverse mix of
business. We believe that our diverse mix of
businesses offers us financial stability. Given our lack of
reliance on any one 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. We intend to further
diversify our businesses to provide us greater financial
stability and provide long-term shareholder value.
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Group
Division
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 medical stop-loss insurance sold to employers with
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
insurance, accidental death and dismemberment insurance; and
disability income insurance 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.
We sell Groups products through several types of
distributors, including third party administrators, or TPAs,
employee benefits brokers, consultants and administrative
services only, or ASO, arrangements. ASOs are fully-insured
carriers that offer administrative services to employer
self-funded health plans and also offer our medical stop-loss
insurance to those employers.
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 health and employee benefit markets provide us with
opportunities to support close distributor relationships and to
provide employers innovative and customer-centric benefit plans.
Our primary measure of profitability in the Group division is
the group loss ratio. This measure indicates the portion of each
dollar of premium that was used for policyholder claims. In late
2009 we took
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pricing actions to bring our loss ratio in line with our
long-term target of 63% 65%. During 2009 our Group
division experienced a higher loss ratio of 68.3% as a result of
a higher frequency of large claims in excess of
$0.5 million. As a result of the pricing actions,
profitability increased during 2010, resulting in a 64.9% loss
ratio.
Products
Group
Medical Stop-Loss
Our medical stop-loss insurance, the leading product in our
Group division representing approximately 90% of premiums in
2010, is provided to employers that self-fund their
employees health claim costs. It is designed for employers
that 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. In general, we retain group
medical stop-loss risk up to $1.1 million per individual
and reinsure the remainder with Reliastar Life Insurance Company
and White Mountains Re America.
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. Employers have a great deal of
flexibility in electing the benefits made available to
employees, which helps employers manage total incurred
healthcare costs.
Life
Insurance, Accidental Death and Dismemberment
Our group term life insurance product provides benefits in the
event of an insured employees (or dependents) 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 employee as a result of accidental death or injury. We
reinsure 40%50% of our group life risk and cap our
liability at $0.5 million per individual.
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.
Benefits can be a set dollar amount or based upon a percentage
of earnings. Our short-term and long-term disability risk is
currently 100% reinsured, except for the short-term disability
income product sold within limited benefit medical plans, which
is not reinsured.
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 this market. Our competitors
include large and highly rated insurance carriers, many of which
offer similar products and use similar distribution channels.
The market has
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remained stable with little change in the number of carriers
serving this market. We focus on profitability as we strive to
underwrite and renew only business that meets our return
targets; however, this discipline sometimes leads to a reduced
market share.
Pricing in the medical stop-loss insurance market has proven to
be cyclical over time. More recently the market has been
reasonably disciplined based upon price increases and retention
rates achieved on our recent account renewals, as well as new
business sales. Our relationships with our distribution partners
are the key to us selling business in this competitive
environment.
Retirement
Division
Deferred
Annuities
Overview
Our Deferred Annuities segment offers fixed and variable
deferred annuities to consumers who want to accumulate
tax-deferred assets for retirement. The fixed or
variable classification describes whether we or the
contract holder bear the investment risk of the assets
supporting the contract. This also determines the manner in
which we generate earnings, either as investment spreads for
fixed annuities or asset-based fees for variable annuities. We
offer qualified and non-qualified annuities to individuals
through financial institutions, broker-dealers, independent
agents and financial advisors.
The demand for fixed annuities increased during the turbulent
markets of 2008 and 2009 as consumers sought the stable return
offered by our products; however, the low interest rate
environment experienced in 2009 and 2010 has dampened demand as
consumers were less willing to invest long term at low interest
rates. We believe the demand for fixed annuity and other
investment products that help consumers supplement their social
security benefits with reliable retirement income will endure as
consumers focus on savings and as interest rates begin to
increase. We also believe that as employers continue to replace
traditional pensions with defined contribution plans, we will
benefit from the consumers decision to rollover their
funds to IRAs or Roth IRAs at retirement. It is our goal to
capture and hold these customers by offering products that
address their evolving needs and by providing excellent service
to our distribution partners and contract holders.
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 Custom and
Select series that offer five- and seven-year surrender charge
periods and a choice of one-, three-, five-, or seven-year
initial guaranteed interest rate periods. After the initial
guaranteed interest rate 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, product profitability and our judgement
as to the impact any such change would have on our relationships
with our customers and distribution partners. 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 holders retain their
contracts through the surrender penalty period. After one year
in the annuity contract, the contract holders 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
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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 seven-year period.
Approximately $7.2 billion, or 77.9%, of the total account
value of our fixed annuities as of December 31, 2010, were
subject to surrender charges.
We change the initial crediting rate for fixed deferred
annuities based on market conditions. We may adjust the
crediting rate annually or after the initial guaranteed interest
rate expires, if applicable, for any given deposit. Most of our
recently issued annuity contracts have lifetime minimum
guaranteed crediting rates between 1.0% and 1.5%.
The attractiveness of our products to distributors depends on
many factors. For example, many of our annuity products compete
on the interest rates we credit initially and through the life
of the contract. We expect to position our products to have more
level interest rates through the life of the contract, which
could reduce our sales volumes.
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, The majority of
our GMDB risk on our individual variable annuities is reinsured.
We do not currently offer guaranteed living benefits found in
most of the products on the market.
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.
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. As part of pricing we
take into account mortality improvements in the general
population and our historical experience. Additionally, we
analyze the risk profile of the product, special reserving and
capital requirements, and the expected expenses we will incur.
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Income
Annuities
Overview
We offer retail 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. Payments can
begin immediately or be deferred several years into the future.
As of December 31, 2010, we had $755.5 million of
reserves associated with retail immediate annuities.
The low interest rate environment during 2010 resulted in
relatively flat sales of immediate annuities. Although low
interest rates dampened sales in 2010, we believe that the
demographic trend of greater numbers of people approaching
retirement age and their corresponding need for dependable
retirement income to last their entire lives will help increase
sales. According to Kehrer-LIMRA, we were the third largest
seller of immediate annuities through banks for the first nine
months of 2010.
We also offer structured settlement annuities that provide an
alternative to a lump sum settlement, generally in a personal
physical injury or workers compensation claim. The
structured settlement annuity provides 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. These are typically
purchased by property and casualty insurance companies for the
benefit of an injured claimant. As of December 31, 2010, we had
$5.9 billion of reserves associated with structured
settlement annuities.
Products
Immediate
Annuities
Immediate annuities differ from deferred annuities in that they
provide for contractually guaranteed payments that typically
begin within one year of issue. Generally, the immediate
annuities available in the marketplace do not provide for
surrender or policy loans by the contract holder. We offer a
liquidity feature that allows the contract holder to
periodically reduce a portion of the future payments in exchange
for a present value lump sum. We also offer a feature that
allows beneficiaries to convert remaining non-life contingent
benefits to a lump sum after death of the annuitant. Our Freedom
Income product enables the customer to pick a payment start date
several years after contract purchase. We believe this product
is a cost effective means of funding a future income stream.
Structured
Settlements
Structured settlement annuities provide an alternative to a lump
sum settlement, generally in a personal, physical injury lawsuit
or workers compensation claim, and are typically purchased
by property and casualty insurance companies for the benefit of
an injured claimant. In addition to providing scheduled payments
over a fixed period or for the life of the claimant, structured
settlement annuities may also 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 annuities 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. We offer funding services to payees whose financial
circumstances may have changed from the time they originally
received a structured settlement. Our funding services provide
an immediate lump sum payment to replace future benefit payments
or allow payees to re-structure a portion of their benefit
stream to assure that the timing of benefit payments meets their
current needs. We believe that this service has been well
received by our clients and the courts.
Our current financial strength ratings limit our ability to
offer structured settlement annuities. If our principal life
insurance company subsidiary, Symetra Life Insurance Company,
receives an upgrade of its
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financial strength ratings from A (Excellent) to
A+ (Superior) from A.M. Best, courts and
defendants will be more willing to approve structured settlement
contract arrangements from us. Improving this rating will allow
us to participate fully in this market.
Underwriting
and Pricing
We price immediate and structured settlement annuities 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 and immediate annuities with life contingencies 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 and structured settlement annuities
are driven by the spread on our investment of premiums versus
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
also increase or decrease on the products that contain life
contingent payments depending upon our mortality experience.
Life
Division
Overview
Life insurance provides protection against financial hardship
after the death of an insured by providing cash payments to the
beneficiaries of the policyholder. 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. Universal life insurance products
including our single premium life product also provide an
efficient way for assets to be transferred to heirs. Our
universal life insurance products 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 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 offer our life insurance products primarily through the
following distribution channels: financial institutions,
brokerage general agents, independent agents, financial
advisors, and through 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 a policyholder decides to lapse the policy. As of
December 31, 2010, we had $181.1 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
12
payments or otherwise terminates the policy, including
potentially converting to a permanent plan of insurance.
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 $8.2 million of XXX
deficiency reserves as of December 31, 2010.
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 also offer a single premium
universal life plan through financial institutions. Its purpose
is wealth transfer for clients between the ages of 60 and 80. 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,
2010, we had $708.8 million of account values associated
with our universal life products.
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 $17.6 million of AXXX deficiency reserves as of
December 31, 2010. Our product pricing is not dependent on
securitization of AXXX deficiency reserves.
Bank-Owned
Life Insurance (BOLI)
Our life insurance business also includes $4.4 billion of
direct BOLI account values. 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. Many financial institutions have purchased BOLI
as a tax-advantaged asset to back employee benefit liabilities.
Our fixed rate BOLI product is a highly stable, low-risk
investment that offers an annual pre-tax equivalent return that
is generally higher than traditional investments.
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. However, in 2011 we plan to reevaluate some of our
reinsurance agreements and potentially increase the amount of
risk retained. 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 six primary risk categories,
depending upon current health, medical history and other
factors. Each of these six 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
13
category. 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.
Our Life division earnings are driven by mortality experience
primarily on our term and traditional life products, and
investment margins primarily on our universal life products
(through spread or fees). Our BOLI earnings are driven by return
on assets considering total revenues including net investment
income and cost of insurance charges less total policyholder
benefits and claims as a percentage of BOLI account values.
Distribution
We distribute our products through a growing, diversified
distribution network. We believe access to a variety of
distribution outlets enables us to capture a broad share of
consumer markets for insurance and financial services products.
We compete with other financial services companies to attract
and retain relationships. Some of the factors that led to our
success in competing for sales include responsiveness to the
needs of our distribution partners, stability and financial
strength ratings, the marketing and training we provide and
strong relationships with key firms.
Late in 2010, we reorganized our life and retirement division
sales structures into a unified and versatile sales team to
improve focus and eliminate redundancies. Our new structure is
focused on a national sales team supporting agents and advisors
through a single field wholesaling force and a national accounts
team supporting the distributor partnerships that drive the
majority of our life insurance and annuity sales, including
banks, wirehouses, brokerage general agents (BGAs), and
independent firms.
The following table sets forth our sales by distribution
channel, which are defined by segment as:
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Group. Annualized first-year premiums for new
policies;
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Deferred Annuities and Income
Annuities. Deposits for new policies; and
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Life. Annualized first-year premiums for
recurring premium products, and 10% of new deposits for BOLI and
other single-premium products.
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Deferred
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Income
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Distribution Channel
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Group
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Annuities
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Annuities
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Life
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(In millions)
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For the Year ended December 31, 2010:
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Financial institutions
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$
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$1,549.2
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$84.4
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$4.5
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Employee benefits brokers/ASOs/TPAs
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95.5
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Independent agents/BGAs
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261.5
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55.6
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5.7
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Structured settlements/BOLI
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120.0
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46.1
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Total
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$95.5
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$1,810.7
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$260.0
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$56.3
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For the Year ended December 31, 2009:
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Financial institutions
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$
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$1,998.1
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$95.6
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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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Total
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$91.3
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$2,228.4
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$251.8
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$13.0
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Financial Institutions. We have sales
agreements with many of the top firms, accounting for over
60,000 agents and registered representatives in all
50 states and the District of Columbia. Financial
institutions distribute a significant portion of our deferred
and income annuities, as well as a growing portion of our life
insurance policies. During 2010 we distributed our annuity and
life insurance products through 24 key financial institutions,
which we define as financial institutions that produce at least
$10 million of sales for us during the fiscal year.
One financial institution, JPMorgan Chase & Co.,
accounted for $319.3 million, or 14.4%, and
$897.4 million, or 34.7%, of our total sales for the years
ended December 31, 2010 and 2009, respectively, selling
primarily fixed annuity products. No other distribution partner
provided 10% or more of our 2010 or 2009 total sales.
Employee Benefits Brokers, Administrative Services Only (ASO)
carriers, Third Party Administrators (TPA). We
distribute our Group segment products through approximately
2,100 agencies in the employee benefits broker/ASO/TPA channel.
This distribution channel is also supported by approximately 25
of our employees located strategically across a nationwide
network of 15 regional offices.
Independent Agents, Brokerage General Agencies
(BGAs). We distribute life insurance and deferred
annuities through approximately 17,000 independent agents from
approximately 9,000 different agencies located throughout the
United States. These independent agents market our products and
those of other insurance companies.
Structured Settlements. We distribute
structured settlement annuities through approximately
570 settlement consultants representing 90 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.
Reserves
Overview
We calculate and maintain reserves for estimated future benefit
payments to our policyholders and contract holders in accordance
with U.S. generally accepted accounting principles, or
GAAP. We establish reserves at amounts that we expect to be
sufficient to satisfy our policy obligations. We release these
reserves
15
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 medical stop-loss 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 not yet reported 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 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.
Deferred
Annuities and Income Annuities
For our investment contracts, which are primarily deferred
annuities, contract holder liabilities are equal to the
accumulated contract account values, which generally consist of
an accumulation of deposit payments, less withdrawals, plus
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 contract holder.
Reserves for future policy benefits on our income 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.
16
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, 2010, our $20.4 billion
(amortized cost) fixed income portfolio was managed by White
Mountains Advisors LLC, or WM Advisors, and our
$220.8 million (cost) 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 liabilities
associated with the portfolio. The portfolio 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 segments:
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Group. We invest in short duration fixed
income corporate bonds and mortgage-backed securities.
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Deferred Annuities. 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 extend 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, and a modest amount of
below investment grade bonds. 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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Life. 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 long duration
fixed income assets and equities, and limited partnerships.
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We are exposed to three primary sources of investment risk:
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Credit riskrisk 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 riskrisk 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 riskrisk 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. For
commercial mortgage loans, we manage credit risk by
17
analyzing the market value and revenue generating potential of
the property, as well as the credit worthiness of the borrower.
We diversify our credit risk by both geographic location and
property-type, and use personal recourse to further reduce our
risk of loss. We routinely review the financial statements of
our borrowers and the underlying properties.
We mitigate interest rate risk through management of cash flow
and duration matches between our assets and liabilities, seeking
to minimize risk of realized loss in both rising and falling
interest rate environments.
We mitigate equity risk by limiting the size of our equity
portfolio. We correlate our equity exposure in our Income
Annuities segment to our long duration obligations. We review
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 automatic
and facultative reinsurance agreements. We use reinsurance to
diversify our risks and manage loss exposures primarily in our
Group and Life segments. The use of reinsurance permits us to
write policies in amounts larger than the risk we are willing to
retain. In some cases, such as our agreement with Transamerica
Life Insurance Company, we instead act as a reinsurer (or
coinsurer) of another life insurance company.
We cede insurance risk 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−.
We had reinsurance recoverables of $280.8 million and
$276.6 million as of December 31, 2010 and 2009,
respectively. The following table sets forth our largest
exposures to reinsurers as of December 31, 2010, 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 (RGA)
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$109.9
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A+
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Transamerica Life Insurance Company (Transamerica)
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77.1
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A+
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UNUM Life Insurance Company of America (UNUM)
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44.9
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A−
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In the table above, the reinsurance recoverables under our
agreements with RGA and UNUM 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.
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
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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. 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
premiums 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
reinsure all 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. 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 approximately 87% of the 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 represents our expense
load and send the remainder to the reinsurer.
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In January 2011, we amended our LTD and STD reinsurance
agreements to terminate the agreements with respect to future
business effective June 1, 2011. As of March 1, 2011,
the reinsurers will no longer accept reinsurance for any cases
underwritten after that date. Notwithstanding the termination,
the reinsurers remain liable for risk previously ceded to and
reinsured by the reinsurers under the terms of the reinsurance
agreements. We are nearing final agreement with respect to a new
reinsurance agreement with a different reinsurer to diversify
our risk and manage our exposure to losses on group long-term
and short-term disability income policies underwritten beginning
March 1, 2011.
Operations
and Technology
We have a dedicated team of service and support personnel, as
well as our outsourced provider Affiliated Computer Services, or
ACS, a Xerox Corp. company that deliver information technology
solutions to drive competitive advantages, 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.
Under the terms of our agreement with ACS we may terminate our
services prior to the July 2014 contract expiration date upon
90 days notice and payment of a $4.9 million
termination fee. The termination fee declines over the life of
the contract, and is pro-rated based upon the services that are
terminated. See Note 16 to the Consolidated Financial
Statements for further discussion of this third-party service
agreement.
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. Generally, our life and health insurance
products compete with similar products offered by other
19
large and highly rated insurers, and our 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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product features;
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price;
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commissions;
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quality of service;
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ability to purchase attractive assets;
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diversification of distribution including on-line 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. For example, many of our annuity
products compete on the interest rates we credit, resulting in
the risk that our annuity purchasers may be able to obtain more
favorable rates from our competitors, which may lead to a loss
of current customers or future annuity business. 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 that is an important factor in
establishing the competitive position of 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, 2010:
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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 |
20
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 XIV,
the third highest of 15 rankings. 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 issuer credit ratings range from AAA to
D, indicating default. 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.
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 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 21 financial strength ratings
categories. Fitch issuer default ratings range from
AAA (highest credit quality) to D
(default). 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.
A.M. Best, S&P, Moodys and Fitch review their
ratings periodically and we cannot provide assurance 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.
21
The ratings included in the table above 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
make inquiries of us regarding compliance with insurance,
securities and other laws and regulations. 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 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
22
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 approval or
non-disapproval 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 approved or
not objected to 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 policyholders or
contract holders.
Market
Conduct Regulation
Our business is subject to extensive laws and regulations that
are administered and/or enforced by a number of different
governmental and non-governmental self-regulatory bodies, and
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
authorities generally enforce these provisions through periodic
market conduct examinations.
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, 2010, we have not
received any material adverse findings resulting from any
insurance department examinations of our insurance subsidiaries;
however, the period remains subject to examination. The
Washington and New York state insurance departments recently
began
23
examinations of our insurance subsidiaries for the five and
three years ended December 31, 2010, respectively. To date,
we have not received any material adverse findings from these
examinations.
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.
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. 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
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
24
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, 2010, 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,
2010, Symetra Life Insurance Company had a risk-based capital
ratio of approximately 480%.
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
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, certain of our
products are required to be registered under the Securities Act
of 1933 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 RegulationsSecurities
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, 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 further modify the federal estate tax, the
Patient
25
Protection and Affordable Care Act, or the Dodd-Frank Act. 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
Existing federal laws and regulations provide favorable tax
treatment to certain insurance products we offer. 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. If existing federal
laws and regulations are revised to reduce this favorable tax
treatment or to increase the tax-deferred status of competing
products, we, along with other life insurance companies, will be
adversely affected with respect to our ability to sell such
products. Furthermore, although Congress has reinstated the
estate tax for 2011 and 2012, Congress also considers from time
to time the repeal of the federal estate tax which may adversely
affect sales and surrenders of our life insurance 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
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 FINRA, as well as
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. In January 2011, the SEC staff released the results of a
study on investment advisors and broker-dealers, and recommended
adoption of a uniform fiduciary standard that would apply to
both investment advisors and broker-dealers. We cannot predict
the precise nature of which regulations, if any, will result
from the study, but they could impact the manner in which
certain of our businesses operate and how certain of our
distributors sell our products.
The laws and regulations noted in the preceding paragraph 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.
26
Employee
Retirement Income Security Act and Internal Revenue Code
Considerations
We provide certain products and services to certain employee
benefits plans that are subject to Employee Retirement Income
Security Act, or 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.
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 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 March 11, 2011, we had approximately
1,100 full-time and part-time employees. We believe our
employee relations are satisfactory.
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 are available free of charge on
Symetras Investor Relations website, which can be accessed
at www.symetra.com, as soon as reasonably practicable
after such material is electronically filed with, or furnished
to, the SEC. Additionally, copies of Symetras annual
report will be made available, free of charge, upon written
request.
Risks
Related to Our Business
Fluctuations
in interest rates and interest rate spreads could impact sales,
profitability or cash flows of interest-rate sensitive
products.
Certain of our insurance and investment products, such as fixed
annuities and universal life insurance, are sensitive to
interest rate fluctuations. Changes in interest rates may make
our products less attractive to customers seeking higher yields,
which could adversely impact our sales or trigger increased
surrenders and withdrawals. For example, when the initial
guaranteed interest rate period for fixed annuity products
expires, we may significantly decrease renewal crediting rates
below the initial rates, which may impact our ability to obtain
and retain business. Fluctuations in interest rates may also
reduce the spread, or the difference between the
returns we earn on the investments that support our obligations
and the amounts that we must credit to policyholders and
contract holders, which could adversely impact the profitability
of those products and therefore our results of operations.
Reductions in expected profitability or increased surrenders and
27
withdrawals may require us to accelerate amortization of
associated deferred policy acquisition costs, or DAC, and
deferred sales inducements, or DSI, balances, further decreasing
our results of operations.
Prolonged
periods of low interest rates
Prolonged periods of low interest rates may have a negative
impact on our ability to sell products that are dependent on
interest earnings, such as fixed annuity and universal life
products, as consumers look for other high-yielding investment
vehicles to fund retirement. In low interest rate environments,
such as we experienced during 2010, it is difficult to offer
attractive rates and benefits to customers while maintaining
profitability, which may limit sales growth of interest
sensitive products.
Sustained declines in interest rates may subject us to lower
returns on our invested assets, as well as increased prepayments
on existing investments with embedded call options, which may
reduce our net investment income and compress the spread on our
interest-rate sensitive products. This risk is exacerbated by
guaranteed minimum crediting rates established by our contracts
and/or
regulatory authorities, and restrictions on the timing and
frequency with which we can adjust our crediting rates. The
performance of our long-term income annuities and BOLI products
is also sensitive to the investment yields on our invested
assets backing such products. In extreme situations, the
investments yield earned could be lower than the credited rates
guaranteed to the customers. We may not be able to successfully
manage interest rate spreads or the potential negative impact of
those risks. Our interest rate spreads and associated investment
margins vary by product as follows:
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For the Years Ended December 31,
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2010
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2009
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(Dollars in millions)
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Fixed deferred annuities:
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Interest rate spread
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1.87
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%
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1.81
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%
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Investment margin
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$169.9
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$134.8
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Income annuities, including structured settlements:
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Interest rate spread
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0.57
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%
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0.53
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%
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Investment margin
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$40.2
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$38.4
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Universal life:
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Interest rate spread
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1.50
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%
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1.20
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%
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Investment margin
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$12.1
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$10.2
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BOLI:
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BOLI return on assets
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1.03
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%
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|
1.08
|
%
|
Return on assets margin
|
|
|
$44.4
|
|
|
|
$43.4
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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 we invest as received. Lower than expected
interest rates may reduce our ability to achieve our targeted
investment margins on these products.
We mitigate some of the aforementioned risks by reducing
guaranteed minimum crediting rates offered on new business and,
for our deferred annuity products, lowering up-front
commissions. However, sustained low interest rates may require
us to limit offerings of certain products.
28
Periods
of rising interest rates
We are also subject to risks associated with periods of rising
interest rates. During such times, we may offer higher crediting
rates on new sales of interest-sensitive products and increase
crediting rates on existing in force products to maintain or
enhance product competitiveness. We may not be able to purchase
enough higher yielding assets necessary to fund higher crediting
rates and maintain our desired spread, which could result in
lower profitability on our in force business. In rising interest
rate environments, especially when interest rates are rapidly
rising, it may be difficult to position our products to offer
attractive rates and benefits to customers while maintaining
profitability, which may limit sales growth of interest
sensitive products. In order to maintain sales growth of
interest sensitive products and retain in force customers, we
may offer higher renewal crediting rates which would impact
profitability.
In addition, periods of rising interest rates may cause
increased policy surrenders, withdrawals and requests for policy
loans on deferred annuity and BOLI products, as policyholders
and contract holders seek investments with higher returns. The
resulting liquidity demands may require us to sell assets that
could cause realization of capital losses, particularly in the
event of a sudden rise in interest rates. We may also be
required to accelerate the amortization of DAC and DSI related
to surrendered contracts, which would adversely affect our
results of operations.
Changes
in yield curves
Shifts in the relationship between short- and long-term interest
rates, or yield curve, can also impact our ability to sell our
products, particularly fixed annuities. When the yield curve is
relatively flat or negatively sloped (i.e., high short-term
rates as compared to long-term rates), customers can receive
similar crediting rates on competing products, such as
certificates of deposit, which have shorter required investment
periods. Customers may be more likely to choose those competing
products than our annuities, which tend to be longer term in
nature.
Our
investment portfolio is subject to various interest rate, credit
and liquidity risks that may diminish the value of our invested
assets, reduce investment returns and/or 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. As of December 31, 2010, our total
investments were $23.5 billion, of which $21.3 billion
were fixed maturities. Our fixed maturities portfolio generated
net investment income of $1,119.9 million and
$1,048.1 million, and realized gains (losses) of
$16.8 million and $(74.6) million for the years ended
December 31, 2010 and 2009, respectively.
Interest
rate and credit spread risk
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.
Fluctuations in interest rates may cause actual net investment
income or cash flows to differ from those originally anticipated
for investments that carry prepayment risk, such as
mortgage-backed and other securities with embedded call options.
In periods of declining interest rates, prepayments generally
increase. Mortgage-backed securities, commercial mortgage
obligations and other bonds in our investment portfolio may be
prepaid or redeemed as borrowers seek to borrow at lower
interest rates. If unanticipated, such prepayments may require
us to accelerate amortization on investments purchased at a
premium, which could decrease our net investment income.
Additionally, we may be required to reinvest those funds in
lower interest-bearing investments. Current concerns over
foreclosures could lead to government intervention in the United
States residential mortgage market, resulting in large numbers
of refinancing and prepayments. As of December 31, 2010, we
held $3,801.6 million in residential mortgage-backed
securities,
29
including gross unamortized premiums of $76.9 million, and
an increase in prepayments could significantly accelerate our
premium amortization and result in asset reinvestment at lower
interest rates.
We include an estimate of future principal prepayments in the
calculation of effective yields for mortgage-backed securities
Differences between the actual and estimated timing of the
principal prepayments impact our investment income and may
reduce our overall interest rate spread. As prepayments increase
in periods of declining interest rates, premium amortization
accelerates because the expected life of the asset is shortened.
In periods of rising interest rates, prepayments generally slow,
and discount amortization slows because the expected life of the
asset is extended. These changes in amortization may adversely
affect our investment income.
In addition, 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
periods of low interest rates, such as we experienced during
2010, we may be challenged to find attractive yields on new
investments. During 2010, we mitigated this risk by increasing
our originations of commercial mortgage loans, which generally
provided higher yields than new fixed maturities securities;
however, we may be unable to continue to find appropriate loan
opportunities meeting our high quality standards.
The fair value of our fixed maturities generally increases or
decreases in an inverse relationship with changes in interest
rates and credit spreads. Because all of our fixed maturities
are classified as
available-for-sale,
changes in the fair value of these securities are reflected as a
component of comprehensive income. A rise in interest rates may
cause the fair value of our fixed maturity securities to
decline, particularly for our long-duration investments
supporting our Income Annuities reserves. Declines in fair value
may decrease unrealized gains or result in unrealized losses
recorded in accumulated other comprehensive income (loss)
(AOCI), and decrease our stockholders equity. Further,
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.
We mitigate the risks related to fluctuations in interest rates
and credit spreads by employing
asset-to-liability
matching strategies to ensure that cash flows are available to
pay claims as they become due. However, these strategies may
fail to eliminate or reduce the adverse effects of interest rate
and credit spread volatility.
Credit
risk
Issuers of the fixed maturities 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 or cause realized investment losses. Further, fixed
maturities are evaluated for impairment based on our assumptions
about the creditworthiness of the issuer. For the years ended
December 31, 2010 and 2009, we incurred $15.3 million
and $57.8 million in credit-related impairments,
respectively. A significant increase in defaults and impairments
on our fixed maturities portfolio could adversely affect our
financial condition, results of operations and cash flows. The
determination of impairments is subject to managements
judgment about the creditworthiness and continued cash flows of
a security. While we have controls and procedures in place to
provide reasonable assurance that our impairment analysis is
complete and based on accurate information, actual cash flows
and defaults may vary significantly from our assumptions.
As of December 31, 2010, 5.9% of our total fixed maturity
portfolio at fair value was considered below investment grade.
Below investment grade securities 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. Private equity and
highly leveraged buyouts could also cause certain of our
investment-grade fixed maturities to present more significant
credit risk than when we first invested.
30
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.
For further information on our fixed maturities portfolio and
credit-related impairments, see
Item 7Managements Discussion and Analysis
of Financial Condition and Results of
OperationsInvestments.
Liquidity
risk
Our investments in privately placed fixed maturities, mortgage
loans, policy loans and limited partnership interests, which
collectively represented approximately 12% of total invested
assets as of December 31, 2010, are relatively illiquid
compared to publicly traded fixed maturities and equities. In
addition, periods of market disruption, such as those
experienced in the past three years, could also reduce liquidity
for securities generally considered to be readily marketable. 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.
This risk is mitigated by the liquidity structure of our
underlying reserves, of which 85.4% are considered illiquid or
somewhat illiquid. For further information on the liquidity of
our underlying reserves, see
Item 7Managements Discussion and Analysis
of Financial Condition and Results of OperationsLiquidity
and Capital Resources.
Defaults
in our commercial mortgage loans may adversely affect our
profitability.
Our mortgage loans, which are collateralized by commercial
properties, are subject to default risk. During 2010, we began
strategically increasing our mortgage loan portfolio and
originated $592.1 million of new loans, compared to
$290.8 million originated in 2009. We carry our mortgage
loans at outstanding principal balances, adjusted for
unamortized deferred fees and costs, net of an allowance for
loan losses. Our allowance includes a reserve for probable
incurred but not specifically identified losses in the
portfolio, and specific reserves for any non-performing loans.
The reserve for probable incurred losses is based on our
historical experience, third party data for expected losses on
loans with similar
loan-to-value,
and debt service coverage ratios. Specific reserves are
determined by comparing the carrying value of the loan to the
expected future cash flows, discounted at the loans
effective interest rate, or the fair value of the underlying
collateral, if the loan is collateral-dependent. These reserves
are estimates and may not be sufficient to cover actual losses.
As of December 31, 2010, no loans were classified as
non-performing. However, due to the uncertain economic
environment and the growth in our portfolio, the performance of
our mortgage loan portfolio may decline in the future. In
addition, the majority of our loans have balloon payment
maturities, which may trigger future defaults on currently
performing loans. An increase in the default rate of our
mortgage loan investments, caused by current or worsening
economic conditions or otherwise, could result in realized
losses or increases in our allowance for credit losses and 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 expose us to higher risk of adverse effects on our
loan portfolio and, consequently, on our results of operations
or financial condition. While we seek to mitigate this risk by
having a diversified portfolio, events or developments that have
a negative effect on any particular geographic region or
economic sector may have a greater adverse effect on our loan
portfolio. As of December 31, 2010, 31.0% of our commercial
mortgage loans were located in California, 15.7% were located in
Washington and 9.8% were located in Texas.
31
For additional information on our mortgage loan portfolio, see
Note 6 to the Consolidated Financial Statements and
Item 7Managements Discussion and Analysis
of Financial Condition and Results of
OperationsInvestmentsMortgage Loans.
Gross
unrealized losses on fixed maturity and equity securities may
become 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 and compose a
significant portion of our total assets. Liquidity needs,
portfolio rebalancing, or other reasons may require us to sell
these securities prior to maturity, or credit concerns could
prompt us to conclude that a decline in fair value is
other-than-temporary.
The resulting realized losses or impairments may have a material
adverse effect on our net income.
Unrealized gains or losses on
available-for-sale
securities are recognized as a component of AOCI and are
therefore excluded from net income. The 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. Our gross unrealized losses
on
available-for-sale
fixed maturity and equity securities as of December 31,
2010 were $305.8 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 $40.6 million as of December 31, 2010.
Our
valuation of fixed maturity securities may include
methodologies, estimations and assumptions that 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 91% of our invested
assets as of December 31, 2010. The accounting guidance for
fair value measurements establishes a three-level hierarchy that
gives the highest priority to quoted prices in active markets
for identical assets or liabilities (Level 1) and the
lowest priority to valuation models using unobservable inputs
(Level 3). Level 2 and Level 3 measurements
compose a significant portion of our invested assets; as of
December 31, 2010, approximately $20.4 billion, or
96%, of our fixed maturities were categorized as Level 2
measurements, and $0.9 billion, or 4%, were categorized as
Level 3. Because values for securities classified as
Level 2 and Level 3 are not based on quoted market
prices for identical instruments, the amount we realize upon
settlement or maturity may differ significantly from our
reported fair value. Additionally, multiple valuation methods
may be applicable to a security, and the use of different
methodologies and assumptions could materially affect the
estimated fair value amounts. Decreases in valuations may result
in unrealized losses recorded in stockholders equity or
realized losses recorded in net income, which may have an
adverse effect on our financial condition and results of
operations.
Our Level 2 measurements are obtained from our pricing
services and derived from models that use objectively
verifiable, observable market inputs, such as 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
maturity 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. 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.
As of December 31, 2010, $892.9 million, or 4.2%, of
our fixed maturities portfolio was invested in private placement
securities, which are not actively traded. The fair values of
$815.4 million, or 91.3%, of these assets are classified as
Level 3, as they are determined using a discounted cash
flow approach that requires the use of inputs that are not
market-observable and involves significant judgment.
32
During periods of market disruption, including periods of
significantly rising 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 financial environment. In
such cases, valuations for those securities may require more
subjectivity and management judgment, including valuation
methods, inputs and assumptions that are less observable or
require greater estimation. Rapidly changing and adverse credit
and equity market conditions could also materially impact the
valuation of securities reported in our consolidated financial
statements, and the
period-to-period
changes in value could vary significantly.
To mitigate these risks, we use established, industry-standard
valuation models consistently from
period-to-period.
For more information on our valuation methodology for invested
assets, see Note 7 to the Consolidated Financial
Statements. Additionally, our investment management objective is
to support the expected cash flows of our liabilities and to
produce stable returns over the long term; thus, we typically
hold our fixed maturities until maturity or until market
conditions are favorable for the sale of such investments.
Downturns
and volatility in equity markets could adversely affect our
profitability.
We recognize changes in fair value of our investments in certain
common stock or other equity-like securities in net income,
through net realized investment gains (losses). These
investments, which generally provide higher expected total
returns over the long term, present a greater risk to
preservation of principal than our fixed maturity investments.
As of December 31, 2010, 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. While these investments do not represent a
significant portion of our invested assets, a decline in the
equity markets could have a significant adverse effect on our
net income, and also increase volatility in results between
periods. For example, for the year ended December 31, 2008,
net losses on our equity securities trading portfolio were
$64.5 million, as the S&P 500 Total Return Index
declined 37% that year. In the following year ending
December 31, 2009, net gains were $36.4 million on the
portfolio, as the S&P 500 Total Return Index improved
nearly 27%. For the year ended December 31, 2010, net gains
on our equity securities trading portfolio were
$32.6 million, as the S&P 500 Total Return Index rose
approximately 15% for the year.
We may
face unanticipated losses if we determine our reserves for
future policy benefits and claims are inadequate, or there are
significant deviations from our pricing
assumptions.
We calculate and maintain reserves for estimated future benefit
payments to our policyholders and contract holders in accordance
with U.S. GAAP, which are released as those future
obligations are extinguished. The reserves we establish are
estimates, primarily based on actuarial assumptions with regard
to our future experience, which 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,
mortality and morbidity, persistency, 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.
Health care costs in particular have risen substantially in
recent history and may continue to do so. Our medical stop-loss
products provide coverage for claims exceeding certain dollar
thresholds for either individual or aggregate claims, and
increased medical costs may result in higher claims. While we
monitor claims costs and changes that may affect future costs,
such as medical inflation, changing demographics and changes in
the mix of our business, increases in medical costs may exceed
our expectations or may not be properly factored into our
pricing. This could adversely affect the results of operations
in our Group segment.
33
Persistency is the probability that a policy or contract will
remain in force from one period to the next. 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 contract holders. 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. Our largest exposure to morbidity risk is in our
medical stop-loss products, which we mitigate through
reinsurance. For example, our specific stop-loss business is
100% reinsured for claims above $1.1 million.
Our largest exposure to mortality risk is in our Life segment,
which we also mitigate through reinsurance. Additionally, a
general increase in mortality would be favorable to our Income
Annuities segment, as we may pay fewer benefits than expected.
We regularly monitor our reserves and review our assumptions. 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 that
determination, which could adversely affect our financial
condition and results of operations. There were no significant
adjustments to reserves due to inadequacy during 2010 or 2009.
Although certain of our products permit us to increase premiums
or reduce benefits or crediting rates during the life of the
policy or contract, these changes may not be sufficient to
maintain profitability, or may reduce the attractiveness of our
products relative to competitors. 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, mortality and morbidity
rates could have an adverse affect on our profitability.
We may
face unanticipated losses if we are required to accelerate the
amortization of deferred policy acquisition costs and/or
deferred sales inducements if there are significant deviations
in actual experience or in anticipated
assumptions.
Deferred policy acquisition costs represent certain costs that
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, certain sales
incentives, and other costs such as underwriting and contract
and policy issuance expenses. Deferred sales inducements
represent bonus interest and excess interest mainly on our fixed
deferred annuity products, which are deferred and reported in
other assets on our consolidated balance sheets and amortized as
interest credited over the estimated life of the related
contracts. Under U.S. GAAP, DAC and DSI are 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. As of December 31, 2010,
we had $250.0 million of DAC and $61.8 million of DSI.
Our amortization of DAC and DSI generally depends upon
anticipated profits from investments, crediting rates, surrender
and other policy and contract charges, mortality, morbidity and
maintenance and
34
expense margins. Unfavorable experience with regard to expected
expenses, investment returns, crediting rates, mortality,
morbidity, withdrawals or lapses may cause us to increase the
amortization of DAC and DSI, resulting in higher expenses and
lower profitability. Our assumptions, including those related to
expenses, investment returns, credited interest rates,
mortality, morbidity, withdrawals or lapse experience among
others, are adjusted quarterly to reflect actual experience to
date. For future assumptions, we conduct a study to refine our
estimates of future gross profits on an annual basis during the
third quarter. Upon completion of this study, we revise our
assumptions and update our DAC models to reflect our current
best estimate. Changes in our actual experience or our expected
future experience may result in increased amortization of DAC or
DSI, which would increase our expenses and reduce profitability.
We regularly review our DAC and DSI asset balances to determine
if it is recoverable from future income. The portion of the DAC
and DSI asset balances 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 or DSI 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 or DSI amortization
as a current-period expense.
For further information on our DAC accounting policy, see
Item 7Managements Discussion and Analysis
of Financial Condition and Results of OperationsCritical
Accounting Policies and EstimatesDeferred Policy
Acquisition Costs.
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 is periodically revised by recognized
authorities, including the Financial Accounting Standards Board
(FASB). Recently, the FASB issued revised guidance for DAC,
which limits the costs that are eligible for deferral. This
guidance is effective for our 2012 fiscal year and may result in
more acquisition costs being expensed as incurred, which could
adversely affect our results of operations. Additionally, we may
retrospectively adopt this guidance, which would decrease our
historical DAC asset and retained earnings balances presented in
our future financial statements and decrease future DAC
amortization.
In addition, the FASB is developing new guidance for accounting
for insurance contracts, which would measure liabilities for
insurance contracts based on the present value of estimated
future cash flows to fulfill the contract. This could change the
recognition and measurement of insurance obligations on our
statement of financial position and impact the timing of the
related income in our results of operations. The FASB is also
drafting new guidance for financial instruments which, as
currently proposed, would change the way credit losses for
financial assets are measured. If adopted, these and other
future accounting standards could change the current accounting
treatment that we apply to our consolidated financial
statements, and such changes could have an adverse effect on our
reported financial condition and results of operations.
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 contract holder and policyholder obligations, are important
to maintaining public confidence in our company and our
products, and the ability to market our products and our
competitive position. Additionally, our structured settlement
products are typically purchased during lawsuit settlements for
the benefit of injured claimants and the purchase must be
approved by the courts, which place significant reliance on
financial strength ratings. 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 contract holders 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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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, primarily related to our individual life and
group products. 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 recoverables due from
reinsurers was $280.8 million as of December 31, 2010,
of which $109.9 million was recoverable from our single
largest reinsurer. Our reinsurers may be unable or unwilling to
pay the reinsurance recoverables 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.
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. While reinsurance agreements generally bind
the reinsurer for the life of the business reinsured at
generally fixed pricing, market conditions beyond our control
can 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.
For further discussion on our reinsurance program, see
Item 1BusinessReinsurance.
We may
be unable to attract and retain independent sales intermediaries
and dedicated sales specialists which could result in a
reduction in sales or a loss of business.
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 design and positioning of our product offerings;
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the adjustments we make in premium or interest crediting rates;
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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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Through time our relationship with distributors may deteriorate
due to any of the above factors, which could result in a drop in
sales and/or
a loss of existing business due to higher surrender activity.
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. Sales from our top five distribution
partners accounted for approximately 42% of our total sales in
2010. If our relationships with these distributors were to
deteriorate, it is likely that we would experience a decline in
our sales.
Turbulent economic conditions may also impair our distribution
partners, which would have an adverse impact on our sales.
Further, consolidation of financial institutions 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.
From time to time, due to competitive forces, we may also
experience unusually high employee 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.
Our future success is highly dependent on maintaining and
growing both existing and new distribution relationships. We may
have little or no contact or brand awareness with end customers
of our products, which makes it more difficult to respond to
evolving customer needs and increases our reliance on our
distribution partners.
New
executive leadership may not be able to successfully implement
business strategies for growth.
Our success depends upon our executive leadership teams
ability to develop and implement a successful business strategy.
During 2010, we announced a number of changes in our executive
leadership team. While the new members of our executive
leadership team are experienced in the life insurance industry,
they have not worked together in their new positions with the
Company and may not be able to successfully implement our new
business strategies in the current economic environment. Failure
to effectively integrate our new executive leadership team or
failure of our new executive leadership team to implement our
business strategies could materially adversely affect our future
financial condition and results of operation.
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
37
compete for sales of deferred and income annuity products, group
health and life insurance, 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, which could make it
difficult to achieve our target returns.
Our
strategies for mitigating risks arising from our
day-to-day
operations may prove ineffective resulting in a material adverse
effect on our results of operations and financial
conditions.
Our performance is highly dependent on our ability to manage
risks that arise from a large number of our
day-to-day
business activities, including setting of premium or interest
crediting rates, underwriting, claims processing, policy
administration and servicing, execution of our investment
strategy, financial and tax reporting, marketing and sales
efforts, and other activities, many of which are complex. We
also may rely on third parties for such activities. We seek to
monitor and control our exposure to risks arising out of or
related to these activities through a variety of internal
controls, management review processes, and other mechanisms.
However, the occurrence of unforeseen or un-contemplated risks,
or the occurrence of risks of a greater magnitude than expected,
including those arising from a failure in processes, procedures
or systems implemented by us or a failure on the part of
employees or third parties upon which we rely in this regard,
may have a material adverse effect on our financial condition or
results of operations.
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, terrorism and military actions. Such events could
also lead to unexpected changes in persistency rates as
policyholders and contract holders 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 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.
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. These could adversely impact the valuation and
performance of our investment portfolio. Further, in our group
health and life insurance operations, including bank-owned life
insurance, 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.
The majority of our operations are located in Bellevue,
Washington. In the event of a catastrophic event or disaster in
this area, our employees may be unable to perform their duties
for an extended period of time, which may interrupt our business
operations and adversely affect our financial condition, results
of operations, cash flows, and may result in limited or no
connectivity. The majority of our employees are equipped to work
remotely; however certain duties, such as processing new
business applications, may be difficult to perform remotely.
38
The
failure to maintain effective and efficient information systems
could adversely affect our business.
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, including
providing insurance quotes, processing premium payments,
providing customer support, filing and paying claims and making
changes to existing policies. We also use systems for investment
management, financial reporting and data analysis to support our
policyholder reserves and other actuarial estimates.
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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increases in administrative expenses;
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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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litigation exposure; or
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regulatory compliance problems, such as failure to meet prompt
payment obligations.
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Systems outages or outright failures would compromise our
ability to perform critical 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 systems or our data are destroyed or disabled, employees
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.
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 ability to keep our systems
fully integrated with those of our clients is critical to the
operation of our business, and 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.
The
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 confidentiality obligations. For example, the collection and
use of patient data in our Group segment is the subject of
national and state
39
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 the same manner and to the same extent as we
protect our own confidential information. The actions we take to
protect 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;
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limiting access to electronic information; and
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in the event of a security breach, providing credit monitoring
or other services to affected customers.
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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.
This could have an adverse impact on our companys image
and, therefore, result in lower sales or lapses of existing
business.
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 investment
management and information technology functions, and expect to
continue to do so in the future. When we engage a third-party
vendor, we perform extensive due diligence on the vendor,
including evaluations of quality of service, financial
stability, compliance with laws and regulations and appropriate
business continuity plans. However, 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 operating and financial covenants
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. We rely on the 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. As of
December 31, 2010, we had no balance outstanding and we
have had no borrowings under this facility since it was
established. In connection with this facility, we have agreed to
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.
40
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 and unable to access it when needed, 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, financial
condition and results of operations.
We may
need additional capital in the future, which may not be
available to us on favorable terms or at all. Raising additional
capital could dilute stockholder ownership in the Company and
may cause the market price of our common stock to
fall.
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. 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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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, which may require us
to:
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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. Actions we might take
to access financing may also cause rating agencies to reevaluate
our ratings. Further, in connection with the CENts
41
offering, we entered into a covenant that may limit our ability
to undertake certain additional types of financing to repay or
redeem the CENts.
Any additional capital raised through the sale of equity will
dilute each stockholders ownership percentage in our
company and may decrease the market price of our common stock.
Furthermore, newly issued 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.
Without sufficient liquidity, we could be forced to curtail our
operations, and our business could suffer. 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,
replace capital withdrawn by customers or raise new capital
required by our subsidiaries as a result of volatility in the
markets in a timely manner. 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.
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, 2010, our insurance
subsidiaries may pay dividends to us of up to
$194.0 million in the aggregate during 2011 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 available cash 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 in this section.
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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 21.0% of our outstanding shares
of common stock as of March 11, 2011 (including warrants
exercisable for 9,487,872 shares held by affiliates of each
of White Mountains Insurance Group, Ltd. and Berkshire Hathaway
Inc.). Accordingly, they may have the ability to significantly
influence all matters requiring stockholder approval, including
the nomination and election of
42
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.
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. Our insurance subsidiaries are subject to state
insurance laws and 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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establishing 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 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, the Dodd-Frank Act
created a Federal Insurance Office. While the office will not
directly regulate domestic insurance business, it is tasked with
studying the potential efficiency and consequences of federal
insurance regulation. We cannot predict what impact, if any, the
results of these studies or other such proposals, if enacted,
may have on our financial condition, results of operations and
cash flows. Additionally, federal legislation and administrative
policies in other areas can significantly and adversely affect
insurance
43
companies, including general financial services regulation,
securities regulation, pension regulation, privacy regulation,
tort reform legislation, and taxation.
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 and are
members of, and subject to regulation by FINRA. In addition, one
of our subsidiaries also is registered as an investment adviser
under the Investment Advisers Act of 1940. These subsidiaries
may also be impacted by interpretations and rules created as a
result of the Dodd-Frank Act.
Securities laws and regulations are primarily intended to ensure
the integrity of financial markets and to protect investors in
the securities markets or investment advisory or brokerage
clients. These laws and regulations 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
regulatory actions and we are or may become subject to
individual lawsuits 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, interest crediting practices,
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 insurance industry has been the focus of
increased scrutiny and lawsuits related to retained asset
accounts offered to beneficiaries, which offer access to
benefits through drafts on interest-bearing accounts held by the
insurer in lieu of a lump-sum payout. The lawsuits allege that
customers were misled about access to and security of these
funds, and that insurers unjustly profited through low crediting
rates offered on the accounts. The outcome of these lawsuits is
unknown. As of December 31, 2010, balances held in our
retained asset accounts were $71.3 million, and 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.
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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.
The
implementation of The Patient Protection and Affordable Care Act
could have a material adverse effect on the profitability or
marketability of the health insurance products that we
sell.
On March 23, 2010, President Obama signed into law The
Patient Protection and Affordable Care Act, which brings
substantial change to the insurance coverage for medical costs.
PPACA directly or indirectly impacts our Group medical stop-loss
and limited benefit medical businesses. PPACA mandated studies
that are expected to be released late in the first quarter 2011
could influence future legislation affecting self-insured health
plans and, thus, our medical stop-loss business. Although our
limited benefit medical product is exempt from many of the
reforms mandated by PPACA due to its fixed indemnity design, it
does not provide minimum essential coverage as defined under
PPACA provisions effective in 2014. We will continue to monitor
the implementation of PPACA and reassess our business strategies
accordingly.
Potential
changes in tax laws could make some of our products less
attractive to customers and adversely affect our results of
operations.
Many of the products that we sell benefit from one or more forms
of tax-favored status under current federal tax law. For
example, we sell life insurance policies that benefit from the
deferral or elimination of taxation on earnings accrued under
the policy, as well as permanent exclusion of certain death
benefits that may be paid to policyholders beneficiaries.
We also sell annuity contracts that allow the policyholders to
defer the recognition of taxable income earned within the
contract.
Congress has previously considered and may revisit 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. Due in large part to the recent budget
crisis affecting many governments, there is an increasing risk
that federal
and/or state
tax legislation could be enacted that would result in higher
taxes on insurance companies and their policyholders. Although
the specific form of any such potential legislation is
uncertain, it could include reducing or eliminating some or all
of the tax advantages currently benefiting us or our
policyholders. Changes to these favorable tax statuses could
adversely affect our sales and lapses of current policies.
In addition, changes in tax laws could increase our company tax
liability and income tax expense. For example, recent federal
budget proposals, if enacted, would affect the taxation of life
insurance companies and certain life insurance products. In
particular, those proposals include modifying the
dividends-received deduction for life insurance company separate
accounts and expanding the interest expense disallowance for
corporate-owned life insurance. If proposals of this type were
enacted, our sales could be adversely affected, primarily
variable products and BOLI, and our actual tax expense could
increase, reducing earnings.
Failures
elsewhere in the insurance industry could obligate us to pay
assessments through guaranty associations.
When an insurance company becomes insolvent, state insurance
guaranty associations have the right to assess other insurance
companies doing business in their state for funds to pay
obligations to policyholders of the insolvent company, 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 portion is based on its
proportionate share of premium volume in the relevant lines of
business. The future failure of a large life, health or annuity
insurer could trigger assessments which we would be obligated to
pay. Further, amounts for historical insolvencies may be
assessed over many years, and there can be significant
uncertainty around the
45
total obligation for a given insolvency. Existing liabilities
may not be sufficient to fund the ultimate obligations of a
historical insolvency, and we may be required to increase our
liability, which could have an adverse effect on our results of
operations.
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Item 1B.
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Unresolved
Staff Comments
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None.
We lease our headquarters in Bellevue, Washington, which
consists of 221,000 square feet in the Symetra Financial
Center building and 72,000 square feet in the Key Center
building. Leases for both facilities expire in 2015 with
multiple options to renew. Our headquarters in Bellevue serves
as the primary location for operations of all of our divisions.
In addition to our headquarters, we lease 16 other properties
throughout the U.S. which comprise a total of
59,000 square feet.
We believe our properties are suitable and adequate for our
business as presently conducted.
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Item 3.
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Legal
Proceedings
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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.
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PART II
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Item 5.
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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 information with respect to the high and low
prices for our common stock and the dividends declared on our
common stock for the periods preceding our initial trading day.
The following table presents the high and low closing price for
our common stock and the dividends declared per share during the
2010 fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
|
|
|
|
|
2010:
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
|
|
|
Fourth quarter
|
|
|
$13.91
|
|
|
|
$10.35
|
|
|
|
$0.05
|
|
|
|
|
|
Third quarter
|
|
|
12.16
|
|
|
|
10.24
|
|
|
|
0.05
|
|
|
|
|
|
Second quarter
|
|
|
14.25
|
|
|
|
11.74
|
|
|
|
0.05
|
|
|
|
|
|
First quarter (1)
|
|
|
13.27
|
|
|
|
12.65
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the quarter ended March 31, 2010, we did not have stock
traded on the NYSE until January 22, 2010. As a result,
this data only reflects stock information after that date. |
On March 11, 2011, there were approximately 20 registered
holders of record for the common stock and 118.533 million
shares outstanding.
The following graph provides a comparison of the cumulative
total shareholder return on our common stock with the cumulative
total return of the S&P 500 Index, and the S&P 500
Life and Health Index. The comparison assumes $100 was invested
on January 22, 2010, in our common stock and in each of the
foregoing indexes, and assumes the reinvestment of dividends.
The graph covers the period of January 22, 2010, through
December 31, 2010.
47
Dividend
Policy
Since becoming a public company we have paid and intend to
continue to pay quarterly cash dividends on our common stock and
warrants. Our current rate is $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 and unvested restricted shares on a
one-to-one
basis.
For more information regarding our ability to pay dividends, see
Item 7Managements Discussion and Analysis
of Financial Condition and Results of OperationsCapital
and Liquidity.
Purchases
of equity securities by the issuer and affiliated
purchasers
Purchases of common stock made by or on behalf of the Company
during the quarter ended December 31, 2010 are set forth in
whole shares below:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares
|
|
|
Maximum Number (or
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Purchased as part of
|
|
|
Approximate Dollar Value) of
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Publicly Announced
|
|
|
Shares that May Yet Be Purchased
|
|
Period
|
|
Purchased (1)
|
|
|
Per Share
|
|
|
Plans or Programs
|
|
|
Under the Plans or Programs
|
|
|
October 1, 2010October 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2010November 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1, 2010December 31, 2010
|
|
|
769
|
|
|
|
$13.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
769
|
|
|
|
$13.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Restricted shares withheld to offset tax withholding obligations
related to the vesting of restricted shares. |
48
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial data, except for non-GAAP
financial measures, have been derived from our consolidated
financial statements. The consolidated income statement data for
the years ended December 31, 2010, 2009 and 2008 and the
consolidated balance sheet data as of December 31, 2010 and
2009, except for the non-GAAP financial measures, have been
derived from our consolidated financial statements included
elsewhere herein. The consolidated income statement data for the
years ended December 31, 2007 and 2006 and the consolidated
balance sheet data as of December 31, 2008, 2007 and 2006,
except for the non-GAAP financial measures, have been derived
from the our consolidated financial statements not included
herein. The selected financial data presented below should be
read in conjunction with
Item 7Managements Discussion and Analysis
of Financial Condition and Results of Operations and our
consolidated financial statements and accompanying notes
included elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions, except per share data)
|
|
|
Consolidated Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
$473.0
|
|
|
|
$470.1
|
|
|
|
$486.1
|
|
|
|
$433.4
|
|
|
|
$456.5
|
|
Net investment income
|
|
|
1,199.4
|
|
|
|
1,113.6
|
|
|
|
956.5
|
|
|
|
973.6
|
|
|
|
984.9
|
|
Policy fees, contract charges and other
|
|
|
166.3
|
|
|
|
159.9
|
|
|
|
166.5
|
|
|
|
165.8
|
|
|
|
125.3
|
|
Net realized investment gains (losses)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(20.9
|
)
|
|
|
(86.5
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
|
|
(25.7
|
)
|
Other net realized investment gains (losses)
|
|
|
60.7
|
|
|
|
57.2
|
|
|
|
(71.6
|
)
|
|
|
33.0
|
|
|
|
27.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
39.8
|
|
|
|
(29.3
|
)
|
|
|
(158.0
|
)
|
|
|
16.8
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,878.5
|
|
|
|
1,714.3
|
|
|
|
1,451.1
|
|
|
|
1,589.6
|
|
|
|
1,568.4
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
335.1
|
|
|
|
350.5
|
|
|
|
348.5
|
|
|
|
267.1
|
|
|
|
264.3
|
|
Interest credited
|
|
|
899.5
|
|
|
|
846.8
|
|
|
|
766.1
|
|
|
|
752.3
|
|
|
|
765.9
|
|
Other underwriting and operating expenses
|
|
|
256.7
|
|
|
|
252.7
|
|
|
|
265.8
|
|
|
|
281.9
|
|
|
|
260.5
|
|
Interest expense
|
|
|
31.9
|
|
|
|
31.8
|
|
|
|
31.9
|
|
|
|
21.5
|
|
|
|
19.1
|
|
Amortization of deferred policy acquisition costs
|
|
|
66.2
|
|
|
|
51.4
|
|
|
|
25.8
|
|
|
|
18.0
|
|
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,589.4
|
|
|
|
1,533.2
|
|
|
|
1,438.1
|
|
|
|
1,340.8
|
|
|
|
1,324.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
289.1
|
|
|
|
181.1
|
|
|
|
13.0
|
|
|
|
248.8
|
|
|
|
244.0
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
57.7
|
|
|
|
6.7
|
|
|
|
23.8
|
|
|
|
62.8
|
|
|
|
92.4
|
|
Deferred
|
|
|
30.5
|
|
|
|
46.1
|
|
|
|
(32.9
|
)
|
|
|
18.7
|
|
|
|
(7.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
|
88.2
|
|
|
|
52.8
|
|
|
|
(9.1
|
)
|
|
|
81.5
|
|
|
|
84.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$200.9
|
|
|
|
$128.3
|
|
|
|
$22.1
|
|
|
|
$167.3
|
|
|
|
$159.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$1.48
|
|
|
|
$1.15
|
|
|
|
$0.20
|
|
|
|
$1.50
|
|
|
|
$1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$1.48
|
|
|
|
$1.15
|
|
|
|
$0.20
|
|
|
|
$1.50
|
|
|
|
$1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
135.609
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
135.618
|
|
|
|
111.626
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
|
$0.15
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$1.79
|
|
|
|
$0.90
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions, except per share data)
|
|
|
Non-GAAP Financial Measure(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
|
$175.2
|
|
|
|
$147.9
|
|
|
|
$122.9
|
|
|
|
$154.9
|
|
|
|
$159.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$1.29
|
|
|
|
$1.32
|
|
|
|
$1.10
|
|
|
|
$1.39
|
|
|
|
$1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$1.29
|
|
|
|
$1.32
|
|
|
|
$1.10
|
|
|
|
$1.39
|
|
|
|
$1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$200.9
|
|
|
|
$128.3
|
|
|
|
$22.1
|
|
|
|
$167.3
|
|
|
|
$159.5
|
|
Less: Net realized investment gains (losses) (net of taxes)
|
|
|
25.9
|
|
|
|
(19.1
|
)
|
|
|
(102.7
|
)
|
|
|
10.9
|
|
|
|
1.1
|
|
Add: Net investment gains (losses) on FIA options (net of taxes)
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
(1.9
|
)
|
|
|
(1.5
|
)
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
|
$175.2
|
|
|
|
$147.9
|
|
|
|
$122.9
|
|
|
|
$154.9
|
|
|
|
$159.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions, except per share data)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
$23,500.2
|
|
|
|
$20,181.0
|
|
|
|
$16,252.5
|
|
|
|
$16,905.0
|
|
|
|
$17,305.3
|
|
Total assets
|
|
|
25,636.9
|
|
|
|
22,435.4
|
|
|
|
19,229.6
|
|
|
|
19,560.2
|
|
|
|
20,114.6
|
|
Total notes payable
|
|
|
449.0
|
|
|
|
448.9
|
|
|
|
448.8
|
|
|
|
448.6
|
|
|
|
298.7
|
|
Separate account assets
|
|
|
881.7
|
|
|
|
840.1
|
|
|
|
716.2
|
|
|
|
1,181.9
|
|
|
|
1,233.9
|
|
Accumulated other comprehensive income (loss) (net of taxes)
(AOCI)
|
|
|
432.5
|
|
|
|
(49.7
|
)
|
|
|
(1,052.6
|
)
|
|
|
(12.5
|
)
|
|
|
(0.5
|
)
|
Total stockholders equity
|
|
|
2,380.6
|
|
|
|
1,433.3
|
|
|
|
286.2
|
|
|
|
1,285.1
|
|
|
|
1,327.3
|
|
U.S. Statutory Financial Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and surplus
|
|
|
$1,752.3
|
|
|
|
$1,415.4
|
|
|
|
$1,179.0
|
|
|
|
$1,225.0
|
|
|
|
$1,266.2
|
|
Asset valuation reserve (AVR)
|
|
|
185.1
|
|
|
|
120.5
|
|
|
|
113.7
|
|
|
|
176.0
|
|
|
|
158.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory book value
|
|
|
$1,937.4
|
|
|
|
$1,535.9
|
|
|
|
$1,292.7
|
|
|
|
$1,401.0
|
|
|
|
$1,424.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per common share (4)
|
|
|
$17.35
|
|
|
|
$12.83
|
|
|
|
$2.56
|
|
|
|
$11.51
|
|
|
|
$11.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value
|
|
|
$1,948.1
|
|
|
|
$1,483.0
|
|
|
|
$1,338.8
|
|
|
|
$1,297.6
|
|
|
|
$1,327.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
$2,380.6
|
|
|
|
$1,433.3
|
|
|
|
$286.2
|
|
|
|
$1,285.1
|
|
|
|
$1,327.3
|
|
Less: AOCI
|
|
|
432.5
|
|
|
|
(49.7
|
)
|
|
|
(1,052.6
|
)
|
|
|
(12.5
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value
|
|
|
$1,948.1
|
|
|
|
$1,483.0
|
|
|
|
$1,338.8
|
|
|
|
$1,297.6
|
|
|
|
$1,327.8
|
|
Add: Assumed proceeds from exercise of warrants
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value, as converted
|
|
|
$2,166.2
|
|
|
|
$1,701.1
|
|
|
|
$1,556.9
|
|
|
|
$1,515.7
|
|
|
|
$1,545.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value per common share
|
|
|
$16.48
|
|
|
|
$15.99
|
|
|
|
$14.45
|
|
|
|
$14.01
|
|
|
|
$14.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value per common share, as converted
|
|
|
$15.79
|
|
|
|
$15.23
|
|
|
|
$13.95
|
|
|
|
$13.58
|
|
|
|
$13.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions, unless otherwise stated)
|
|
|
Return on stockholders equity, or ROE
|
|
|
9.3
|
%
|
|
|
15.4
|
%
|
|
|
2.6
|
%
|
|
|
12.6
|
%
|
|
|
12.8
|
%
|
Average stockholders equity (5)
|
|
|
$2,167.9
|
|
|
|
$832.4
|
|
|
|
$861.8
|
|
|
|
$1,328.3
|
|
|
|
$1,249.5
|
|
Non-GAAP Financial Measures(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating return on average equity, or ROAE
|
|
|
9.8
|
%
|
|
|
10.5
|
%
|
|
|
9.2
|
%
|
|
|
11.2
|
%
|
|
|
12.1
|
%
|
Average adjusted book value (5)
|
|
|
$1,795.4
|
|
|
|
$1,407.8
|
|
|
|
$1,329.8
|
|
|
|
$1,380.2
|
|
|
|
$1,324.2
|
|
|
|
|
(1) |
|
We adopted new OTTI accounting guidance effective
January 1, 2009, which changed the recognition and
measurement of OTTI for fixed maturities. See
Item 7Managements Discussion and Analysis
of Financial Condition and Results of OperationsCritical
Accounting Policies and
EstimatesOther-Than-Temporary
Impairments (OTTI). |
|
(2) |
|
Basic and diluted net income per common share includes all
participating securities, such as warrants and unvested
restricted shares, based on the application of the two-class
method. Diluted net income per common share also includes the
dilutive impact of non-participating securities, to the extent
dilutive, such as stock options and shares estimated to be
issued under the employee stock purchase plan, based on
application of the treasury stock method. |
|
(3) |
|
For a definition and discussion of this non-GAAP measure and
other metrics used in our analysis, see
Item 7Managements Discussion and Analysis
of Financial Condition and Results of OperationsUse of
non-GAAP Financial Measures. |
|
(4) |
|
Book value per common share is calculated based on
stockholders equity divided by outstanding common shares
and shares subject to outstanding warrants totaling 137.191, as
of December 31, 2010, 111.705, as of December 31, 2009
and 111.622 as of December 31, 2008, 2007 and 2006. |
|
(5) |
|
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. |
51
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
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).
This discussion contains forward-looking statements that
involve risk 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. You should read the
following discussion in conjunction with the consolidated
financial statements and accompanying condensed notes included
in Item 8Financial Statements and Supplementary
Data included in this
Form 10-K,
as well as the discussion under Item 6Selected
Financial Data.
Management considers certain non-GAAP financial measures,
including adjusted operating income, adjusted operating income
per common share, adjusted book value, adjusted book value per
common share, adjusted book value per common share, as
converted, operating ROAE, and debt to capital ratio, excluding
AOCI to be useful to investors in evaluating our financial
performance and condition. These measures have been reconciled
to their most comparable GAAP financial measures. For a
definition of these non-GAAP measures, see Use
of non-GAAP Financial Measures.
All amounts, except share and per share data, are in millions
unless otherwise stated.
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 18 offices across the United
States, serving approximately 1.7 million customers.
Our
Operations
We manage our business through three divisions composed of four
operating segments and one non-operating segment:
Group
Division
|
|
|
|
|
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.
|
Retirement
Division
|
|
|
|
|
Deferred Annuities. We offer fixed and
variable deferred annuities to consumers who want to accumulate
tax-deferred assets for retirement.
|
|
|
|
Income Annuities. We offer single premium
immediate annuities, or SPIAs, to customers seeking a reliable
source of retirement income or to protect against outliving
their assets during retirement, and structured settlement
annuities to fund third party personal injury settlements. In
addition, we offer funding services options to existing
structured settlement clients.
|
52
Life
Division
|
|
|
|
|
Life. We offer a wide array of individual
products such as term and universal life insurance, including
single premium life insurance as well as bank-owned life
insurance, or BOLI.
|
Other
|
|
|
|
|
Other. This segment consists of unallocated
corporate income, composed primarily of investment income on
unallocated surplus, unallocated corporate expenses, interest
expense on debt, earnings related to our limited partnership
interests, the results of small, non-insurance businesses that
are managed outside of our divisions, and inter-segment
elimination entries.
|
See Note 21 to the Consolidated Financial Statements for
financial results of our segments, including our operating
revenues, for each of the last three fiscal years.
Current
Outlook
We are entering 2011 with positive momentum and an energized
executive team that is focused on growing and diversifying the
Company. We are diversifying our product offerings to profitably
grow in a wider variety of economic environments. The work to
build and launch new products will continue well into 2012.
Meanwhile, we continue to face economic uncertainty and we
recognize that this environment may slow our deployment of
capital.
The economic recovery was slow during 2010 and we expect the
recovery to continue at a fairly slow pace in 2011. Although
interest rates increased at the end of 2010 from the recent
historic low levels, low interest rate conditions and tight
credit spreads continue to be a challenge for our asset-based
businesses and make it difficult for us to generate attractive
product returns. To mitigate the risk of unfavorable
consequences in this environment, such as spread compression or
instances where our returns on investments are not enough to
support the interest rate guarantees on the products we sell, we
remain proactive in our investment and product strategies,
interest crediting strategies and overall asset-liability
management practices.
The lack of supply of investments with attractive risk-return
profiles and yields continues to be a challenge as we try to
invest cash. To improve our asset yield in this environment, we
have been and plan to continue increasing our investments in
commercial mortgage loans. In addition, we also plan to continue
managing our cash levels through temporary investments in
U.S. Treasury securities until more permanent investments
with attractive risk-return profiles can be acquired.
To navigate our way through this environment and provide
profitable growth and long-term ROE expansion to our
shareholders, we intend to focus on the following strategies:
|
|
|
|
|
developing new products that capitalize on favorable demographic
trends such as the need for retirement savings, life insurance
and employers need to provide affordable health care to
employees;
|
|
|
|
expanding distribution partnerships, especially with financial
institutions and broker-dealers;
|
|
|
|
adding additional products with existing partners;
|
|
|
|
building cost-efficient infrastructure to support growth
initiatives; and
|
|
|
|
maintaining disciplined balance sheet management.
|
53
During 2011 we will focus on executing our strategic growth
initiatives. We expect to organically deploy our capital as we
grow through sales of new and refreshed products. In addition,
we will look for acquisition opportunities that fit our
strategies and help us drive improved earnings. However, the
success of these and other strategies may be affected by the
factors discussed in Item 1ARisk Factors
and other factors as discussed herein.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP
requires management to adopt accounting policies and make
estimates and assumptions that affect amounts reported and
disclosed in the consolidated financial statements. The
accounting policies discussed in this section are those that we
consider to be particularly critical to an understanding of our
consolidated financial statements because their application
places the most significant demands on our ability to judge the
effect of inherently uncertain matters on our financial results.
In applying the Companys accounting policies, management
makes subjective and complex judgments that frequently require
estimates about matters that are inherently uncertain. Many of
these policies, estimates and related judgments are common in
the insurance and financial services industries; others are
specific to the Companys businesses and operations. 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. Revised
accounting guidance related to OTTI was adopted effective
January 1, 2009. We record OTTI on fixed maturity
securities which are in an unrealized loss position when one of
the following occurs:
|
|
|
|
|
we do not expect to recover the entire amortized cost basis of
the security, based on the estimate of cash flows expected to be
collected; or
|
|
|
|
we intend to sell a security; or it is more likely than not that
we will be required to sell a security prior to recovery of its
amortized cost basis.
|
Making the determinations as to whether one or more of these
conditions exist often requires judgment. As part of this
process, we analyze investments in an unrealized loss position
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;
|
|
|
|
any regulatory developments; and
|
|
|
|
any decisions to reposition our security portfolio for liquidity
needs.
|
54
For securities which are considered to have OTTI, it is required
that the losses be separated into the amount representing the
decrease in cash flows expected to be collected (credit
loss), which is recognized in earnings, and the amount
related to all other factors (noncredit loss), which
is recognized in other comprehensive income (loss), or OCI. For
securities we intend to sell or for which it is more likely than
not that we will be required to sell before recovery, the
impairment charge is equal to the difference between the fair
value and the amortized cost basis of the security in the period
of determination. In determining our intent to sell a security
or whether it is more likely than not that we will be required
to sell a security, we evaluate facts and circumstances such as
decisions to reposition our security portfolio, sales of
securities to meet cash flow needs and sales of securities to
capitalize on favorable pricing.
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 of December 31, 2010 and 2009, the fair value of our
available-for-sale
fixed maturity securities that were below cost or amortized cost
by 20% or more was $163.0 and $621.3, respectively. Included in
the gross unrealized losses are losses attributable to both
movements in market interest rates as well as movements in
credit spreads. Net income for the year ended December 31,
2010 would be reduced by approximately $59.9 on a pre-tax basis
if all the securities in an unrealized loss position of more
than 20% were deemed to be other than temporarily impaired and
all of the unrealized loss was credit related.
Prior to January 1, 2009, 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.
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
55
measurement. For further discussion of the levels of the fair
value hierarchy, see Note 7 to the 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 tables
summarize our assets carried at fair value and the respective
fair value hierarchy, based on input levels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 3%
|
|
|
Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
|
$33.1
|
|
|
|
$
|
|
|
|
$33.1
|
|
|
|
$
|
|
|
|
|
|
State and political subdivisions
|
|
|
452.8
|
|
|
|
|
|
|
|
452.8
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
14,541.4
|
|
|
|
|
|
|
|
13,786.8
|
|
|
|
754.6
|
|
|
|
3.3
|
%
|
Residential mortgage-backed securities
|
|
|
3,801.6
|
|
|
|
|
|
|
|
3,801.6
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
|
1,887.3
|
|
|
|
|
|
|
|
1,868.2
|
|
|
|
19.1
|
|
|
|
0.1
|
|
Other debt obligations
|
|
|
565.6
|
|
|
|
|
|
|
|
412.4
|
|
|
|
153.2
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale
|
|
|
21,281.8
|
|
|
|
|
|
|
|
20,354.9
|
|
|
|
926.9
|
|
|
|
4.1
|
|
Marketable equity securities,
available-for-sale
|
|
|
45.1
|
|
|
|
43.3
|
|
|
|
|
|
|
|
1.8
|
|
|
|
0.0
|
|
Marketable equity securities, trading
|
|
|
189.3
|
|
|
|
188.7
|
|
|
|
|
|
|
|
0.6
|
|
|
|
0.0
|
|
Investments in limited partnerships (1)
|
|
|
36.5
|
|
|
|
|
|
|
|
|
|
|
|
36.5
|
|
|
|
0.2
|
|
Other invested assets
|
|
|
6.4
|
|
|
|
2.6
|
|
|
|
|
|
|
|
3.8
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments carried at fair value
|
|
|
21,559.1
|
|
|
|
234.6
|
|
|
|
20,354.9
|
|
|
|
969.6
|
|
|
|
4.3
|
|
Separate account assets
|
|
|
881.7
|
|
|
|
881.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$22,440.8
|
|
|
|
$1,116.3
|
|
|
|
$20,354.9
|
|
|
|
$969.6
|
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes investments in private equity and hedge funds. |
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 3%
|
|
|
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
|
%
|
Corporate securities
|
|
|
12,400.0
|
|
|
|
|
|
|
|
11,552.9
|
|
|
|
847.1
|
|
|
|
4.3
|
|
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
|
|
|
341.6
|
|
|
|
|
|
|
|
286.9
|
|
|
|
54.7
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 carried at fair value
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes investments in private equity and hedge funds. |
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 our
available-for-sale
securities, which is equal to the difference between the fair
value and the amortized cost, in AOCI in stockholders
equity. We report net realized investment gains and losses in
the consolidated statements of income.
We determine the fair value of fixed maturities primarily by
obtaining prices from third-party independent pricing services,
and we do not adjust their prices or obtain multiple prices for
these securities. As of December 31, 2010 and 2009, our
pricing services priced 95.6% and 93.6%, respectively, of our
fixed maturities. The third-party independent pricing services
we use have policies and processes to ensure that they are using
objectively verifiable, observable market data, including
documentation on the observable market inputs, by major security
type, used to determine the prices. Securities are priced using
evaluated pricing models that vary by asset class. The standard
inputs for security evaluations include benchmark yields,
reported trades, broker-dealer quotes, issuer spreads, two-sided
markets, benchmark securities, bids, offers and other reference
data, including market research publications. Because many fixed
income securities do not trade on a daily basis, evaluated
pricing models apply available information through processes
such as benchmark curves, benchmarking of like securities,
sector groupings and matrix pricing to prepare evaluations. In
addition, models are used to develop prepayment and interest
rate scenarios, which take into account market convention.
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:
57
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, 2010 and 2009, $892.9, or 4.2%, and
$901.3, or 4.8%, respectively, of our fixed maturities portfolio
was invested in private placement securities, which are not
actively traded. The fair values of these assets are typically
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 88.0% 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 the
case when the security is priced by our pricing services, it is
classified as a Level 2 measurement. When there is not
sufficient observable market information and the security is
priced using internal pricing models, which is the case for
corporate private placements and other securities our pricing
services are unable to price, it is classified as a Level 3
measurement. The inputs used to measure the fair value of
securities priced using internal pricing models may fall into
different levels of the fair value hierarchy. It has been our
experience that, in these situations, the lowest level input
that is significant to the determination of fair value is a
Level 3 input and thus, we typically report securities
valued using internal pricing models as Level 3
measurements. In limited situations, private placement
securities are valued through the use of a single broker quote
because the security is very thinly traded. In such situations,
we consider the fair value a Level 3 measurement.
Fixed maturities categorized as Level 3 investments were
$926.9 and $1,183.5 as of December 31, 2010 and 2009,
respectively. The decrease is primarily due to the transfer out
of $250.5 in reverse mortgages that were classified as
Level 3 to Level 2, but are now priced by our pricing
services. As of December 31, 2010 and 2009, we had net
unrealized gains of $57.9 and $25.2, respectively, on our
Level 3 fixed maturities. For the year ended
December 31, 2010 and 2009, we reported net realized losses
of $5.0 and $5.6, respectively, on our Level 3 fixed
maturities.
We believe that the amount we may realize upon settlement or
maturity of our fixed maturities may differ significantly from
the current estimated fair value of the security, as we do not
actively trade our fixed maturity portfolio. Our investment
management objective is to support the expected cash flows of
our liabilities and to produce stable returns over the long
term. To meet this objective, we typically hold our fixed
maturities until maturity or until market conditions are
favorable for the sale of such investments.
Deferred
Policy Acquisition Costs
We defer as assets certain costs, including commissions,
distribution costs and other underwriting costs, that vary with,
and are primarily related to, the production of new and renewal
business. We limit our
58
deferral to acquisition expenses contained in our product
pricing assumptions. The following table summarizes our DAC
asset balances by segment:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Group
|
|
|
$3.6
|
|
|
|
$3.2
|
|
Deferred Annuities
|
|
|
283.2
|
|
|
|
249.1
|
|
Income Annuities
|
|
|
31.2
|
|
|
|
22.4
|
|
Life
|
|
|
69.4
|
|
|
|
51.0
|
|
|
|
|
|
|
|
|
|
|
Total unamortized balance at end of period
|
|
|
387.4
|
|
|
|
325.7
|
|
Accumulated effect of net unrealized gains
|
|
|
(137.4
|
)
|
|
|
(75.3
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
$250.0
|
|
|
|
$250.4
|
|
|
|
|
|
|
|
|
|
|
In our Group segment, the DAC amortization period for medical
stop-loss policies is one year as these policies are one year
policies and can be renewed or repriced on an annual basis.
In our Deferred Annuities, Income Annuities and Life 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:
|
|
|
|
|
Deferred Annuities. The DAC amortization
period is typically 20 years for deferred annuities,
although most of the DAC amortization occurs within the first
10 years because the EGPs are highest during such period.
It is common for deferred annuity policies to lapse after the
surrender charge period expires.
|
|
|
|
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.
|
|
|
|
Life. 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. EGPs are adjusted quarterly to reflect
actual experience to date. For example, for our deferred annuity
products, if renewal crediting rates are greater or lower than
the renewal crediting rates we assumed in our DAC amortization
models, we would record a change in amortization expense to
reflect the change in our EGPs. 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 renewal crediting rates, which may
decrease interest margins, increases to expected future lapse
and withdrawal rates, increases to future expected expense
levels, increases to interest margins in
59
the current period, decreases to expected future interest
margins and decreases to current or expected equity market
returns.
We regularly conduct DAC recoverability analyses, where we
compare the current DAC asset balance with the estimated present
value of future profitability of the underlying business. The
DAC asset balances are considered recoverable if the present
value of future profits is greater than the current DAC asset
balance.
In connection with our recoverability analyses, we perform
sensitivity analyses on our most significant DAC asset balances,
which currently relate to our deferred annuity, universal life,
and BOLI products, 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 would be approximately $5.9; if we changed
our future expense assumptions by a factor of 10%, the effect on
the DAC asset balance would be $0.3. Also, 25% of our DAC
balance relates to a block of recently issued deferred annuity
products with either a three- or five-year guaranteed interest
rate period. Given the recent rise in interest rates and other
factors, we will likely change our renewal interest rate
assumption in our DAC and DSI models. If we increased renewal
interest rates on these contracts 100 basis points above
the renewal interest rates currently assumed in our DAC
amortization models during the surrender charge period, the
effect would be an adjustment of $0.8 and $0.4 to reduce our DAC
and DSI balances, respectively. In addition, during 2011 we
would also anticipate an additional net impact on our DAC and
DSI balances, and reduction of pre-tax earnings, of
approximately $7.0.
We adjust the unamortized DAC balance for the accumulated effect
of net unrealized gains or losses. This adjustment reflects the
impact on estimated future gross profits as if the net
unrealized investment gains and losses had been realized as of
the balance sheet date. We record the impact of this adjustment,
net of tax, in AOCI. In periods of rising interest rates, the
fair value of our fixed maturities generally decreases,
resulting in an increase in unrealized investment losses, which
is recorded as a reduction of AOCI. In such a period, the DAC
adjustment would increase our DAC balance and increase AOCI.
However, this adjustment is limited to cumulative capitalized
acquisition costs plus interest. As of December 31, 2010,
this adjustment would have been limited to $86.0, net of taxes
of $46.3, in our Deferred Annuities segment and $5.4, net of
taxes of $2.9, in our Life segment. We expect the DAC asset
balance to grow during 2011 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.
As discussed in Note 2 of the Consolidated Financial
Statements, the FASB issued new guidance that limits the amounts
of deferrable acquisition costs to those incremental costs
directly related to the successful acquisition of an insurance
contract. The implementation of this guidance will impact our
DAC balances in the future, and will result in a decrease in the
costs that we defer as well as DAC amortization. For example,
for the year ended December 31, 2010, $91.6 of the total
$131.4 deferred acquisition costs represented commissions that
we believe will continue to be deferred under the new accounting
guidance. The remaining $39.8 represents other underwriting and
operating expenses for which a portion would no longer qualify
as deferrable expenses. We are currently in the process of
evaluating the impact of this guidance on our consolidated
financial statements.
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
60
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. These interest rates 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 recorded
in the consolidated statements of income in the period in which
the variance occurs. If expected loss ratios increase or
expected claims paying completion patterns extend, the IBNR
amount increases.
New
Accounting Standards
For a discussion of recently adopted and not yet adopted
accounting pronouncements, see Note 2 to the Consolidated
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 allocate shared service operating expenses to
each segment using multiple factors, including employee
headcount, allocated investments, account values and time study
results. 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, which are centrally managed. The net
investment income and realized investment gains (losses) are
reported in the segment in which they occur. We also allocate
surplus net investment income to each segment using a risk-based
capital formula. The unallocated portion of net investment
income is reported in the Other segment.
Revenues
Premiums
Premiums consist primarily of premiums from our medical
stop-loss and individual term and whole life insurance products.
61
Net
investment income
Net investment income represents the income earned on our
investments, net of investment expenses, including gains or
losses from changes in the fair value of our investments in
private equity and hedge fund limited partnerships.
Policy
fees, contract charges and other
Policy fees, contract charges and other includes cost of
insurance (COI) charges on our universal life insurance and BOLI
policies, mortality expense, surrender and other administrative
charges to policyholders, 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.
Benefits
and Expenses
Policyholder
benefits and claims
Policyholder benefits and claims consist of benefits paid and
reserve activity on medical stop-loss and individual life
products. In addition, in accordance with purchase method of
accounting (referred to as PGAAP), we record, as a reduction of
this expense, PGAAP reserve amortization related to our BOLI
policies. PGAAP reserve amortization related to our fixed
deferred annuities was fully amortized as of September 30,
2009.
Interest
credited
Interest credited represents interest credited to policyholder
reserves and contract holder 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 business 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, 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.
62
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. The non-GAAP financial measures
discussed below are not a substitute for their most directly
comparable GAAP measures. The adjustments made to derive these
non-GAAP measures are important to understanding our overall
results of operations and financial position and, if evaluated
without proper context, these non-GAAP measures possess material
limitations. Therefore, our management and board of directors
also separately review the items excluded from or added to the
most directly comparable GAAP measures to arrive at these
non-GAAP measures. In addition, management and our board of
directors also analyze each of the comparable GAAP measures in
connection with their review of our results of operations and
financial position.
Many of the non-GAAP measures, including adjusted operating
income, adjusted operating income per common share, adjusted
book value, adjusted book value per common share, adjusted book
value per common share, as converted, operating ROAE, and debt
to capital ratio, excluding AOCI are included specifically for
the purpose of excluding AOCI from the GAAP measure
stockholders equity. We present each of these non-GAAP
measures because we believe investors find useful financial
measures that remove the temporary and unrealized changes in the
fair values of our investments, and the related effects on AOCI.
This allows investors to assess our financial condition based on
our general practice of holding our fixed investments to
maturity. For example, we believe it is important that an
investor not assume that an increase in stockholders
equity driven by unrealized gains means our company has grown in
value and alternatively, it is important that an investor not
assume that a decrease in stockholders equity driven by
unrealized losses means our companys value has decreased.
In the following paragraphs, we provide definitions of our
non-GAAP measures. For a reconciliation of these non-GAAP
measures to their most directly comparable GAAP measures, see
Item 6Selected Financial Data.
Adjusted
Operating Income, Adjusted Operating Income per Common
ShareBasic, and Adjusted Operating Income per Common
ShareDiluted
Adjusted
Operating Income
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 indexed 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, net
investment income and policy fees, contract charges and other,
have been sufficient to generate operating earnings after
meeting our insurance-related obligations, composed primarily of
claims paid to policyholders, investment returns credited to
policyholder accounts, and other operating costs.
In presenting adjusted operating income, we are excluding
after-tax net realized investment gains (losses). The timing and
amount of these gains and losses are driven by investment
decisions and external
63
economic developments unrelated to our management of the
insurance and underwriting aspects of our business. The one
exception to the exclusion of realized investment gains and
losses is the gains (losses) on our FIA options in our Deferred
Annuities segment. Each year, we use the realized gains from our
FIA options, similar to the way we use investment income, to
meet our obligations associated with our FIA product, which
credits interest to policyholder accounts based on equity market
performance.
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.
Adjusted
Operating Income per Common ShareBasic and Adjusted
Operating Income per Common ShareDiluted
Adjusted operating income per common sharebasic, and
adjusted operating income per common sharediluted, consist
of adjusted operating income, divided by the GAAP-basis weighted
average basic and diluted shares outstanding, respectively.
Net income per common sharebasic, and net income per
common sharediluted, are the most directly comparable GAAP
measure to adjusted operating income per common
sharebasic, and adjusted operating income per common
sharediluted, respectively. See Adjusted
operating income above, for an explanation of the
differences between net income, which is the numerator for the
GAAP measures, and adjusted operating income, the numerator for
these non-GAAP measures.
We believe investors find it useful to review a per share
measure of the results of our insurance operations separate from
the gain and loss activity attributable to most of our
investment portfolio, in order to evaluate their proportionate
stake in the earnings of the insurance operations.
In addition to using adjusted operating income per common
sharebasic, and adjusted operating income per common
sharediluted, to evaluate our insurance operations, our
management and board of directors have other uses for this
measure, including assessing achievement of our financial plan.
Adjusted
Book Value and Adjusted Book Value per Common
Share
Adjusted book value consists of stockholders equity, less
AOCI. Adjusted book value per common share is calculated as
adjusted book value, divided by outstanding common shares. This
measure does not include shares subject to outstanding warrants
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.
Stockholders equity is the most directly comparable GAAP
measure to adjusted book value. AOCI, which is primarily
composed of the net unrealized gains (losses) on our fixed
maturities, net of taxes, is a component of stockholders
equity. Book value per common share is the most directly
comparable GAAP measure to adjusted book value per common share.
Book value per common share is calculated as stockholders
equity divided by the sum of our common shares outstanding and
shares issuable pursuant to outstanding warrants.
We purchase fixed maturities with durations and cash flows that
match our estimate of when our insurance liabilities and other
obligations will come due. We typically expect to hold our fixed
maturities to maturity, using the principal and interest cash
flows to pay our obligations over time. Since we expect to
collect the contractual cash flows on these fixed maturities, we
do not expect to realize the unrealized gains (losses) that are
included in our AOCI balance as of any particular date. AOCI
primarily fluctuates based on changes in the fair value of our
fixed maturities, which is driven by factors outside of our
control, including the impact of credit market conditions and
the movement of interest rates and credit spreads.
64
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. Additionally, by translating this
measure into adjusted book value per common share, we allow the
investor to assess its proportionate stake in our adjusted book
value as of the dates presented, and the change in such measures
over time.
In addition to using adjusted book value and adjusted book value
per common share to evaluate our financial condition, our
management and board of directors have other uses for these
measures, including reviewing debt levels as a percentage of
adjusted book value to monitor compliance with revolving credit
facility covenants and to evaluate and review our ratings from
rating agencies. Finally, our board of directors uses adjusted
book value as a basis to measure the success of our Company over
historical periods and reviews managements financial plans
based on the projected growth in adjusted book value.
Adjusted
Book Value per Common Share, as converted
Adjusted book value, as converted consists of adjusted book
value, plus the assumed proceeds from the exercise of
outstanding warrants. This measure is used to calculate adjusted
book value per common share, as converted which 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.
Book value per common share is the most directly comparable GAAP
measure to adjusted book value per common share, as converted
and is calculated as stockholders equity divided by the
sum of our common shares outstanding and shares issuable
pursuant to outstanding warrants.
We believe investors find it useful if we present them with
adjusted book value per common share, as converted, to remove
AOCI from stockholders equity and give effect to the
exercise of our outstanding warrants. This allows the investor
to assess its proportionate stake in our adjusted book value,
while understanding the effect of the exercise of outstanding
warrants, as of the dates presented, and the change in such
measures over time, based on our practice of holding our fixed
maturities to maturity.
In addition to using adjusted book value per common share, as
converted to evaluate our financial condition on a per common
share basis, our management and board of directors use this
measure to assess our financial performance and to compare the
value and the change in value over time of our common shares to
that of our peer companies.
Operating
ROAE
Operating return on average equity, or operating ROAE, consists
of adjusted operating income for the most recent four quarters,
divided by average adjusted book value, both of which are
non-GAAP measures as described above. We measure average
adjusted book value by averaging 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.
We believe investors find it useful to review the results of our
insurance operations separate from the gain and loss activity
attributable to most of our investment portfolio because it
highlights trends in the performance of our insurance
operations. In addition, we believe investors find it useful if
we present them with a financial measure that removes from
stockholders equity the temporary and unrealized changes
in the fair values of our investments, and the related effects
on AOCI, because we do not expect to realize the
65
.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.
Results
of Operations
The following discussion should be read in conjunction with our
consolidated financial statements and the related Notes to the
Consolidated Financial Statements.
Total
Company
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Variance (%)
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
$473.0
|
|
|
|
$470.1
|
|
|
|
$486.1
|
|
|
|
0.6
|
%
|
|
|
(3.3
|
)%
|
Net investment income
|
|
|
1,199.4
|
|
|
|
1,113.6
|
|
|
|
956.5
|
|
|
|
7.7
|
|
|
|
16.4
|
|
Policy fees, contract charges, and other
|
|
|
166.3
|
|
|
|
159.9
|
|
|
|
166.5
|
|
|
|
4.0
|
|
|
|
(4.0
|
)
|
Net realized investment gains (losses)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(20.9
|
)
|
|
|
(86.5
|
)
|
|
|
(86.4
|
)
|
|
|
75.8
|
|
|
|
(0.1
|
)
|
Other net realized investment gains (losses)
|
|
|
60.7
|
|
|
|
57.2
|
|
|
|
(71.6
|
)
|
|
|
6.1
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
39.8
|
|
|
|
(29.3
|
)
|
|
|
(158.0
|
)
|
|
|
|
*
|
|
|
81.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,878.5
|
|
|
|
1,714.3
|
|
|
|
1,451.1
|
|
|
|
9.6
|
|
|
|
18.1
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
335.1
|
|
|
|
350.5
|
|
|
|
348.5
|
|
|
|
(4.4
|
)
|
|
|
0.6
|
|
Interest credited
|
|
|
899.5
|
|
|
|
846.8
|
|
|
|
766.1
|
|
|
|
6.2
|
|
|
|
10.5
|
|
Other underwriting and operating expenses
|
|
|
256.7
|
|
|
|
252.7
|
|
|
|
265.8
|
|
|
|
1.6
|
|
|
|
(4.9
|
)
|
Interest expense
|
|
|
31.9
|
|
|
|
31.8
|
|
|
|
31.9
|
|
|
|
0.3
|
|
|
|
(0.3
|
)
|
Amortization of deferred policy acquisition costs
|
|
|
66.2
|
|
|
|
51.4
|
|
|
|
25.8
|
|
|
|
28.8
|
|
|
|
99.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,589.4
|
|
|
|
1,533.2
|
|
|
|
1,438.1
|
|
|
|
3.7
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
289.1
|
|
|
|
181.1
|
|
|
|
13.0
|
|
|
|
59.6
|
|
|
|
|
*
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
57.7
|
|
|
|
6.7
|
|
|
|
23.8
|
|
|
|
|
*
|
|
|
(71.8
|
)
|
Deferred
|
|
|
30.5
|
|
|
|
46.1
|
|
|
|
(32.9
|
)
|
|
|
(33.8
|
)
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
|
88.2
|
|
|
|
52.8
|
|
|
|
(9.1
|
)
|
|
|
67.0
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$200.9
|
|
|
|
$128.3
|
|
|
|
$22.1
|
|
|
|
56.6
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$1.48
|
|
|
|
$1.15
|
|
|
|
$0.20
|
|
|
|
28.7
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$1.48
|
|
|
|
$1.15
|
|
|
|
$0.20
|
|
|
|
28.7
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
135.609
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
21.5
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
135.618
|
|
|
|
111.626
|
|
|
|
111.622
|
|
|
|
21.5
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Variance (%)
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Non-GAAP Financial Measures(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
|
$175.2
|
|
|
|
$147.9
|
|
|
|
$122.9
|
|
|
|
18.5
|
%
|
|
|
20.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$200.9
|
|
|
|
$128.3
|
|
|
|
$22.1
|
|
|
|
56.6
|
|
|
|
|
*
|
Less: Net realized investment gains (losses) (net of taxes)
|
|
|
25.9
|
|
|
|
(19.1
|
)
|
|
|
(102.7
|
)
|
|
|
|
*
|
|
|
81.4
|
|
Add: Net investment gains (losses) on FIA options (net of taxes)
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
(1.9
|
)
|
|
|
(60.0
|
)
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
|
$175.2
|
|
|
|
$147.9
|
|
|
|
$122.9
|
|
|
|
18.5
|
|
|
|
20.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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 and diluted net income per common share includes all
participating securities, such as warrants and unvested
restricted shares, based on the application of the two-class
method. Diluted net income per common share also includes the
dilutive impact of non-participating securities, to the extent
dilutive, such as stock options and shares estimated to be
issued under the employee stock purchase plan, based on
application of the treasury stock method. Antidilutive awards
were excluded from the computation of dilutive net income per
share. |
|
(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, 2010 Compared to the Twelve
Months Ended December 31, 2009
Summary
of Results
Net income increased $72.6 as a result of an increase in
adjusted operating income and net realized investment gains for
the year ended December 31, 2010, versus losses during the
same period in 2009. Adjusted operating income increased $27.3,
primarily due to a $38.2 increase in the investment margin (net
investment income less interest credited) in our Deferred
Annuities segment and increased profitability in our Group and
Life segments. Our Group segments loss ratio improved to
64.9% for the year ended December 31, 2010, compared to
68.3% for the same period in 2009. These favorable drivers were
partially offset by mortality losses in our Income Annuities
segment and increased DAC amortization, primarily in our
Deferred Annuities segment.
Net realized investment gains (losses) increased $69.1 to a
$39.8 net gain from a $(29.3) net loss. This was primarily
driven by a reduction in impairments, which were $20.9 for the
year ended December 31, 2010, versus $86.5 for the same
period in 2009, an improvement of $65.6. For further discussion
of our investment results and portfolio refer to
Investments below.
The provision for income taxes increased $35.4 primarily due to
higher income from operations before income taxes during the
year ended December 31, 2010, compared to the same period
in 2009. Our effective tax rate was 30.5% and 29.2%, for the
years ended December 31, 2010 and 2009, respectively.
67
Further
discussion of adjusted operating income drivers described
above:
Our Group segments loss ratio improved to 64.9% for the
year ended December 31, 2010 from 68.3% for the same period
in 2009. This improvement was driven by medical stop-loss
pricing increases initiated in late 2009, and improved limited
benefit medical underwriting results on increased premiums.
Our Deferred Annuities segments investment margin
increased $38.2 on a $1.6 billion increase in our fixed
account values, driven by strong sales over the past three
years. Partially offsetting the increase in the investment
margin was a $16.0 increase in DAC amortization also related to
the increase in fixed account values as our DAC balances grew
from increased sales.
Our Income Annuities segments results were impacted by
unfavorable mortality as mortality losses were $2.6 during 2010,
compared to mortality gains of $5.1 for 2009. Slightly
offsetting this was an improved interest spread on reserves,
which increased to 0.57% for the year ended December 31,
2010 compared to 0.53% for the same period of 2009. This
improvement was driven by increased originations of mortgage
loans and a reduction in interest credited.
Our Life segments individual insurance claims, decreased
$2.8 on favorable mortality experience. Lifes results also
included a $7.4 benefit related to the release of bonus interest
reserves and decreased amortization of deferred acquisition
costs as the credited interest rate on our universal life
products was adjusted downward to the guaranteed minimum over
2010. This was partially offset by a decrease in the BOLI return
on assets (ROA) driven by a decrease in the PGAAP reserve
amortization, and an increase in BOLI claims.
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 Deferred
Annuities 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 Deferred Annuities segments investment margin
increased $46.4 as a result of a $1.9 billion increase in
our fixed annuity account value. Strong sales of fixed deferred
annuity products drove this increase as there was a higher
demand for fixed retirement savings products during the economic
downturn, and we continued to capitalize on our broad
distribution network. The strong year over year sales growth
also led to a $21.5 increase in amortization of DAC.
68
Our Income Annuities segment experienced favorable mortality as
mortality gains increased to $5.1 for the year ended
December 31, 2009, compared to $2.1 for the same period in
2008. In addition, we experienced strong sales growth as total
sales for 2009 nearly doubled 2008 production.
Our other underwriting and operating expenses decreased $13.1 as
a result of an overall reduction in non-deferrable operating
expenses. Primarily, we experienced a $4.0 decrease in payroll
and employee related expenses due to attrition and disciplined
expense management.
Our Group segments underwriting margin decreased $17.1
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.
Also in our Group segment, commission expense, which is not
deferred, decreased $4.3, consistent with decreased premiums.
Our Life segments pre-tax adjusted operating income
increased $6.6, driven by favorable mortality on all insurance
products leading to improved underwriting results, partially
offset by a decrease in BOLI ROA.
Division Operating
Results
The results of operations and selected operating metrics for our
five segments, (Group, Deferred Annuities, Income Annuities,
Life and Other), for the years ended December 31, 2010,
2009 and 2008 are set forth in the following respective sections.
Group
The following table sets forth the results of operations
relating to our Group segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Variance (%)
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
$433.2
|
|
|
|
$432.2
|
|
|
|
$449.8
|
|
|
|
0.2
|
%
|
|
|
(3.9
|
)%
|
Net investment income
|
|
|
18.7
|
|
|
|
17.8
|
|
|
|
17.8
|
|
|
|
5.1
|
|
|
|
0.0
|
|
Policy fees, contract charges, and other
|
|
|
11.7
|
|
|
|
14.9
|
|
|
|
19.0
|
|
|
|
(21.5
|
)
|
|
|
(21.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
463.6
|
|
|
|
464.9
|
|
|
|
486.6
|
|
|
|
(0.3
|
)
|
|
|
(4.5
|
)
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
281.3
|
|
|
|
295.4
|
|
|
|
295.9
|
|
|
|
(4.8
|
)
|
|
|
(0.2
|
)
|
Other underwriting and operating expenses
|
|
|
102.6
|
|
|
|
106.2
|
|
|
|
115.7
|
|
|
|
(3.4
|
)
|
|
|
(8.2
|
)
|
Amortization of deferred policy acquisition costs
|
|
|
8.1
|
|
|
|
7.9
|
|
|
|
8.1
|
|
|
|
2.5
|
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
392.0
|
|
|
|
409.5
|
|
|
|
419.7
|
|
|
|
(4.3
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income
|
|
|
$71.6
|
|
|
|
$55.4
|
|
|
|
$66.9
|
|
|
|
29.2
|
%
|
|
|
(17.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
The following table sets forth selected historical operating
metrics relating to our Group segment as of, or for the years
ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Group loss ratio (1)
|
|
|
64.9
|
%
|
|
|
68.3
|
%
|
|
|
65.8
|
%
|
Expense ratio (2)
|
|
|
24.7
|
%
|
|
|
24.5
|
%
|
|
|
24.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio (3)
|
|
|
89.6
|
%
|
|
|
92.8
|
%
|
|
|
90.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical stop-lossloss ratio (4)
|
|
|
66.6
|
%
|
|
|
69.8
|
%
|
|
|
67.9
|
%
|
Total sales (5)
|
|
|
$95.5
|
|
|
|
$91.3
|
|
|
|
$112.6
|
|
|
|
|
(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-lossloss 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, 2010 Compared to the Twelve
Months Ended December 31, 2009
Summary
of Results
Segment pre-tax adjusted operating income increased $16.2 as a
result of an improved loss ratio, reflecting medical stop-loss
pricing actions initiated in late 2009. In addition, we
experienced an overall decrease in the number of medical
stop-loss claims, as well as strong underwriting results on our
limited benefit medical product.
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
Policy fees, contract charges, and other decreased $3.2
primarily due to a reduction in revenue from our third party
administrator, which was sold in the third quarter of 2009. This
reduction in revenue was fully offset by a corresponding
reduction in operating expenses.
Benefits
and Expenses
The $3.6 decrease in other underwriting and operating expenses
was primarily the result of the sale of our third party
administrator, described above.
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
70
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.
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.
Deferred
Annuities
The following table sets forth the results of operations
relating to our Deferred Annuities segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Variance (%)
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
$
|
|
|
|
$
|
|
|
|
$0.1
|
|
|
|
*
|
|
|
|
*
|
|
Net investment income
|
|
|
462.9
|
|
|
|
388.0
|
|
|
|
261.1
|
|
|
|
19.3
|
%
|
|
|
48.6
|
%
|
Policy fees, contract charges, and other
|
|
|
19.3
|
|
|
|
16.8
|
|
|
|
20.2
|
|
|
|
14.9
|
|
|
|
(16.8
|
)
|
Net investment gains (losses) on FIA options
|
|
|
0.3
|
|
|
|
0.8
|
|
|
|
(2.9
|
)
|
|
|
(62.5
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
482.5
|
|
|
|
405.6
|
|
|
|
278.5
|
|
|
|
19.0
|
|
|
|
45.6
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
0.1
|
|
|
|
(2.2
|
)
|
|
|
(6.8
|
)
|
|
|
*
|
|
|
|
67.6
|
|
Interest credited
|
|
|
293.6
|
|
|
|
256.9
|
|
|
|
176.4
|
|
|
|
14.3
|
|
|
|
45.6
|
|
Other underwriting and operating expenses
|
|
|
55.1
|
|
|
|
55.9
|
|
|
|
57.4
|
|
|
|
(1.4
|
)
|
|
|
(2.6
|
)
|
Amortization of deferred policy acquisition costs
|
|
|
52.4
|
|
|
|
36.4
|
|
|
|
14.9
|
|
|
|
44.0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
401.2
|
|
|
|
347.0
|
|
|
|
241.9
|
|
|
|
15.6
|
|
|
|
43.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income
|
|
|
$81.3
|
|
|
|
$58.6
|
|
|
|
$36.6
|
|
|
|
38.7
|
%
|
|
|
60.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents percentage variances that are not meaningful or are
explained through the discussion of other variances. |
71
The following table sets forth selected historical operating
metrics relating to our Deferred Annuities segment as of, or for
the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Account valuesFixed annuities
|
|
|
$9,243.7
|
|
|
|
$7,655.7
|
|
|
|
$5,724.9
|
|
Account valuesVariable annuities
|
|
|
791.1
|
|
|
|
755.7
|
|
|
|
645.7
|
|
Interest spread on average account values (1)
|
|
|
1.87
|
%
|
|
|
1.81
|
%
|
|
|
1.67
|
%
|
Total sales (2)
|
|
|
$1,810.7
|
|
|
|
$2,228.4
|
|
|
|
$1,766.5
|
|
|
|
|
(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. |
|
(2) |
|
Total sales represent deposits for new policies. |
Twelve
Months Ended December 31, 2010 Compared to the Twelve
Months Ended December 31, 2009
Summary
of Results
Segment pre-tax adjusted operating income increased $22.7 driven
by an increase in the investment margin (net investment income
less interest credited) from a higher interest spread on record
high account values. This was partially offset by an increase in
DAC amortization which is also related to an increase in account
value driven by higher sales.
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 $74.9, which was driven by a
$1.5 billion increase in average invested assets from
increased fixed annuities account values. Further growth of net
investment income was limited in 2009 and, to a lesser extent,
2010 as sales during a tight credit market have resulted in us
carrying higher levels of cash than during normal economic
periods, which earn lower yields. During 2010, we began
investing in U.S. Treasury securities as a strategy to help
reduce cash levels and increase yields. We expect future growth
in our investment yield as the credit markets have opened
slightly, allowing us to carry less cash.
Policy fees, contract charges, and other increased $2.5
primarily due to higher in force account values. Fees from our
variable annuities increased $1.5 due to improved market
conditions resulting in an increase in our variable annuities
account values. The remaining increase is primarily due to an
increase in surrender charges on higher withdrawals, which was
expected given the growth in account values.
Benefits
and Expenses
Interest credited increased $36.7 primarily due to a
$1.6 billion increase in fixed account values driven by
strong sales of fixed deferred annuity products over the past
three years. In addition, the interest spread improved on a
reduction in the new and renewal crediting rates, which were
lowered in response to the lower interest rate environment.
72
Amortization of DAC increased $16.0, which was driven by a
growing block of business and corresponding growth in our DAC
asset.
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, 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.
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.
Policy fees, contract charges, and other 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 contract holders 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.
73
Income
Annuities
The following table sets forth the results of operations
relating to our Income Annuities segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Variance (%)
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
$422.7
|
|
|
|
$422.4
|
|
|
|
$423.4
|
|
|
|
0.1
|
%
|
|
|
(0.2
|
)%
|
Policy fees, contract charges, and other
|
|
|
0.8
|
|
|
|
0.5
|
|
|
|
0.9
|
|
|
|
60.0
|
|
|
|
(44.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
423.5
|
|
|
|
422.9
|
|
|
|
424.3
|
|
|
|
0.1
|
|
|
|
(0.3
|
)
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited
|
|
|
366.3
|
|
|
|
357.9
|
|
|
|
364.5
|
|
|
|
2.3
|
|
|
|
(1.8
|
)
|
Other underwriting and operating expenses
|
|
|
22.0
|
|
|
|
21.0
|
|
|
|
21.9
|
|
|
|
4.8
|
|
|
|
(4.1
|
)
|
Amortization of deferred policy acquisition costs
|
|
|
2.0
|
|
|
|
1.6
|
|
|
|
1.4
|
|
|
|
25.0
|
|
|
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
390.3
|
|
|
|
380.5
|
|
|
|
387.8
|
|
|
|
2.6
|
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income
|
|
|
$33.2
|
|
|
|
$42.4
|
|
|
|
$36.5
|
|
|
|
(21.7
|
)%
|
|
|
16.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth selected historical operating
metrics relating to our Income Annuities segment as of, or for
the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Reserves (1)
|
|
|
$6,676.8
|
|
|
|
$6,726.3
|
|
|
|
$6,761.2
|
|
Interest spread on reserves (2)
|
|
|
0.57
|
%
|
|
|
0.53
|
%
|
|
|
0.59
|
%
|
Mortality gains (losses) (3)
|
|
|
$(2.6
|
)
|
|
|
$5.1
|
|
|
|
$2.1
|
|
Prepayment speed adjustment on mortgage-backed
securities (4)
|
|
|
3.0
|
|
|
|
2.4
|
|
|
|
(0.3
|
)
|
Total sales (5)
|
|
|
260.0
|
|
|
|
251.8
|
|
|
|
140.8
|
|
|
|
|
(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) |
|
Prepayment speed adjustment on mortgage-backed securities is the
impact to net investment income due to the change in prepayment
speeds on the underlying collateral of mortgage-backed
securities. |
|
(5) |
|
Sales represent deposits for new policies. |
74
Twelve
Months Ended December 31, 2010 Compared to the Twelve
Months Ended December 31, 2009
Summary
of Results
Segment pre-tax adjusted operating income decreased $9.2
primarily due to mortality losses of $2.6 for the year ended
December 31, 2010 compared to mortality gains of $5.1 for
the same period in 2009. In addition, we experienced a $3.9
decrease in the benefit from funding services activity. This was
offset by improvement in the interest spread from increased
originations of mortgage loans and a reduction in interested
credited. Total 2010 sales increased over 2009 driven by sales
of our structured settlement annuities as the low interest rate
environment impacted sales of our SPIAs.
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 slightly, the net effect of $5.8
of additional income from mortgage loans offset by a $5.5
reduction due to a smaller fixed maturities portfolio. The
increase in income from mortgage loans was due to increased
originations, which increased our average assets invested in
mortgage loans in this segment by $74.9 to $386.4. The smaller
asset portfolio is the result of a decrease in reserves.
Benefits
and Expenses
Interest credited increased $8.4 primarily driven by a $7.7
unfavorable fluctuation in our mortality experience as we
experienced mortality losses of $2.6 in 2010 versus mortality
gains of $5.1 in 2009. The gains from the first quarter of 2009
were the highest quarterly mortality gains we have experienced
over the past five years. In addition, the $3.9 reduction in
benefit from funding services activity was driven by a decrease
in the number of cases factored as well as the average gain per
case due to strong competition in this market. Offsetting these
increases was a $3.1 reduction in interest credited due to lower
reserves.
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.
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.
75
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.
Life
The following table sets forth the results of operations
relating to our Life segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Variance (%)
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
$39.8
|
|
|
|
$37.9
|
|
|
|
$36.2
|
|
|
|
5.0
|
%
|
|
|
4.7
|
%
|
Net investment income
|
|
|
271.3
|
|
|
|
265.2
|
|
|
|
254.6
|
|
|
|
2.3
|
|
|
|
4.2
|
|
Policy fees, contract charges, and other
|
|
|
118.3
|
|
|
|
116.7
|
|
|
|
114.7
|
|
|
|
1.4
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
429.4
|
|
|
|
419.8
|
|
|
|
405.5
|
|
|
|
2.3
|
|
|
|
3.5
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
53.7
|
|
|
|
57.3
|
|
|
|
59.4
|
|
|
|
(6.3
|
)
|
|
|
(3.5
|
)
|
Interest credited
|
|
|
242.7
|
|
|
|
235.3
|
|
|
|
227.7
|
|
|
|
3.1
|
|
|
|
3.3
|
|
Other underwriting and operating expenses
|
|
|
54.4
|
|
|
|
55.4
|
|
|
|
57.3
|
|
|
|
(1.8
|
)
|
|
|
(3.3
|
)
|
Amortization of deferred policy acquisition costs
|
|
|
3.7
|
|
|
|
5.5
|
|
|
|
1.4
|
|
|
|
(32.7
|
)
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
354.5
|
|
|
|
353.5
|
|
|
|
345.8
|
|
|
|
0.3
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income
|
|
|
$74.9
|
|
|
|
$66.3
|
|
|
|
$59.7
|
|
|
|
13.0
|
%
|
|
|
11.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents percentage variances that are not meaningful or are
explained through the discussion of other variances. |
The following table sets forth selected historical operating
metrics relating to our Life segment as of, or for the years
ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Individual Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual insurance in force (1)
|
|
|
$38,011.5
|
|
|
|
$38,683.7
|
|
|
|
$39,810.7
|
|
Individual insurance claims (2)
|
|
|
50.7
|
|
|
|
53.5
|
|
|
|
53.7
|
|
UL account value (3)
|
|
|
607.0
|
|
|
|
583.8
|
|
|
|
580.3
|
|
UL interest spread (4)
|
|
|
1.50
|
%
|
|
|
1.20
|
%
|
|
|
1.14
|
%
|
Individual insurance sales (5)
|
|
|
$10.2
|
|
|
|
$10.5
|
|
|
|
$7.2
|
|
BOLI:
|
|
|
|
|
|
|
|
|
|
|
|
|
BOLI insurance in force (1)
|
|
|
$12,667.5
|
|
|
|
$11,346.6
|
|
|
|
$11,502.8
|
|
BOLI account value (3)
|
|
|
4,365.4
|
|
|
|
3,789.1
|
|
|
|
3,700.4
|
|
BOLI ROA (6)
|
|
|
1.03
|
%
|
|
|
1.08
|
%
|
|
|
1.13
|
%
|
BOLI sales (7)
|
|
|
46.1
|
|
|
|
2.5
|
|
|
|
2.9
|
|
|
|
|
(1) |
|
Insurance in force represents dollar face amounts of policies. |
|
(2) |
|
Individual insurance claims represents incurred claims on our
term and universal life policies. |
76
|
|
|
(3) |
|
UL account value and BOLI account value represent our
liabilities to our policyholders. |
|
(4) |
|
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 2010
credited rate to policyholders has been adjusted to exclude a
reserve adjustment related to a persistency bonus. Without this
adjustment the 2010 UL interest spread of 1.50% would have been
2.50%. |
|
(5) |
|
Individual insurance sales represents annualized first year
premiums for recurring premium products, and 10% of new single
premium deposits. |
|
(6) |
|
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. |
|
(7) |
|
BOLI sales represent 10% of new BOLI total deposits. |
Twelve
Months Ended December 31, 2010 Compared to the Twelve
Months Ended December 31, 2009
Summary
of Results
Segment pre-tax adjusted operating income increased $8.6
primarily due to a $2.8 reduction in individual insurance
claims, and a $7.4 benefit related to a 2010 first quarter
credited rate reduction, discussed in further detail below.
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 increased $1.9 driven by an increase in premium from
our term products. This increase is primarily the result of a
change in reinsurance coverage obtained on new terms sales,
which has lowered our ceded premiums.
Net investment income increased $6.1. Of this increase, $14.0
was due to an increase in average invested assets, which
increased to $5.2 billion from $4.9 billion mainly due
to growth in the BOLI account value. This was partially offset
by a negative rate variance of $7.9 as yields decreased to 5.24%
from 5.39%.
Benefits
and Expenses
Due to the continued low interest rate environment, the credited
interest rate on a universal life product was adjusted downward
beginning first quarter 2010 to the guaranteed minimum rate. For
this product, bonus interest is not earned if the credited rate
is equal to the guaranteed minimum. As a result, during the
first quarter of 2010, we released bonus interest reserves of
$6.0 recorded in policyholder benefits and claims, benefited
from a $1.7 reduction in DAC amortization due to the unlocking
of future assumptions and recorded a $(0.3) adjustment to policy
fees, contract charges and other. In addition, policyholder
benefits and claims decreased due to individual insurance
claims, decreasing $2.8.
Interest credited increased $7.4 primarily due to growth in BOLI
account value as a result of strong persistency and new sales in
2010.
77
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 improved underwriting results from favorable
mortality on all life insurance products, partially offset by a
decrease in BOLI ROA.
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 increased $1.7 driven by 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%.
Police fees, contract charges, and other increased $2.0 driven
by the annual increases in COI charges on the UL and BOLI blocks
of business due to the aging of the covered lives.
Benefits
and Expenses
Policyholder benefits and claims decreased $2.1 primarily due to
strong underwriting results, 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.
78
Other
The following table sets forth the results of operations
relating to our Other segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Variance (%)
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
$23.8
|
|
|
|
$20.2
|
|
|
|
$(0.4
|
)
|
|
|
17.8
|
%
|
|
|
|
*
|
Policy fees, contract charges, and other
|
|
|
16.2
|
|
|
|
11.0
|
|
|
|
11.7
|
|
|
|
47.3
|
|
|
|
(6.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
40.0
|
|
|
|
31.2
|
|
|
|
11.3
|
|
|
|
28.2
|
|
|
|
|
*
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited
|
|
|
(3.1
|
)
|
|
|
(3.3
|
)
|
|
|
(2.5
|
)
|
|
|
6.1
|
|
|
|
(32.0
|
)
|
Other underwriting and operating expenses
|
|
|
22.6
|
|
|
|
14.2
|
|
|
|
13.5
|
|
|
|
59.2
|
|
|
|
5.2
|
|
Interest expense
|
|
|
31.9
|
|
|
|
31.8
|
|
|
|
31.9
|
|
|
|
0.3
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
51.4
|
|
|
|
42.7
|
|
|
|
42.9
|
|
|
|
20.4
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating loss
|
|
|
$(11.4
|
)
|
|
|
$(11.5
|
)
|
|
|
$(31.6
|
)
|
|
|
0.9
|
%
|
|
|
63.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents percentage variances that are not meaningful or are
explained through the discussion of other variances. |
Twelve
Months Ended December 31, 2010 Compared to the Twelve
Months Ended December 31, 2009
Summary
of Results
Our Other segment reported pre-tax adjusted operating losses of
$11.4 and $11.5 for the years ended December 31, 2010 and
2009, respectively. Contributing to the current period losses
were other underwriting and operating expenses, which increased
$8.4 due to $3.4 of transition expenses, primarily severance,
related to the change in our CEO and other management positions
in 2010. The remaining increase relates to higher broker-dealer
commission expense on higher sales, which is offset by a $5.2
increase in policy fees, contract charges, and other. The $3.6
increase in net investment income was due to an increase in
invested assets in the surplus portfolio, offset by a decrease
in private equity and hedge fund income.
Twelve
Months Ended December 31, 2009 Compared to the Twelve
Months Ended December 2008
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.
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 risk.
Our investment portfolio mix as of December 31, 2010
consisted in large part of high quality fixed maturities and
commercial
79
mortgage loans, as well as a smaller allocation of high yield
fixed maturities, marketable equity securities, investments in
limited partnerships (which includes tax credit investments,
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, 2010
|
|
|
As of December 31, 2009
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
|
Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
|
|
|
$20,388.9
|
|
|
|
86.8
|
%
|
|
|
$17,693.0
|
|
|
|
87.7
|
%
|
Private
|
|
|
892.9
|
|
|
|
3.8
|
|
|
|
901.3
|
|
|
|
4.5
|
|
Marketable equity securities,
available-for-sale (1)
|
|
|
45.1
|
|
|
|
0.2
|
|
|
|
36.7
|
|
|
|
0.2
|
|
Marketable equity securities, trading (2)
|
|
|
189.3
|
|
|
|
0.8
|
|
|
|
154.1
|
|
|
|
0.7
|
|
Mortgage loans, net
|
|
|
1,713.0
|
|
|
|
7.3
|
|
|
|
1,199.6
|
|
|
|
5.9
|
|
Policy loans
|
|
|
71.5
|
|
|
|
0.3
|
|
|
|
73.9
|
|
|
|
0.4
|
|
Investments in limited partnerships(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity and hedge funds
|
|
|
36.5
|
|
|
|
0.1
|
|
|
|
24.7
|
|
|
|
0.1
|
|
Tax credit investments
|
|
|
150.4
|
|
|
|
0.6
|
|
|
|
85.5
|
|
|
|
0.4
|
|
Other invested assets
|
|
|
12.6
|
|
|
|
0.1
|
|
|
|
12.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$23,500.2
|
|
|
|
100.0
|
%
|
|
|
$20,181.0
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount primarily represents nonredeemable preferred stock. |
|
(2) |
|
Amount represents investments in common stock. |
|
(3) |
|
Investments in private equity and hedge funds are carried at
fair value, while our limited partnership interests related to
tax credit investments are carried at amortized cost. |
The increase in invested assets during 2010 is primarily due to
portfolio growth generated by sales of fixed deferred annuities
and BOLI, a net increase in the fair value of our fixed
maturities, and the investment of the net proceeds from our IPO.
As of December 31, 2010, we had $865.3 of net unrealized
gains on our fixed maturities, an increase of $824.7 from $40.6
as of December 31, 2009. Contributing to the increase in
fair value was an improvement in the markets during the latter
part of 2010. In addition, U.S. Treasury yields declined in
the middle half of the year before rising in the fourth quarter
of 2010, while fixed income spreads ended the year modestly
tighter.
80
Investment
Returns
Net
Investment Income
Return on invested assets is an important element of our
financial results. The following table sets forth the income
yield and net investment income, excluding realized investment
gains (losses) for each major investment category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Yield (1)
|
|
|
Amount
|
|
|
Yield (1)
|
|
|
Amount
|
|
|
Yield (1)
|
|
|
Amount
|
|
|
Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale
|
|
|
5.72
|
%
|
|
|
$1,119.9
|
|
|
|
5.89
|
%
|
|
|
$1,048.1
|
|
|
|
5.82
|
%
|
|
|
$930.7
|
|
Marketable equity securities,
available-for-sale
|
|
|
6.44
|
|
|
|
3.4
|
|
|
|
6.43
|
|
|
|
3.4
|
|
|
|
6.44
|
|
|
|
3.4
|
|
Marketable equity securities, trading
|
|
|
1.84
|
|
|
|
3.0
|
|
|
|
1.60
|
|
|
|
2.5
|
|
|
|
2.06
|
|
|
|
2.7
|
|
Mortgage loans, net
|
|
|
6.44
|
|
|
|
89.1
|
|
|
|
6.35
|
|
|
|
67.4
|
|
|
|
6.49
|
|
|
|
59.4
|
|
Policy loans
|
|
|
5.93
|
|
|
|
4.3
|
|
|
|
5.90
|
|
|
|
4.4
|
|
|
|
5.89
|
|
|
|
4.5
|
|
Investments in limited partnerships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity and hedge funds
|
|
|
15.64
|
|
|
|
5.4
|
|
|
|
15.52
|
|
|
|
8.9
|
|
|
|
(28.98
|
)
|
|
|
(24.4
|
)
|
Tax credit investments (2)
|
|
|
(6.59
|
)
|
|
|
(9.7
|
)
|
|
|
(8.42
|
)
|
|
|
(9.0
|
)
|
|
|
(12.24
|
)
|
|
|
(12.0
|
)
|
Other income producing assets (3)
|
|
|
1.22
|
|
|
|
4.9
|
|
|
|
1.53
|
|
|
|
7.5
|
|
|
|
2.69
|
|
|
|
11.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment income before investment expenses
|
|
|
5.59
|
|
|
|
1,220.3
|
|
|
|
5.72
|
|
|
|
1,133.2
|
|
|
|
5.49
|
|
|
|
975.8
|
|
Investment expenses
|
|
|
(0.10
|
)
|
|
|
(20.9
|
)
|
|
|
(0.10
|
)
|
|
|
(19.6
|
)
|
|
|
(0.11
|
)
|
|
|
(19.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
5.49
|
%
|
|
|
$1,199.4
|
|
|
|
5.62
|
%
|
|
|
$1,113.6
|
|
|
|
5.38
|
%
|
|
|
$956.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 tax credit investments is offset by U.S.
federal income tax benefits. The resulting impact to net income
was $4.6, $3.7 and $0.5 for the years ended December 31,
2010, 2009 and 2008, respectively. |
|
(3) |
|
Other income producing assets includes income from other
invested assets and cash and cash equivalents. |
For the year ended December 31, 2010, net investment income
increased 7.7% compared to 2009 driven primarily by an increase
in invested assets on strong sales of our fixed deferred
annuities in 2009 and 2010. In addition, income from mortgage
loans increased as we continue to grow our mortgage loan
portfolio. These were partially offset by a decrease in net
investment yields, which decreased to 5.49% in 2010 from 5.62%
in 2009. The reduction in yields is the result of the low
interest rate environment as we have experienced lower yields on
recent purchases of fixed maturities, a negative impact from
reinvestment at lower yields, and the partial write-off of
unamortized fixed maturities premium from prepayments of
mortgage-backed securities.
For the years ended December 31, 2010 and 2009,
respectively, the Company had average daily cash balances of
$302.3 and $406.9. The decrease in the 2010 average daily cash
balance is primarily attributable to investing in
U.S. Treasury securities on a short-term basis until
appropriate investments can be purchased. As of
December 31, 2010, the Company held U.S. Treasury
securities with a fair value of $19.3.
81
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 as a result of the equity
market recovery during 2009. In addition, starting in late 2008,
and continuing in 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.
Net
Realized Investment Gains (Losses)
Our portfolio produced total net realized gains of $39.8 for the
year ended December 31, 2010 as compared to net losses of
$29.3 for the same period in 2009, primarily due to a
significant reduction in impairments. Starting in the third
quarter and through the fourth quarter of 2010, equity markets
rebounded which led to net gains on our trading securities for
the year, but remained slightly below 2009 levels, as
illustrated in the following table.
The following table sets forth the detail of our net realized
investment gains (losses) before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Gross realized gains on sales of fixed maturities
|
|
|
$31.3
|
|
|
|
$25.5
|
|
|
|
$10.3
|
|
Gross realized losses on sales of fixed maturities
|
|
|
(10.1
|
)
|
|
|
(23.3
|
)
|
|
|
(7.0
|
)
|
Impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Public fixed maturities (1)
|
|
|
(6.9
|
)
|
|
|
(50.9
|
)
|
|
|
(31.9
|
)
|
Private fixed maturities
|
|
|
(8.4
|
)
|
|
|
(6.9
|
)
|
|
|
(7.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit-related
|
|
|
(15.3
|
)
|
|
|
(57.8
|
)
|
|
|
(39.4
|
)
|
Other
|
|
|
(5.6
|
)
|
|
|
(28.7
|
)
|
|
|
(47.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairments
|
|
|
(20.9
|
)
|
|
|
(86.5
|
)
|
|
|
(86.4
|
)
|
Net gains on trading securities
|
|
|
32.6
|
|
|
|
36.4
|
|
|
|
(64.5
|
)
|
Other net investment gains (losses)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other gross gains
|
|
|
27.5
|
|
|
|
32.1
|
|
|
|
14.0
|
|
Other gross losses
|
|
|
(20.6
|
)
|
|
|
(13.5
|
)
|
|
|
(24.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses) before taxes
|
|
|
$39.8
|
|
|
|
$(29.3
|
)
|
|
|
$(158.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Public fixed maturities includes publicly traded securities and
highly marketable private placements for which there is an
actively traded market. |
|
(2) |
|
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. |
Impairments
We monitor our investments for indicators of possible
credit-related impairments, with a focus on securities that
represent a significant risk of impairment, primarily securities
for which the fair value has declined below amortized cost by
20% or more for a period of six months or more, or for which we
have concerns about the creditworthiness of the issuer based on
qualitative information. When evaluating a security for possible
impairment, we consider several factors, which are described in
more detail in Note 4 to the accompanying Consolidated
Financial Statements.
Impairments for the years ended December 31, 2010, 2009 and
2008 were $20.9, $86.5 and $86.4, respectively. The significant
decrease in impairments during 2010 was primarily driven by an
improvement in
82
the overall economy. For those issuers in which we recorded an
impairment during the year ended December 31, 2010, we had
remaining holdings with an amortized cost of $290.5 and a fair
value of $270.9 as of December 31, 2010.
Fixed
Maturity Securities
Fixed maturities represented approximately 91% and 92% of
invested assets as of December 31, 2010 and 2009,
respectively. As of December 31, 2010, publicly traded and
privately placed fixed maturities represented 95.8% and 4.2%,
respectively, of our total fixed maturity portfolio at fair
value. We invest in privately placed fixed maturities to enhance
the overall value of the portfolio, increase diversification and
obtain higher yields than can ordinarily be obtained with
comparable public market securities.
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.
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, 2010
|
|
|
As of December 31, 2009
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
% of Total
|
|
|
Amortized
|
|
|
Fair
|
|
|
% of Total
|
|
NAIC
|
|
S&P Equivalent
|
|
Cost
|
|
|
Value
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Value
|
|
|
Fair Value
|
|
|
1
|
|
AAA, AA, A
|
|
|
$12,453.2
|
|
|
|
$13,042.4
|
|
|
|
61.3
|
%
|
|
|
$10,917.3
|
|
|
|
$11,031.3
|
|
|
|
59.3
|
%
|
2
|
|
BBB
|
|
|
6,642.1
|
|
|
|
6,981.9
|
|
|
|
32.8
|
|
|
|
6,471.3
|
|
|
|
6,530.9
|
|
|
|
35.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
19,095.3
|
|
|
|
20,024.3
|
|
|
|
94.1
|
|
|
|
17,388.6
|
|
|
|
17,562.2
|
|
|
|
94.4
|
|
3
|
|
BB
|
|
|
700.3
|
|
|
|
679.0
|
|
|
|
3.2
|
|
|
|
717.9
|
|
|
|
641.3
|
|
|
|
3.5
|
|
4
|
|
B
|
|
|
420.6
|
|
|
|
393.8
|
|
|
|
1.8
|
|
|
|
251.0
|
|
|
|
219.2
|
|
|
|
1.2
|
|
5
|
|
CCC & lower
|
|
|
178.4
|
|
|
|
164.8
|
|
|
|
0.8
|
|
|
|
128.0
|
|
|
|
113.5
|
|
|
|
0.6
|
|
6
|
|
In or near default
|
|
|
21.9
|
|
|
|
19.9
|
|
|
|
0.1
|
|
|
|
68.2
|
|
|
|
58.1
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total below investment grade
|
|
|
1,321.2
|
|
|
|
1,257.5
|
|
|
|
5.9
|
|
|
|
1,165.1
|
|
|
|
1,032.1
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$20,416.5
|
|
|
|
$21,281.8
|
|
|
|
100.0
|
%
|
|
|
$18,553.7
|
|
|
|
$18,594.3
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 and 2009, securities with an
amortized cost of $847.3 and $898.2, and fair value of $891.9
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 5.9% and 5.6% of our
fixed maturities portfolio as of December 31, 2010 and
2009, respectively. We had NAIC 5 and 6 designated securities
with gross unrealized losses of $27.0 as of December 31,
2010, of which $15.4, or 57.0%, related to two issuers. These
issuers are current on their contractual payments and our
analysis supports the recoverability of amortized cost.
Certain of our fixed maturities are supported by guarantees from
monoline bond insurers. The credit ratings of our fixed
maturities set forth in the table above reflect, where
applicable, the guarantees provided by
83
monoline bond insurers. As of December 31, 2010, fixed
maturities with monoline guarantees had an amortized cost of
$555.1 and a fair value of $547.5, with gross unrealized losses
of $19.3. 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. The
majority of these securities were municipal bonds. As of
December 31, 2010, $515.7, or 94.2%, of the fair value of
fixed maturities supported by guarantees from monoline bond
insurers had investment grade credit ratings both when including
and excluding the effect of the monoline insurance.
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, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
% of
|
|
|
Temporary
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Total Fair
|
|
|
Impairments
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Value
|
|
|
in AOCI
|
|
|
Security Sector
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer discretionary
|
|
|
$1,526.6
|
|
|
|
$77.4
|
|
|
|
$(15.0
|
)
|
|
|
$1,589.0
|
|
|
|
7.4
|
%
|
|
|
$(2.8
|
)
|
Consumer staples
|
|
|
2,085.3
|
|
|
|
145.9
|
|
|
|
(15.1
|
)
|
|
|
2,216.1
|
|
|
|
10.4
|
|
|
|
(1.4
|
)
|
Energy
|
|
|
675.5
|
|
|
|
49.1
|
|
|
|
(4.3
|
)
|
|
|
720.3
|
|
|
|
3.4
|
|
|
|
|
|
Financials
|
|
|
2,028.9
|
|
|
|
68.7
|
|
|
|
(83.9
|
)
|
|
|
2,013.7
|
|
|
|
9.5
|
|
|
|
(0.7
|
)
|
Health care
|
|
|
1,218.9
|
|
|
|
99.6
|
|
|
|
(6.2
|
)
|
|
|
1,312.3
|
|
|
|
6.2
|
|
|
|
(1.8
|
)
|
Industrials
|
|
|
2,446.8
|
|
|
|
176.4
|
|
|
|
(19.6
|
)
|
|
|
2,603.6
|
|
|
|
12.2
|
|
|
|
(5.8
|
)
|
Information technology
|
|
|
450.9
|
|
|
|
40.2
|
|
|
|
(1.7
|
)
|
|
|
489.4
|
|
|
|
2.3
|
|
|
|
|
|
Materials
|
|
|
1,176.7
|
|
|
|
64.8
|
|
|
|
(30.6
|
)
|
|
|
1,210.9
|
|
|
|
5.7
|
|
|
|
(12.7
|
)
|
Telecommunication services
|
|
|
569.3
|
|
|
|
32.6
|
|
|
|
(10.1
|
)
|
|
|
591.8
|
|
|
|
2.8
|
|
|
|
(0.9
|
)
|
Utilities
|
|
|
1,712.8
|
|
|
|
100.6
|
|
|
|
(19.1
|
)
|
|
|
1,794.3
|
|
|
|
8.4
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate securities
|
|
|
13,891.7
|
|
|
|
855.3
|
|
|
|
(205.6
|
)
|
|
|
14,541.4
|
|
|
|
68.3
|
|
|
|
(26.2
|
)
|
U.S. government and agencies
|
|
|
30.3
|
|
|
|
2.8
|
|
|
|
|
|
|
|
33.1
|
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
State and political subdivisions
|
|
|
462.9
|
|
|
|
5.3
|
|
|
|
(15.4
|
)
|
|
|
452.8
|
|
|
|
2.1
|
|
|
|
(0.2
|
)
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
3,239.9
|
|
|
|
139.3
|
|
|
|
(18.6
|
)
|
|
|
3,360.6
|
|
|
|
15.8
|
|
|
|
|
|
Non-agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
351.6
|
|
|
|
6.1
|
|
|
|
(28.0
|
)
|
|
|
329.7
|
|
|
|
1.5
|
|
|
|
(31.3
|
)
|
Alt-A
|
|
|
115.7
|
|
|
|
3.5
|
|
|
|
(7.9
|
)
|
|
|
111.3
|
|
|
|
0.5
|
|
|
|
(8.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage-backed securities
|
|
|
3,707.2
|
|
|
|
148.9
|
|
|
|
(54.5
|
)
|
|
|
3,801.6
|
|
|
|
17.8
|
|
|
|
(40.0
|
)
|
Commercial mortgage-backed securities
|
|
|
1,782.2
|
|
|
|
115.2
|
|
|
|
(10.1
|
)
|
|
|
1,887.3
|
|
|
|
8.9
|
|
|
|
(3.3
|
)
|
Other debt obligations
|
|
|
542.2
|
|
|
|
35.8
|
|
|
|
(12.4
|
)
|
|
|
565.6
|
|
|
|
2.7
|
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$20,416.5
|
|
|
|
$1,163.3
|
|
|
|
$(298.0
|
)
|
|
|
$21,281.8
|
|
|
|
100.0
|
%
|
|
|
$(76.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2010 we increased our
investments in corporate securities with cash generated from
sales, primarily fixed deferred annuities. We have primarily
purchased new issues of
84
investment grade corporate securities with a focus on obtaining
appropriate yields and duration to match our policyholder
liabilities 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, 2010 and 2009, the fair
value of our ten largest corporate securities holding was
$1,276.9 and $1,138.3, or 8.8% and 9.1%, respectively. The fair
value of our largest exposure to a single issuer of corporate
securities was $140.4, or 1.0%, as of December 31, 2010.
All of the securities related to this issuer had an NAIC rating
of 2 or higher. As of December 31, 2009, the fair value of
our largest exposure to a single issuer of corporate securities
was $141.9, or 1.1%, all of which had an NAIC rating of 1. As of
December 31, 2010, we had $1.3 in direct exposure to the
sovereign and local debt of Portugal, Ireland, Italy, Greece,
and Spain.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Security Sector
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer discretionary
|
|
|
$1,083.4
|
|
|
|
$41.9
|
|
|
|
$(27.8
|
)
|
|
|
$1,097.5
|
|
|
|
5.9
|
%
|
|
|
$(7.9
|
)
|
Consumer staples
|
|
|
1,686.4
|
|
|
|
84.3
|
|
|
|
(14.3
|
)
|
|
|
1,756.4
|
|
|
|
9.4
|
|
|
|
(1.4
|
)
|
Energy
|
|
|
651.4
|
|
|
|
28.3
|
|
|
|
(8.8
|
)
|
|
|
670.9
|
|
|
|
3.6
|
|
|
|
|
|
Financials
|
|
|
2,109.2
|
|
|
|
39.8
|
|
|
|
(189.2
|
)
|
|
|
1,959.8
|
|
|
|
10.6
|
|
|
|
(5.8
|
)
|
Health care
|
|
|
861.1
|
|
|
|
59.1
|
|
|
|
(4.1
|
)
|
|
|
916.1
|
|
|
|
4.9
|
|
|
|
(1.9
|
)
|
Industrials
|
|
|
2,022.3
|
|
|
|
90.3
|
|
|
|
(27.5
|
)
|
|
|
2,085.1
|
|
|
|
11.2
|
|
|
|
(0.9
|
)
|
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
|
|
|
572.0
|
|
|
|
20.3
|
|
|
|
(16.7
|
)
|
|
|
575.6
|
|
|
|
3.1
|
|
|
|
(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
|
|
|
12,300.2
|
|
|
|
483.8
|
|
|
|
(384.0
|
)
|
|
|
12,400.0
|
|
|
|
66.7
|
|
|
|
(32.3
|
)
|
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
|
)
|
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
|
|
|
355.8
|
|
|
|
13.1
|
|
|
|
(27.3
|
)
|
|
|
341.6
|
|
|
|
1.8
|
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$18,553.7
|
|
|
|
$651.0
|
|
|
|
$(610.4
|
)
|
|
|
$18,594.3
|
|
|
|
100.0
|
%
|
|
|
$(81.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
Fixed
Maturity Securities by Contractual Maturity Date
As of December 31, 2010 and 2009, approximately 27% and
29%, respectively, of the fair value of our fixed maturity
portfolio was held in mortgaged-backed securities, and 24% and
27%, respectively, of our portfolio was due after ten years,
which we consider to be longer duration assets. Fixed maturities
in these categories primarily back long duration reserves in our
Income Annuities segment, which can exceed a period of
30 years. As of December 31, 2010 and 2009,
approximately 75% and 82%, respectively, of the gross unrealized
losses on our investment portfolio related to these longer
duration assets, which fluctuate more significantly with changes
in interest rates and credit spreads.
Mortgage-Backed
Securities
Our fixed maturity securities portfolio includes
$5.7 billion of residential and commercial mortgage-backed
securities at fair value. Approximately 70% of these securities
are agency securities and approximately 21% are AAA rated
non-agency securities in the most senior tranche of the
structure type.
All of our RMBS and CMBS securities have a prepayment option.
Prepayments that vary in amount or timing from our estimates
cause fluctuations in our yields due to an acceleration or
deceleration of unamortized premium or discount associated with
the securities in our portfolio. Such adjustment is recorded in
net investment income in our results of operations. As of
December 31, 2010, our RMBS had gross unamortized premiums
and discounts of $76.9 and $68.9, respectively, and our CMBS had
gross unamortized premiums and discounts of $36.7 and $44.3,
respectively.
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. Alt-A RMBS have
overall credit quality between prime and subprime, based on a
review of their underlying mortgage loans and factors such as
credit scores and financial ratios.
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, 2010
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
Fair Value
|
|
|
Invested Assets
|
|
|
Fair Value
|
|
|
Invested Assets
|
|
|
Agency
|
|
|
$3,360.6
|
|
|
|
14.3
|
%
|
|
|
$3,032.7
|
|
|
|
15.0
|
%
|
Non-agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
329.7
|
|
|
|
1.4
|
|
|
|
378.0
|
|
|
|
1.9
|
|
Alt-A
|
|
|
111.3
|
|
|
|
0.5
|
|
|
|
125.5
|
|
|
|
0.6
|
|
Subprime
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal non-agency
|
|
|
441.0
|
|
|
|
1.9
|
|
|
|
503.7
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$3,801.6
|
|
|
|
16.2
|
%
|
|
|
$3,536.4
|
|
|
|
17.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
The following table sets forth the total fair value, and
amortized cost of our non-agency RMBS by credit quality and year
of origination (vintage). There were seven securities with a
total amortized cost and fair value of $82.4 and $69.8,
respectively, that were rated below investment grade by either
Moodys, S&P or Fitch, while at least one other rated
them investment grade.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
Highest Rating Agency Rating
|
|
|
Total as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB and
|
|
|
|
|
|
December 31,
|
|
Vintage
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Below
|
|
|
Total
|
|
|
2009
|
|
|
2007
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$41.1
|
|
|
|
$41.1
|
|
|
|
$91.0
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.7
|
|
|
|
116.2
|
|
|
|
127.9
|
|
|
|
177.0
|
|
2005
|
|
|
|
|
|
|
9.2
|
|
|
|
8.9
|
|
|
|
57.2
|
|
|
|
39.9
|
|
|
|
115.2
|
|
|
|
113.6
|
|
2004 & prior
|
|
|
168.7
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
|
|
183.1
|
|
|
|
213.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized cost
|
|
|
$168.7
|
|
|
|
$23.0
|
|
|
|
$8.9
|
|
|
|
$68.9
|
|
|
|
$197.8
|
|
|
|
$467.3
|
|
|
|
$595.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses
|
|
|
(2.1
|
)
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
(8.7
|
)
|
|
|
(12.4
|
)
|
|
|
(26.3
|
)
|
|
|
(91.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
|
$166.6
|
|
|
|
$19.9
|
|
|
|
$8.9
|
|
|
|
$60.2
|
|
|
|
$185.4
|
|
|
|
$441.0
|
|
|
|
$503.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On a fair value basis as of December 31, 2010, our Alt-A
portfolio was 86.0% fixed rate collateral and 14.0% hybrid
adjustable rate mortgages, or ARMs, with no exposure to option
ARMs. Generally, fixed rate mortgages have performed better with
lower delinquencies and defaults on the underlying collateral
than both option ARMs and hybrid ARMs in the current economic
environment. As of December 31, 2010 and 2009,
respectively, $62.6, or 56.2%, and $73.9, or 58.9%, of the total
Alt-A portfolio had an S&P equivalent credit rating of AAA.
As of December 31, 2010, our Alt-A, prime and total
non-agency RMBS had an estimated weighted-average credit
enhancement of 13.5%, 8.6% and 9.8%, respectively. Credit
enhancement refers to the weighted-average percentage of the
outstanding capital structure that is subordinate in the
priority of cash flows and absorbs losses first. As of
December 31, 2010 and 2009, 58.8% and 59.6%, respectively,
of the fair value of our RMBS had super senior subordination.
The super senior class has priority over all principal and
interest cash flows and will not experience any loss of
principal until lower levels are written down to zero.
Therefore, the majority of our RMBS investments have less
exposure to defaults and delinquencies in the underlying
collateral than if we held the more subordinated classes.
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, 2010
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
Fair Value
|
|
|
Invested Assets
|
|
|
Fair Value
|
|
|
Invested Assets
|
|
|
Agency
|
|
|
$607.4
|
|
|
|
2.6
|
%
|
|
|
$425.6
|
|
|
|
2.1
|
%
|
Non-agency
|
|
|
1,279.9
|
|
|
|
5.4
|
|
|
|
1,363.8
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$1,887.3
|
|
|
|
8.0
|
%
|
|
|
$1,789.4
|
|
|
|
8.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The disruptions in the CMBS market that began in 2009 and
continued through 2010 were attributable to weakness in
commercial real estate market fundamentals, and previously
reduced underwriting standards by some originators of commercial
mortgage loans, particularly within the more recent vintage
years (2006 through 2008). This has reduced market liquidity and
availability of capital, increased market belief that default
rates will increase, and increased spreads and the repricing of
risk. As of December 31, 2010, on an amortized cost basis,
97.4% of our entire CMBS portfolio were rated AAA, 1.3% were
rated AA or A, and 1.3% were rated B and below.
87
The following table sets forth the total fair value, and
amortized cost of our non-agency CMBS by credit quality and year
of origination (vintage). There were 12 securities having a fair
value of $299.5 and an amortized cost of $279.0 that were rated
A by S&P, while Moodys
and/or Fitch
rated them AAA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
Highest Rating Agency Rating
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB and
|
|
|
|
|
|
December 31,
|
|
Vintage
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Below
|
|
|
Total
|
|
|
2009
|
|
|
2008
|
|
|
$51.1
|
|
|
|
$18.4
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$69.5
|
|
|
|
$66.0
|
|
2007
|
|
|
443.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
|
|
444.4
|
|
|
|
471.0
|
|
2006
|
|
|
157.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.3
|
|
|
|
168.5
|
|
|
|
148.0
|
|
2005
|
|
|
283.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283.6
|
|
|
|
311.4
|
|
2004 & prior
|
|
|
209.8
|
|
|
|
|
|
|
|
5.3
|
|
|
|
|
|
|
|
9.7
|
|
|
|
224.8
|
|
|
|
391.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized cost
|
|
|
$1,144.8
|
|
|
|
$18.4
|
|
|
|
$5.3
|
|
|
|
$
|
|
|
|
$22.3
|
|
|
|
$1,190.8
|
|
|
|
$1,388.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses)
|
|
|
95.3
|
|
|
|
(2.2
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
(3.7
|
)
|
|
|
89.1
|
|
|
|
(24.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
|
$1,240.1
|
|
|
|
$16.2
|
|
|
|
$5.0
|
|
|
|
$
|
|
|
|
$18.6
|
|
|
|
$1,279.9
|
|
|
|
$1,363.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. CMBS securities have historically utilized a
senior/subordinate credit structure to allocate cash flows and
losses. The structure was changed in late 2004 and was in
transition into early 2005 when fully implemented to include
super-senior, mezzanine, and junior AAA tranches. This change
resulted in increasing the credit enhancement (subordination) on
the most senior tranche (super-senior) to 30%. The mezzanine
AAAs were structured to typically have 20% credit enhancement
and the junior AAAs 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 property value 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.
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, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
2008
|
|
|
51.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51.1
|
|
2007
|
|
|
443.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
443.1
|
|
2006
|
|
|
157.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157.2
|
|
2005
|
|
|
135.6
|
|
|
|
30.6
|
|
|
|
|
|
|
|
117.4
|
|
|
|
|
|
|
|
|
|
|
|
283.6
|
|
2004 & prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180.9
|
|
|
|
28.9
|
|
|
|
|
|
|
|
209.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$787.0
|
|
|
|
$30.6
|
|
|
|
$
|
|
|
|
$298.3
|
|
|
|
$28.9
|
|
|
|
$
|
|
|
|
$1,144.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$818.8
|
|
|
|
$31.1
|
|
|
|
$
|
|
|
|
$443.4
|
|
|
|
$42.1
|
|
|
|
$19.4
|
|
|
|
$1,354.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As the tables above indicate, our CMBS holdings are
predominately in the most senior tranche of the structure type.
As of December 31, 2010, on an amortized cost basis, 94.8%
of our AAA-rated CMBS were in the most senior tranche. The
weighted-average credit enhancement of our CMBS was 28.6% as of
December 31, 2010. 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, 2010
88
was at 29.8%. We believe this additional credit enhancement is
significant in a deep real estate downturn during which losses
are expected to increase substantially.
Return
on Equity-Like Investments
Prospector manages a portfolio of equity and equity-like
investments, including publicly traded common stock and
convertible securities. Previously, our relationship with
Prospector had been through our investment advisor, White
Mountains Advisors, LLC, with Prospector serving in a
sub-advisory
role. We entered into an investment management agreement,
effective July 1, 2010, directly with Prospector under
which they will continue to supervise and direct our equity and
equity-like investment portfolio. The following table compares
our total return to the benchmark S&P 500 Total Return
Index for the years ended December 31, 2010, 2009 and 2008.
For the years ended December 31, 2010 and 2009, convertible
securities were $83.0 or 30.5%, and $51.8 or 25.2% of the
portfolio, respectively. We believe that these equity and
equity-like investments are suitable for funding certain long
duration liabilities in our Income Annuities segment, and, on a
limited basis, in our surplus portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Common stock
|
|
|
23.9
|
%
|
|
|
34.6
|
%
|
|
|
(36.4
|
)%
|
Convertible bonds
|
|
|
16.3
|
|
|
|
29.2
|
|
|
|
(11.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-Like Investments
|
|
|
21.6
|
|
|
|
34.0
|
|
|
|
(30.6
|
)
|
S&P 500 Total Return Index
|
|
|
15.1
|
|
|
|
26.5
|
|
|
|
(37.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference
|
|
|
6.5
|
%
|
|
|
7.5
|
%
|
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 ratios based on income and
detailed market, property and borrower analysis using our
long-term experience in commercial mortgage lending. A
substantial majority of our loans have personal guarantees and
are inspected and evaluated annually. We diversify our mortgage
loans by geographic region, loan size and scheduled maturities.
On our consolidated balance sheets, mortgage loans are reported
net of an allowance for losses, deferred loan origination costs,
unearned mortgage loan fees, and a PGAAP adjustment; however,
the tables below are reported excluding these items.
The stress experienced in the U.S. financial markets and
unfavorable credit market conditions led to a decrease in
overall liquidity and availability of capital in the commercial
mortgage loan market, which has led to greater opportunities for
more selective loan originations. We believe a disciplined
increase in our mortgage loan portfolio will help maintain the
overall quality of our investment portfolio and obtain
appropriate yields to match our policyholder liabilities. We are
prudently increasing our investments in mortgage loans primarily
in our Income Annuities and Deferred Annuities segments to
improve our overall investment yields. We originated $592.1 of
mortgage loans during the year ended December 31, 2010 and
expect strong originations to continue during 2011.
As of December 31, 2010 and 2009, 73.6% and 77.7%,
respectively, of our mortgage loans were under $5.0 and our
average loan balance was $2.2 and $1.9, respectively. As of
December 31, 2010 and 2009, our largest loan balance was
$13.0 and $13.4, respectively.
89
Credit
Quality
We use the
loan-to-value
(LTV) ratio and debt service coverage ratio (DSCR) as our
primary metrics to assess mortgage loan quality. The following
table sets forth the LTV ratios for our gross mortgage loan
portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
As of December 31, 2009
|
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Loan-to-Value Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< or = 50%
|
|
|
$596.2
|
|
|
|
34.7
|
%
|
|
|
$484.2
|
|
|
|
40.1
|
%
|
51%60%
|
|
|
369.8
|
|
|
|
21.5
|
|
|
|
348.5
|
|
|
|
28.9
|
|
61%70%
|
|
|
463.7
|
|
|
|
26.9
|
|
|
|
195.8
|
|
|
|
16.2
|
|
71%75%
|
|
|
120.4
|
|
|
|
7.0
|
|
|
|
68.2
|
|
|
|
5.6
|
|
76%80%
|
|
|
46.3
|
|
|
|
2.7
|
|
|
|
17.7
|
|
|
|
1.5
|
|
81%100%
|
|
|
90.7
|
|
|
|
5.3
|
|
|
|
85.1
|
|
|
|
7.1
|
|
> 100%
|
|
|
33.1
|
|
|
|
1.9
|
|
|
|
7.4
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$1,720.2
|
|
|
|
100.0
|
%
|
|
|
$1,206.9
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
loan-to-value
ratio compares the amount of the loan to the estimated fair
value of the underlying property collateralizing the loan. In
the year of funding, LTV ratios are calculated using independent
appraisals performed by Member of the Appraisal Institute, or
MAI, designated appraisers. Subsequent to the year of funding,
LTV ratios are updated annually between June 1st and
September 30th using internal valuations based on property
income and market capitalization rates. LTV ratios greater than
100% indicate that the loan amount is greater than the
collateral value. A smaller LTV ratio generally indicates a
higher quality loan.
As of December 31, 2010 and 2009, the mortgage loan
portfolio had weighted-average LTV ratios of 57.0% and 53.5%,
respectively. The slight increase in the LTV ratio is driven by
a reduction in the market values of the underlying properties,
which is the result of a distressed commercial real estate
market. The weighted average LTV ratio was 55.2% and 49.4% for
loans funded during 2010 and 2009, respectively. For loans
originated during 2010, 31.7% had a LTV ratio of 50% or less,
and no loans had a LTV ratio of more than 75%. For loans
originated during 2009, 44.8% had a LTV ratio of 50% or less,
and no loans had a LTV ratio of more than 70%. The following
table sets forth the DSCR for our gross mortgage loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
As of December 31, 2009
|
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Debt Service Coverage Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> or = 1.60
|
|
|
$896.4
|
|
|
|
52.1
|
%
|
|
|
$637.5
|
|
|
|
52.8
|
%
|
1.401.59
|
|
|
327.1
|
|
|
|
19.0
|
|
|
|
222.2
|
|
|
|
18.4
|
|
1.201.39
|
|
|
295.7
|
|
|
|
17.2
|
|
|
|
158.4
|
|
|
|
13.1
|
|
1.001.19
|
|
|
117.7
|
|
|
|
6.8
|
|
|
|
109.9
|
|
|
|
9.1
|
|
0.850.99
|
|
|
32.0
|
|
|
|
1.9
|
|
|
|
30.0
|
|
|
|
2.5
|
|
< 0.85
|
|
|
51.3
|
|
|
|
3.0
|
|
|
|
48.9
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$1,720.2
|
|
|
|
100.0
|
%
|
|
|
$1,206.9
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The DSCR compares the amount of rental income a property is
generating to the amount of the mortgage payments due on the
property. DSCRs are calculated using the most current annual
operating history for the collateral. As of December 31,
2010 and 2009, the mortgage loan portfolio had weighted-average
DSCRs of 1.73 and 1.75, respectively. For loans originated
during the years ended December 31, 2010 and 2009, 58.4%
and 58.9%, respectively, had a debt-service coverage ratio of
1.60 or more.
90
Composition
of Mortgage Loans
The following table sets forth the gross carrying value of our
investments in mortgage loans by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
As of December 31, 2009
|
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
|
$533.6
|
|
|
|
31.0
|
%
|
|
|
$346.0
|
|
|
|
28.6
|
%
|
Washington
|
|
|
270.4
|
|
|
|
15.7
|
|
|
|
222.9
|
|
|
|
18.5
|
|
Texas
|
|
|
168.9
|
|
|
|
9.8
|
|
|
|
125.6
|
|
|
|
10.4
|
|
Oregon
|
|
|
95.6
|
|
|
|
5.6
|
|
|
|
88.0
|
|
|
|
7.3
|
|
Florida
|
|
|
54.9
|
|
|
|
3.2
|
|
|
|
23.9
|
|
|
|
2.0
|
|
Other
|
|
|
596.8
|
|
|
|
34.7
|
|
|
|
400.5
|
|
|
|
33.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$1,720.2
|
|
|
|
100.0
|
%
|
|
|
$1,206.9
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the gross carrying value of our
investments in mortgage loans by property type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
As of December 31, 2009
|
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Property Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shopping Centers and Retail
|
|
|
$735.7
|
|
|
|
42.8
|
%
|
|
|
$472.9
|
|
|
|
39.2
|
%
|
Office Buildings
|
|
|
460.8
|
|
|
|
26.8
|
|
|
|
339.2
|
|
|
|
28.1
|
|
Industrial
|
|
|
433.9
|
|
|
|
25.2
|
|
|
|
345.7
|
|
|
|
28.6
|
|
Multi-Family
|
|
|
46.8
|
|
|
|
2.7
|
|
|
|
34.9
|
|
|
|
2.9
|
|
Other
|
|
|
43.0
|
|
|
|
2.5
|
|
|
|
14.2
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$1,720.2
|
|
|
|
100.0
|
%
|
|
|
$1,206.9
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
Date of Mortgage Loans
The following table sets forth our gross mortgage loans by
contractual maturity date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
As of December 31, 2009
|
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Years to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
|
$6.3
|
|
|
|
0.4
|
%
|
|
|
$2.4
|
|
|
|
0.2
|
%
|
Due after one year through five years
|
|
|
107.1
|
|
|
|
6.2
|
|
|
|
100.0
|
|
|
|
8.3
|
|
Due after five years through ten years
|
|
|
871.9
|
|
|
|
50.7
|
|
|
|
541.8
|
|
|
|
44.9
|
|
Due after ten years
|
|
|
734.9
|
|
|
|
42.7
|
|
|
|
562.7
|
|
|
|
46.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$1,720.2
|
|
|
|
100.0
|
%
|
|
|
$1,206.9
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For more information and further discussion of our allowance of
mortgage loans, see Note 6 to the Consolidated Financial
Statements.
Investments
in Limited PartnershipsTax Credit
Investments
We invest in limited partnership interests related to tax credit
investments, which are typically
15-year
investments that provide tax credits in years one through ten.
As of December 31, 2010, we were invested in 16 limited
partnership interests related to federal affordable housing
projects and other various state tax credit
91
funds. We accounted for these investments under the equity
method and they are recorded at amortized cost in investments in
limited partnerships, with the present value of unfunded
contributions recorded in other liabilities.
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 related tax credits had on net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Amortization related to tax credit investments, net of tax
benefit
|
|
|
$(6.3
|
)
|
|
|
$(5.9
|
)
|
|
|
$(7.8
|
)
|
Affordable housing tax credits
|
|
|
10.9
|
|
|
|
9.6
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact to net income
|
|
|
$4.6
|
|
|
|
$3.7
|
|
|
|
$0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides the future estimated impact to net
income:
|
|
|
|
|
|
|
Impact to
|
|
|
|
Net Income
|
|
|
2011
|
|
|
$8.1
|
|
2012
|
|
|
12.9
|
|
2013
|
|
|
13.3
|
|
2014 and beyond
|
|
|
39.1
|
|
|
|
|
|
|
Estimated impact to net income (net of taxes)
|
|
|
$73.4
|
|
|
|
|
|
|
Liquidity
and Capital Resources
Symetra conducts all of its operations through its operating
subsidiaries, and our liquidity requirements primarily have been
and will continue to be met by funds from such subsidiaries.
Dividends and permitted tax sharing payments from its
subsidiaries are Symetras principal sources of cash to pay
dividends and meet its obligations, including payments of
principal and interest on notes payable and tax obligations. On
January 27, 2010, Symetra completed an initial public
offering of its common stock and received net proceeds of
$282.5, which further enhanced our liquidity and capital
resources.
We have and intend to pay quarterly cash dividends on our common
stock and warrants. Our current rate is $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. See Dividends and Regulatory
Requirements below for further discussion.
Over the past few years, the global financial markets
experienced unprecedented disruption, adversely affecting the
business environment in general, and financial services
companies in particular. During the year ended December 31,
2010, the economy began to slowly recover. The credit markets
remained tight, and we continued to experience a low interest
rate environment through most of 2010, although interest rates
began to rise in late 2010. In managing the challenging market
conditions over the past couple of years, we benefited from the
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:
|
|
|
|
|
Sales for the year ended December 31, 2010 were solid
across all distribution channels. Although below the record
levels for the same period in 2009, sales continued to generate
strong cash inflows on our deposit contracts (annuities and
universal life policies, including BOLI).
|
92
|
|
|
|
|
While certain lapses and surrenders occur in the normal course
of business, these lapses and surrenders have not deviated
materially from management expectations.
|
|
|
|
The amount of AOCI, net of taxes, on our balance sheet increased
to income of $432.5 as of December 31, 2010 from a loss of
$49.7 as of December 31, 2009. The primary driver was an
increase in the fair value of our
available-for-sale
securities, due to the low interest rate environment.
|
|
|
|
As of December 31, 2010, we had the ability to borrow, on
an unsecured basis, up to a maximum principal amount of $200.0
under a revolving line of credit arrangement.
|
|
|
|
We continued to generate strong cash flows from operations,
which grew $127.3 to $925.7 for 2010, from $798.4 for 2009.
|
|
|
|
To support the 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. As of December 31, 2010, Symetra Life Insurance
Company had a risk-based capital ratio of approximately 480%.
This capital level provides more than adequate capital levels
for growth of our business.
|
Liquidity
Requirements and Sources of Liquidity
The liquidity requirements of Symetras insurance
subsidiaries principally relate to the liabilities associated
with their 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 products include the payment of benefits, as well
as cash payments in connection with policy and contract
surrenders and withdrawals and policy loans. Historically,
Symetras 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 contract holder
withdrawals of funds earlier than assumed 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 policyholder liabilities, composed of annuity
reserves, deposit liabilities and policy and contract claim
liabilities, net of reinsurance recoverables. The total
represents the sum of funds held under deposit contracts, future
policy benefits and policy and
93
contract claims on the consolidated balance sheets, excluding
other policyholder related liabilities and reinsurance
recoverables of $234.3 and $247.2 as of December 31, 2010
and 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
As of December 31, 2009
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
|
Illiquid Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured settlements & other SPIAs (1)
|
|
|
$6,670.4
|
|
|
|
31.4
|
%
|
|
|
$6,703.6
|
|
|
|
35.1
|
%
|
Deferred annuities with
5-year
payout provision or MVA (2)
|
|
|
377.1
|
|
|
|
1.8
|
|
|
|
381.0
|
|
|
|
2.0
|
|
Traditional insurance (3)
|
|
|
185.6
|
|
|
|
0.9
|
|
|
|
185.8
|
|
|
|
1.0
|
|
Group health & life (3)
|
|
|
95.9
|
|
|
|
0.4
|
|
|
|
97.2
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total illiquid liabilities
|
|
|
7,329.0
|
|
|
|
34.5
|
|
|
|
7,367.6
|
|
|
|
38.6
|
|
Somewhat Liquid Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank-owned life insurance (BOLI) (4)
|
|
|
4,444.0
|
|
|
|
20.9
|
|
|
|
3,865.1
|
|
|
|
20.2
|
|
Deferred annuities with surrender charges of 5% or higher
|
|
|
6,176.8
|
|
|
|
29.1
|
|
|
|
4,788.2
|
|
|
|
25.1
|
|
Universal life with surrender charges of 5% or higher
|
|
|
181.7
|
|
|
|
0.9
|
|
|
|
152.5
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total somewhat liquid liabilities
|
|
|
10,802.5
|
|
|
|
50.9
|
|
|
|
8,805.8
|
|
|
|
46.1
|
|
Fully Liquid Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred annuities with surrender charges of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3% up to 5%
|
|
|
462.6
|
|
|
|
2.2
|
|
|
|
412.4
|
|
|
|
2.2
|
|
Less than 3%
|
|
|
231.2
|
|
|
|
1.1
|
|
|
|
87.6
|
|
|
|
0.5
|
|
No surrender charges (5)
|
|
|
1,946.9
|
|
|
|
9.2
|
|
|
|
1,950.7
|
|
|
|
10.2
|
|
Universal life with surrender charges less than 5%
|
|
|
439.9
|
|
|
|
2.0
|
|
|
|
441.7
|
|
|
|
2.3
|
|
Other (6)
|
|
|
21.9
|
|
|
|
0.1
|
|
|
|
24.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fully liquid liabilities
|
|
|
3,102.5
|
|
|
|
14.6
|
|
|
|
2,916.6
|
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$21,234.0
|
|
|
|
100.0
|
%
|
|
|
$19,090.0
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These contracts cannot be surrendered. The benefits are
specified in the contracts as fixed amounts, primarily 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.
Represents incurred but not reported claim liabilities. |
|
(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 does not qualify for this tax-free treatment due to the
employment status of the original covered employees and charges
may be applicable. |
|
(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. |
|
(6) |
|
Represents BOLI, traditional insurance, and Group health and
life reported claim liabilities. |
94
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-terms. 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, 2010 and 2009,
our insurance subsidiaries had liquid assets of
$20.8 billion and $18.1 billion, respectively, and
Symetra had liquid assets of $89.7 and $33.3, respectively. The
portion of total company liquid assets comprised of cash and
cash equivalents and short-term investments was $277.1 and
$259.9 as of December 31, 2010 and 2009, respectively. The
increase in our insurance subsidiaries liquid assets was
primarily the result of sales of deferred annuities during 2010.
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 limited 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 December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Notes payable
|
|
|
$449.0
|
|
|
|
$448.9
|
|
Stockholders equity
|
|
|
2,380.6
|
|
|
|
1,433.3
|
|
|
|
|
|
|
|
|
|
|
Total capital
|
|
|
$2,829.6
|
|
|
|
$1,882.2
|
|
|
|
|
|
|
|
|
|
|
Our capitalization increased $947.4 as of December 31, 2010
compared to December 31, 2009 due to an increase in
stockholders equity. This increase was driven by an
increase in AOCI, the net proceeds received from our IPO, and
the generation of net income of $200.9, offset partially by
current year dividends. AOCI improved primarily due to improved
valuation of
available-for-sale
fixed maturities, primarily corporate securities. We believe our
capital levels position us well to capitalize on organic growth
as well as pursue any potentially favorable acquisition
opportunities.
95
Debt
The following table summarizes our debt instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Amount Available as of
|
|
|
Amount Outstanding as of
|
|
|
|
Maturity
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
Description
|
|
Date
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Senior notes payable
|
|
|
4/1/2016
|
|
|
|
$300.0
|
|
|
|
$300.0
|
|
|
|
$300.0
|
|
|
|
$300.0
|
|
Capital Efficient Notes (CENts)
|
|
|
10/15/2067
|
|
|
|
150.0
|
|
|
|
150.0
|
|
|
|
150.0
|
|
|
|
150.0
|
|
Revolving credit facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America, N.A.
|
|
|
8/16/2012
|
|
|
|
200.0
|
|
|
|
200.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable and revolving credit facility
|
|
|
|
|
|
|
$650.0
|
|
|
|
$650.0
|
|
|
|
$450.0
|
|
|
|
$450.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 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 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 Consolidated Financial Statements.
Revolving
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. 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 Consolidated Financial Statements.
96
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, 2010, Symetra received dividends of $40.0 from
its insurance subsidiaries. Symetra received no dividends from
its insurance subsidiaries in 2009.
Based on our statutory results, as of December 31, 2010,
Symetras insurance subsidiaries may pay it dividends of up
to $194.0 during 2011 without needing to obtain regulatory
approval. A dividend of $20.0 was paid from our subsidiaries to
us on March 4, 2011, leaving $174.0 available for our
insurance subsidiaries to dividend to us during 2011 without
having to seek approval.
We declared and paid quarterly dividends of $0.05 per common
share for a total of $20.6 during the second, third, and fourth
quarters of 2010. On February 9, 2011, we declared a
dividend of $0.05 per common share to shareholders, warrant
holders, and unvested restricted shareholders of record as of
February 22, 2011, for a total of $6.9, paid by
March 9, 2011.
Cash
Flows
The following table sets forth a summary of our consolidated
cash flows for the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net cash flows provided by operating activities
|
|
|
$925.7
|
|
|
|
$798.4
|
|
|
|
$733.0
|
|
Net cash flows used in investing activities
|
|
|
(2,456.8
|
)
|
|
|
(2,142.3
|
)
|
|
|
(976.8
|
)
|
Net cash flows provided by financing activities
|
|
|
1,547.9
|
|
|
|
1,133.7
|
|
|
|
457.9
|
|
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 on our investments, including dividends and
interest, as well as the amounts and timing of cash disbursed
for our payment of policyholder benefits and claims,
underwriting and operating expenses and income taxes. The
following discussion highlights key drivers in the level of cash
flows generated from our operating activities:
|
|
|
|
|
Years ended December 31, 2010 and
2009. Net cash provided by operating activities
for 2010 was $925.7, a $127.3 increase over 2009. This was
primarily driven by increased net investment income driven by an
increase in average assets, a decline in paid commissions
related to our deferred annuity products on lower sales, and a
decrease in group medical stop-loss paid claims.
|
|
|
|
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.
|
Investing
Activities
Cash flows from our investing activities are primarily driven by
the amounts and timing of cash received from sales of
investments and from maturities and calls of fixed maturity
securities, as well as the
97
amounts and timing of cash disbursed for purchases of
investments and funding of mortgage loan originations. The
following discussion highlights key drivers in the level of cash
flows used in our investing activities:
|
|
|
|
|
Years ended December 31, 2010 and
2009. Net cash used in investing activities for
the year ended December 31, 2010 was $2,456.8, a $314.5
increase over the same period in 2009. This increase was
primarily the result of increased purchases of fixed maturities
and higher originations of mortgage loans, as we deployed cash
generated from sales of fixed deferred annuities and BOLI, as
well as net proceeds from our IPO. These were partially offset
by an increase in cash received from prepayments, maturities and
calls on fixed maturities, and strategic sales of fixed
maturities.
|
|
|
|
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.
|
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 common stock, as well as the amounts and timing
of cash disbursed to fund withdrawals from certain life
insurance and annuity policies, and dividend distributions to
our stock and warrant holders. The following discussion
highlights key drivers in the level of cash flows generated from
our financing activities:
|
|
|
|
|
Years ended December 31, 2010 and
2009. Net cash provided by financing activities
for the year ended December 31, 2010 was $1,547.9, a $414.2
increase over the same period in 2009. This was primarily due to
net IPO proceeds of $282.5 received during the first quarter of
2010 and an increase in policyholder deposits, primarily related
to increased BOLI deposits offset by decreased fixed annuity
deposits.
|
|
|
|
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.
|
Contractual
Obligations and Commitments
We enter into obligations with third parties in the ordinary
course of our operations. The estimated cash payments related to
these obligations as of December 31, 2010 are set forth in
the table below. The estimated payments reflected in this table
are based on managements estimates and assumptions, which
are necessarily subjective. Actual cash out flows in future
periods will vary, possibly materially. Further, 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 payroll and income taxes.
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 and
|
|
|
|
Total
|
|
|
2011
|
|
|
2012-2013
|
|
|
2014-2015
|
|
|
thereafter
|
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance obligations (1)
|
|
|
$41,556.9
|
|
|
|
$1,827.7
|
|
|
|
$3,972.0
|
|
|
|
$3,989.3
|
|
|
|
$31,767.9
|
|
Notes payable
|
|
|
450.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450.0
|
|
Interest on notes payable
|
|
|
188.2
|
|
|
|
30.8
|
|
|
|
61.7
|
|
|
|
61.7
|
|
|
|
34.0
|
|
Purchase obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in limited partnerships (2)
|
|
|
77.5
|
|
|
|
50.8
|
|
|
|
26.7
|
|
|
|
|
|
|
|
|
|
Servicing fees (3)
|
|
|
39.8
|
|
|
|
11.2
|
|
|
|
22.2
|
|
|
|
6.4
|
|
|
|
|
|
Other (4)
|
|
|
44.3
|
|
|
|
41.2
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
Operating lease obligations (5)
|
|
|
34.6
|
|
|
|
7.7
|
|
|
|
15.2
|
|
|
|
11.6
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$42,391.3
|
|
|
|
$1,969.4
|
|
|
|
$4,100.9
|
|
|
|
$4,069.0
|
|
|
|
$32,252.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
|
(2) |
|
We have investments in sixteen limited partnership interests
related to tax credit investments, and five private equity
partnerships. We will provide capital contributions to the five
private equity partnerships through 2013 with a remaining
committed amount of $11.5 at the discretion of the general
partner, subject to certain contribution limits. Since the
timing of payment is uncertain, the unfunded amount has been
included in the payment due in less than one year. For more
information, see Note 16 to the Consolidated Financial
Statements. Amounts recorded on the balance sheet are included
in other liabilities. |
|
(3) |
|
Includes contractual commitments for a service agreement to
outsource the majority of our information technology
infrastructure. For more information, see Note 16 to the
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 $39.2, as of
December 31, 2010. |
|
(5) |
|
Includes minimum rental commitments on leases for office space
and certain equipment. For more information, see Note 16 to
the Consolidated Financial Statements. |
Off-balance
Sheet Transactions
We do not have any off-balance sheet arrangements that are
reasonably likely to have a material effect on our financial
condition, results of operations, liquidity, or capital
resources.
|
|
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.
99
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. A gradual 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, have increased annuity and
universal life insurance sales, and limit the potential risk of
margin erosion due to minimum guaranteed crediting rates.
However, 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,
commercial mortgage-backed securities, and commercial mortgage
loans. The carrying value of our investment portfolio as of
December 31, 2010 and 2009 was $23.5 billion and
$20.2 billion, respectively, of which 90.6% in 2010 and
92.1% in 2009 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 effective duration of our fixed
maturity portfolio was approximately 5.7 and 5.4 years and
as of December 31, 2010 and 2009, 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.
We manage equity price risk on investment holdings through
industry and issuer diversification and asset allocation
techniques.
Derivative
Financial Instruments
We have minimal investments in derivative financial instruments.
We use indexed call options to manage our exposure to changes in
indices. Our exposure is related to our FIA block of business,
which credits policyholders account values based on gains
in these indices.
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
100
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. With the assistance of our
investment advisor, we use 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 $1.20 billion and
$1.00 billion, based on our securities positions as of
December 31, 2010 and 2009, respectively. Under the same
model, we estimate our Income Annuities segments fixed
maturities portfolio, the majority of which are long duration
assets, would decline by approximately $0.48 billion and
$0.44 billion, based on our positions as of
December 31, 2010 and 2009, 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
$30.9 and $23.2, as of December 31, 2010 and 2009,
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.
101
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial Statements of Symetra Financial
Corporation:
|
|
|
|
|
|
|
|
103
|
|
|
|
|
104
|
|
|
|
|
105
|
|
|
|
|
106
|
|
|
|
|
107
|
|
|
|
|
108
|
|
102
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, 2010 and
2009, and the related consolidated statements of income, changes
in stockholders equity, and cash flows for each of the
three years in the period ended December 31, 2010. Our
audits also included the financial statement schedules listed in
the Index at Item 15(a). These financial statements and
schedules are the responsibility of the 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as 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, 2010 and 2009, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2010, 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
2009, the Company changed its method of accounting for
other-than-temporary
impairments of fixed maturity securities.
Seattle, Washington
March 16, 2011
103
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In millions, except share and per share data)
|
|
|
ASSETS
|
Investments:
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value (cost: $20,416.5 and
$18,553.7, respectively)
|
|
|
$21,281.8
|
|
|
|
$18,594.3
|
|
Marketable equity securities, at fair value (cost: $52.8
and $52.6, respectively)
|
|
|
45.1
|
|
|
|
36.7
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
Marketable equity securities, at fair value (cost: $168.0
and $165.9, respectively)
|
|
|
189.3
|
|
|
|
154.1
|
|
Mortgage loans, net
|
|
|
1,713.0
|
|
|
|
1,199.6
|
|
Policy loans
|
|
|
71.5
|
|
|
|
73.9
|
|
Investments in limited partnerships (includes $36.5 and
$24.7 measured at fair value, respectively)
|
|
|
186.9
|
|
|
|
110.2
|
|
Other invested assets
|
|
|
12.6
|
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
23,500.2
|
|
|
|
20,181.0
|
|
Cash and cash equivalents
|
|
|
274.6
|
|
|
|
257.8
|
|
Accrued investment income
|
|
|
257.6
|
|
|
|
237.2
|
|
Accounts receivable and other receivables
|
|
|
65.6
|
|
|
|
70.1
|
|
Reinsurance recoverables
|
|
|
280.8
|
|
|
|
276.6
|
|
Deferred policy acquisition costs
|
|
|
250.0
|
|
|
|
250.4
|
|
Goodwill
|
|
|
28.4
|
|
|
|
26.3
|
|
Current income tax recoverable
|
|
|
3.0
|
|
|
|
20.2
|
|
Deferred income tax assets, net
|
|
|
|
|
|
|
191.2
|
|
Other assets
|
|
|
95.0
|
|
|
|
84.5
|
|
Separate account assets
|
|
|
881.7
|
|
|
|
840.1
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$25,636.9
|
|
|
|
$22,435.4
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Funds held under deposit contracts
|
|
|
$20,953.3
|
|
|
|
$18,816.7
|
|
Future policy benefits
|
|
|
398.4
|
|
|
|
394.9
|
|
Policy and contract claims
|
|
|
116.6
|
|
|
|
125.6
|
|
Unearned premiums
|
|
|
12.2
|
|
|
|
12.1
|
|
Other policyholders funds
|
|
|
111.0
|
|
|
|
113.8
|
|
Notes payable
|
|
|
449.0
|
|
|
|
448.9
|
|
Deferred income tax liabilities, net
|
|
|
99.0
|
|
|
|
|
|
Other liabilities
|
|
|
235.1
|
|
|
|
250.0
|
|
Separate account liabilities
|
|
|
881.7
|
|
|
|
840.1
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
23,256.3
|
|
|
|
21,002.1
|
|
Commitments and contingencies (Note 16)
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; none issued
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 750,000,000 shares
authorized; 118,216,470 issued and 118,215,701
outstanding as of December 31, 2010;
92,729,455 shares issued and outstanding as of
December 31, 2009
|
|
|
1.2
|
|
|
|
0.9
|
|
Additional paid-in capital
|
|
|
1,450.2
|
|
|
|
1,165.7
|
|
Retained earnings
|
|
|
496.7
|
|
|
|
316.4
|
|
Accumulated other comprehensive income (loss), net of taxes
|
|
|
432.5
|
|
|
|
(49.7
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,380.6
|
|
|
|
1,433.3
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
|
$25,636.9
|
|
|
|
$22,435.4
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
$473.0
|
|
|
|
$470.1
|
|
|
|
$486.1
|
|
Net investment income
|
|
|
1,199.4
|
|
|
|
1,113.6
|
|
|
|
956.5
|
|
Policy fees, contract charges, and other
|
|
|
166.3
|
|
|
|
159.9
|
|
|
|
166.5
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(53.3
|
)
|
|
|
(191.2
|
)
|
|
|
(86.4
|
)
|
Less: portion of losses recognized in other comprehensive income
|
|
|
32.4
|
|
|
|
104.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(20.9
|
)
|
|
|
(86.5
|
)
|
|
|
(86.4
|
)
|
Other net realized investment gains (losses)
|
|
|
60.7
|
|
|
|
57.2
|
|
|
|
(71.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
39.8
|
|
|
|
(29.3
|
)
|
|
|
(158.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,878.5
|
|
|
|
1,714.3
|
|
|
|
1,451.1
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
335.1
|
|
|
|
350.5
|
|
|
|
348.5
|
|
Interest credited
|
|
|
899.5
|
|
|
|
846.8
|
|
|
|
766.1
|
|
Other underwriting and operating expenses
|
|
|
256.7
|
|
|
|
252.7
|
|
|
|
265.8
|
|
Interest expense
|
|
|
31.9
|
|
|
|
31.8
|
|
|
|
31.9
|
|
Amortization of deferred policy acquisition costs
|
|
|
66.2
|
|
|
|
51.4
|
|
|
|
25.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,589.4
|
|
|
|
1,533.2
|
|
|
|
1,438.1
|
|
Income from operations before income taxes
|
|
|
289.1
|
|
|
|
181.1
|
|
|
|
13.0
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
57.7
|
|
|
|
6.7
|
|
|
|
23.8
|
|
Deferred
|
|
|
30.5
|
|
|
|
46.1
|
|
|
|
(32.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
|
88.2
|
|
|
|
52.8
|
|
|
|
(9.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$200.9
|
|
|
|
$128.3
|
|
|
|
$22.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$1.48
|
|
|
|
$1.15
|
|
|
|
$0.20
|
|
Diluted
|
|
|
$1.48
|
|
|
|
$1.15
|
|
|
|
$0.20
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
135.609
|
|
|
|
111.622
|
|
|
|
111.622
|
|
Diluted
|
|
|
135.618
|
|
|
|
111.626
|
|
|
|
111.622
|
|
Cash dividends declared per common share
|
|
|
$0.15
|
|
|
|
$
|
|
|
|
$
|
|
See accompanying notes.
105
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2008
|
|
|
$0.9
|
|
|
|
$1,165.5
|
|
|
|
$131.2
|
|
|
|
$(12.5
|
)
|
|
|
$1,285.1
|
|
Cumulative effect adjustmentnew accounting guidance (net
of taxes: $(10.3))
|
|
|
|
|
|
|
|
|
|
|
19.1
|
|
|
|
(19.1
|
)
|
|
|
|
|
Comprehensive income, 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 as of December 31, 2008
|
|
|
$0.9
|
|
|
|
$1,165.5
|
|
|
|
$172.4
|
|
|
|
$(1,052.6
|
)
|
|
|
$286.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2009
|
|
|
$0.9
|
|
|
|
$1,165.5
|
|
|
|
$172.4
|
|
|
|
$(1,052.6
|
)
|
|
|
$286.2
|
|
Cumulative effect adjustmentnew 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 as of December 31, 2009
|
|
|
$0.9
|
|
|
|
$1,165.7
|
|
|
|
$316.4
|
|
|
|
$(49.7
|
)
|
|
|
$1,433.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2010
|
|
|
$0.9
|
|
|
|
$1,165.7
|
|
|
|
$316.4
|
|
|
|
$(49.7
|
)
|
|
|
$1,433.3
|
|
Common stock issued (net of issuance costs: $20.6)
|
|
|
0.3
|
|
|
|
282.2
|
|
|
|
|
|
|
|
|
|
|
|
282.5
|
|
Comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
200.9
|
|
|
|
|
|
|
|
200.9
|
|
Other comprehensive income (net of taxes: $259.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
482.2
|
|
|
|
482.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
683.1
|
|
Stock-based compensation
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
2.3
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
(20.6
|
)
|
|
|
|
|
|
|
(20.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2010
|
|
|
$1.2
|
|
|
|
$1,450.2
|
|
|
|
$496.7
|
|
|
|
$432.5
|
|
|
|
$2,380.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
106
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$200.9
|
|
|
|
$128.3
|
|
|
|
$22.1
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment (gains) and losses
|
|
|
(39.8
|
)
|
|
|
29.3
|
|
|
|
158.0
|
|
Accretion and amortization of invested assets
|
|
|
38.2
|
|
|
|
25.2
|
|
|
|
36.4
|
|
Accrued interest on bonds
|
|
|
(39.6
|
)
|
|
|
(36.7
|
)
|
|
|
(33.4
|
)
|
Amortization and depreciation
|
|
|
15.6
|
|
|
|
14.3
|
|
|
|
14.6
|
|
Deferred income tax provision (benefit)
|
|
|
30.5
|
|
|
|
46.1
|
|
|
|
(32.9
|
)
|
Interest credited on deposit contracts
|
|
|
899.5
|
|
|
|
846.8
|
|
|
|
766.1
|
|
Mortality and expense charges and administrative fees
|
|
|
(103.1
|
)
|
|
|
(100.2
|
)
|
|
|
(96.7
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income
|
|
|
(20.4
|
)
|
|
|
(30.9
|
)
|
|
|
(11.8
|
)
|
Deferred policy acquisition costs, net
|
|
|
(61.7
|
)
|
|
|
(106.2
|
)
|
|
|
(89.6
|
)
|
Other receivables
|
|
|
(6.7
|
)
|
|
|
(18.3
|
)
|
|
|
(13.7
|
)
|
Future policy benefits
|
|
|
3.5
|
|
|
|
2.8
|
|
|
|
7.2
|
|
Policy and contract claims
|
|
|
(9.0
|
)
|
|
|
(7.5
|
)
|
|
|
22.2
|
|
Current income tax recoverable
|
|
|
17.2
|
|
|
|
0.8
|
|
|
|
(16.6
|
)
|
Other assets and liabilities
|
|
|
(0.4
|
)
|
|
|
6.6
|
|
|
|
1.2
|
|
Other, net
|
|
|
1.0
|
|
|
|
(2.0
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
724.8
|
|
|
|
670.1
|
|
|
|
710.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
925.7
|
|
|
|
798.4
|
|
|
|
733.0
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities and marketable equity securities
|
|
|
(4,884.9
|
)
|
|
|
(4,014.7
|
)
|
|
|
(2,286.7
|
)
|
Other invested assets and investments in limited partnerships
|
|
|
(77.9
|
)
|
|
|
(36.2
|
)
|
|
|
(33.5
|
)
|
Issuances of mortgage loans
|
|
|
(592.1
|
)
|
|
|
(290.8
|
)
|
|
|
(224.5
|
)
|
Issuances of policy loans
|
|
|
(17.3
|
)
|
|
|
(18.0
|
)
|
|
|
(16.2
|
)
|
Maturities, calls, paydowns, and other
|
|
|
1,987.2
|
|
|
|
1,312.8
|
|
|
|
922.0
|
|
Securities lending collateral returned, net
|
|
|
|
|
|
|
103.7
|
|
|
|
174.4
|
|
Acquisitions, net of cash received
|
|
|
(2.0
|
)
|
|
|
(2.0
|
)
|
|
|
(9.2
|
)
|
Sales of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities and marketable equity securities
|
|
|
1,017.4
|
|
|
|
660.1
|
|
|
|
371.8
|
|
Other invested assets and investments in limited partnerships
|
|
|
21.1
|
|
|
|
45.3
|
|
|
|
29.6
|
|
Repayments of mortgage loans
|
|
|
76.1
|
|
|
|
73.5
|
|
|
|
80.1
|
|
Repayments of policy loans
|
|
|
18.6
|
|
|
|
18.2
|
|
|
|
17.0
|
|
Other, net
|
|
|
(3.0
|
)
|
|
|
5.8
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,456.8
|
)
|
|
|
(2,142.3
|
)
|
|
|
(976.8
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder account balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
$2,649.6
|
|
|
|
$2,580.0
|
|
|
|
$1,970.8
|
|
Withdrawals
|
|
|
(1,357.9
|
)
|
|
|
(1,353.6
|
)
|
|
|
(1,322.0
|
)
|
Securities lending collateral paid, net
|
|
|
|
|
|
|
(103.7
|
)
|
|
|
(174.4
|
)
|
Net proceeds from issuance of common stock
|
|
|
282.5
|
|
|
|
|
|
|
|
|
|
Cash dividends paid on common stock
|
|
|
(20.6
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(5.7
|
)
|
|
|
11.0
|
|
|
|
(16.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,547.9
|
|
|
|
1,133.7
|
|
|
|
457.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
16.8
|
|
|
|
(210.2
|
)
|
|
|
214.1
|
|
Cash and cash equivalents at beginning of period
|
|
|
257.8
|
|
|
|
468.0
|
|
|
|
253.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
$274.6
|
|
|
|
$257.8
|
|
|
|
$468.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
$31.1
|
|
|
|
$31.0
|
|
|
|
$31.3
|
|
Income taxes
|
|
|
40.5
|
|
|
|
5.6
|
|
|
|
40.4
|
|
Non-cash transactions during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in limited partnerships and capital obligations
incurred
|
|
|
21.3
|
|
|
|
10.7
|
|
|
|
4.2
|
|
Bond exchanges
|
|
|
125.9
|
|
|
|
206.6
|
|
|
|
50.7
|
|
See accompanying notes.
107
|
|
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 25.260 newly issued shares
of common stock sold by the Company and 9.700 existing shares of
common stock sold by selling stockholders. 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.
Common
and Preferred Stock
The Company has 750.000 authorized shares of common stock,
$0.01 par value per share, and 10.000 authorized shares of
preferred stock, $0.01 par value per share. The
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, 2010, which are
recorded in total stockholders equity. The warrants are
exercisable at any time until August 2, 2014, to acquire
18.976 shares of common stock at an exercise price of
$11.49 per share and can be net-share settled at the option of
the warrant holder.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis of
Presentation and Use of Estimates
The audited 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); and
the liabilities for funds held under deposit contracts, future
policy benefits, and policy and contract claims. The recorded
amounts reflect managements best estimates, though actual
results could differ from those estimates.
The audited consolidated financial statements include the
accounts of Symetra Financial and its subsidiaries that are
wholly owned, directly or indirectly. All significant
intercompany transactions and balances have been eliminated.
Certain reclassifications have been made to prior year financial
information for it to conform to the current period
presentation. For the years ended December 31, 2009 and
2008, this included reclassifications of $103.5 and $98.7,
respectively, related to cost of insurance charges on universal
life-type (UL) contracts. These amounts were reclassified from
premium revenues to policy fees, contract charges and other
revenues on the consolidated statements of income. These
reclassifications did not change
108
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
total revenues or amounts previously reported as other revenues
that are now included in policy fees, contract charges and other.
Recognition
of Insurance Revenue and Related Benefits
The Companys group life and health insurance policies are
short duration contracts. Premiums from these products are
recognized as revenue when earned over the life of the policy
and a liability for the portion of premiums unearned is reported
on the consolidated balance sheets. Benefit claims are charged
to operations as incurred.
Traditional individual life insurance products, including term
and whole life insurance products, are long-duration contracts,
and the associated premiums and benefits are fixed and
guaranteed. Premiums from these products are recognized as
revenue and considered earned when due. As premiums are earned,
the Company establishes a reserve for future policy benefits
associated with those premiums, resulting in the recognition of
profits over the life of the policy.
Deposits related to universal life, bank-owned life insurance
(BOLI), limited payment 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 net investment income
on the policyholders fund balances and amounts assessed
during the period for cost of insurance, policy administration,
and surrender charges. The Company includes such costs in policy
fees, contract charges, and other in the consolidated statements
of income. Expenses that are charged to operations for these
products include interest credited and benefit claims incurred
in excess of related policyholder account balances.
Fees for variable annuity and variable life products include
mortality and expense charges, policy administration charges,
and surrender charges. These fees are charged to
policyholders accounts based upon the daily net assets of
the policyholders account values, and are recognized in
policy fees, contract charges, and other on the consolidated
statements of income when charged.
Investments
Available-for-Sale
Securities
The Company classifies its investments in fixed maturities and
certain marketable equity securities as
available-for-sale
and carries them at fair value. Fixed maturities include bonds,
mortgage-backed securities and redeemable preferred stock.
Marketable equity securities classified as
available-for-sale
primarily include nonredeemable preferred stock.
The Company reports net unrealized investment gains (losses)
related to its
available-for-sale
securities in accumulated other comprehensive income (loss)
(AOCI) in stockholders equity, net of related DAC and
deferred income taxes.
The Company reports interest and dividends earned in net
investment income. Interest income for fixed maturities is
recognized using the effective yield method. When the
collectability of interest income for fixed maturities is
considered doubtful, any accrued but uncollectible interest is
excluded from 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
109
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
prepayments and recalculates the effective yield to reflect
actual payments plus anticipated future payments. The Company
includes any resulting adjustment in net investment income.
Trading
Securities
The Company has elected fair value accounting for its
investments in common stock. As a result, the impact of changes
in the fair value of the Companys trading portfolio is
recorded in net realized investment gains (losses) in the
consolidated statements of income. The Company believes this
presents its investment results for these securities on a basis
that is consistent with managements operating principles,
as the Company considers changes in fair value on these
securities when evaluating its performance. Dividends earned on
trading securities are reported 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
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, 2010 and 2009 included $892.9 and $901.3,
respectively, of fixed maturities that were not publicly traded.
See Note 7 for additional disclosures about fair value
measurements.
The cost of securities sold is determined using the
specific-identification method.
Other-Than-Temporary
Impairments
Investments are considered to be impaired when a decline in fair
value below a securitys amortized cost 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 its mortgage loans at outstanding principal
balances, adjusted for unamortized deferred fees and costs, net
of an allowance for loan losses. Loan origination fees and costs
are deferred and amortized over the life of the loan. Interest
income, including amortization of deferred fees and expenses, is
recorded in net investment income. See Note 6 for further
discussion of the Companys allowance for 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 consist of investments in
limited partnerships that operate affordable housing projects
and state tax credit funds (collectively, tax credit
investments). These
110
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
investments are accounted for under the equity method and
recorded at amortized cost, with amortization recorded in net
investment income. The present value of any unfunded commitments
related to these investments is recorded in other liabilities.
Investments in limited partnerships also include 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.
The Companys investments in certain limited partnerships
meet the definition of a variable interest entity (VIE). Based
on the analyses of these interests, the Company is not
considered the primary beneficiary of any of these
partnerships and therefore has not consolidated them. The
maximum exposure to loss as a result of the Companys
involvement in these VIEs was $208.0 and $147.3 as of
December 31, 2010 and 2009, respectively. The maximum
exposure to loss includes commitments to provide future capital
contributions as described in Note 16.
Derivative
Financial Instruments
The Companys recognition of changes 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 currently held
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 further
discussion.
Cash and
Cash Equivalents
Cash and cash equivalents consist of demand bank deposits and
short-term highly liquid investments with maturities of three
months or less at the time of purchase. Cash equivalents are
reported at cost, which approximates fair value, and were $261.0
and $244.4 as of December 31, 2010 and 2009, respectively.
As of December 31, 2010 and 2009, cash equivalents of
$257.9 and $223.8, respectively, were held at a single highly
rated financial institution.
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. The Company remains liable
to its policyholders to the extent that counterparties to
reinsurance contracts do not meet their contractual obligations.
Accordingly, the future policy benefit reserves and policy and
contract claims liabilities are reported gross of any related
reinsurance recoverables, which are reported as assets. The
Company reports premiums, benefits, and settlement expenses net
of reinsurance 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.
Deferred
Policy Acquisition Costs
The Company defers 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 deferrals to the lesser of the acquisition costs
contained in the Companys product pricing assumptions or
actual costs incurred.
111
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
The Company amortizes acquisition costs for deferred annuity
contracts and universal life insurance policies over the lives
of the contracts or policies in proportion to the estimated
future gross profits of each of these product lines. To do this,
the Company makes assumptions as to surrender rates, mortality
experience, maintenance expenses, and investment performance.
Actual profits can vary from the estimates and can thereby
result in increases or decreases to DAC amortization rates. For
interest-sensitive life products, the Company regularly
evaluates its assumptions and, when necessary, revises the
estimated gross profits of these contracts, resulting in
adjustments to DAC amortization. When such estimates are
revised, they are recorded in current earnings. The Company
adjusts the unamortized balance of DAC for the impact on
estimated future gross profits as if net unrealized investment
gains and losses on securities had been realized as of the
balance sheet date. The Company includes the impact of this
adjustment, net of tax, in AOCI.
The Company amortizes acquisition costs for immediate annuities
using a constant yield approach.
The Company 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 DAC
asset balances associated with deferred and immediate annuity
contracts, universal life contracts, and traditional life
contracts. The Company compares the current DAC asset balances
with the estimated present value of future profitability of the
underlying business. The DAC asset balances are considered
recoverable if the present value of future profits is greater
than the current DAC asset balance. As of December 31, 2010
and 2009, all of the DAC asset balances were considered
recoverable.
For some products, policyholders can elect to modify product
benefits, features, rights or coverage by exchanging a contract
for a new contract; by amendment, endorsement or rider to a
contract; or by election of a feature or coverage within a
contract. These transactions are known as internal replacements.
If the modification substantially changes the original contract,
the DAC is immediately written off through income and any
eligible costs associated with the replacement contract are
deferred. If the modification does not substantially change the
contract, the DAC is retained and amortized over the life of the
modified contract and any acquisition costs associated with the
related modification are expensed.
Deferred
Sales Inducements
The Company offers sales inducements on certain deferred annuity
contracts. The inducement interest entitles the contract holder
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
contract holders 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 regular recoverability testing to ensure that
capitalized amounts do not exceed the present value of
anticipated gross profits.
Goodwill
Goodwill is not amortized but is tested for impairment at least
annually. No impairment was recorded for the years ended
December 31, 2010, 2009 or 2008.
112
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
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 minimum lease term. Rent holidays,
rent incentives, and tenant improvement allowances are amortized
on the straight-line basis over the initial term of the lease
and any option period that is reasonably assured.
Separate
Account Assets and Liabilities
Separate account assets are reported at fair value and represent
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
guaranteed minimum death benefits (GMDB) 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 policy
fees, contract charges, and other on the consolidated statements
of income.
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.
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. 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 pricing mortality
assumptions, which include provisions for longer life spans over
time. The interest rate pattern used to calculate the reserves
for SPIAs is set at issue. The interest rates within the pattern
vary over time and start with interest rates that prevailed at
contract issue. As of December 31, 2010, the
weighted-average implied interest rate on the existing book of
business was 5.9% and is expected to grade to 6.5% 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
assumptions in the year of issue and includes a provision for
adverse deviation. 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. 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
113
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
Company discounts future benefits at interest rates that vary by
year of policy issue. These rates are initially set to be
consistent with portfolio rates at the time of issue, and are
graded to a lower rate, such as the statutory valuation interest
rate, over time. Assumptions are set at the time each product is
introduced and are not updated for actual experience unless the
total product liability amount is determined to be inadequate to
cover future policy benefits.
Policy
and Contract Claims
Liabilities for policy and contract claims primarily represent
liabilities for claims under group health insurance policies 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.
Stock-based
Compensation
The Company accounts for stock-based compensation based on the
fair value of the awards on the grant date. Compensation expense
for these awards is recognized over the requisite service
period, using the straight-line method. See Note 15 for
further discussion.
Income
Taxes
Income taxes have been determined 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 bases 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
ASU
2010-20,
Disclosures about the Credit Quality of Financing Receivables
and the Allowance for Credit Losses
In July 2010, the FASB issued ASU
2010-20,
Receivables (ASC Topic 310)Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit
Losses. This guidance increases required disclosure about
financing receivables, including credit risk exposures and the
allowance for credit losses; however, it does not change how
credit losses are measured or recognized. It requires, on a
disaggregated basis, new disclosures regarding allowances for
credit losses, the credit quality of financing receivables, and
loan impairments. The Company adopted this guidance as of
December 31, 2010, for its financing receivables, primarily
investments in mortgage loans. See Note 6 for the
Companys disclosures related to mortgage loans.
ASU
2010-6,
Improving Disclosures about Fair Value Measurement
In January 2010, the FASB issued ASU
2010-06,
Fair Value Measurements and Disclosures (ASC Topic
820)Improving Disclosures about Fair Value
Measurement. The guidance in this ASU requires additional
disclosures about an entitys fair value measurements,
including information about inputs to Level 2 measurements,
gross transfers into and out of Levels 1 and 2, and
information about activity for Level 3
114
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
measurements on a gross basis. It also clarifies the level of
disaggregation required for existing fair value disclosures. The
Company adopted this guidance on January 1, 2010, except
for the provisions regarding activity for Level 3
measurements presented on a gross basis which, as permitted by
the guidance, will be adopted on January 1, 2011. See
Note 7 for the Companys disclosures related to fair
value measurements.
ASC
810-10
(formerly SFAS No. 167), Amendments to FASB
Interpretation No. 46(R)
In June 2009, the Financial Accounting Standards Board (FASB)
issued SFAS No. 167 (ASC
810-10),
Amendments to FASB Interpretation No. 46(R), which
provides guidance for determining whether an entity is a
variable interest entity (VIE); assessing which enterprise, if
any, has a controlling financial interest in a VIE; and
providing additional disclosures about involvement with such
entities. This guidance changes the basis for determining the
primary beneficiary of a VIE from a quantitative analysis to a
primarily qualitative analysis and requires reassessment of this
determination at each reporting period. The Company adopted this
guidance on January 1, 2010, and it did not change the
Companys previous conclusions regarding its VIEs, which
consist primarily of investments in limited partnerships.
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.
Under this guidance, 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 AOCI.
To determine the cumulative effect of adoption, the Company
compared the present value of cash flows expected to be received
as of January 1, 2009, to the amortized cost basis of the
fixed maturities. The cumulative effect adjustment increased the
amortized cost of our fixed maturity securities, primarily
corporate securities, by $24.1.
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, or for existing financial assets and
liabilities at the time of adoption, and may not be reversed.
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 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.
115
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
Accounting
Pronouncements Not Yet Adopted
ASU
2010-15, How
Investments Held through Separate Accounts Affect an
Insurers Consolidation Analysis of Those
Investments
In April 2010, the FASB issued ASU
2010-15,
Financial ServicesInsurance (Topic 944)How
Investments Held through Separate Accounts Affect an
Insurers Consolidation Analysis of Those Investments.
This guidance clarifies that an insurer should only consider its
ownership interests held within its general account when
determining if it holds a controlling interest in an investment,
thus excluding interests held in a separate account from the
analysis. It does not change the guidance for consolidating
investments when the general account holds a controlling
interest. The Company will adopt this guidance on
January 1, 2011 when it becomes effective, which will not
change the Companys current practice of excluding
ownership interests held in its separate account from its
consolidation analysis.
ASU
2010-26,
Accounting for Costs Associated with Acquiring or Renewing
Insurance Contracts
In October 2010, the FASB issued ASU
2010-26,
Financial ServicesInsurance (Topic 944)Accounting
for Costs Associated with Acquiring or Renewing Insurance
Contracts. This guidance limits the amounts of deferrable
acquisition costs to those incremental costs directly related to
the successful acquisition of an insurance contract and
clarifies which costs are included in that definition.
Additionally, advertising costs must meet existing GAAP guidance
for capitalization of advertising costs to be deferred under
ASC 944. The guidance is effective for fiscal years
beginning after December 15, 2011. Retrospective
application, as well as early adoption, are permitted, but not
required. The Company will adopt this guidance on
January 1, 2012 and is evaluating the method and impact of
adopting this guidance.
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 Companys outstanding warrants, exercisable for 18.976
common shares, are considered participating securities, which
are potential common stock securities that are included in
weighted-average common shares outstanding for purposes of
computing basic and diluted earnings per share using the
two-class method. The warrants are considered participating
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.
The Company has issued equity instruments to employees that are
included in the computation of earnings per share, weighted for
the portion of the period the shares were outstanding. These
instruments include restricted stock, stock options and shares
issued under the employee stock purchase plan. Refer to
Note 15 for discussion of these plans.
Certain of the restricted shares are considered participating
securities because the holders are entitled to receive any
dividends declared on the common stock concurrently with the
holders of outstanding shares of common stock, on a
one-to-one
basis. Participating restricted stock is included in basic and
diluted earnings per share based on the application of the
two-class method. Non-participating restricted stock is included
in diluted earnings per share based on the application of the
treasury stock method. Estimated shares to be issued
116
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
under the employee stock purchase plan were included in diluted
earnings per share based on the application of the treasury
stock method.
For the year ended December 31, 2010, 2.950 stock options
were excluded from the computation of diluted earnings per
share, based on the application of the treasury stock method,
because they were antidilutive. There were no antidilutive
awards outstanding as of December 31, 2009 or 2008. Also,
performance units granted during 2010 were also excluded from
the computation of diluted earnings per share, because the
Company has a historical practice of and intent to settle these
awards in cash. Refer to Note 17 for discussion of the
performance units.
The following table presents information relating to the
Companys calculations of basic and diluted earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions, except per share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported
|
|
|
$200.9
|
|
|
|
$128.3
|
|
|
|
$22.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstandingbasic
|
|
|
135.609
|
|
|
|
111.622
|
|
|
|
111.622
|
|
Add: Dilutive effect of equity instruments
|
|
|
0.009
|
|
|
|
0.004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstandingdiluted
|
|
|
135.618
|
|
|
|
111.626
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$1.48
|
|
|
|
$1.15
|
|
|
|
$0.20
|
|
Diluted
|
|
|
$1.48
|
|
|
|
$1.15
|
|
|
|
$0.20
|
|
117
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
The following tables summarize the Companys
available-for-sale
fixed maturities and marketable equity securities. The OTTI in
AOCI represent the amount of cumulative non-credit OTTI losses
transferred to, or recorded in, AOCI for securities that also
have a credit-related impairment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
Temporary
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Impairments in
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
AOCI
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
|
$30.3
|
|
|
|
$2.8
|
|
|
|
$
|
|
|
|
$33.1
|
|
|
|
$(0.1
|
)
|
State and political subdivisions
|
|
|
462.9
|
|
|
|
5.3
|
|
|
|
(15.4
|
)
|
|
|
452.8
|
|
|
|
(0.2
|
)
|
Corporate securities
|
|
|
13,891.7
|
|
|
|
855.3
|
|
|
|
(205.6
|
)
|
|
|
14,541.4
|
|
|
|
(26.2
|
)
|
Residential mortgage-backed securities
|
|
|
3,707.2
|
|
|
|
148.9
|
|
|
|
(54.5
|
)
|
|
|
3,801.6
|
|
|
|
(40.0
|
)
|
Commercial mortgage-backed securities
|
|
|
1,782.2
|
|
|
|
115.2
|
|
|
|
(10.1
|
)
|
|
|
1,887.3
|
|
|
|
(3.3
|
)
|
Other debt obligations
|
|
|
542.2
|
|
|
|
35.8
|
|
|
|
(12.4
|
)
|
|
|
565.6
|
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
20,416.5
|
|
|
|
1,163.3
|
|
|
|
(298.0
|
)
|
|
|
21,281.8
|
|
|
|
(76.2
|
)
|
Marketable equity securities,
available-for-sale
|
|
|
52.8
|
|
|
|
0.1
|
|
|
|
(7.8
|
)
|
|
|
45.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$20,469.3
|
|
|
|
$1,163.4
|
|
|
|
$(305.8
|
)
|
|
|
$21,326.9
|
|
|
|
$(76.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
Temporary
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Impairments in
|
|
As of December 31, 2009
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
AOCI
|
|
|
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
|
)
|
Corporate securities
|
|
|
12,300.2
|
|
|
|
483.8
|
|
|
|
(384.0
|
)
|
|
|
12,400.0
|
|
|
|
(32.3
|
)
|
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
|
|
|
355.8
|
|
|
|
13.1
|
|
|
|
(27.3
|
)
|
|
|
341.6
|
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the U.S. government and agencies securities, agencies
comprised $13.9 and $23.7 of the fair value as of
December 31, 2010 and 2009, respectively.
As of December 31, 2010 and 2009, the Company had $83.0 and
$51.8, respectively, of convertible fixed maturities recorded at
fair value.
118
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
As of December 31, 2010, financial institutions,
U.S. federal government, and industrials industries
represented 19.0%, 18.6% and 12.4%, respectively, of the
Companys investments in fixed maturity and marketable
equity securities at fair value.
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.
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 AOCI. The tables 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
|
|
As of December 31, 2010
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
139.1
|
|
|
|
(3.3
|
)
|
|
|
19
|
|
|
|
146.9
|
|
|
|
(12.1
|
)
|
|
|
24
|
|
Corporate securities
|
|
|
2,191.5
|
|
|
|
(92.2
|
)
|
|
|
203
|
|
|
|
897.7
|
|
|
|
(113.4
|
)
|
|
|
105
|
|
Residential mortgage-backed securities
|
|
|
525.8
|
|
|
|
(18.6
|
)
|
|
|
37
|
|
|
|
273.1
|
|
|
|
(35.9
|
)
|
|
|
42
|
|
Commercial mortgage-backed securities
|
|
|
160.5
|
|
|
|
(2.9
|
)
|
|
|
26
|
|
|
|
63.2
|
|
|
|
(7.2
|
)
|
|
|
17
|
|
Other debt obligations
|
|
|
41.4
|
|
|
|
(0.8
|
)
|
|
|
7
|
|
|
|
94.9
|
|
|
|
(11.6
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
$3,058.3
|
|
|
|
$(117.8
|
)
|
|
|
292
|
|
|
|
$1,475.8
|
|
|
|
$(180.2
|
)
|
|
|
198
|
|
Marketable equity securities,
available-for-sale
|
|
|
19.9
|
|
|
|
(0.7
|
)
|
|
|
2
|
|
|
|
24.1
|
|
|
|
(7.1
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$3,078.2
|
|
|
|
$(118.5
|
)
|
|
|
294
|
|
|
|
$1,499.9
|
|
|
|
$(187.3
|
)
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
As of December 31, 2009
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
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
|
|
Corporate securities
|
|
|
1,377.6
|
|
|
|
(33.3
|
)
|
|
|
148
|
|
|
|
2,442.6
|
|
|
|
(350.7
|
)
|
|
|
284
|
|
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
|
|
|
37.8
|
|
|
|
(0.3
|
)
|
|
|
6
|
|
|
|
89.6
|
|
|
|
(27.0
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
Based on the National Association of Insurance Commissioners
(NAIC) ratings, as of December 31, 2010 and 2009, the
Company held below-investment-grade fixed maturities with fair
values of $1,257.5 and $1,032.1, respectively, and amortized
costs of $1,321.2 and $1,165.1, respectively. These holdings
amounted to 5.9% and 5.6% of the Companys investments in
fixed maturities at fair value as of December 31, 2010 and
2009, respectively.
As of December 31, 2010 and 2009, $3,968.0, or 69.7%, and
$3,458.3 or 64.9%, respectively, of the Companys
mortgage-backed securities were agency securities. The remaining
$1,720.9 and $1,867.5, respectively, consisted of non-agency
securities. Of these non-agency securities $1,240.1, or 72.1%,
and $1,338.6, or 71.7%, respectively, were AAA-rated commercial
mortgage-backed securities, and $329.7, or 19.2%, and $378.0, or
20.2%, were residential mortgage-backed securities 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 $111.3 and $125.5, of
its non-agency residential mortgage-backed securities as Alt-A
as of December 31, 2010 and 2009, respectively, as each has
overall collateral credit quality between prime and subprime. Of
the securities classified as Alt-A, 88.1% and 90.7% had an NAIC
rating of 1 as of December 31, 2010 and 2009, respectively.
As of December 31, 2010, the Company had no mortgage-backed
securities classified as subprime, and as of December 31,
2009, $0.2 was classified as subprime.
The following table summarizes the amortized cost and fair value
of fixed maturities as of December 31, 2010, by contractual
years to maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
One year or less
|
|
|
$583.5
|
|
|
|
$591.7
|
|
Over one year through five years
|
|
|
3,247.9
|
|
|
|
3,439.7
|
|
Over five years through ten years
|
|
|
5,606.2
|
|
|
|
5,947.8
|
|
Over ten years
|
|
|
5,004.0
|
|
|
|
5,109.5
|
|
Residential mortgage-backed securities
|
|
|
3,707.2
|
|
|
|
3,801.6
|
|
Commercial mortgage-backed securities
|
|
|
1,782.2
|
|
|
|
1,887.3
|
|
Other
|
|
|
485.5
|
|
|
|
504.2
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
$20,416.5
|
|
|
|
$21,281.8
|
|
|
|
|
|
|
|
|
|
|
120
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
The following table summarizes the Companys net investment
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Fixed maturities
|
|
|
$1,119.9
|
|
|
|
$1,048.1
|
|
|
|
$930.7
|
|
Marketable equity securities,
available-for-sale
|
|
|
3.4
|
|
|
|
3.4
|
|
|
|
3.4
|
|
Marketable equity securities, trading
|
|
|
3.0
|
|
|
|
2.5
|
|
|
|
2.7
|
|
Mortgage loans
|
|
|
89.1
|
|
|
|
67.4
|
|
|
|
59.4
|
|
Policy loans
|
|
|
4.3
|
|
|
|
4.4
|
|
|
|
4.5
|
|
Investments in limited partnerships
|
|
|
(4.3
|
)
|
|
|
(0.1
|
)
|
|
|
(36.4
|
)
|
Other
|
|
|
4.9
|
|
|
|
7.5
|
|
|
|
11.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
1,220.3
|
|
|
|
1,133.2
|
|
|
|
975.8
|
|
Investment expenses
|
|
|
(20.9
|
)
|
|
|
(19.6
|
)
|
|
|
(19.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
$1,199.4
|
|
|
|
$1,113.6
|
|
|
|
$956.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of investments in fixed maturities that have not
produced income for the last twelve months was $5.5 and $65.6 at
December 31, 2010 and 2009, respectively.
The following table summarizes the Companys net realized
investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains on sales
|
|
|
$31.3
|
|
|
|
$25.5
|
|
|
|
$10.3
|
|
Gross losses on sales
|
|
|
(10.1
|
)
|
|
|
(23.3
|
)
|
|
|
(7.0
|
)
|
Other-than-temporary
impairments
|
|
|
(20.9
|
)
|
|
|
(86.5
|
)
|
|
|
(86.4
|
)
|
Other (1)
|
|
|
16.5
|
|
|
|
9.7
|
|
|
|
(11.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
16.8
|
|
|
|
(74.6
|
)
|
|
|
(94.2
|
)
|
Marketable equity securities, trading (2)
|
|
|
32.6
|
|
|
|
36.4
|
|
|
|
(64.5
|
)
|
Other invested assets
|
|
|
(5.0
|
)
|
|
|
(2.7
|
)
|
|
|
(5.2
|
)
|
Deferred policy acquisition costs adjustment
|
|
|
(4.6
|
)
|
|
|
11.6
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
|
$39.8
|
|
|
|
$(29.3
|
)
|
|
|
$(158.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This includes gains (losses) on calls and redemptions. Also
included are changes in the fair value of the Companys
convertible securities held as of period end totaling $5.4,
$10.1, and $(7.1) for the years ended December 31, 2010,
2009 and 2008, respectively. |
|
(2) |
|
This includes $34.5, $28.3, and $(60.7) of net gains for the
years ended December 31, 2010, 2009, and 2008,
respectively, related to changes in fair value of trading
securities held as of period end. |
Other-Than-Temporary
Impairments
During 2010, the Company recorded OTTI charges in earnings on
fixed maturities totaling $20.9. The largest write-downs were
from investments in the financial industry, totaling $8.3, or
39.7%; the industrial industry, totaling $6.7, or 32.1%; and the
utilities industry, totaling $2.2, or 10.5%. During 2009, the
Company
121
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
recorded OTTI charges on fixed maturities totaling $86.5. The
largest write-downs were from investments in the financial
industry, totaling $43.8, or 50.6%; the consumer discretionary
industry, totaling $21.2, or 24.5%; and the materials industry,
totaling $12.0, or 13.9%. During 2008, the Company recorded OTTI
charges of $86.4. The largest write-downs were from investments
in the materials industry, totaling $25.3, or 29.3%; the
financial industry, totaling $22.3, or 25.8%; and the consumer
discretionary industry, totaling $12.6, or 14.6%.
The Companys review of investment securities for OTTI
includes both quantitative and qualitative criteria.
Quantitative criteria include the length of time and amount that
each security is in an unrealized loss position (i.e., is
underwater) and, for fixed maturities, whether expected future
cash flows indicate that a credit loss exists.
While all securities are monitored for impairment, the
Companys experience indicates that securities for which
the cost or amortized cost exceeds fair value by less than 20%
do not represent a significant risk of impairment and, often,
fair values recover over time as the factors that caused the
declines improve. If the estimated fair value has declined and
remained below cost or amortized cost by 20% or more for at
least six months, the Company further analyzes the decrease in
fair value to determine whether it is an
other-than-temporary
decline. To make this determination for each security, the
Company considers, among other factors:
|
|
|
|
|
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 or
whether it is more likely than not the Company will be required
to sell the fixed maturity prior to recovery of its amortized
cost, considering any regulatory developments and the
Companys liquidity needs.
|
For fixed maturities, if the Company determines that the present
value of the cash flows expected to be collected is less than
the amortized cost of the security (i.e., a credit loss exists),
the Company concludes that an OTTI has occurred. In order to
determine the amount of the credit loss, the Company calculates
the recovery value by discounting 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 effective
yield for corporate securities, or current effective yield for
mortgage-backed securities.
Determination
of OTTI on Corporate Securities
To determine the recovery value, credit loss or intent to sell
for a corporate security, the Company performs an analysis
related to the underlying issuer including, but not limited to,
the following:
|
|
|
|
|
Expected cash flows of the issuer;
|
122
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
|
|
|
|
|
Fundamentals of the industry in which the issuer operates;
|
|
|
|
Fundamentals of the issuer to determine what the Company would
recover if the issuer were to file for bankruptcy, compared to
the price at which the market is trading;
|
|
|
|
Earnings multiples for an issuers industry or sector of
the industry, divided by the outstanding debt to determine an
expected recovery value of the security in the case of a
liquidation;
|
|
|
|
Expectations regarding defaults and recovery rates;
|
|
|
|
Changes to the rating of the security by a rating
agency; and
|
|
|
|
Additional market information.
|
Determination
of OTTI on Structured Securities
To determine the recovery value, credit loss or intent to sell
for a structured security, including residential mortgage-,
commercial mortgage- and other asset-backed securities, the
Company performs an analysis related to the underlying issuer
including, but not limited to, the following:
|
|
|
|
|
Discounted cash flow analysis based on the future cash flows the
Company expects to recover;
|
|
|
|
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 variability of prepayments; and
|
|
|
|
Susceptibility to reinvestment risk.
|
123
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
The following table presents the severity and duration of the
gross unrealized losses on the Companys underwater
available-for-sale
securities, after the recognition of OTTI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwater by 20% or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 6 consecutive months
|
|
|
$69.1
|
|
|
|
$(23.7
|
)
|
|
|
$103.4
|
|
|
|
$(28.4
|
)
|
6 consecutive months or more
|
|
|
93.9
|
|
|
|
(36.2
|
)
|
|
|
517.9
|
|
|
|
(229.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwater by 20% or more
|
|
|
163.0
|
|
|
|
(59.9
|
)
|
|
|
621.3
|
|
|
|
(257.9
|
)
|
All other underwater fixed maturities
|
|
|
4,371.1
|
|
|
|
(238.1
|
)
|
|
|
5,398.1
|
|
|
|
(352.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwater fixed maturities
|
|
|
$4,534.1
|
|
|
|
$(298.0
|
)
|
|
|
$6,019.4
|
|
|
|
$(610.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwater by 20% or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 6 consecutive months
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
6 consecutive months or more
|
|
|
1.7
|
|
|
|
(4.4
|
)
|
|
|
35.6
|
|
|
|
(15.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwater by 20% or more
|
|
|
1.7
|
|
|
|
(4.4
|
)
|
|
|
35.6
|
|
|
|
(15.9
|
)
|
All other underwater marketable equity securities,
available-for-sale
|
|
|
42.3
|
|
|
|
(3.4
|
)
|
|
|
0.7
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwater marketable equity securities,
available-for-sale
|
|
|
$44.0
|
|
|
|
$(7.8
|
)
|
|
|
$36.3
|
|
|
|
$(16.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, $17.4, or 48.1%, of the unrealized
losses on fixed maturities underwater by more than 20% for a
period of six months or more related to investment-grade
securities. Unrealized losses on investment-grade securities are
principally related to changes in interest rates or changes in
the issuer and the sector-related credit spreads since the
securities were acquired.
The Company reviewed its investments in fixed maturities with
unrealized losses at the end of 2010 and 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, 2010 and 2009, the Company did not
intend to sell its underwater
available-for-sale
marketable equity securities, primarily consisting of
non-redeemable preferred stock, and it had the intent and
ability to hold them until recovery. Therefore, the Company
concluded that the declines in fair value of these securities
were temporary.
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
the Companys 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 a credit
risk.
124
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
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:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance, beginning of period
|
|
|
$69.6
|
|
|
|
$73.0
|
|
Increases recognized in the current period:
|
|
|
|
|
|
|
|
|
For which an OTTI was not previously recognized
|
|
|
12.3
|
|
|
|
37.2
|
|
For which an OTTI was previously recognized
|
|
|
3.0
|
|
|
|
20.6
|
|
Decreases attributable to:
|
|
|
|
|
|
|
|
|
Securities sold or paid down during the period
|
|
|
(16.9
|
)
|
|
|
(38.0
|
)
|
Previously recognized credit losses on securities impaired
during the period due to a change in intent to sell (1)
|
|
|
|
|
|
|
(23.2
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
$68.0
|
|
|
|
$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.
S&P
500 Index Options
The Company has a closed block of fixed indexed annuity (FIA)
product that credits 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 $0.3, $0.8
and $(2.9) for the years ended December 31, 2010, 2009 and
2008, respectively.
The notional amount of the options purchased 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, and were settled on December 31,
2010. The notional amount of the options purchased in 2010 to
hedge the Companys 2011 exposure to changes in the
S&P 500 Index was $35.0. These options had a fair value of
$1.8 as of December 31, 2010.
125
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
The Company originates and manages a portfolio of mortgage loans
which are secured by first-mortgage liens on income-producing
commercial real estate, primarily in the retail, industrial and
office building sectors. All loans are underwritten consistently
using standards based on
loan-to-value
(LTV) ratios and debt-service coverage ratios (DSCR) as well as
detailed market, property and borrower analyses. The
Companys mortgage loan portfolio is considered a single
portfolio segment and class of financing receivable, which is
consistent with how the Company assesses and monitors the risk
and performance of the portfolio. A large majority of these
loans have personal guarantees and all loans are inspected and
evaluated annually. The Companys mortgage loan portfolio
is diversified by geographic region, loan size and scheduled
maturities. As of December 31, 2010, 31.0% of our
commercial mortgage loans were located in California, 15.7% were
located in Washington and 9.8% were located in Texas. Individual
loans generally do not exceed $15.0.
Allowance
for Mortgage Loans
The 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, as needed, specific reserves
for non-performing loans. The allowance for losses on mortgage
loans is evaluated as of each reporting period and adjustments
are recorded when appropriate. To assist in its evaluation of
the allowance for loan losses the Company utilizes the following
credit quality indicators to categorize its loans as lower,
medium or higher risk:
|
|
|
|
|
Lower Risk LoansLoans with an LTV ratio of less
than 65%, and a DSCR of greater than 1.50.
|
|
|
|
Medium Risk LoansLoans that have an LTV ratio of
less than 65% but a DSCR below 1.50, or loans with an LTV ratio
between 65% and 80%, and a DSCR of greater than 1.50.
|
|
|
|
Higher Risk LoansAll loans with an LTV ratio
greater than 80%, or loans which have an LTV ratio between 65%
and 80%, and a DSCR of less than 1.50.
|
The following table sets forth the Companys mortgage loans
by risk category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
% of Credit
|
|
|
|
|
|
% of Credit
|
|
|
|
Carrying
|
|
|
Quality
|
|
|
Carrying
|
|
|
Quality
|
|
|
|
Value
|
|
|
Indicators
|
|
|
Value
|
|
|
Indicators
|
|
|
Lower Risk
|
|
|
$917.5
|
|
|
|
53.3
|
%
|
|
|
$735.9
|
|
|
|
61.0
|
%
|
Medium Risk
|
|
|
430.4
|
|
|
|
25.0
|
|
|
|
239.3
|
|
|
|
19.8
|
|
Higher Risk
|
|
|
372.3
|
|
|
|
21.7
|
|
|
|
231.7
|
|
|
|
19.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality indicator total
|
|
|
1,720.2
|
|
|
|
100.0
|
%
|
|
|
1,206.9
|
|
|
|
100.0
|
%
|
Other (1)
|
|
|
(7.2
|
)
|
|
|
|
|
|
|
(7.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$1,713.0
|
|
|
|
|
|
|
|
$1,199.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other includes the allowance for loan losses, deferred fees and
costs, and a 2004 purchase accounting adjustment. |
In developing its portfolio reserve for incurred but not
specifically identified losses the Company evaluates loans by
risk category as well as its past loan experience, commercial
real estate market conditions,
126
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
and third party data for expected losses on loans with similar
LTV ratios and DSCRs. For existing loans the Companys LTV
ratios and DSCRs are updated each year between June 1 and
September 30.
Specific reserves are established for non-performing loans,
which are those loans that are more than 90 days past due
on payment or for which the Company considers it probable that
amounts due according to the terms of the loan agreement will
not be collected. The following table summarizes the
Companys allowance for mortgage loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Allowance at beginning of period
|
|
|
$8.2
|
|
|
|
$5.0
|
|
|
|
$4.2
|
|
Provision for specific loans
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
Provision for loans not specifically identified
|
|
|
1.1
|
|
|
|
1.0
|
|
|
|
0.8
|
|
Write-off for foreclosed property
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
|
$7.1
|
|
|
|
$8.2
|
|
|
|
$5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 all borrowers were current on loan
payments. No loans were considered non-performing or were
specifically evaluated and identified as impaired. As of
December 31, 2009 one loan, with an unpaid principal
balance of $3.9, was considered non-performing and specifically
reserved for. As of December 31, 2008 no loans were
considered non-performing or were specifically evaluated and
identified as impaired.
|
|
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 1Unadjusted quoted prices in active
markets for identical instruments. This level primarily consists
of exchange-traded marketable equity securities and actively
traded mutual fund investments.
|
|
|
|
Level 2Quoted 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.
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.
|
127
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
|
|
|
|
|
Level 3Instruments 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 and
investments in private equity and hedge funds.
|
The following tables present the financial instruments carried
at fair value under the valuation hierarchy 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, 2010
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 3%
|
|
|
Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
|
$33.1
|
|
|
|
$
|
|
|
|
$33.1
|
|
|
|
$
|
|
|
|
|
|
State and political subdivisions
|
|
|
452.8
|
|
|
|
|
|
|
|
452.8
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
14,541.4
|
|
|
|
|
|
|
|
13,786.8
|
|
|
|
754.6
|
|
|
|
3.3
|
%
|
Residential mortgage-backed securities
|
|
|
3,801.6
|
|
|
|
|
|
|
|
3,801.6
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
|
1,887.3
|
|
|
|
|
|
|
|
1,868.2
|
|
|
|
19.1
|
|
|
|
0.1
|
|
Other debt obligations
|
|
|
565.6
|
|
|
|
|
|
|
|
412.4
|
|
|
|
153.2
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale
|
|
|
21,281.8
|
|
|
|
|
|
|
|
20,354.9
|
|
|
|
926.9
|
|
|
|
4.1
|
|
Marketable equity securities,
available-for-sale
|
|
|
45.1
|
|
|
|
43.3
|
|
|
|
|
|
|
|
1.8
|
|
|
|
0.0
|
|
Marketable equity securities, trading
|
|
|
189.3
|
|
|
|
188.7
|
|
|
|
|
|
|
|
0.6
|
|
|
|
0.0
|
|
Investments in limited partnerships (1)
|
|
|
36.5
|
|
|
|
|
|
|
|
|
|
|
|
36.5
|
|
|
|
0.2
|
|
Other invested assets
|
|
|
6.4
|
|
|
|
2.6
|
|
|
|
|
|
|
|
3.8
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments carried at fair value
|
|
|
21,559.1
|
|
|
|
234.6
|
|
|
|
20,354.9
|
|
|
|
969.6
|
|
|
|
4.3
|
|
Separate account assets
|
|
|
881.7
|
|
|
|
881.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$22,440.8
|
|
|
|
$1,116.3
|
|
|
|
$20,354.9
|
|
|
|
$969.6
|
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes investments in private equity and hedge funds. |
128
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 3%
|
|
|
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
|
%
|
Corporate securities
|
|
|
12,400.0
|
|
|
|
|
|
|
|
11,552.9
|
|
|
|
847.1
|
|
|
|
4.3
|
|
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
|
|
|
341.6
|
|
|
|
|
|
|
|
286.9
|
|
|
|
54.7
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 carried at fair value
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 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, 2010 and 2009, pricing services provided
prices for 95.6% and 93.6% of the Companys fixed
maturities, respectively.
The pricing services provide prices where observable inputs are
available. The Companys pricing services utilize evaluated
pricing models that vary by asset class. If sufficient
objectively verifiable information about a securitys
valuation is not available, the pricing services will not
provide a valuation for the security.
The Company performs an analysis on the prices received from the
pricing services to ensure they represent a reasonable estimate
of fair value and to gain assurance on the overall
reasonableness and consistent application of input assumptions,
valuation methodologies and compliance with accounting standards
for fair value determination. This analysis is performed through
evaluation of pricing methodologies and inputs, analytical
reviews of certain prices between reporting periods and
back-testing of selected sales activity to determine whether
there were significant differences between the market price used
to value the security prior to sale and the actual sales price.
Based upon this analysis, the Company has not adjusted prices
obtained from the pricing services and multiple prices for these
securities are not obtained.
129
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
In situations where the Company is unable to obtain sufficient
market-observable information to estimate the fair value of a
security, the securitys fair value is determined using
internal pricing models. These models typically utilize
significant, unobservable market inputs or inputs that are
difficult to corroborate with observable market data, and the
resulting value is considered a Level 3 measurement. This
is generally the case for private placement securities and other
securities the pricing services are unable to price.
As of December 31, 2010 and 2009, the Company had $892.9,
or 4.2%, and $901.3, or 4.8%, of its fixed maturities invested
in private placement securities, respectively. The valuation of
certain private placement securities requires significant
judgment by management due to the absence of quoted market
prices, the inherent lack of liquidity and the long-term nature
of such assets. The use of significant unobservable inputs in
determining the fair value of the Companys investments in
private placement securities resulted in the classification of
$815.4, or 91.3%, and $819.8, or 91.0%, as Level 3
measurements, as of December 31, 2010 and 2009,
respectively.
Corporate
Securities
As of December 31, 2010 and 2009, the fair value of the
Companys corporate securities classified as Level 2
measurements was $13,786.8 and $11,552.9, respectively. The
following table presents additional information about the
composition of the Level 2 corporate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
%
|
|
|
# of
|
|
|
|
|
|
%
|
|
|
# of
|
|
|
|
Fair Value
|
|
|
of Total
|
|
|
Securities
|
|
|
Fair Value
|
|
|
of Total
|
|
|
Securities
|
|
|
Significant Security Sectors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrials
|
|
|
$2,444.7
|
|
|
|
17.7
|
%
|
|
|
225
|
|
|
|
$1,923.4
|
|
|
|
16.6
|
%
|
|
|
215
|
|
Consumer staples
|
|
|
2,118.0
|
|
|
|
15.4
|
|
|
|
157
|
|
|
|
1,695.9
|
|
|
|
14.7
|
|
|
|
147
|
|
Financials
|
|
|
1,862.1
|
|
|
|
13.5
|
|
|
|
260
|
|
|
|
1,750.5
|
|
|
|
15.2
|
|
|
|
285
|
|
Utilities
|
|
|
1,738.2
|
|
|
|
12.6
|
|
|
|
194
|
|
|
|
1,771.6
|
|
|
|
15.3
|
|
|
|
216
|
|
Weighted-average coupon rate
|
|
|
6.27
|
%
|
|
|
|
|
|
|
|
|
|
|
6.55
|
%
|
|
|
|
|
|
|
|
|
Weighted-average remaining years to contractual maturity
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
13.3
|
|
|
|
|
|
|
|
|
|
Corporate securities classified as Level 2 measurements are
priced by independent pricing services, who utilize evaluated
pricing models. The significant inputs for security evaluations
include benchmark yields, reported trades, broker-dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids,
offers and other reference data, including market research
publications. Because many corporate securities do not trade on
a daily basis, evaluated pricing applications apply available
information through processes such as benchmark curves,
benchmarking of like securities, sector groupings and matrix
pricing to prepare evaluations.
As of December 31, 2010, 94.7% of the Level 3
corporate securities were privately placed securities. These
securities were issued by entities primarily in the industrial
sector, 21.6%, the financial sector, 21.2%, and the consumer
discretionary sector, 15.9%.
As of December 31, 2009, 91.9% of the Level 3
corporate securities were privately placed securities. These
securities were issued by entities primarily in the financial
sector, 22.9%, the industrial sector, 20.7%, and the materials
sector, 15.6%.
The valuation of these privately placed Level 3 corporate
securities requires significant judgment due to the absence of
quoted market prices, the inherent lack of liquidity and the
duration of such assets. The fair
130
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
values of these securities were determined using a discounted
cash flow approach. The discount rate was based on the current
Treasury curve, adjusted for credit and liquidity factors. The
credit factor adjustment, which is based on credit spreads to
the Treasury curve for similar securities, varies for each
security based on its quality and industry or sector. The
illiquidity adjustment is estimated based on illiquidity spreads
observed in transactions involving similar securities. As of
December 31, 2010 and 2009, the range of illiquidity
adjustments varied from 0 to 50 basis points.
The following table presents additional information about the
quality of the Level 3 privately placed corporate
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
As of December 31, 2009
|
|
NAIC Rating
|
|
Comparable Standard & Poors rating
|
|
Fair Value
|
|
|
% of Total
|
|
|
Fair Value
|
|
|
% of Total
|
|
|
1
|
|
AAA, AA, A
|
|
|
$118.6
|
|
|
|
16.6
|
%
|
|
|
$153.5
|
|
|
|
19.2
|
%
|
2
|
|
BBB
|
|
|
497.5
|
|
|
|
69.6
|
|
|
|
557.4
|
|
|
|
69.8
|
|
3 6
|
|
BB & below
|
|
|
98.7
|
|
|
|
13.8
|
|
|
|
87.3
|
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$714.8
|
|
|
|
100.0
|
%
|
|
|
$798.2
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
Mortgage-backed Securities
As of December 31, 2010 and 2009, the fair value of the
Companys residential mortgage-backed securities (RMBS)
classified as Level 2 measurements was $3,801.6 and
$3,285.9, respectively. These securities were primarily
fixed-rate, with a weighted-average coupon rate of 5.13% and
5.36% as of December 31, 2010 and 2009, respectively.
Agency securities composed 88.4% and 84.7% of the Companys
Level 2 RMBS as of December 31, 2010 and 2009,
respectively. The following table presents additional
information about the composition of the Level 2 non-agency
RMBS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
As of December 31, 2009
|
|
|
|
Fair Value
|
|
|
% of Total
|
|
|
Fair Value
|
|
|
of Total
|
|
|
Standard & Poors equivalent rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
$166.6
|
|
|
|
37.8
|
%
|
|
|
$200.8
|
|
|
|
39.9
|
%
|
AA through BBB
|
|
|
89.0
|
|
|
|
20.2
|
|
|
|
140.2
|
|
|
|
27.8
|
|
BB & below
|
|
|
185.4
|
|
|
|
42.0
|
|
|
|
162.7
|
|
|
|
32.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-agency RMBS
|
|
|
$441.0
|
|
|
|
100.0
|
%
|
|
|
$503.7
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency RMBS with super senior subordination
|
|
|
$259.2
|
|
|
|
58.8
|
%
|
|
|
$300.3
|
|
|
|
59.6
|
%
|
As of December 31, 2010 and 2009, the Companys
non-agency Level 2 RMBS had a weighted-average credit
enhancement of 9.8%, and $181.8 and $191.3, or 41.2% and 38.0%,
respectively, had an origination or vintage year of 2004 and
prior.
Level 2 RMBS securities are priced by independent pricing
services, who utilize evaluated pricing models. The significant
inputs for security evaluations include benchmark yields,
reported trades, broker-dealer quotes, issuer spreads, two-sided
markets, benchmark securities, bids, offers and other reference
data, including market research publications. Because many RMBS
do not trade on a daily basis, evaluated pricing applications
apply available information through processes such as benchmark
curves, benchmarking of like securities, sector groupings and
matrix pricing to prepare evaluations. In addition, the pricing
services use
131
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
models and processes to develop prepayment and interest rate
scenarios. The pricing services monitor market indicators,
industry and economic events, and their models take into account
market convention.
Commercial
Mortgage-backed Securities
As of December 31, 2010 and 2009, the fair value of the
Companys commercial mortgage-backed securities (CMBS)
classified as Level 2 measurements was $1,868.2 and
$1,765.4, respectively. These were primarily non-agency
securities, which comprised 68.3% and 76.8% of Level 2 CMBS
as of December 31, 2010 and 2009, respectively. The
non-agency CMBS had an estimated weighted-average credit
enhancement of 28.5% and 27.8% as of December 31, 2010 and
2009, respectively, and 94.3% and 92.4%, respectively, were in
the most senior tranche.
The Companys Level 2 CMBS had a weighted-average
coupon rate of 5.50% and 5.55% as of December 31, 2010 and
2009, respectively. As of December 31, 2010, 18.2% of the
underlying collateral for these securities was located in New
York, 13.3% was located in California, and 7.1% was located in
Texas. The underlying collateral primarily consisted of retail
shopping centers and office buildings, comprising 33.7% and
30.5%, respectively, as of December 31, 2010.
Level 2 CMBS securities are priced by independent pricing
services, who utilize evaluated pricing models. The significant
inputs for security evaluations include benchmark yields,
reported trades, broker-dealer quotes, issuer spreads, two-sided
markets, benchmark securities, bids, offers, new issues, monthly
payment information and other reference data, including market
research publications. Because many CMBS 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.
Marketable
Equity Securities
Marketable equity securities are investments in common stock and
certain nonredeemable preferred stocks, which primarily 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, which are classified as
Level 1 measurements.
Investments
in Limited Partnerships
Investments in limited partnerships recorded at fair value are
investments in private equity and hedge funds. The Company
utilizes the fair value option for these investments, regardless
of ownership percentage, to standardize the related accounting
and reporting.
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 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
with published NAVs, which are classified as Level 1
measurements.
132
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
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
significant unobservable inputs (Level 3) were
utilized to determine fair value between January 1, 2010
and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers In
|
|
|
|
|
|
Included in:
|
|
|
|
|
|
|
|
|
|
Balance as
|
|
|
|
|
|
|
|
|
and/or
|
|
|
|
|
|
|
|
|
Other
|
|
|
Realized
|
|
|
Balance as of
|
|
|
|
of January 1,
|
|
|
|
|
|
|
|
|
(Out) of
|
|
|
|
|
|
Net
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
December 31,
|
|
|
|
2010
|
|
|
Purchases
|
|
|
Sales
|
|
|
Level 3 (1)
|
|
|
Other (2)
|
|
|
Income (3)
|
|
|
Income
|
|
|
(Losses) (3)
|
|
|
2010
|
|
|
Types of Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
$7.2
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$(7.2
|
)
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
Corporate securities
|
|
|
847.1
|
|
|
|
56.8
|
|
|
|
(27.2
|
)
|
|
|
12.8
|
|
|
|
(147.8
|
)
|
|
|
|
|
|
|
13.5
|
|
|
|
(0.6
|
)
|
|
|
754.6
|
|
Residential mortgage-backed securities
|
|
|
250.5
|
|
|
|
|
|
|
|
|
|
|
|
(250.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
|
24.0
|
|
|
|
|
|
|
|
|
|
|
|
(1.3
|
)
|
|
|
(5.1
|
)
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
19.1
|
|
Other debt obligations
|
|
|
54.7
|
|
|
|
|
|
|
|
|
|
|
|
(3.4
|
)
|
|
|
89.9
|
|
|
|
|
|
|
|
16.4
|
|
|
|
(4.4
|
)
|
|
|
153.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale
|
|
|
1,183.5
|
|
|
|
56.8
|
|
|
|
(27.2
|
)
|
|
|
(242.4
|
)
|
|
|
(70.2
|
)
|
|
|
|
|
|
|
31.4
|
|
|
|
(5.0
|
)
|
|
|
926.9
|
|
Marketable equity securities,
available-for-sale
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
Marketable equity securities, trading
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
Investments in limited partnerships
|
|
|
24.7
|
|
|
|
22.6
|
|
|
|
|
|
|
|
|
|
|
|
(14.8
|
)
|
|
|
3.2
|
|
|
|
|
|
|
|
0.8
|
|
|
|
36.5
|
|
Other invested assets
|
|
|
4.6
|
|
|
|
2.0
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
(3.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
0.7
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3
|
|
|
$1,214.9
|
|
|
|
$81.4
|
|
|
|
$(27.5
|
)
|
|
|
$(242.4
|
)
|
|
|
$(87.9
|
)
|
|
|
$3.2
|
|
|
|
$31.4
|
|
|
|
$(3.5
|
)
|
|
|
$969.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $14.9 for the
year ended December 31, 2010. Gross transfers out of
Level 3 were $257.3 for the year ended December 31,
2010, of which $250.5 were related to reverse mortgages that are
now priced by the Companys pricing services. |
|
(2) |
|
Other is comprised of transactions such as pay downs, calls,
amortization, and redemptions, as well as reclassifications
between categories. |
|
(3) |
|
Realized and unrealized gains and losses for investments in
limited partnerships are included in net investment income. |
133
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
The following table presents additional information about assets
measured at fair value on a recurring basis and for which
significant unobservable inputs (Level 3) were
utilized to determine fair value between January 1, 2009
and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (2)
|
|
|
Income (3)
|
|
|
Income
|
|
|
(Losses) (3)
|
|
|
2009
|
|
|
Types of Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
$6.3
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$(0.7
|
)
|
|
|
$
|
|
|
|
$
|
|
|
|
$1.6
|
|
|
|
$
|
|
|
|
$7.2
|
|
Corporate securities
|
|
|
610.0
|
|
|
|
166.8
|
|
|
|
(4.1
|
)
|
|
|
(14.3
|
)
|
|
|
(38.2
|
)
|
|
|
|
|
|
|
132.5
|
|
|
|
(5.6
|
)
|
|
|
847.1
|
|
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
|
|
|
33.6
|
|
|
|
18.0
|
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
6.6
|
|
|
|
|
|
|
|
54.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
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. |
|
(3) |
|
Realized and unrealized gains and losses for investments in
limited partnerships are included in net investment income. |
134
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)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 December 31, 2010
|
|
|
As of December 31, 2009
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
$21,281.8
|
|
|
|
$21,281.8
|
|
|
|
$18,594.3
|
|
|
|
$18,594.3
|
|
Marketable equity securities,
available-for-sale
|
|
|
45.1
|
|
|
|
45.1
|
|
|
|
36.7
|
|
|
|
36.7
|
|
Marketable equity securities, trading
|
|
|
189.3
|
|
|
|
189.3
|
|
|
|
154.1
|
|
|
|
154.1
|
|
Mortgage loans
|
|
|
1,713.0
|
|
|
|
1,772.2
|
|
|
|
1,199.6
|
|
|
|
1,190.1
|
|
Investments in limited partnerships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity and hedge funds
|
|
|
36.5
|
|
|
|
36.5
|
|
|
|
24.7
|
|
|
|
24.7
|
|
Tax credit investments
|
|
|
150.4
|
|
|
|
152.6
|
|
|
|
85.5
|
|
|
|
89.9
|
|
Other invested assets
|
|
|
12.6
|
|
|
|
12.6
|
|
|
|
12.2
|
|
|
|
12.2
|
|
Cash and cash equivalents
|
|
|
274.6
|
|
|
|
274.6
|
|
|
|
257.8
|
|
|
|
257.8
|
|
Separate account assets
|
|
|
881.7
|
|
|
|
881.7
|
|
|
|
840.1
|
|
|
|
840.1
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds held under deposit contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred annuities
|
|
|
8,795.8
|
|
|
|
8,694.2
|
|
|
|
7,212.1
|
|
|
|
7,128.2
|
|
Immediate annuities
|
|
|
6,670.4
|
|
|
|
7,188.9
|
|
|
|
6,724.4
|
|
|
|
6,937.8
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Efficient Notes (CENts)
|
|
|
149.8
|
|
|
|
140.9
|
|
|
|
149.8
|
|
|
|
118.5
|
|
Senior notes
|
|
|
299.2
|
|
|
|
301.6
|
|
|
|
299.1
|
|
|
|
276.8
|
|
Other
Financial Instruments
Cash and cash equivalents are reported at cost, which
approximates fair value.
The fair values of the Companys mortgage loans were
measured by discounting the projected future cash flows using
the current rate at which the loans would be made to borrowers
with similar credit ratings and for the same maturities.
Investments in limited partnerships associated with tax credit
investments are carried at amortized cost. Fair value was
estimated based on the discounted cash flows over the remaining
life of the tax credits. The discount rate used was the original
internal rate of return for each investment.
The Company estimates the fair values of funds held under
deposit contracts related to investment-type contracts using an
income approach, based on the present value of discounted cash
flows. Cash flows were projected using best estimates for
lapses, mortality and expenses, and discounted at a risk-free
rate plus a nonperformance risk spread. The carrying value of
this balance excludes $5,487.1 and $4,880.2 of liabilities
related to insurance contracts as of December 31, 2010 and
2009, respectively.
The fair values of the Companys notes payable were based
on nonbinding quotes provided by third-parties. The fair value
measurement assumes that liabilities were transferred to a
market participant of equal credit standing and without
consideration for any optional redemption features.
135
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
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
of claims, 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.
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 of its reinsurers. Of the total amount due from
reinsurers as of both December 31, 2010 and 2009, 99.6% was with
reinsurers rated A- or higher by A.M. Best. The Company had
no reserve for uncollectible reinsurance in 2010 or 2009.
Reinsurance recoverables are composed of the following amounts:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Life insurance
|
|
|
|
|
|
|
|
|
Reinsurance recoverables on:
|
|
|
|
|
|
|
|
|
Funds held under deposit contracts
|
|
|
$82.1
|
|
|
|
$77.9
|
|
Future policy benefits
|
|
|
138.2
|
|
|
|
131.6
|
|
Paid claims, expense allowance and premium tax recoverables
|
|
|
1.5
|
|
|
|
1.9
|
|
Policy and contract claims
|
|
|
1.5
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
Total life insurance and annuities
|
|
|
223.3
|
|
|
|
217.8
|
|
Accident and health insurance
|
|
|
|
|
|
|
|
|
Reinsurance recoverables on:
|
|
|
|
|
|
|
|
|
Future policy benefits
|
|
|
54.2
|
|
|
|
55.9
|
|
Paid claims, expense allowance and premium tax recoverables
|
|
|
1.0
|
|
|
|
0.8
|
|
Policy and contract claims
|
|
|
2.3
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
Total accident and health insurance
|
|
|
57.5
|
|
|
|
58.8
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance recoverables
|
|
|
$280.8
|
|
|
|
$276.6
|
|
|
|
|
|
|
|
|
|
|
136
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
The following table sets forth net life insurance in force:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Direct life insurance in force
|
|
|
$54,762.3
|
|
|
|
$54,813.1
|
|
|
|
$55,577.1
|
|
Amounts assumed from other companies
|
|
|
204.2
|
|
|
|
199.9
|
|
|
|
223.1
|
|
Amounts ceded to other companies
|
|
|
(23,887.4
|
)
|
|
|
(24,245.9
|
)
|
|
|
(24,190.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net life insurance in force
|
|
|
$31,079.1
|
|
|
|
$30,767.1
|
|
|
|
$31,610.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of amount assumed to net
|
|
|
0.66
|
%
|
|
|
0.65
|
%
|
|
|
0.71
|
%
|
The effect of reinsurance on premiums and policy fees, contract
charges, and other was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident and health
|
|
|
$439.1
|
|
|
|
$437.4
|
|
|
|
$456.3
|
|
Life insurance
|
|
|
87.7
|
|
|
|
87.6
|
|
|
|
90.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
526.8
|
|
|
|
525.0
|
|
|
|
546.3
|
|
Assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident and health
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
0.6
|
|
Life insurance
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.8
|
|
Ceded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident and health
|
|
|
(13.2
|
)
|
|
|
(12.6
|
)
|
|
|
(13.6
|
)
|
Life insurance
|
|
|
(41.2
|
)
|
|
|
(42.9
|
)
|
|
|
(47.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(54.4
|
)
|
|
|
(55.5
|
)
|
|
|
(61.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums
|
|
|
473.0
|
|
|
|
470.1
|
|
|
|
486.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy fees and contract charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct life insurance
|
|
|
112.0
|
|
|
|
109.6
|
|
|
|
105.3
|
|
Ceded life insurance
|
|
|
(5.6
|
)
|
|
|
(6.1
|
)
|
|
|
(6.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total policy fees and contract charges (1)
|
|
|
106.4
|
|
|
|
103.5
|
|
|
|
98.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums and other amounts assessed to policyholders
|
|
|
$579.4
|
|
|
|
$573.6
|
|
|
|
$584.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of amount assumed to total premiums and other amounts
assessed to policyholders
|
|
|
0.10
|
%
|
|
|
0.10
|
%
|
|
|
0.14
|
%
|
|
|
|
(1) |
|
Total policy fees and contract charges represents amounts
charged to policyholders other than premiums and recorded in
policy fees, contract charges, and other on the consolidated
statements of income. This primarily consists of cost of
insurance charges. |
Ceded reinsurance reduced policyholder benefits and claims by
$51.0, $54.1 and $54.3 for the years ended December 31,
2010, 2009 and 2008, respectively.
137
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
|
|
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
Unamortized balance at beginning of period
|
|
|
$325.7
|
|
|
|
$219.5
|
|
Deferral of acquisition costs
|
|
|
131.4
|
|
|
|
148.3
|
|
Adjustments related to investment (gains) losses
|
|
|
(3.5
|
)
|
|
|
9.3
|
|
Amortization
|
|
|
(66.2
|
)
|
|
|
(51.4
|
)
|
|
|
|
|
|
|
|
|
|
Unamortized balance at end of period
|
|
|
387.4
|
|
|
|
325.7
|
|
Accumulated effect of net unrealized investment gains
|
|
|
(137.4
|
)
|
|
|
(75.3
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
$250.0
|
|
|
|
$250.4
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
Unamortized balance at beginning of period
|
|
|
$67.6
|
|
|
|
$33.0
|
|
Capitalizations
|
|
|
59.6
|
|
|
|
42.5
|
|
Adjustments related to investment (gains) losses
|
|
|
(1.2
|
)
|
|
|
2.4
|
|
Amortization
|
|
|
(20.2
|
)
|
|
|
(10.3
|
)
|
|
|
|
|
|
|
|
|
|
Unamortized balance at end of period
|
|
|
105.8
|
|
|
|
67.6
|
|
Accumulated effect of net unrealized investment gains
|
|
|
(44.0
|
)
|
|
|
(18.4
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
$61.8
|
|
|
|
$49.2
|
|
|
|
|
|
|
|
|
|
|
138
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
|
|
11.
|
Policy
and Contract Claims
|
The following table provides a reconciliation of the beginning
and ending reserve balances for policy and contract claims:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Balance as of January 1
|
|
|
$125.6
|
|
|
|
$133.1
|
|
|
|
$110.9
|
|
Less: reinsurance recoverables
|
|
|
8.5
|
|
|
|
5.1
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of January 1
|
|
|
117.1
|
|
|
|
128.0
|
|
|
|
105.0
|
|
Incurred related to insured events of:
|
|
|
|
|
|
|
|
|
|
|
|
|
The current year
|
|
|
338.2
|
|
|
|
369.5
|
|
|
|
364.2
|
|
Prior years
|
|
|
8.6
|
|
|
|
(0.9
|
)
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
346.8
|
|
|
|
368.6
|
|
|
|
368.7
|
|
Paid related to insured events of:
|
|
|
|
|
|
|
|
|
|
|
|
|
The current year
|
|
|
271.8
|
|
|
|
288.5
|
|
|
|
271.7
|
|
Prior years
|
|
|
79.3
|
|
|
|
91.0
|
|
|
|
74.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
351.1
|
|
|
|
379.5
|
|
|
|
345.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of December 31
|
|
|
112.8
|
|
|
|
117.1
|
|
|
|
128.0
|
|
Add: reinsurance recoverables
|
|
|
3.8
|
|
|
|
8.5
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
|
$116.6
|
|
|
|
$125.6
|
|
|
|
$133.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses estimates in determining its liability for
policy and contract claims. These estimates are based on
historical claim payment patterns and expected loss ratios to
provide for the inherent variability in claim patterns and
severity. For the year ended December 31, 2010, the change
in prior year incurred claims was primarily due to unfavorable
changes in liability estimates for group medical stop-loss
claims, offset by lower than expected individual life claims.
For the year ended December 31, 2009, the change in prior
year incurred claims was primarily due to favorable changes in
liability estimates for group medical stop-loss claims partially
offset by higher than expected paid claims for individual life.
For the year ended December 31, 2008, the change in prior
year incurred claims was primarily due to higher than expected
paid claims and unfavorable changes in liability estimates,
primarily for group medical stop-loss.
|
|
12.
|
Notes
Payable and Credit Facilities
|
Capital
Efficient Notes (CENts) 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%, including the impact of a related terminated cash flow
hedge.
139
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
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. Interest on the senior
notes is payable semi-annually in arrears, beginning on
October 2, 2006. The effective interest rate on the senior
notes is 6.11%, including the impact of a related terminated
cash flow hedge.
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, 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 AOCI, may not exceed 37.5%, measured at the end
of each quarter. In addition, the Company has agreed to
140
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
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.
As of December 31, 2010 and 2009, and during the years
ended December 31, 2010, 2009, and 2008, the Company had no
borrowings outstanding under this facility and was in compliance
with all covenants.
The Company files income tax returns in the U.S. federal
and various state jurisdictions. The 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, 2006. Other than an exam by the State of
Florida, the Company is not currently subject to any state
income tax exams.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Income from operations before income taxes
|
|
|
$289.1
|
|
|
|
|
|
|
|
$181.1
|
|
|
|
|
|
|
|
$13.0
|
|
|
|
|
|
Computed expected tax expense
|
|
|
101.2
|
|
|
|
35.0
|
%
|
|
|
63.4
|
|
|
|
35.0
|
%
|
|
|
4.5
|
|
|
|
35.0
|
%
|
Low income housing credits
|
|
|
(10.9
|
)
|
|
|
(3.8
|
)
|
|
|
(9.6
|
)
|
|
|
(5.3
|
)
|
|
|
(8.5
|
)
|
|
|
(65.4
|
)
|
Separate account dividend received deduction
|
|
|
(1.1
|
)
|
|
|
(0.4
|
)
|
|
|
(1.1
|
)
|
|
|
(0.6
|
)
|
|
|
(1.4
|
)
|
|
|
(10.8
|
)
|
Prior period adjustments
|
|
|
(0.5
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(2.9
|
)
|
|
|
(22.3
|
)
|
Other
|
|
|
(0.5
|
)
|
|
|
(0.2
|
)
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
(0.8
|
)
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
|
$88.2
|
|
|
|
30.5
|
%
|
|
|
$52.8
|
|
|
|
29.2
|
%
|
|
|
$(9.1
|
)
|
|
|
(70.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
The tax effects of temporary differences that gave rise to the
deferred income tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Adjustments to life policy liabilities
|
|
|
$520.7
|
|
|
|
$458.7
|
|
Capitalization of policy acquisition costs
|
|
|
55.3
|
|
|
|
48.6
|
|
Intangibles
|
|
|
9.6
|
|
|
|
11.0
|
|
Investment impairments
|
|
|
38.9
|
|
|
|
46.7
|
|
Performance share plan and performance units
|
|
|
1.1
|
|
|
|
3.7
|
|
Other liabilities accruals
|
|
|
3.0
|
|
|
|
1.6
|
|
Unrealized losses on investment securities (net of DAC
adjustment: $0 and $26.4, respectively)
|
|
|
|
|
|
|
26.7
|
|
Non-life net operating loss
|
|
|
8.7
|
|
|
|
4.6
|
|
Other
|
|
|
8.3
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
645.6
|
|
|
|
606.7
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
135.6
|
|
|
|
114.0
|
|
Securitiesbasis adjustment
|
|
|
374.5
|
|
|
|
300.1
|
|
Unrealized gains on investment securities (net of DAC
adjustment: $48.1 and $0, respectively)
|
|
|
232.9
|
|
|
|
|
|
Other
|
|
|
1.6
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
744.6
|
|
|
|
415.5
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset (liability)
|
|
|
$(99.0
|
)
|
|
|
$191.2
|
|
|
|
|
|
|
|
|
|
|
Included in the 2010 deferred tax assets were gross federal net
operating loss carry-forwards attributable to the non-life
companies in the amount of $24.9, due to expire under current
law during 2029 and 2030. The Company is required to establish a
valuation allowance for any portion of the deferred tax assets
that management believes will not be realized. Based on an
analysis of the Companys tax position, management believes
that it is more likely than not that the results of future
operations will generate sufficient taxable income to enable the
Company to utilize all of its deferred tax assets. Accordingly,
no valuation allowance for deferred tax assets has been
established as of December 31, 2010 and 2009.
In 2010, the Company removed its balance of $0.5 in unrecognized
tax benefits related to tax positions of prior years. The
Company does not expect the total amount of unrecognized tax
benefits for any tax position to change significantly within the
next twelve months.
142
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
The components of comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income
|
|
|
$200.9
|
|
|
|
$128.3
|
|
|
|
$22.1
|
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses) on
available-for-sale
securities (1)
|
|
|
567.6
|
|
|
|
1,113.2
|
|
|
|
(1,142.9
|
)
|
Reclassification adjustment for net realized investment (gains)
losses included in net income (2)
|
|
|
(32.2
|
)
|
|
|
24.9
|
|
|
|
103.2
|
|
Adjustment for deferred policy acquisition costs and deferred
sales inducements valuation allowance (3)
|
|
|
(57.0
|
)
|
|
|
(82.0
|
)
|
|
|
18.6
|
|
Other-than-temporary-impairments
on fixed maturities not related to credit losses (4)
|
|
|
3.7
|
|
|
|
(37.6
|
)
|
|
|
|
|
Terminated cash flow hedges
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
482.2
|
|
|
|
1,018.6
|
|
|
|
(1,021.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
$683.1
|
|
|
|
$1,146.9
|
|
|
|
$(998.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of taxes of $305.6, $599.5 and $(615.3) for the years ended
December 31, 2010, 2009 and 2008, respectively. |
|
(2) |
|
Net of taxes of $(17.3), $13.4 and $55.5 for the years ended
December 31, 2010, 2009 and 2008, respectively. For the
years ended December 31, 2010 and 2009, $24.8 (net of taxes
of $13.3), and $30.5 (net of taxes of $16.4), respectively, 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 $(30.7), $(44.2) and $10.0 for the years ended
December 31, 2010, 2009 and 2008, respectively. |
|
(4) |
|
Net of taxes of $2.0 and $(20.2) for the years ended
December 31, 2010 and 2009, respectively. |
The components of accumulated other comprehensive income (loss)
are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net unrealized gains on
available-for-sale
securities
|
|
|
$925.7
|
|
|
|
$102.0
|
|
Other-than-temporary-impairments
on fixed maturities not related to credit losses
|
|
|
(76.2
|
)
|
|
|
(81.9
|
)
|
Net unrealized losses on terminated cash flow hedges
|
|
|
(2.7
|
)
|
|
|
(2.8
|
)
|
Adjustment for deferred policy acquisition costs
|
|
|
(137.4
|
)
|
|
|
(75.3
|
)
|
Adjustment for deferred sales inducements
|
|
|
(44.0
|
)
|
|
|
(18.4
|
)
|
Deferred income taxes
|
|
|
(232.9
|
)
|
|
|
26.7
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
$432.5
|
|
|
|
$(49.7
|
)
|
|
|
|
|
|
|
|
|
|
143
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
The following table provides a reconciliation of changes in
outstanding shares of common stock:
|
|
|
|
|
|
|
Common Shares
|
|
|
Balance as of January 1, 2008
|
|
|
92.646
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
92.646
|
|
|
|
|
|
|
Balance as of January 1, 2009
|
|
|
92.646
|
|
Restricted shares issued
|
|
|
0.083
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
92.729
|
|
|
|
|
|
|
Balance as of January 1, 2010
|
|
|
92.729
|
|
Common stock, issued in initial public offering
|
|
|
25.260
|
|
Restricted shares issued
|
|
|
0.243
|
|
Employee stock purchase plan shares issued
|
|
|
0.033
|
|
Treasury stock acquired (1)
|
|
|
(0.001
|
)
|
Treasury shares retired (2)
|
|
|
(0.048
|
)
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
118.216
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents shares repurchased during the fourth quarter of 2010
to satisfy employee income tax withholding, pursuant to the
Companys Equity Plan. |
|
(2) |
|
Represents shares repurchased during the second quarter of 2010
and subsequently retired, pursuant to the Companys Equity
Plan. |
|
|
15.
|
Stock-Based
Compensation
|
As of December 31, 2010, the Company had two stock-based
compensation plans: the Symetra Financial Corporation Equity
Plan, amended and restated on August 11, 2010, (the
Equity Plan) and the Symetra Financial Corporation
Employee Stock Purchase Plan, amended and restated on
May 11, 2010, (the Stock Purchase Plan). Under
the Equity Plan, the Company is authorized to issue various
types of stock-based compensation to employees, directors and
consultants. A total of 7.830 shares are authorized for
issuance under the Equity Plan, and 4.602 equity instruments are
available for future issuance as of December 31, 2010. The
Stock Purchase Plan allows eligible employees to purchase shares
of the Companys common stock at a 15% discount from the
market price. A total of 0.870 shares are authorized for
issuance under this plan. As of December 31, 2010,
0.837 shares are available for future issuance under the
Stock Purchase Plan.
Restricted
Stock
Restricted shares are valued based on the number of shares
granted and the Companys closing stock price on the grant
date. The Company recognizes such compensation cost as expense
over the service period (generally three years), net of
estimated forfeitures, using the straight-line method. Many
factors are considered when estimating forfeitures, including
types of awards, employee class and historical experience. The
estimation of equity awards that will ultimately vest requires
judgment, and to the extent actual results or future estimates
differ from current estimates, the Company records a cumulative
adjustment in the period that the estimates are revised.
144
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
Stock-based compensation expense for restricted shares, which is
recognized in other underwriting and operating expenses on the
consolidated statements of income, was $2.0 and $0.2 for the
years ended December 31, 2010 and 2009, respectively. This
included compensation expense of $1.2 for the year ended
December 31, 2010, related to the modification and
accelerated vesting of certain restricted shares. The related
income tax benefit for the years ended December 31, 2010
and 2009 was $0.7 and $0.1, respectively.
The Company issued 0.274 and 0.083 shares of restricted
stock for the years ended December 31, 2010 and 2009,
respectively. These awards vest over a weighted average period
of 2.6 and 2.4 years. The weighted average fair value of
restricted stock granted for the years ended December 31,
2010 and 2009 was $12.25 and $13.08 per share, respectively. The
total fair value of restricted stock vested during the year
ended December 31, 2010 was $1.6. No restricted stock
vested during the year ended December 31, 2009. The Company
did not issue restricted stock awards in 2008 or prior.
The following table summarizes the Companys restricted
stock activity for the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Outstanding as of January 1, 2010
|
|
|
0.083
|
|
|
|
$13.08
|
|
Shares granted
|
|
|
0.274
|
|
|
|
12.25
|
|
Shares vested
|
|
|
(0.134
|
)
|
|
|
12.92
|
|
Shares forfeited
|
|
|
(0.031
|
)
|
|
|
12.53
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
0.192
|
|
|
|
$12.61
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, unrecognized compensation cost for
restricted stock was $1.7 and is expected to be recognized over
the weighted average of 2.0 years.
Stock
Options
The Company measures compensation cost for stock awards at fair
value on the grant date and recognizes such cost, net of
estimated forfeitures, over the requisite service period
(generally seven years). Stock options are valued using the
Black-Scholes valuation model. Stock-based compensation expense
for stock options was $0.5 for the year ended December 31,
2010, and the related tax benefit was $0.2. The Company did not
issue stock options during 2009, 2008 or prior.
The Company issued 2.950 options for the year ended
December 31, 2010, with an exercise price of $28.00. These
options vest on June 30, 2017 and expire one year
thereafter. The weighted average fair value of awards granted
during the year ended December 31, 2010 was $2.73 per share.
The following table summarizes the weighted average assumptions
used to value stock options issued:
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2010
|
|
|
Expected term
|
|
|
7.5 years
|
|
Risk-free interest rate
|
|
|
2.0
|
% - 2.7%
|
Dividend yield
|
|
|
1.6
|
%
|
Volatility
|
|
|
45.6
|
%
|
145
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
The expected term of stock options is the period that options
are expected to be outstanding. The risk-free rate is based on
the U.S. Treasury yield curve over the expected term of the
option that is in effect at the grant date. The dividend yield
is calculated based on historical dividends. Expected volatility
is calculated based on daily historical prices and implied
volatility.
As of December 31, 2010, 2.950 options were outstanding,
none of which were exercisable. Outstanding options have a
remaining contractual term of 7.5 years and no intrinsic
value as of December 31, 2010. As of December 31,
2010, unrecognized compensation cost for stock options was $7.2
and is expected to be recognized over the next 6.5 years.
Employee
Stock Purchase Plan
The Companys Stock Purchase Plan is a qualified employee
stock purchase plan under Section 423 of the Internal
Revenue Code. Under the plan, eligible employees may purchase
shares of the Companys stock on quarterly purchase dates
at an amount equal to 85% of the closing market price of the
common stock.
Compensation cost for employees is recognized for each
three-month period between purchase dates, and is equal to the
fair value of the discount received on the purchase of shares.
During the year ended December 31, 2010, 0.033 shares
were purchased under the plan. Compensation cost recognized for
employees under the Companys Stock Purchase Plan for the
year ended December 31, 2010 was $0.1. The Company did not
issue any shares pursuant to the Stock Purchase Plan in 2009 or
2008.
|
|
16.
|
Commitments
and Contingencies
|
Investments
in Limited Partnerships
As of December 31, 2010, the Company was invested in 16
limited partnership interests related to tax credit investments,
five of which were entered into in 2010. The Company
unconditionally committed to provide capital contributions
totaling approximately $197.4, of which the remaining $66.0 is
expected to be contributed over a period of three years. Capital
contributions of $131.4 were paid as of December 31, 2010,
with the remaining expected cash capital contributions as
follows:
|
|
|
|
|
|
|
Expected Capital
|
|
|
|
Contributions
|
|
|
2011
|
|
|
$39.3
|
|
2012
|
|
|
24.4
|
|
2013
|
|
|
2.3
|
|
|
|
|
|
|
Total expected capital contributions
|
|
|
$66.0
|
|
|
|
|
|
|
The Company has also committed to invest $47.5 in four private
equity funds, of which $36.0 had been made through
December 31, 2010. 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 commitments range up to 3 years, ending in 2013.
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
146
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
or threatened, as of December 31, 2010, will have a
material adverse effect on its consolidated financial condition,
future operating results or liquidity.
Leases
The Company has office space and certain equipment under leases
that expire at various dates through 2016. Certain of the leases
include renewal options. The Company accounts for these leases
as operating leases.
Future minimum lease commitments, including cost escalation
clauses, for the next five years and thereafter are as follows:
|
|
|
|
|
|
|
Lease
|
|
|
|
Payments
|
|
|
2011
|
|
|
$7.7
|
|
2012
|
|
|
7.7
|
|
2013
|
|
|
7.5
|
|
2014
|
|
|
7.3
|
|
2015
|
|
|
4.3
|
|
Thereafter
|
|
|
0.1
|
|
|
|
|
|
|
Total
|
|
|
$34.6
|
|
|
|
|
|
|
Rent expense was $7.1, $7.9, and $8.0 for the years ended
December 31, 2010, 2009 and 2008, respectively.
Other
Commitments
The Company has a service agreement with a third party service
provider to outsource the majority of its information technology
infrastructure. The initial term of the 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
$10.7, $11.2 and $11.8 for the years ended December 31,
2010, 2009 and 2008, respectively.
As of December 31, 2010 and 2009, unfunded mortgage loan
commitments were $39.2 and $4.5, respectively. The Company had
no other material commitments or contingencies as of
December 31, 2010 and 2009.
|
|
17.
|
Employee
Benefit Plans
|
Defined
Contribution Plan
The Company sponsors a defined contribution 401(k) plan for all
eligible employees that includes a matching contribution of 100%
of a participants contributions up to 6% of eligible
compensation. The expense for the matching contributions was
$4.8, $4.5 and $4.5 for the years ended December 31, 2010,
2009, and 2008, respectively.
147
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
Performance
Share Plan
The Company has a performance share plan program (the
Performance Share Plan) that provides incentives to
selected members of management based on the long-term success of
the Company. Awards under the Performance Share Plan have been
made in the form of performance shares. The value of each
performance share is determined at the discretion of the
Companys Board of Directors, based on achievement of a
specified growth target over a three-year period, and is paid in
cash. The expense recorded for awards under the Performance
Share Plan was $(4.3), $8.3 and $6.0 for the years ended
December 31, 2010, 2009, and 2008, respectively. Due to
management turnover during 2010, the Company reduced its
Performance Share Plan accrual to reflect forfeitures from
management turnover and recorded a net benefit. The Company also
incurred related severance expenses of $5.4 during the year
ended December 31, 2010.
As of December 31, 2010 the Performance Share Plan has one
remaining active plan, which is scheduled to end on
December 31, 2011. For the 2010 fiscal year incentives were
provided as performance unit grants under the Equity Plan (see
below).
Equity
Plan
Under the Equity Plan, the Company has the ability to issue
various types of awards, including restricted stock, stock
options, stock appreciation rights, restricted stock units,
performance shares, performance units and other types of awards
at the discretion of the Board of Directors. During 2010, the
Company granted 0.072 performance units to various members of
management under the Equity Plan. The Company also granted
restricted stock and stock options as discussed in Note 15.
The value of each performance unit is determined at the
discretion of the Companys Board of Directors based on the
long-term success of the Company over a three-year period. These
are accounted for as liability awards as the Company intends to
settle such awards in cash. The Company recognized $1.5 in
expense related to performance units granted during 2010.
Dividends
to Stockholders
The Company paid cash dividends totaling $20.6, or $0.05 per
share, to its stockholders and warrant holders of record during
the year ended December 31, 2010. No dividends were paid
during the years ended December 31, 2009 and 2008.
Intracompany
Dividends
The Companys insurance subsidiaries are restricted by
state regulations as to the aggregate amount of dividends they
may pay to their parent company in any consecutive
12-month
period without regulatory approval. Accordingly, based on
statutory limits as of December 31, 2009, the Company was
eligible to receive dividends from its insurance subsidiaries
during 2010 without obtaining regulatory approval as long as the
aggregate dividends paid over the twelve months preceding any
dividend payment date in 2010 did not exceed $141.5. The total
amount of dividends received by the Company from its insurance
subsidiaries during 2010 was $40.0. Based on state regulations
as of December 31, 2010, the Company is eligible to receive
dividends from its insurance subsidiaries during 2011 without
obtaining regulatory approval as long as the aggregate dividends
paid over the 12 months preceding any dividend payment date
in 2011 do not exceed $194.0.
148
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
|
|
19.
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Statutory net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Symetra Life Insurance Company
|
|
|
$194.5
|
|
|
|
$43.1
|
|
|
|
$36.7
|
|
First Symetra National Life Insurance Company of New York
|
|
|
7.9
|
|
|
|
(0.6
|
)
|
|
|
(2.2
|
)
|
Symetra National Life Insurance Company
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$202.9
|
|
|
|
$42.7
|
|
|
|
$35.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and surplus for Symetra Life Insurance Company
was $1,752.3 and $1,415.4 for the years ended December 31,
2010 and 2009, respectively.
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, 2010
and 2009, Symetra Life Insurance Company and its subsidiaries
met the minimum 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 Insurance Group, Ltd. White
Mountains Insurance Group, Ltd. is a related party who
beneficially owns 26.888 shares of the Companys
common stock, including warrants exercisable for
9.488 shares. This agreement, as amended, provides for
investment advisory services related to the Companys
invested assets and portfolio management services. Expenses
amounted to $14.1, $14.0, and $14.6 for the years ended
December 31, 2010, 2009 and 2008, respectively. As of
December 31, 2010 and 2009, amounts due to WMA were $3.4,
and $3.5, respectively.
The 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
three divisions, consisting of four operating segments based on
product groupings, and a fifth reportable segment consisting
primarily of unallocated corporate items and surplus investment
income. The five segments are: Group, Deferred Annuities
(formerly Retirement Services), Income Annuities, Life (formerly
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
149
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
net realized investment gains (losses), and for the Deferred
Annuities segment to include the net investment gains
(losses) on FIA options.
When evaluating segment pre-tax adjusted operating income (loss)
in the Deferred Annuities segment, management includes the
net investment gains (losses) from options related to an FIA
hedging program. This program consists of buying S&P 500
Index call options to hedge the equity return component of FIA
products. These options do not qualify as hedge instruments or
for hedge accounting treatment, and net gains (losses) from the
options are recorded in net realized investment gains (losses).
Since the interest incurred on the Companys FIA products
is included as a component of interest credited, it is more
meaningful to evaluate results inclusive of the results of this
hedge program.
Group
Division
|
|
|
|
|
Group. Group offers medical stop-loss
insurance, limited benefit medical plans, group life insurance,
accidental death and dismemberment insurance and disability
income insurance mainly to employer groups of 50 to 5,000
individuals. In addition to insurance products Group offers
managing general underwriting, or MGU, services.
|
Retirement
Division
|
|
|
|
|
Deferred Annuities. Deferred Annuities offers
fixed and variable deferred annuities to consumers who want to
accumulate tax-deferred assets for retirement.
|
|
|
|
Income Annuities. Income Annuities offers
single premium immediate annuities, or SPIAs, to customers
seeking a reliable source of retirement income or to protect
against outliving their assets during retirement, and structured
settlement annuities to fund third party personal injury
settlements. In addition, Income Annuities offers funding
services options to existing structured settlement clients.
|
Life
Division
|
|
|
|
|
Life. Life offers a wide array of individual
products such as term and universal life insurance including
single premium life insurance, as well as BOLI.
|
Non-Operating
|
|
|
|
|
Other. This segment consists of unallocated
corporate income, composed primarily of investment income on
unallocated surplus, unallocated corporate expenses, interest
expense on debt, earnings related to limited partnership
interests, the results of small, non-insurance businesses that
are managed outside of our divisions, and inter-segment
elimination entries.
|
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.
150
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
The following tables present selected financial information by
segment and reconcile segment pre-tax adjusted operating income
(loss) to amounts reported in the consolidated statements of
income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
Deferred
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Annuities
|
|
|
Annuities
|
|
|
Life
|
|
|
Other
|
|
|
Total
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
$433.2
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$39.8
|
|
|
|
$
|
|
|
|
$473.0
|
|
Net investment income
|
|
|
18.7
|
|
|
|
462.9
|
|
|
|
422.7
|
|
|
|
271.3
|
|
|
|
23.8
|
|
|
|
1,199.4
|
|
Policy fees, contract charges and other
|
|
|
11.7
|
|
|
|
19.3
|
|
|
|
0.8
|
|
|
|
118.3
|
|
|
|
16.2
|
|
|
|
166.3
|
|
Net investment gains on FIA options
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
463.6
|
|
|
|
482.5
|
|
|
|
423.5
|
|
|
|
429.4
|
|
|
|
40.0
|
|
|
|
1,839.0
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
281.3
|
|
|
|
0.1
|
|
|
|
|
|
|
|
53.7
|
|
|
|
|
|
|
|
335.1
|
|
Interest credited
|
|
|
|
|
|
|
293.6
|
|
|
|
366.3
|
|
|
|
242.7
|
|
|
|
(3.1
|
)
|
|
|
899.5
|
|
Other underwriting and operating expenses
|
|
|
102.6
|
|
|
|
55.1
|
|
|
|
22.0
|
|
|
|
54.4
|
|
|
|
22.6
|
|
|
|
256.7
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.9
|
|
|
|
31.9
|
|
Amortization of deferred policy acquisition costs
|
|
|
8.1
|
|
|
|
52.4
|
|
|
|
2.0
|
|
|
|
3.7
|
|
|
|
|
|
|
|
66.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
392.0
|
|
|
|
401.2
|
|
|
|
390.3
|
|
|
|
354.5
|
|
|
|
51.4
|
|
|
|
1,589.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income (loss)
|
|
|
$71.6
|
|
|
|
$81.3
|
|
|
|
$33.2
|
|
|
|
$74.9
|
|
|
|
$(11.4
|
)
|
|
|
$249.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
$463.6
|
|
|
|
$482.5
|
|
|
|
$423.5
|
|
|
|
$429.4
|
|
|
|
$40.0
|
|
|
|
$1,839.0
|
|
Add: Net realized investment gains (losses), excluding FIA
options
|
|
|
(0.2
|
)
|
|
|
11.6
|
|
|
|
26.6
|
|
|
|
2.0
|
|
|
|
(0.5
|
)
|
|
|
39.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
463.4
|
|
|
|
494.1
|
|
|
|
450.1
|
|
|
|
431.4
|
|
|
|
39.5
|
|
|
|
1,878.5
|
|
Total benefits and expenses
|
|
|
392.0
|
|
|
|
401.2
|
|
|
|
390.3
|
|
|
|
354.5
|
|
|
|
51.4
|
|
|
|
1,589.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
$71.4
|
|
|
|
$92.9
|
|
|
|
$59.8
|
|
|
|
$76.9
|
|
|
|
$(11.9
|
)
|
|
|
$289.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
$94.7
|
|
|
|
$8,996.7
|
|
|
|
$6,824.6
|
|
|
|
$5,419.6
|
|
|
|
$2,164.6
|
|
|
|
$23,500.2
|
|
Deferred policy acquisition costs
|
|
|
3.6
|
|
|
|
150.8
|
|
|
|
31.2
|
|
|
|
64.4
|
|
|
|
|
|
|
|
250.0
|
|
Goodwill
|
|
|
28.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28.4
|
|
Separate account assets
|
|
|
|
|
|
|
791.1
|
|
|
|
|
|
|
|
90.6
|
|
|
|
|
|
|
|
881.7
|
|
Total assets
|
|
|
226.4
|
|
|
|
10,249.7
|
|
|
|
6,931.6
|
|
|
|
$5,953.9
|
|
|
|
2,275.3
|
|
|
|
25,636.9
|
|
Future policy benefits, losses, claims and loss expenses (1)
|
|
|
170.3
|
|
|
|
9,228.2
|
|
|
|
6,668.8
|
|
|
|
5,427.7
|
|
|
|
(26.7
|
)
|
|
|
21,468.3
|
|
Unearned premiums
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
|
|
|
|
|
|
12.2
|
|
Other policyholders funds
|
|
|
9.8
|
|
|
|
15.5
|
|
|
|
8.0
|
|
|
|
71.7
|
|
|
|
6.0
|
|
|
|
111.0
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
449.0
|
|
|
|
449.0
|
|
|
|
|
(1) |
|
This includes funds held under deposit contracts, future policy
benefits, and policy and contract claims. |
151
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
Deferred
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Annuities
|
|
|
Annuities
|
|
|
Life
|
|
|
Other
|
|
|
Total
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
$432.2
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$37.9
|
|
|
|
$
|
|
|
|
$470.1
|
|
Net investment income
|
|
|
17.8
|
|
|
|
388.0
|
|
|
|
422.4
|
|
|
|
265.2
|
|
|
|
20.2
|
|
|
|
1,113.6
|
|
Policy fees, contract charges and other
|
|
|
14.9
|
|
|
|
16.8
|
|
|
|
0.5
|
|
|
|
116.7
|
|
|
|
11.0
|
|
|
|
159.9
|
|
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
|
|
|
|
$7,249.3
|
|
|
|
$6,395.8
|
|
|
|
$4,701.8
|
|
|
|
$1,686.9
|
|
|
|
$20,181.0
|
|
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
|
|
|
|
8,431.8
|
|
|
|
6,625.1
|
|
|
|
5,175.8
|
|
|
|
1,930.1
|
|
|
|
22,435.4
|
|
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. |
152
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
Deferred
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Annuities
|
|
|
Annuities
|
|
|
Life
|
|
|
Other
|
|
|
Total
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
$449.8
|
|
|
|
$0.1
|
|
|
|
$
|
|
|
|
$36.2
|
|
|
|
$
|
|
|
|
$486.1
|
|
Net investment income (loss)
|
|
|
17.8
|
|
|
|
261.1
|
|
|
|
423.4
|
|
|
|
254.6
|
|
|
|
(0.4
|
)
|
|
|
956.5
|
|
Policy fees, contract charges and other
|
|
|
19.0
|
|
|
|
20.2
|
|
|
|
0.9
|
|
|
|
114.7
|
|
|
|
11.7
|
|
|
|
166.5
|
|
Add: 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 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. |
153
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless
otherwise stated)Continued
|
|
22.
|
Quarterly
Results of Operations (Unaudited)
|
The unaudited quarterly results of operations for years ended
December 31, 2010 and 2009 are summarized in the table
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
$453.2
|
|
|
|
$444.4
|
|
|
|
$485.5
|
|
|
|
$495.4
|
|
Total benefits and expenses
|
|
|
387.7
|
|
|
|
393.9
|
|
|
|
402.3
|
|
|
|
405.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
65.5
|
|
|
|
50.5
|
|
|
|
83.2
|
|
|
|
89.9
|
|
Net income
|
|
|
46.3
|
|
|
|
35.8
|
|
|
|
56.6
|
|
|
|
62.2
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
|
|
$0.35
|
|
|
|
$0.26
|
|
|
|
$0.41
|
|
|
|
$0.45
|
|
Diluted (1)
|
|
|
0.35
|
|
|
|
0.26
|
|
|
|
0.41
|
|
|
|
0.45
|
|
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 (1)
|
|
|
$0.05
|
|
|
|
$0.42
|
|
|
|
$0.40
|
|
|
|
$0.29
|
|
Diluted (1)
|
|
|
0.05
|
|
|
|
0.42
|
|
|
|
0.40
|
|
|
|
0.29
|
|
|
|
|
(1) |
|
Quarterly earnings per share amounts may not add to the full
year amounts due to share weighting and rounding. |
During the first quarter of 2010, the Company revised its
estimate for bonus interest reserve on one of its universal life
products. This bonus interest is not earned by the contract
holder if the policys credited rate is equal to the
guaranteed minimum. Due to the negative impact the low interest
rate environment had on investment yields, the credited interest
rate was adjusted downward to the guaranteed minimum rate over
2010. As a result, for the three months ended March 31,
2010, income from operations before income taxes increased $7.4.
The impact on net income for the three month period was $4.8, or
$0.03 per share of common stock.
On February 9, 2011, the Company declared a dividend of
$0.05 per common share, for a total of $6.9 to shareholders and
warrant holders of record as of February 22, 2011. The
dividend was paid by March 9, 2011.
154
|
|
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 13a15(e)
of the 1934 Act, as of December 31, 2010. Based on
this evaluation our principal executive officer and principal
financial officer concluded that, as of December 31, 2010,
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 13a15(f) of
the 1934 Act. Management has assessed the effectiveness of
our internal control over financial reporting as of
December 31, 2010 based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. As a result
of this assessment, management concluded that, as of
December 31, 2010, our internal control over financial
reporting was effective in providing reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting
principles.
This annual report does not include an attestation report of the
Companys independent registered public accounting firm on
internal controls of financial reporting due to rules
established by the SEC, which do not require such report for a
non-accelerated filer.
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, 2010
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.
155
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Certain of the information called for by Item 10 will be
set forth in the definitive proxy statement (the Proxy
Statement) to be filed pursuant to Regulation 14A of
the Securities Exchange Act of 1934 in connection with the
Companys 2011 Annual Meeting of Stockholders, under the
captions Election of Directors,
Section 16(a) Beneficial Ownership Reporting
Compliance, and Corporate Governance and is
incorporated herein by reference.
Directors
and Executive Officers of Symetra Financial
Corporation
Set forth below is a list of the directors and executive
officers of Symetra as of March 11, 2011. The positions
listed are of Symetra unless otherwise indicated.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Positions
|
|
Lowndes A. Smith
|
|
|
71
|
|
|
Director, Chairman of the Board
|
Lois W. Grady
|
|
|
66
|
|
|
Director, Vice Chairman of the Board
|
Thomas M. Marra
|
|
|
52
|
|
|
Director, President and Chief Executive Officer
|
Margaret A. Meister
|
|
|
46
|
|
|
Executive Vice President, Chief Financial Officer
|
Tommie D. Brooks
|
|
|
40
|
|
|
Senior Vice President, Chief Actuary
|
Christine A. Katzmar Holmes
|
|
|
52
|
|
|
Senior Vice President, Human Resources and Administration
|
George C. Pagos
|
|
|
61
|
|
|
Senior Vice President, General Counsel and Secretary
|
Jonathan E. Curley
|
|
|
57
|
|
|
Executive Vice PresidentLife Division, Symetra Life
Insurance Company
|
Michael W. Fry
|
|
|
49
|
|
|
Executive Vice PresidentGroup Division, Symetra Life
Insurance Company
|
Daniel R. Guilbert
|
|
|
37
|
|
|
Executive Vice PresidentRetirement Division, Symetra Life
Insurance Company
|
Richard G. LaVoice
|
|
|
51
|
|
|
Executive Vice PresidentLife and Retirement Sales and
Distribution, Symetra Life Insurance Company
|
Peter S. Burgess
|
|
|
68
|
|
|
Director
|
David T. Foy
|
|
|
44
|
|
|
Director
|
Sander M. Levy
|
|
|
49
|
|
|
Director
|
Robert R. Lusardi
|
|
|
54
|
|
|
Director
|
Lowndes A. Smith has been a director of Symetra since
June 2007 and has served as Chairman of the Board since May
2009. Mr. Smith has served as Managing Partner of
Whittington Gray Associates since 2003. Mr. Smith formerly
served as Vice Chairman of The Hartford Financial Services
Group, Inc. (The Hartford) and President and Chief
Executive Officer of Hartford Life Insurance Company until his
retirement in 2002. He joined The Hartford in 1968.
Mr. Smith also serves as Chairman of OneBeacon Insurance
Group, Ltd. (NYSE: OB) and is a director of White Mountains
Insurance Group, Ltd. (NYSE: WTM) and 72 investment companies in
the mutual funds of The Hartford. He received his B.S. degree
from Babson College.
Lois W. Grady has been a director of Symetra since August
2004 and has served as Vice Chairman of the Board since May
2009. Ms. Grady served as Executive Vice President and
Director of Investment Products Services of Hartford Life, Inc.
from 2002 until her retirement in April 2004 and as Senior Vice
President and
156
Director of Investment Products Services of Hartford Life, Inc.
from 1998 through 2002. She began her career with Hartford Life
in 1983. She is also a director of OneBeacon Insurance Group,
Ltd. (NYSE: OB). Ms. Grady received her B.S. degree from
Southern Connecticut State University.
Thomas M. Marra has been a director, Chief Executive
Officer and President of Symetra since June 2010 and director
and President of Symetra Life Insurance Company since June 2010.
He is also an officer and director of various affiliates of
Symetra. Prior to joining Symetra, Mr. Marra served as
Senior Advisor at the Boston Consulting Group in the North
America Financial Services division from September 2009 until
May 2010. Beginning in 1980, when he was an actuarial student,
and until July 2009, Mr. Marra was with The Hartford
Financial Services Group, Inc. (The Hartford). While
at The Hartford, Mr. Marra held increasingly senior
positions, most recently as President and Chief Operating
Officer, as well as holding various directorships with the
parent company and its subsidiaries. Mr. Marra is a past
Chairman of the Board of the American Council of Life Insurers
and of the National Association of Variable Annuities, now known
as the Insured Retirement Institute. Mr. Marra is a Fellow
of the Society of Actuaries and a member of the American Academy
of Actuaries. He received his B.S. degree from St. Bonaventure
University.
Margaret A. Meister has been Executive Vice President and
Chief Financial Officer of Symetra since February 2006 and
Executive Vice President and Chief Financial Officer of Symetra
Life Insurance Company since March 2006. She is also a director
of Symetra Life Insurance Company as well as an officer and
director of various affiliates of Symetra. Ms. Meister is a
Fellow of the Society of Actuaries and is a member of the
American Academy of Actuaries. She joined Symetra Life Insurance
Company in 1988 and served in a variety of positions, including
Chief Actuary and Vice President, prior to being promoted to her
current position. Ms. Meister received her B.A. degree from
Whitman College.
Tommie D. Brooks has been Senior Vice President of
Symetra and Symetra Life Insurance Company since November 2010
and Chief Actuary since March 2007. He is also an officer of
various affiliates of Symetra. Mr. Brooks joined Symetra
Life Insurance Company in 1992, and served in a variety of
managerial positions, including Vice President, throughout the
organization. Mr. Brooks attained the Fellow of the Society
of Actuaries and is a member of the American Academy of
Actuaries. Mr. Brooks earned his B.S. in Math and Actuarial
Sciences from Central Washington University.
Christine A. Katzmar Holmes has been a Senior Vice
President of Symetra since November 2010 and was Vice President
of Symetra from August 2004 to November 2010. She is responsible
for Human Resources, Service Operations and Security.
Ms. Katzmar Holmes joined Symetra Life Insurance Company in
2001 as Vice President and has been a Senior Vice President of
Symetra Life Insurance Company since November 2010. She is also
an officer of various affiliates of Symetra. Ms. Katzmar
Holmes received her B.S. degree from Miami University, Ohio.
George C. Pagos has been Senior Vice President of Symetra
and Symetra Life Insurance Company since September 2007 and
General Counsel and Secretary of Symetra and Symetra Life
Insurance Company since August 2004. He is also a director of
Symetra Life Insurance Company as well as an officer and
director of various affiliates of Symetra. Mr. Pagos joined
Symetra Life Insurance Company in 1976 and served in a variety
of positions, including Vice President, prior to being promoted
to his current position. Mr. Pagos received his B.A. degree
from George Washington University and his J.D. degree from the
University of Maryland.
Jonathan E. Curley has been a director and Executive Vice
President of Symetra Life Insurance Company since November 2010
and is responsible for the operations of its Life Division. He
is also an officer and director of various affiliates of
Symetra. From January 2009 to October 2010 Mr. Curley was
with Wells Fargo Insurance Services USA, Inc., where he was
Senior Vice President and Managing Director of Individual
Insurance. From May 2005 until December 2008 he held various
senior executive positions at Wachovia Insurance Services.
Mr. Curley is a Chartered Financial Consultant (ChFC), a
Chartered Life Underwriter
157
(CLU) and a member of the Association of Advanced Life
Underwriting (AALU). Mr. Curley earned a bachelors
degree in political science from the College of the Holy Cross
in Worcester, Massachusetts.
Michael W. Fry has been Executive Vice President of
Symetra Life Insurance Company since September 2010 and is
responsible for the operations of its Group Division. He has
been a director of Symetra Life Insurance Company since January
2009. He is also an officer and director of various affiliates
of Symetra. Prior to his current position, Mr. Fry served
as Senior Vice President of Symetra Life Insurance Company from
May 2008 to September 2010 and as Vice President from February
2003 to May 2008. Mr. Fry joined Symetra in August 2002. He
earned a bachelors degree in accounting from Indiana
University.
Daniel R. Guilbert has been a director and Executive Vice
President of Symetra Life Insurance Company since November 2010
and is responsible for the operations of its Retirement
Division. He is also an officer and director of various
affiliates of Symetra. From May 2010 to October 2010,
Mr. Guilbert was with Aviva North America, where he served
as Chief Risk Officer. From June 1996 to April 2010 he was at
The Hartford Life Insurance Company in a variety of senior risk
management, product development and actuarial roles.
Mr. Guilbert attained the Fellow of the Society of
Actuaries in 2001. He earned a bachelors degree in applied
actuarial science from Bryant University.
Richard G. LaVoice has been Executive Vice President of
Symetra Life Insurance Company since September 2010 and is
responsible for its Life and Retirement Sales and Distribution.
He has been a director of Symetra Life Insurance Company since
February 2011. He is also an officer and director of various
affiliates of Symetra. From October 2005 to September 2009, he
was Corporate Vice President and National Sales Manager of
Retirement Income at MassMutual Financial Group. He earned a
bachelors degree in legal studies from the University of
Massachusetts at Amherst.
Peter S. Burgess has been director of Symetra since June
2010. Since June 1999 he has served as an independent adviser on
financial and governance issues to insurance companies and their
audit committees. He previously spent 35 years at Arthur
Andersen LLP as an accountant and partner until his retirement
in 1999. He is also a director of John Hancock Trust and John
Hancock Funds II, overseeing 188 mutual funds, and of Lincoln
Educational Services Corporation (NASDAQ: LINC). He was a
director at PMA Capital Corporation from 2002 to 2010.
Mr. Burgess received his B.S. degree from Lehigh University.
David T. Foy has been a director of Symetra since March
2004 and served as Chairman of the Board from August 2004 until
May 2009. He has been Executive Vice President and Chief
Financial Officer of White Mountains Insurance Group, Ltd. since
2003. Previously, he was Senior Vice President and Chief
Financial Officer of Hartford Life, Inc., which he joined in
1993. He is also a director of OneBeacon Insurance Group, Ltd.
(NYSE: OB). He received his B.S. degree from the Rochester
Institute of Technology.
Sander M. Levy has been a director of Symetra since
August 2004. He is a Managing Director of Vestar Capital
Partners, a private equity firm, and was a founding partner at
its inception in 1988. He was previously a member of the
Management Buyout Group of The First Boston Corporation. He is
also a director of Validus Holdings, Ltd. (NYSE: VR),
Duff & Phelps Corporation (NYSE: DUF), and Wilton Re
Holdings Limited. He received his B.S. degree from the Wharton
School of the University of Pennsylvania and his M.B.A. degree
from Columbia Business School.
Robert R. Lusardi has been a director of Symetra since
August 2005. Since February 2011 he has been Chief Executive
Officer and member of PremieRe Holdings LLC, a private insurance
company. He has been a director of Primus Guaranty, Ltd. (NYSE:
PRS) since 2002, where he was also Senior Advisor from March
2010 to October 2010. He was a director at OneBeacon Insurance
Group, Ltd. (NYSE: OB) from August 2006 to February 2010. He was
President and Chief Executive Officer of White Mountains
Financial Services LLC from February 2005 to February 2010. He
received his B.A. and M.A. degrees from Oxford University and
his M.B.A. from Harvard University.
158
|
|
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 2011 Annual Meeting of
Stockholders, under the caption Executive
Compensation and is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
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 2011 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 2011 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 2011 Annual Meeting of
Stockholders, under the caption Independent Auditor
and is incorporated herein by reference.
159
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 8Financial Statements and
Supplementary Data.
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
Consolidated Balance SheetsAs of December 31, 2010
and 2009 (page 104)
|
|
|
|
Consolidated Statements of IncomeYears ended
December 31, 2010, 2009 and 2008 (page 105)
|
|
|
|
Consolidated Statements of Changes in Stockholders
EquityYears ended December 31, 2010, 2009 and 2008
(page 106)
|
|
|
|
Consolidated Statements of Cash FlowsYears ended
December 31, 2010, 2009 and 2008 (page 107)
|
|
|
|
Notes to Consolidated Financial StatementsYears ended
December 31, 2010, 2009 and 2008 (pages 108 to 154)
|
2. Financial schedules required to be filed by Item 8
of this form, and by Item 15(d):
|
|
|
|
|
Schedule ISummary of InvestmentsOther Than
Investments in Related Parties
|
|
|
|
Schedule IICondensed Financial Information of
Registrant (Parent Company Only)
|
We omit other schedules from this listand from this
Form 10-Kbecause
they either are not applicable or the information is included in
our consolidated financial statements.
3. ExhibitsPlease refer to the Exhibit Index on
page 167.
160
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
Name: Thomas M. Marra
|
|
|
|
Title:
|
President and Chief Executive Officer
|
Date: March 16, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated as
of March 16, 2011.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Thomas
M. Marra
|
|
Thomas M. Marra
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/ Peter
S. Burgess*
|
|
Peter S. Burgess
(Director)
|
|
|
|
/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/ Lowndes
A. Smith*
|
|
Lowndes A. Smith
(Director)
|
George C. Pagos,
Attorney-in-Fact*
161
Schedule I
Summary of InvestmentsOther Than Investments in Related
Parties
Year Ended December 31, 2010
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
Amount as
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Shown in the
|
|
Type of Investment
|
|
Cost
|
|
|
Value
|
|
|
Balance Sheet
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies and authorities
|
|
|
$30.3
|
|
|
|
$33.1
|
|
|
|
$33.1
|
|
States, municipalities and political subdivisions
|
|
|
462.9
|
|
|
|
452.8
|
|
|
|
452.8
|
|
Foreign governments
|
|
|
22.0
|
|
|
|
23.6
|
|
|
|
23.6
|
|
Public utilities
|
|
|
1,624.8
|
|
|
|
1,698.7
|
|
|
|
1,698.7
|
|
Convertible bonds and bonds with warrants attached
|
|
|
74.9
|
|
|
|
83.0
|
|
|
|
83.0
|
|
All other corporate bonds
|
|
|
12,006.8
|
|
|
|
12,574.5
|
|
|
|
12,574.5
|
|
Mortgage-backed securities
|
|
|
5,983.8
|
|
|
|
6,201.9
|
|
|
|
6,201.9
|
|
Redeemable preferred stock
|
|
|
50.6
|
|
|
|
40.9
|
|
|
|
40.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities (1)
|
|
|
20,256.1
|
|
|
|
21,108.5
|
|
|
|
21,108.5
|
|
Marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities
|
|
|
20.2
|
|
|
|
19.9
|
|
|
|
19.9
|
|
Banks, trusts, and insurance companies
|
|
|
19.3
|
|
|
|
21.2
|
|
|
|
21.2
|
|
Industrial, miscellaneous, and all other
|
|
|
121.9
|
|
|
|
137.5
|
|
|
|
137.5
|
|
Nonredeemable preferred stock
|
|
|
52.2
|
|
|
|
44.5
|
|
|
|
44.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities (2)
|
|
|
213.6
|
|
|
|
223.1
|
|
|
|
223.1
|
|
Mortgage loans (3)
|
|
|
1,720.1
|
|
|
|
1,772.2
|
|
|
|
1,713.0
|
|
Policy loans
|
|
|
71.5
|
|
|
|
71.5
|
|
|
|
71.5
|
|
Other investments (4)
|
|
|
200.8
|
|
|
|
201.7
|
|
|
|
199.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
$22,462.1
|
|
|
|
$23,377.0
|
|
|
|
$23,315.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 an amortized cost and fair value of
$160.4 and $173.3, respectively. |
|
(2) |
|
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 $7.2 and $11.3, respectively. |
|
(3) |
|
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 a $7.1
allowance for loan losses. |
|
(4) |
|
The amount shown in the consolidated balance sheet for other
investments differs from the fair value presented above, as the
Companys tax credit investments are presented at amortized
cost in the consolidated balance sheet. |
162
Schedule II
Condensed Statements of Financial Position
(Parent Company Only)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In millions, except share and per share data)
|
|
|
ASSETS
|
Cash and investments:
|
|
|
|
|
|
|
|
|
Investments, at fair value (cost: $111.3 and $52.7,
respectively)
|
|
|
$105.4
|
|
|
|
$44.1
|
|
Investments in subsidiaries
|
|
|
2,698.7
|
|
|
|
1,782.1
|
|
Cash and cash equivalents
|
|
|
2.7
|
|
|
|
16.4
|
|
|
|
|
|
|
|
|
|
|
Total cash and investments
|
|
|
2,806.8
|
|
|
|
1,842.6
|
|
Current and deferred income tax receivables
|
|
|
19.2
|
|
|
|
21.4
|
|
Receivables due from affiliates
|
|
|
14.5
|
|
|
|
39.9
|
|
Other assets
|
|
|
12.7
|
|
|
|
17.0
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$2,853.2
|
|
|
|
$1,920.9
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Notes payable
|
|
|
$449.0
|
|
|
|
$448.9
|
|
Other liabilities
|
|
|
23.6
|
|
|
|
38.7
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
472.6
|
|
|
|
487.6
|
|
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; none issued
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 750,000,000 shares
authorized; 118,216,470 issued and 118,215,701
outstanding as of December 31, 2010 and
92,729,455 shares issued and outstanding as of
December 31, 2009
|
|
|
1.2
|
|
|
|
0.9
|
|
Additional paid-in capital
|
|
|
1,450.2
|
|
|
|
1,165.7
|
|
Retained earnings
|
|
|
496.7
|
|
|
|
316.4
|
|
Accumulated other comprehensive income (loss), net of taxes
|
|
|
432.5
|
|
|
|
(49.7
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,380.6
|
|
|
|
1,433.3
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
|
$2,853.2
|
|
|
|
$1,920.9
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
163
Schedule II
(continued)
Condensed Statements of Income
(Parent Company Only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Symetra Life Insurance Company
|
|
|
$40.0
|
|
|
|
$
|
|
|
|
$100.0
|
|
Other subsidiaries
|
|
|
6.5
|
|
|
|
14.1
|
|
|
|
15.7
|
|
Net investment income (loss)
|
|
|
5.2
|
|
|
|
10.5
|
|
|
|
(14.8
|
)
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(8.0
|
)
|
Other net realized investment gains (losses)
|
|
|
|
|
|
|
0.1
|
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(12.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
51.7
|
|
|
|
24.4
|
|
|
|
88.6
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
31.9
|
|
|
|
31.8
|
|
|
|
31.9
|
|
Operating expenses
|
|
|
2.3
|
|
|
|
1.4
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
34.2
|
|
|
|
33.2
|
|
|
|
32.7
|
|
Income (loss) from operations before income taxes
|
|
|
17.5
|
|
|
|
(8.8
|
)
|
|
|
55.9
|
|
Income tax benefit
|
|
|
(10.3
|
)
|
|
|
(8.3
|
)
|
|
|
(22.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in undistributed net income (loss)
of subsidiaries
|
|
|
27.8
|
|
|
|
(0.5
|
)
|
|
|
78.5
|
|
Equity in undistributed net income (loss) of subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Symetra Life Insurance Company
|
|
|
166.7
|
|
|
|
131.4
|
|
|
|
(52.3
|
)
|
Other subsidiaries
|
|
|
6.4
|
|
|
|
(2.6
|
)
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity in undistributed net income (loss) of subsidiaries
|
|
|
173.1
|
|
|
|
128.8
|
|
|
|
(56.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$200.9
|
|
|
|
$128.3
|
|
|
|
$22.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
164
Schedule II
(continued)
Condensed Statements of Cash Flows
(Parent Company Only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$200.9
|
|
|
|
$128.3
|
|
|
|
$22.1
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income (loss) of subsidiaries
|
|
|
(173.1
|
)
|
|
|
(128.8
|
)
|
|
|
56.4
|
|
Net realized investment (gains) losses
|
|
|
|
|
|
|
0.2
|
|
|
|
12.3
|
|
Changes in accrued items and other adjustments, net
|
|
|
12.6
|
|
|
|
(23.1
|
)
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(160.5
|
)
|
|
|
(151.7
|
)
|
|
|
71.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
40.4
|
|
|
|
(23.4
|
)
|
|
|
93.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(179.4
|
)
|
|
|
(78.6
|
)
|
|
|
(173.6
|
)
|
Maturities, calls, paydowns and other
|
|
|
66.0
|
|
|
|
10.8
|
|
|
|
18.9
|
|
Sales of investments
|
|
|
55.8
|
|
|
|
48.8
|
|
|
|
150.7
|
|
Capital contributions
|
|
|
(256.3
|
)
|
|
|
|
|
|
|
(65.1
|
)
|
Acquisitions, net of cash received
|
|
|
(2.0
|
)
|
|
|
(2.0
|
)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(315.9
|
)
|
|
|
(21.0
|
)
|
|
|
(70.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
282.5
|
|
|
|
|
|
|
|
|
|
Cash dividends paid on common stock
|
|
|
(20.6
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
261.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(13.7
|
)
|
|
|
(44.4
|
)
|
|
|
22.4
|
|
Cash and cash equivalents at beginning of period
|
|
|
16.4
|
|
|
|
60.8
|
|
|
|
38.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
$2.7
|
|
|
|
$16.4
|
|
|
|
$60.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid (received) during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
$31.1
|
|
|
|
$31.0
|
|
|
|
$31.3
|
|
Income taxes
|
|
|
(12.9
|
)
|
|
|
(6.2
|
)
|
|
|
(7.8
|
)
|
See accompanying notes.
165
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 the Companys accounting
policies pertaining to investments and other significant areas,
notes payable and commitments and contingencies are as set forth
in Notes 2, 12 and 16, respectively, to the Consolidated
Financial Statements of the Company.
The Company received cash dividends of $46.5, $14.1 and $115.7
from its subsidiaries for the years ended December 31,
2010, 2009, and 2008, respectively.
166
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 CertificateGeneral 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 CertificateSirius International Holdings (NL)
B.V., dated October 4, 2010*
|
|
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
|
|
Amendment No. 1 dated August 9, 2010 to Master
Services Agreement by and between Symetra Life Insurance Company
and Affiliated Computer Services, Inc., dated August 1,
2009 (incorporated by reference to Exhibit 10.1 of
Form 10-Q
filed on August 12, 2010)
|
|
10
|
.3
|
|
Amendment No. 2 dated December 17, 2010 to Master
Services Agreement by and between Symetra Life Insurance Company
and Affiliated Computer Services, Inc., dated August 1,
2009*
|
|
10
|
.4
|
|
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)
|
167
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.5
|
|
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 10.2 of
Form 10-Q
filed on November 10, 2010)
|
|
10
|
.6
|
|
Amendment No. 3 to the Group Short Term Disability
Reinsurance Agreement dated as of January 19, 2011 between
Safeco Life Insurance Company and Reliance Standard Life
Insurance Company, doing business as Custom Disability
Solutions, successor to Duncanson & Holt Services,
Inc.*
|
|
10
|
.7
|
|
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 10.3 of
Form 10-Q
filed on November 10, 2010)
|
|
10
|
.8
|
|
Amendment No. 6 to the Group Long Term Disability
Reinsurance Agreement dated as of January 19, 2011 (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.*
|
|
10
|
.9
|
|
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
|
.10
|
|
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
|
.11
|
|
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
|
.12
|
|
Amendment No. 5 dated September 19, 2009 to the
Investment Management Agreement dated as of March 14, 2004
between White Mountains Advisors LLC and Occum Acquisition Corp.*
|
|
10
|
.13
|
|
Investment Management Agreement by and between Prospector
Partners, LLC and Symetra Financial Corporation, dated
July 1, 2010 (incorporated by reference to
Exhibit 10.2 of
Form 10-Q
filed on August 12, 2010)
|
168
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.14
|
|
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
|
.15
|
|
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
|
.16
|
|
Amendments dated September 21, 2010 and January 1,
2011 to the Agency Agreement dated as of September 26, 2006
among Symetra Life Insurance Company and Chase Insurance Agency,
Inc.*
|
|
10
|
.17
|
|
Employment Agreement between Mr. Marra and Symetra
Financial Corporation, dated June 7, 2010 (incorporated by
reference to Exhibit 10.1 of
Form 8-K
filed on June 11, 2010)**
|
|
10
|
.18
|
|
Separation and Consulting Agreement between Mr. Talbot and
Symetra Financial Corporation, dated June 7, 2010
(incorporated by reference to Exhibit 10.2 of
Form 8-K
filed on June 11, 2010)**
|
|
10
|
.19
|
|
Separation Agreement and General Release between
Mr. Lindsay and Symetra Financial Corporation, dated
August 27, 2010 (incorporated by reference to
Exhibit 10.1 of
Form 8-K/A
filed on September 7, 2010)**
|
|
10
|
.20
|
|
Separation Agreement and General Release between
Mr. McCormick and Symetra Financial Corporation, dated
November 1, 2010 (incorporated by reference to
Exhibit 10.1 of
Form 8-K/A
filed on November 22, 2010)**
|
|
10
|
.21
|
|
Separation Agreement and General Release between Ms. Davies
and Symetra Life Insurance Company, dated December 15, 2010
(incorporated by reference to Exhibit 10.1 of
Form 8-K/A
filed on December 23, 2010)**
|
|
10
|
.22
|
|
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
|
.23
|
|
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
|
.24
|
|
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
|
.25
|
|
Annual Incentive Bonus Plan (incorporated by reference to
Exhibit 10.14 of
Form 10-Q
filed on August 12, 2010)**
|
|
10
|
.26
|
|
Symetra Financial Corporation Equity Plan (amended and restated
on March 4, 2011)* **
|
|
10
|
.27
|
|
Symetra Financial Corporation Employee Stock Purchase Plan
(amended and restated on May 11, 2010) (incorporated by
reference to Exhibit 10.23 of
Form 10-Q
filed on May 14, 2010)**
|
|
10
|
.28
|
|
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
|
.29
|
|
Form of Restricted Stock Agreement (incorporated by reference to
Exhibit 10.21 of
Form 10-Q
filed on May 14, 2010)**
|
|
10
|
.30
|
|
Form of Performance Unit Award Agreement Pursuant to the Symetra
Financial Corporation Equity Plan
2010-2012
Grant (incorporated by reference to Exhibit 10.22 of
Form 10-Q
filed on May 14, 2010)**
|
169
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|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.31
|
|
Form of Stock Option Award Agreement (incorporated by reference
to Exhibit 10.1 of
Form 10-Q
filed on November 10, 2010)**
|
|
10
|
.32
|
|
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)**
|
|
10
|
.33
|
|
Restricted Stock Agreement between Thomas M. Marra and Symetra
Financial Corporation, dated February 18, 2011
(incorporated by reference to Exhibit 10.1 of
Form 8-K
filed on February 23, 2011)**
|
|
10
|
.34
|
|
Performance Unit Award Agreement between Thomas M. Marra and
Symetra Financial Corporation, dated February 18, 2011
(incorporated by reference to Exhibit 10.2 of
Form 8-K
filed on February 23, 2011)**
|
|
10
|
.35
|
|
2011 Incentive Compensation Plan Life and Retirement
Sales for Richard LaVoice* **
|
|
14
|
.1
|
|
Code of Business Conduct (incorporated by reference to
Exhibit 14.1 of
Form 10-K
filed on March 9, 2010)
|
|
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
|
|
Powers of Attorney with respect to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2010.*
|
|
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 requested for portions of this
exhibit. |
|
|
|
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. |
|
** |
|
Management contract and compensatory plans and arrangements
required to be filed as exhibits under Item 15(b) of this
report. |
170